<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 10, 1997
REGISTRATION NO. 333-
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
----------------
CAREER EDUCATION CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 610000 39-3932190
(STATE OR OTHER (PRIMARY STANDARD (I.R.S. EMPLOYER
JURISDICTION OF INDUSTRIAL IDENTIFICATION NO.)
INCORPORATION OR CLASSIFICATION CODE NO.)
ORGANIZATION)
2800 WEST HIGGINS ROAD, SUITE 790, HOFFMAN ESTATES, ILLINOIS 60195, (847) 781-
3600
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
----------------
JOHN M. LARSON
PRESIDENT AND CHIEF EXECUTIVE OFFICER
CAREER EDUCATION CORPORATION
2800 WEST HIGGINS ROAD, SUITE 790, HOFFMAN ESTATES, ILLINOIS 60195, (847) 781-
3600
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
COPIES TO:
LAWRENCE D. LEVIN, ESQ DENNIS V. OSIMITZ, ESQ.
MARK D. WOOD, ESQ. SIDLEY & AUSTIN
KATTEN MUCHIN & ZAVIS ONE FIRST NATIONAL PLAZA
525 WEST MONROE STREET, SUITE 1600 CHICAGO, ILLINOIS 60603
CHICAGO, ILLINOIS 60661 (312) 853-7000
(312) 902-5200
----------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box: [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering: [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering: [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box: [_]
CALCULATION OF REGISTRATION FEE
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PROPOSED
MAXIMUM AMOUNT OF
TITLE OF EACH CLASS OF AGGREGATE REGISTRATION
SECURITIES TO BE REGISTERED OFFERING PRICE (1) FEE
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
Common Stock, $.01 par value.................................. $51,750,000 $15,682
- -----------------------------------------------------------------------------------------------
</TABLE>
- -------------------------------------------------------------------------------
(1) Estimated solely for the purpose of calculating the registration fee in
accordance with Rule 457(o) under the Securities Act of 1933, as amended.
----------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO
SECTION 8(A), MAY DETERMINE.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED OCTOBER 10, 1997
Shares
LOGO
Common Stock
-----------
The shares of Common Stock, $.01 par value (the "Common Stock"), of
Career Education Corporation ("CEC" or the "Company") offered hereby (the
"Offering") are being offered by the Company. Prior to the Offering,
there has been no public market for the Common Stock. It is anticipated
that the initial public offering price will be between $ and
$ per share. For information relating to the factors
considered in determining the initial offering price to the
public, see "Underwriting."
Application will be made to list the Common Stock on the Nasdaq National Market
under the symbol "CECO."
FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED IN CONNECTION
WITH AN INVESTMENT IN THE COMMON STOCK, SEE "RISK FACTORS" ON PAGE 8 HEREIN.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS COMPANY(1)
---------- ------------- -----------
<S> <C> <C> <C>
Per Share.................................. $ $ $
Total (2).................................. $ $ $
</TABLE>
- --------------
(1) Before deduction of expenses payable by the Company estimated at
$ .
(2) The Company and certain stockholders of the Company have granted the
Underwriters an option, exercisable for 30 days from the date of this
Prospectus, to purchase a maximum of additional shares from the
Company and a maximum of additional shares from such
stockholders to cover over-allotments of shares. If the option is exercised
in full, the total Price to Public will be $ , Underwriting Discounts and
Commissions will be $ , Proceeds to Company will be $ , and proceeds to
such stockholders will be $ .
The shares of Common Stock are offered by the several Underwriters when, as
and if delivered to and accepted by the Underwriters and subject to their right
to reject orders in whole or in part. It is expected that the shares of Common
Stock will be ready for delivery on or about , 1997, against payment in
immediately available funds.
CREDIT SUISSE FIRST BOSTON
SMITH BARNEY INC.
ABN AMRO CHICAGO CORPORATION
Prospectus dated , 1997
<PAGE>
[PHOTOGRAPHS AND CAPTIONS TO BE INSERTED HERE]
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE SECURITIES
OFFERED HEREBY, INCLUDING OVER-ALLOTMENT, STABILIZING TRANSACTIONS, SYNDICATE
SHORT COVERING TRANSACTIONS AND PENALTY BIDS. FOR A DESCRIPTION OF THESE
ACTIVITIES, SEE "UNDERWRITING."
2
<PAGE>
[FRONT COVER GATEFOLD]
PROGRAMS
[PICTURE]
The fields of Visual Communication and Design Technologies, i.e.,
CADD, Fashion Design and
Merchandising, Interactive/Digital Media, Interior Design,
Internet, Package Design,
Print Media and Broadcasting, are pervasive in our society. With
a focus on providing thorough
knowledge of the techniques used to create and produce all forms
of Visual
Communication, our schools prepare today's graduates to succeed
in these creative fields.What keeps our students at the leading
edge of these technologies is their own creativityand
imagination, coupled with the solid training offered by our
schools.
[PICTURE]
The philosophy of our Business Studies program is to provide
quality education that is
relevant to the job market, implemented by an experienced and
dedicated staff, and
geared to those seeking a solid foundation in knowledge and
skills. Our schools are
driven to developing people for career positions using hands-on
teaching techniques,
externship positions and the latest technologies in a variety of
fields, including the
following: Accounting, Business Administration, Hotel and
Restaurant Management,
Marketing, Office Management, Secretarial, Travel, and Legal
Executive Assistant.
<PAGE>
[FRONT COVER GATEFOLD]
OF STUDY
Our Computer Technologies programs emphasize
the technical training, development, and
preparation necessary for our graduates to
succeed in the various computer technology
fields. Whether it is Computer Programming,
Computer Technical Support, Computer
Information Management, Electronics, Network
Management, PC/LAN or PC/Net, active learning
and real-time training are a primary emphasis
in our facilities.
[PICTURE]
The core of our Culinary
Arts
program is the hands-on
teaching of cooking and
baking skills as well as
the
theoretical knowledge
that
must underlie competency
in
[PICTURE] both fields. It
endeavors to
present students the
different
styles and experiences
of the
school's chefs and
instructors, and to
introduce
students to a wide
variety of
equipment, all of which
will
prepare them for the
area of
the food service or
hospitality industry
they
choose to enter.
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and the Company's Consolidated Financial Statements and Notes
thereto included elsewhere in this Prospectus. Prospective investors should
consider carefully, among other things, the information set forth under "Risk
Factors" in this Prospectus. Unless otherwise indicated, all information in
this Prospectus (i) reflects the consummation of the Transactions (as defined
under "The Transactions") and (ii) assumes no exercise of the Underwriters'
over-allotment option. See "The Transactions" and "Description of Capital
Stock." As used in this Prospectus, unless the context indicates otherwise, the
terms "Company" and "CEC" refer to Career Education Corporation and its
subsidiaries, including all of their schools and campuses; the term "school"
means a campus or group of campuses known by a single brand name (such as The
Katharine Gibbs Schools or Al Collins Graphic Design School); the term "campus"
means a single location of any school (such as the New York campus of The
Katharine Gibbs Schools or the Al Collins Graphic Design School in Tempe,
Arizona); and the term "institution" means a main campus and its additional
locations, as such are defined under regulations of the United States
Department of Education.
THE COMPANY
Career Education Corporation (the "Company" or "CEC") is one of the largest
providers of private, for-profit postsecondary education in North America, with
more than students enrolled as of October 31, 1997. CEC operates
nine schools, with 18 campuses located in 13 states and two Canadian provinces.
These schools enjoy long operating histories and offer a variety of bachelor's
degree, associate degree and non-degree programs in career-oriented disciplines
within the Company's core curricula of (i) computer technologies, (ii) visual
communication and design technologies, (iii) business studies and (iv) culinary
arts.
CEC was founded in January 1994 by John M. Larson, the Company's President
and Chief Executive Officer, who has over 23 years of experience in the career-
oriented education industry. The Company was formed to capitalize on
opportunities in the large and highly fragmented postsecondary school industry.
Since its inception, CEC has completed nine acquisitions. The Company has
acquired schools that it believes possess strong curricula, leading reputations
and broad marketability but have been undermanaged from a marketing and
financial standpoint. The Company seeks to apply its expertise in operations,
marketing and curricula development, as well as its financial strength, to
improve the performance of these schools. The schools acquired by the Company
and their improved populations are summarized in the following table:
<TABLE>
<CAPTION>
STUDENT POPULATION
AT OCTOBER 31,
YEAR DATE ------------------
SCHOOL FOUNDED ACQUIRED 1996 1997 % INCREASE
------ ------- -------- --------- --------- ----------
<S> <C> <C> <C> <C> <C>
AL COLLINS GRAPHIC DESIGN SCHOOL
("Collins") 1978 1/94 936 %
BROOKS COLLEGE ("Brooks") 1970 6/94 960
ALLENTOWN BUSINESS SCHOOL
("Allentown") 1869 7/95 781
BROWN INSTITUTE ("Brown") 1946 7/95 1,391
WESTERN CULINARY INSTITUTE
("Western Culinary") 1983 10/96 453
SCHOOL OF COMPUTER TECHNOLOGY
("SCT") (2 campuses) 1967 2/97 902
THE KATHARINE GIBBS SCHOOLS
("Gibbs") (7 campuses) 1911 5/97 2,920
INTERNATIONAL ACADEMY OF MER-
CHANDISING & DESIGN (U.S.)
("IAMD-U.S.") (2 campuses) 1977 6/97 1,207
INTERNATIONAL ACADEMY OF MER-
CHANDISING & DESIGN (CANADA)
("IAMD-Canada") (2 campuses) 1983 6/97 1,230
</TABLE>
3
<PAGE>
The Company's success in completing acquisitions and improving the financial
performance of acquired schools has enabled it to achieve rapid growth. Net
revenue has increased from $7.5 million in 1994 to $33.6 million in 1996. For
the first six months of 1997, net revenue was $25.7 million. 1996 pro forma net
revenue, reflecting the results of operations of schools the Company acquired
in 1997, would have been $86.6 million.
BUSINESS AND OPERATING STRATEGY
The Company was founded based upon a business and operating strategy which it
believes has enabled it to achieve significant improvements in the performance
of its acquired schools. The Company believes this strategy will enable it to
continue to capitalize on favorable economic, demographic and social trends
which are driving demand for career-oriented education. These trends include
increasing technological requirements for entry level jobs, growing numbers of
high school students and greater recognition of the value of higher education.
The key elements of this strategy are as follows:
. Focusing on Core Curricula. The Company's schools offer educational
programs principally in four career-related fields of study identified by
the Company as areas with highly interested and motivated students,
strong entry-level employment opportunities and ongoing career and salary
advancement potential.
. Adapting and Expanding Educational Programs. Each of the Company's
schools strives to meet the changing needs of its students and the
employment markets by regularly refining and adapting its existing
educational programs, selectively duplicating successful programs from
other CEC schools and introducing entirely new programs of study.
. Direct Response Marketing. The Company seeks to increase school
enrollment and profitability through intensive local, regional and
national direct response marketing programs specifically crafted for each
school to maximize that school's market penetration.
. Improving Student Retention. The Company focuses substantial attention on
student retention, as modest improvements in student retention rates can
result in meaningful increases in school revenue and profitability. The
Company strives to improve retention by treating students as valued
customers.
. Emphasizing Employment of Graduates. The Company devotes significant
resources to graduate placement efforts because it believes that
maintaining high employment rates for graduates of its schools enhances
the overall reputation of the schools and their ability to attract new
students.
. Making Capital Investments. The Company makes substantial investments in
its facilities and equipment to attract, retain and prepare students for
the increasing technical demands of the workplace.
. Emphasizing School Management Autonomy and Accountability. The Company
provides significant operational autonomy and appropriate performance-
based incentives to its campus-level managers. The Company believes these
policies foster among these managers an important sense of personal
responsibility for achieving campus performance objectives and provide
the Company with a significant advantage in recruiting and retaining
highly-motivated, entrepreneurial individuals.
The Company believes that its application of this strategy has been a major
factor in improving operations at the four schools owned by the Company as of
July 1995: Allentown, Brooks, Brown and Collins. At these schools, the
aggregate student population has increased % over the past two years, from
3,361 at October 31, 1995 to at October 31, 1997. In addition,
approximately 88% of the available 1996 graduates of these schools obtained
employment related to their program of study within six months of graduation.
4
<PAGE>
GROWTH STRATEGY
The Company believes it can achieve superior long-term growth in revenue and
profitability through:
. Expanding Existing Operations. Through the execution of its business and
operating strategy, the Company intends to achieve growth at its existing
campuses.
. Acquiring Additional North American Schools. The Company intends to
continue to acquire schools in the U.S. and Canada that have, among other
things, leading reputations, broad marketability and demonstrated
compliance with regulatory requirements and accreditation standards. The
Company plans to acquire schools which it believes have been undermanaged
and will benefit from the implementation of the Company's business and
operating strategy.
. Establishing New Campuses. The Company expects to open new campuses, most
likely as additional locations of existing institutions, to capitalize on
new markets or geographic regions that exhibit strong enrollment
potential and/or the opportunity to establish a successful school
operation in one of the Company's core curricula areas.
. Entering New Service Areas. The Company plans to develop new services,
such as distance learning (offering educational products and services for
working adults through video, Internet and other distribution channels)
and educational publishing (producing and marketing educational
publications), which the Company believes offer strong long-term growth
potential. Additionally, the Company plans to expand its contract
training operations (providing customized training on a contract basis
for business and government organizations).
. Expanding Internationally. The Company may also acquire or establish
operations outside North America where the Company believes significant
opportunities exist.
CEC was incorporated in Delaware on January 5, 1994. CEC's principal
executive offices are located at 2800 West Higgins Road, Suite 790, Hoffman
Estates, Illinois 60195 and its telephone number is (847) 781-3600. The address
of the Company's web site is http://www.careered.com. Web sites for most of the
Company's schools can be accessed through hyperlinks at the Company's web site.
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered............... shares
Common Stock to be outstanding
after the Offering................ shares (1)
Use of proceeds.................... Repayment of certain indebtedness, payment
of dividends on Preferred Stock and general
corporate purposes, including capital
expenditures, possible future acquisitions
of schools and working capital. See "Use of
Proceeds."
Proposed Nasdaq National Market
symbol............................ CECO
</TABLE>
- --------
(1) Excludes (i) shares of Common Stock issuable upon the exercise
of outstanding options and (ii) an aggregate of shares of Common
Stock reserved for issuance under the Career Education Corporation 1995
Stock Option Plan, the Career Education Corporation 1997 Employee Incentive
Compensation Plan, the Career Education Corporation 1997 Non-Employee
Directors' Stock Option Plan and the Career Education Corporation 1998
Employee Stock Purchase Plan (collectively, the "Stock Plans"). See
"Management--Stock Plans" and "Description of Capital Stock."
5
<PAGE>
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."
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, DECEMBER 31, 1996 JUNE 30, JUNE 30, 1997
----------------------------- ------------------ ----------------- ------------------
PRO PRO
FORMA AS FORMA AS
PRO ADJUSTED PRO ADJUSTED
1994(1) 1995 1996 FORMA(2) (2)(3) 1996 1997 FORMA(2) (2)(3)
---------- -------- -------- -------- -------- ------- -------- --------- --------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Revenue:
Tuition and
registration fees,
net................... $ 5,794 $ 16,330 $ 29,269 $78,997 $ $12,716 $ 23,073 $47,794 $
Other, net............. 1,692 3,066 4,311 7,600 2,074 2,579 3,901
------- -------- -------- ------- ------- ------- -------- ------- -------
Total net revenue.... 7,486 19,396 33,580 86,597 14,790 25,652 51,695
Depreciation and
amortization (4)....... 980 1,344 2,179 10,642 973 2,109 5,482
Income (loss) from
operations............. (1,455) 390 2,375 (578) 91 1,511 989
Income (loss) before
extraordinary item..... (1,589) 69 1,495 (5,517) (134) 316 (1,612)
Extraordinary loss (5).. -- -- -- -- -- 418 --
------- -------- -------- ------- ------- ------- -------- ------- -------
Net income (loss)....... (1,589) 69 1,495 (5,517) (134) (102) (1,612)
======= ======== ======== ======= ======= ======= ======== ======= =======
Income (loss) before
extraordinary item
attributable to common
stockholders (6)....... (1,982) (804) 137 (5,517) (806) (693) (1,612)
======= ======== ======== ======= ------- ======= ======== ======= -------
Net income (loss)
attributable to common
stockholders (5)(6).... (1,982) (804) 137 (806) (1,111)
======= ======== ======== ======= ======= ======== =======
Pro forma income (loss)
before extraordinary
item(7)................ $ 1,495 $(5,517) $ $ 316 $(1,612) $
======== ======= ======= ======== ======= =======
Pro forma income (loss)
before extraordinary
item per share
attributable to common
stockholders (7)(8).... $ $ $ $ $ $
======== ======= ======= ======== ======= =======
OTHER DATA:
EBITDA (9).............. $ (475) $ 1,741 $ 4,563 $10,072 $ $ 1,072 $ 3,627 $ 6,478 $
EBITDA margin (9)....... (6.3)% 9.0% 13.6% 11.6% % 7.2% 14.1% 12.5% %
Cash flow provided by
(used in):
Operating activities... (1,000) 235 5,275 570 (2,797) (4,170)
Investing activities... (2,372) (3,478) (9,518) (365) (38,192) (2,321)
Financing activities... 6,014 4,566 8,076 (1,703) 42,936 126
Capital expenditures,
net.................... 153 897 1,231 365 482 (2,321)
Student population (10). 1,131 3,361 4,537 10,780 2,273 7,697 7,697
Number of campuses (11). 2 4 5 18 4 18 18
<CAPTION>
JUNE 30, 1997
----------------------------
PRO
FORMA AS
PRO ADJUSTED
ACTUAL FORMA(12) (12)(13)
-------- --------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents.................................................... $ 9,745 $ 9,745 $
Working capital.............................................................. 3,750 3,750
Total assets................................................................. 100,767 100,767
Long-term debt, net of current maturities.................................... 47,651 47,651
Redeemable preferred stock and warrants...................................... 32,989 --
Total stockholders' investment............................................... 1,088 34,077
</TABLE>
6
<PAGE>
- --------
(1) Commencing January 5, 1994, the date of the Company's incorporation.
(2) Gives effect to the Company's acquisitions of Western Culinary, SCT, Gibbs,
IAMD-U.S. and IAMD-Canada and the Transactions (as defined under "The
Transactions"), as if they had occurred at the beginning of each period
presented. See "Unaudited Pro Forma Condensed Consolidated Financial Data."
(3) Gives effect to the sale of shares of Common Stock offered
hereby, at an assumed initial public offering price of $ per share,
and the application of the estimated net proceeds therefrom as described in
"Use of Proceeds," as if they had occurred as of the beginning of each
period presented. See "Unaudited Pro Forma Condensed Consolidated Financial
Data."
(4) Amount includes depreciation of property and equipment, amortization of
goodwill, student contracts and covenants not to compete and excludes the
amortization of debt discount.
(5) Represents the extraordinary loss of $418, net of a $233 tax benefit,
resulting from the early extinguishment of debt during the six months ended
June 30, 1997. See Note 4 of the Notes to the Company's Consolidated
Financial Statements.
(6) Includes reductions to income (loss) before extraordinary item for
dividends paid or added to the redemption value of preferred stock, and the
accretion to redemption value of preferred stock and warrants. See Note 2
of the Notes to the Company's Consolidated Financial Statements.
(7) For the year ended December 31, 1996 and the six months ended June 30,
1997, pro forma income (loss) before extraordinary item is derived by
eliminating the effect of dividends paid or accrued on preferred stock and
the accretion to redemption value of preferred stock and warrants from
historical income (loss) before extraordinary item attributable to common
stockholders.
(8) Pro forma weighted average number of common and common stock equivalent
shares outstanding totaling and at December 31, 1996 and June
30, 1997, respectively, include the dilutive effect of (i) actual Common
Stock outstanding, (ii) options and warrants issued during the last 12
months, (iii) common stock equivalents and (iv) shares of Common
Stock to be issued upon the Transactions and assumes that
shares (representing the approximate number of shares which are being sold
by the Company at an assumed initial public offering price of $ per
share to fund the estimated Dividend Payment (as defined under "Use of
Proceeds") of $2,100) of the Common Stock being offered by the Company
hereby were outstanding during the periods indicated. Pro forma as adjusted
weighted average number of common and common stock equivalent shares
outstanding totaling and at December 31, 1996 and June 30, 1997,
respectively, also include shares of Common Stock issued in the
Offering at an assumed initial public offering price of $ in order to
repay indebtedness as described in "Use of Proceeds," as if the Offering
had occurred as of January 1, 1996. See "The Transactions" and "Use of
Proceeds."
(9) For any period, EBITDA equals earnings before interest expense, taxes,
depreciation and amortization (including amortization of debt discount),
and EBITDA margin equals EBITDA as a percentage of net revenue. EBITDA and
EBITDA margin are presented because the Company believes they allow for a
more complete analysis of the Company's results of operations. EBITDA and
EBITDA margin should not be considered as alternatives to, nor is there any
implication that they are more meaningful than, any measure of performance
or liquidity as promulgated under Generally Accepted Accounting Principles
("GAAP").
(10) Represents the total number of students attending the Company's schools
(a) in the case of each full year, as of October 31, or (b) for the six
months ended June 30, 1996 and 1997, as of June 30.
(11) Represents the total number of campuses operated by the Company as of the
end of the period.
(12) Gives effect to the Transactions.
(13) As adjusted to give effect to the sale of shares of Common
Stock offered hereby at an assumed initial public offering price of $
per share, after deducting estimated underwriting discounts and
commissions and offering expenses, and the application of the net proceeds
therefrom as described in "Use of Proceeds."
7
<PAGE>
RISK FACTORS
In addition to the other information contained in this Prospectus, the
following risk factors should be considered carefully in evaluating the
Company and its business before purchasing any shares of Common Stock offered
hereby. This Prospectus contains certain forward-looking statements that are
based on the beliefs of, as well as assumptions made by and information
currently available to, the Company's management. The words "believe,"
"anticipate," "intend," "estimate," "expect" and similar expressions are
intended to identify such forward-looking statements, but are not the
exclusive means of identifying such statements. Such statements reflect the
current views of the Company or its management and are subject to certain
risks, uncertainties and assumptions, including, but not limited to, those set
forth in the following Risk Factors. Should one or more of these risks or
uncertainties materialize, or should underlying assumptions prove incorrect,
the Company's actual results, performance or achievements in 1997 and beyond
could differ materially from those expressed in, or implied by, such forward-
looking statements. The Company undertakes no obligation to release publicly
any revisions to any such forward-looking statements that may reflect events
or circumstances after the date of this Prospectus.
DEPENDENCE ON FINANCIAL AID; POTENTIAL ADVERSE EFFECTS OF REGULATION
Students attending the Company's schools finance their education through a
combination of family contributions, individual resources (including earnings
from full or part-time employment) and government-sponsored financial aid. The
Company estimates that over 71% of the students at its U.S. schools receive
some government-sponsored (federal or state) financial aid. For the 1996-97
award year (July 1, 1996 to June 30, 1997), approximately 81% of the Company's
U.S. tuition and fee revenue was derived from some form of such financial aid
received by the students of its schools. In addition, students attending IAMD-
Canada receive government-sponsored financial aid. A reduction in U.S. or
Canadian government funding levels could lead to lower enrollments at the
Company's schools and require the Company to seek alternative sources of
financial aid for students enrolled at its schools. If student enrollments are
lowered or such alternative sources can not be arranged, the Company's
business, results of operations and financial condition would be adversely
affected.
U.S. Financial Aid and Regulation
The Company and its U.S. schools are subject to extensive regulation by
federal and state governmental agencies and accrediting bodies. In particular,
the Higher Education Act of 1965, as amended (the "HEA"), and the regulations
promulgated thereunder by the United States Department of Education (the
"DOE") subject the Company's U.S. schools to significant regulatory scrutiny
on the basis of numerous standards that schools must satisfy in order to
participate in the various federal student financial assistance programs under
Title IV of the HEA (the "Title IV Programs"). Under the HEA and its
implementing regulations, certain of these standards must be complied with on
an institutional basis. For purposes of these standards, the regulations
define an institution as a main campus and its additional locations (formerly
referred to as branch campuses), if any. Under this definition, each of the
Company's U.S. campuses is a separate institution, except for The Katharine
Gibbs School in Piscataway, New Jersey, which is an additional location of The
Katharine Gibbs School in Montclair, New Jersey, and the School of Computer
Technology in Fairmont, West Virginia, which is an additional location of the
School of Computer Technology in Pittsburgh, Pennsylvania. Among other things,
the standards under the HEA and its implementing regulations with which the
Company's U.S. institutions must comply: (i) require each institution to
maintain a rate of default by its students on federally guaranteed or funded
student loans that is below a specified rate, (ii) limit the proportion of an
institution's revenue that may be derived from the Title IV Programs, (iii)
establish certain financial responsibility and administrative capability
standards, (iv) restrict the ability of an institution or its parent
corporation to engage in certain types of transactions that would result in a
change in ownership and control of that institution or corporation, (v)
prohibit the payment of certain incentives to personnel engaged in student
recruiting and admissions activities related to educational programs eligible
for Title IV Program funds and (vi) require certain short-term educational
programs to achieve stringent completion and placement outcomes in order to be
eligible for Title IV Program funds. Under the rule concerning the
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limitation on the amount of revenue that may be derived from the Title IV
Programs, commonly referred to as the "85/15 Rule," an institution would be
disqualified from participation in those programs if more than 85% of its
revenue in any fiscal year was derived from the Title IV Programs. The Company
has calculated that, since this requirement took effect in 1995, none of the
Company's U.S. institutions has derived more than 82% of its revenue from the
Title IV Programs for any fiscal year, and that for 1996 the range for the
Company's U.S. institutions was from approximately 52% to approximately 82%.
The Company is required to engage an independent auditor to conduct a
compliance review of each U.S. institution's Title IV Program operations and
to submit the results of such audits to the DOE on an annual basis. The
Company has complied with its obligations in this regard on a timely basis.
Based upon the most recent annual compliance audits of the Company's U.S.
institutions and upon other reviews and audits by independent and governmental
entities relating to compliance with the requirements established by the HEA
and the regulations thereunder, the Company's institutions have been found to
be in substantial compliance with the requirements for participating in the
Title IV Programs, and the Company believes that its institutions continue to
be in substantial compliance with those requirements. However, the DOE has
asserted that the Company and certain of its institutions are not in
compliance with certain financial responsibility requirements, as further
discussed in "Company Compliance with Financial Responsibility Standards"
below. Further, the DOE has raised a question regarding the method used to
determine Federal Family Education Loan ("FFEL") eligibility for students
enrolled in the Evening Legal Executive Assistant Program at The Katharine
Gibbs School, Boston, Massachusetts ("Gibbs-Boston"). While communication with
the DOE indicates that the DOE now agrees with the method used by the Company,
a final determination has not yet been made. If the DOE does not agree with
the Company's interpretation of the relevant regulation, it could impose
liability or take other administrative action against Gibbs-Boston, which
could have a material adverse effect on the Company's business, results of
operations and financial condition. See "Financial Aid and Regulation."
In addition, because the DOE periodically revises its regulations (e.g., the
DOE is expected in the near future to propose new regulations with respect to
financial responsibility standards) and changes its interpretation of existing
laws and regulations, there can be no assurance that the DOE will agree with
the Company's understanding of each Title IV Program requirement.
The HEA mandates specific regulatory responsibilities for each of the
following components of the higher education regulatory triad: (i) the federal
government through the DOE; (ii) the non-governmental accrediting agencies
recognized by the DOE (see "--Accreditation"); and (iii) state postsecondary
education regulatory bodies (see "--State Authorization"). As in the case of
the HEA and its implementing regulations, the regulations, standards and
policies of the accrediting and state education regulatory bodies frequently
change, and changes in, or new interpretations of, applicable laws,
regulations or standards could have a material adverse effect on the schools'
accreditation, authorization to operate in various states, permissible
activities, receipt of funds under the Title IV Programs or costs of doing
business. The Company's failure to maintain or renew any required regulatory
approvals, accreditations or authorizations could have a material adverse
effect on the Company's business, results of operations and financial
condition. See "Financial Aid and Regulation--Federal Oversight of the Title
IV Programs--Increased Regulatory Scrutiny."
In the event of a determination by the DOE that one of the Company's
institutions had improperly disbursed Title IV Program funds, the affected
institution could be required to repay those funds and could be assessed an
administrative fine of up to $25,000 per violation of the Title IV Program
requirements. In addition, the DOE could transfer that institution from the
"advance" system of payment of Title IV Program funds, under which an
institution requests and receives funding from the DOE in advance based on
anticipated needs, to the "reimbursement" system of payment, under which an
institution must disburse funds to students and document their eligibility for
Title IV Program funds before receiving funds from the DOE or from FFEL
lenders. Violations of the Title IV Program requirements could also subject an
institution or the Company to sanctions under the False Claims Act as well as
other civil and criminal penalties. The failure by any of the Company's
institutions to comply with applicable federal, state or accrediting agency
requirements could result in the limitation, suspension or termination of that
institution's ability to participate in the Title IV Programs or the
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loss of state licensure or accreditation. Any such event could have a material
adverse effect on the Company's business, results of operations and financial
condition. There are no proceedings for any such purposes pending against any
of the Company's institutions, and the Company has no reason to believe that
any such proceeding is contemplated. See "Financial Aid and Regulation--
Federal Oversight of the Title IV Programs."
Risk of Legislative Action
The Title IV Programs are subject to significant political and budgetary
pressures. The process of reauthorizing the HEA by the U.S. Congress, which
takes place every five years, has begun and is expected to be completed in
1998. It is not possible to predict the outcome of the reauthorization
process. Although there is no present indication that the Congress will
decline to reauthorize the Title IV Programs, there can be no assurance that
government funding for the Title IV Programs will continue to be available or
maintained at current levels. A reduction in government funding levels could
lead to lower enrollments at the Company's schools and require the Company to
seek alternative sources of financial aid for students enrolled in its
schools. Given the significant percentage of the Company's revenue that is
indirectly derived from the Title IV Programs, the loss of or a significant
reduction in Title IV Program funds available to students at the Company's
schools could have a material adverse effect on the Company's business,
results of operations and financial condition.
In addition, there can be no assurance that current requirements for student
and institutional participation in the Title IV Programs will be unchanged or
that one or more of the present Title IV Programs will not be replaced by
other programs with materially different student or institutional eligibility
requirements. Numerous changes to the HEA have been proposed by the DOE and
other parties. Thus, the reauthorization process could result in revisions to
the HEA that increase the compliance burden on the Company's institutions. For
example, the DOE has circulated proposals to amend the HEA as follows: (i) to
require all vocational programs of up to one year in length to establish a 70%
completion and placement rate; (ii) to modify cohort default rate threshold
provisions so that they apply with respect to the Federal Perkins Loan
("Perkins") program; and (iii) to require each institution that appeals high
cohort default rates to post surety and be liable for loans and related costs
if the institution's appeal is not successful. If the Company cannot comply
with the provisions of the HEA, as revised during the reauthorization process,
or if the cost of such compliance is excessive, the Company's business,
results of operations and financial condition would be materially adversely
affected. The DOE has also circulated proposals that would impact guaranty
agencies and lenders which could impact the access of the Company's
institutions and their students to FFEL program loans. Such proposals include,
among other things, (i) requiring FFEL lenders to offer extended and graduated
payment plans for borrowers and (ii) raising the level of lender risk-sharing
from two to five percent. There can be no assurance that any legislation
resulting from the DOE's current proposals will not include statutory language
that is different from, or in addition to, that which is currently being
proposed by the DOE or that in the future there will not be enacted other
different legislation amending the HEA or otherwise impacting institutions,
guaranty agencies or lenders.
Student Loan Defaults
The Company is substantially dependent on continued participation by its
institutions in the student loan programs included in the Title IV Programs.
For the 1996-97 award year (July 1, 1996 to June 30, 1997), federally
guaranteed or funded student loans represented approximately 55% of the
Company's U.S. tuition and fee revenue. Under the HEA, an institution could
lose its eligibility to participate in some or all of the Title IV Programs if
the defaults of its students on their FFEL or William D. Ford Federal Direct
Loan ("FDL") loans exceed specified rates for specified periods of time. An
institution's annual cohort default rate on FFEL or FDL loans, including a
"weighted average" cohort default rate for institutions that participate in
both loan programs, is calculated as the rate at which borrowers scheduled to
begin repayment on such loans in one year default on those loans by the end of
the following year. If an institution's cohort default rate is 25% or greater
in any one of the three most recent federal fiscal years, the DOE may
determine that the institution lacks administrative capability and may place
that institution on "provisional certification" status for up to four years.
Provisional
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certification does not limit an institution's access to Title IV Program
funds, but does subject that institution to closer review by the DOE and
possible summary adverse action if that institution commits violations of the
Title IV Program requirements. If an institution has cohort default rates of
25% or greater for three consecutive federal fiscal years, that institution
will no longer be eligible to participate in the FFEL or FDL programs for the
remainder of the federal fiscal year in which the determination of
ineligibility is made and for the two subsequent federal fiscal years. An
institution whose cohort default rate for any federal fiscal year exceeds 40%
may have its eligibility to participate in all of the Title IV Programs
limited, suspended or terminated. In addition, if an institution's cohort
default rate for loans under the Perkins program exceeds 15% for any federal
award year, the DOE may determine that the institution lacks administrative
capability and place the institution on provisional certification status for
up to four years. See "Financial Aid and Regulation--Federal Oversight of the
Title IV Programs--Cohort Default Rates."
None of the Company's institutions has published FFEL or FDL cohort default
rates of 25% or greater for three consecutive federal fiscal years, and none
has a published FFEL or FDL cohort default rate of 25% or greater for federal
fiscal year 1994, which is the most recent year for which rates have been
published. Two of the Company's institutions have had a cohort default rate
exceeding 25% in one of the last three federal fiscal years for which such
rates have been published. One of the Company's institutions, The Katharine
Gibbs School, Norwalk, Connecticut ("Gibbs-Norwalk"), has a "prepublication"
cohort default rate of 27.1% for federal fiscal year 1995. Such prepublication
cohort default rate will be subject to revision by the DOE at the time that
final rates are officially published, which is expected to occur in the fall
of 1997. The Company has reviewed the data with which the federal fiscal year
1995 prepublication cohort default rate for Gibbs-Norwalk was calculated and,
pursuant to DOE regulations, has filed the necessary documents to seek certain
corrections in such data, but the Company expects the cohort default rate for
Gibbs-Norwalk to exceed 25% when published as official. Nine of the Company's
institutions have Perkins cohort default rates in excess of 15% for students
who were scheduled to begin repayment in the 1996-1997 federal award year, the
most recent year for which such rates have been calculated. These institutions
are Allentown, Brown, Collins, Gibbs-Boston, Gibbs-Melville, Gibbs-Montclair,
Gibbs-New York, Gibbs-Norwalk and Gibbs-Providence, which collectively
accounted for approximately 59% of the Company's 1996 pro forma net revenue,
reflecting the Company's acquisitions of Western Culinary, SCT, Gibbs, IAMD-
U.S. and IAMD-Canada as if they had occurred as of January 1, 1996 ("1996 Pro
Forma Net Revenue"). The Perkins program cohort default rates for these nine
institutions ranged from 20.7% to 64.3%. Thus, these institutions could be
placed on provisional certification status, which would subject them to closer
review by the DOE and possible summary adverse action if they commit any
violation of the Title IV Program requirements. To date, none of these
institutions has been placed on such status solely for this reason. In 1995,
the Gibbs institutions voluntarily chose to discontinue their participation in
the Perkins program. The loss of eligibility to participate in any or all of
the Title IV Programs by any of the Company's institutions could have a
material adverse effect on the Company's business, results of operations and
financial condition.
Financial Responsibility Standards
The HEA and its implementing regulations establish specific standards of
financial responsibility that must be satisfied in order to qualify for
participation in the Title IV Programs. Under such standards, an institution
must: (i) have an acid test ratio (defined as the ratio of cash, cash
equivalents and current accounts receivable to current liabilities) of at
least 1:1 at the end of each fiscal year, (ii) have a positive tangible net
worth at the end of each fiscal year and (iii) not have a cumulative net
operating loss during its two most recent fiscal years that results in a
decline of more than 10% of the institution's tangible net worth at the
beginning of that two-year period. In order to make this determination, the
DOE requires an institution annually to submit audited financial statements
prepared on an accrual basis in accordance with Generally Accepted Accounting
Principles ("GAAP"). The DOE may measure an institution's financial
responsibility on the basis of the financial statements of the institution
itself or the financial statements of the institution's parent company, and
may also consider the financial condition of any other entity related to the
institution. In reviewing the Company's acquisitions in the last 12 months, it
has been the DOE's practice to measure financial responsibility on the basis
of the financial statements of both the acquired institutions and the Company.
In 1996, the DOE issued proposed
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regulations that, if promulgated, would significantly revise the present
financial responsibility requirements, primarily by replacing the three
separate numeric ratios described above with a composite figure based on three
new ratio calculations. The DOE has not yet issued new regulations in final
form, but has stated its intent to do so by December 1, 1997 and to make the
new regulations effective July 1, 1998.
An institution that is determined by the DOE not to meet the standards of
financial responsibility on the basis of failing to meet one or more of the
specified numeric indicators is nonetheless entitled to participate in the
Title IV Programs if it can demonstrate to the DOE that it is financially
responsible on an alternative basis. An institution may do so by posting
surety, either in an amount equal to 50% (or greater, as the DOE may require)
of the total Title IV Program funds received by students enrolled at such
institution during the prior year or in an amount equal to 10% (or greater, as
the DOE may require) of such prior year's funds if the institution also agrees
to transfer to the reimbursement system of payment for its Title IV Program
funds. The DOE has interpreted this surety condition to require the posting of
an irrevocable letter of credit in favor of the DOE. Alternatively, an
institution may demonstrate, with the support of a statement from a certified
public accountant and other information specified in the regulations, that it
was previously in compliance with the numeric standards and that its continued
operation is not jeopardized by its financial condition. See "Financial Aid
and Regulation--Federal Oversight of the Title IV Programs--Financial
Responsibility Standards."
Company Compliance with Financial Responsibility Standards
In its review of the Company's annual financial statements and interim
balance sheets, as filed with the DOE in connection with the Company's
applications for DOE certification of institutions acquired subsequent to
September 1996 to allow such institutions to participate in the Title IV
Programs, the DOE has questioned whether the Company's financial statements
are acceptable and therefore an authoritative basis upon which to determine
the Company's financial responsibility under the applicable DOE regulations.
Specifically, the DOE has questioned the Company's accounting for certain
direct marketing costs and courseware and other instructional materials.
Further, the DOE has asserted that the Company did not satisfy the 1:1 acid
test ratio based on its fiscal 1996 financial statements. The audited
financial statements included in this Registration Statement have been
restated to expense as incurred all direct marketing and advertising costs
which had previously been deferred. This change in accounting method is
disclosed in the audit opinion and footnotes to the financial statements and
is permitted in accordance with Accounting Principles Board Opinion No. 20.
In lieu of accepting the Company's previously filed 1996 audited financial
statements, the DOE has offered the Company the alternative of posting an
irrevocable letter of credit in favor of the Secretary of Education with
respect to each institution the Company has acquired since September 1996 in a
sum sufficient to secure the DOE's interest in the Title IV Program funds
administered by the applicable institution. While the Company continues to
disagree with the position taken by the DOE, in order to obtain certification
of the institutions to resume participation in the Title IV Programs in a
timely fashion, and thus to avoid any material interruption in Title IV
Program funding for the acquired institutions, the Company has posted and
currently has outstanding a letter of credit in the amount of $1.9 million,
which expires on September 30, 1998, with respect to Western Culinary, and a
letter of credit in the amount of $800,000, with an expiration date of July
31, 1998, with respect to SCT.
The Company has agreed to the DOE's directive, dated September 9, 1997, to
submit a letter of credit in the amount of $15.2 million, to expire on October
31, 1998, with respect to the six Gibbs institutions. Consequently, the six
Gibbs institutions were certified to resume participation in the Title IV
Programs as of October 1, 1997, and the Company must post the letter of credit
with the DOE no later than November 9, 1997. In addition, the Company is
considering the DOE's request to increase, no later than November 15, 1997,
the letter of credit with respect to SCT by $721,000 in order to maintain
SCT's eligibility to participate in the Title IV Programs. Further, upon the
DOE's request, the Company is prepared to post an additional letter of credit
with respect to IAMD-U.S., which the Company estimates will be in the range of
$3.0 million to $5.0 million, in order to reestablish the eligibility of the
two IAMD-U.S. institutions to participate in the Title IV Programs in the near
future.
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The original letters of credit for Western Culinary and SCT represented 50%
of each institution's Title IV Program funding in the prior award year. In
September 1997, the DOE increased the level of surety for SCT to, and
established the level of surety of Gibbs at, 100% of the Title IV Program funds
that students enrolled at each such institution received in the previous award
year. Beginning in September 1997, the DOE has imposed a condition that, for up
to the next 12 months, SCT and Gibbs may not disburse Title IV Program funds in
excess of the sum secured by the applicable letter of credit for each
institution. The DOE has advised the Company that the same conditions will
apply to the IAMD-U.S. institutions, and any other institutions that the
Company may acquire prior to a determination by the DOE that the Company
satisfies the standards of financial responsibility when such institutions
apply for recertification to participate in the Title IV Programs.
As a result of the DOE's requirement that the Company provide letters of
credit to secure the participation of newly acquired CEC institutions in the
Title IV Programs, the Company will have to utilize approximately $22.6 million
of availability under its credit agreement. In addition, if the DOE limits the
aggregate dollar value of the Title IV Program participation of SCT, Gibbs and
IAMD-U.S. to the amount of the letter of credit posted with respect to each
such institution, such a limitation could significantly reduce the Company's
ability to provide financial assistance to additional students at those
institutions, which in turn could reduce the Company's ability to enroll such
additional students. The inability of the Company to significantly increase
aggregate enrollment at the newly-acquired institutions could have a material
adverse effect on the Company's business, results of operations and financial
condition and on its ability to generate sufficient liquidity to continue to
fund growth in its operations and purchase other institutions. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operation--Liquidity and Capital Resources."
Subsequent to the October 1, 1997 certification of the Gibbs institutions and
the restoration of their participation in the Title IV Programs, the Company
and the DOE continue negotiations regarding the size and terms of the sureties
to allow for growth in the Company's operations. Therefore, before the Company
is required to post the expanded surety for SCT or any surety for Gibbs and
IAMD-U.S., agreement may be reached to provide for a material reduction in the
amounts and terms of such sureties and to provide a mechanism to allow the
Company to utilize additional Title IV Program funds in the event of increased
enrollments. However, there can be no assurance as to the outcome of such
continued negotiations.
As a result of the Offering, the Company expects to receive net proceeds of
approximately $ , which will significantly enhance the Company's
financial position. See "Use of Proceeds." The Company believes that such
proceeds and the cash expected to be generated from operations during the
remainder of 1997 will enable the Company and each of its U.S. subsidiaries to
present audited 1997 financial statements which will satisfy each of the DOE's
standards of financial responsibility, including the acid test ratio and
tangible net worth test. Applicable law and regulations require the DOE to
consider only an institution's most recent audited annual financial statements
in making a determination of the institution's financial responsibility.
Accordingly, the Company intends to seek the DOE's review of its audited 1997
financial statements on an expedited basis in the spring of 1998. Once the DOE
has determined that the Company and its U.S. subsidiaries satisfy each of the
DOE's standards of financial responsibility, applicable law and regulations
require the DOE to release the Company from the requirement that it post the
sureties described above and from the limitations on Title IV Program funding
in excess of the surety amounts. However, there can be no assurance that the
DOE will expedite its review of the Company's 1997 financial statements, or of
the outcome of such review.
Under a separate standard of financial responsibility, if an institution has
made late Title IV Program refunds to students in its prior two years, the
institution is required to post a letter of credit in favor of the DOE in an
amount equal to 25% of the total Title IV Program refunds paid by the
institution in its prior fiscal year. Based on this standard, since July 1,
1997, the Company has posted a total of $310,000 in additional letters of
credit with respect to Brown, Collins, Gibbs-Montclair, Gibbs-New York, SCT and
Western Culinary. As of July 1, 1997, this standard has been modified to exempt
an institution if it has not been found to make late refunds to 5% or more of
its students in either of the two most recent fiscal years and has not been
cited for a reportable condition or material weakness in its internal controls
related to late refunds in either of its two most recent fiscal years. The
Company believes that its institutions satisfy this modified standard and
intends to allow its current letters of credit for late refunds to expire
without further action.
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State Authorization
In order to operate and award degrees, diplomas and certificates and to
participate in the Title IV Programs, a campus must be licensed or authorized
to offer its programs of instruction by the relevant agency of the state in
which such campus is located. Each state has its own standards and
requirements for licensure or authorization, which vary substantially among
the states. Typically, state laws require that a campus demonstrate that it
has the personnel, resources and facilities appropriate to its instructional
programs. Each of the Company's U.S. campuses is licensed or authorized by the
relevant agency of the state in which such campus is located. If any of the
Company's campuses were to lose its state license or authorization, such
campus would lose its eligibility to participate in the Title IV Programs,
which could have a material adverse effect on the Company's business, results
of operations and financial condition. See "Financial Aid and Regulation--
State Authorization."
Accreditation
In order to participate in the Title IV Programs, an institution must be
accredited by an accrediting agency recognized by the DOE. Accreditation is a
non-governmental process through which an institution submits to qualitative
review by an organization of peer institutions, based on the standards of the
accrediting agency and the stated aims and purposes of the institution. The
three types of accrediting agencies are (i) national accrediting agencies,
which accredit institutions on the basis of the overall nature of the
institutions without regard to their locations, (ii) regional accrediting
agencies, which accredit institutions located within their geographic areas,
and (iii) specialized accrediting agencies, which accredit specific
educational programs offered by an institution. An accrediting agency
primarily examines the academic quality of an institution's educational
programs, as well as the institution's administrative and financial
operations. Certain states require institutions to maintain accreditation as a
condition of continued authorization to grant degrees. The HEA specifies
certain standards that each accrediting agency must utilize in reviewing
institutions in order for such accrediting agency to be recognized by the DOE.
Each of the Company's U.S. institutions is accredited by an accrediting agency
recognized by the DOE, namely, the Accrediting Council for Independent
Colleges and Schools ("ACICS"), the Accrediting Commission for Career Schools
and Colleges of Technology ("ACCSCT"), and the Accrediting Commission for
Community and Junior Colleges/Western Association of Schools and Colleges
("WASC/ACCJC"). If any of the Company's campuses were to lose its
accreditation, such school would lose its eligibility to participate in the
Title IV Programs, which could have a material adverse effect on the Company's
business, results of operations and financial condition. See "Financial Aid
and Regulation--Accreditation."
The HEA requires accrediting agencies recognized by the DOE to review many
aspects of an institution's operations to ensure that the education or
training offered by the institution is of sufficient quality to achieve, for
the duration of the accreditation period, the stated objective for which the
education or training is offered. Under the HEA, a recognized accrediting
agency must perform regular inspections and reviews of institutions of higher
education, including unannounced site visits to institutions, such as the
Company's schools, that provide career-oriented education and training. An
accrediting agency may place an institution on "reporting" status in order to
monitor one or more specified areas of the institution's performance. An
institution placed on reporting status is required to report periodically to
its accrediting agency on that institution's performance in the specified
areas. While on reporting status, an institution may be limited in opening and
commencing instruction at new locations without first receiving a waiver from
its accrediting agency.
Regulatory Consequences of a Change of Ownership or Control
When the Company expands through the acquisition of an institution that is
eligible to participate in the Title IV Programs, that institution undergoes a
"change of ownership" that results in a "change of control," as defined in the
HEA and applicable regulations. In such event, that institution becomes
ineligible to participate in the Title IV Programs and may receive and
disburse only previously committed Title IV Program funds to its students
until it has applied for and received from the DOE recertification under the
Company's ownership. Approval of an application for recertification must be
based upon a determination by the DOE that the institution under its new
ownership is in compliance with the requirements of institutional eligibility.
The time required to
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act on such an application can vary substantially and may take several months.
If an institution is recertified following a change of ownership, it will be on
a provisional basis. Provisional certification does not limit an institution's
access to Title IV Program funds, but does subject that institution to closer
review by the DOE and possible summary adverse action if that institution
commits violations of the Title IV Program requirements.
Each of the U.S. institutions acquired by the Company, other than IAMD-U.S.,
has undergone a recertification review under the Company's ownership and has
been recertified to participate in the Title IV Programs in accordance with the
DOE's change of ownership requirements and procedures. The DOE recertified such
institutions within periods ranging from two and one-half to five months from
the dates of their respective acquisitions. Of the U.S. institutions that have
been recertified, 11 are presently participating in the Title IV Programs under
provisional certification. With respect to IAMD-U.S., the Company has submitted
to the DOE the application of IAMD-U.S. for recertification to participate in
the Title IV Programs under the Company's ownership. IAMD-U.S. is waiting to
receive such recertification so that it can resume its participation in the
Title IV Programs.
Under the HEA and its implementing regulations, a change of ownership
resulting in a change in control would occur upon the transfer of a controlling
interest in the voting stock of an institution or such institution's parent
corporation. For a corporation such as the Company that is, prior to the
Offering, neither publicly traded nor closely held (as defined under the HEA),
a change of ownership resulting in a change in control would occur if any
person either acquires or ceases to hold at least 25% of such corporation's
total outstanding voting stock and that person gains or loses actual control of
the corporation. With respect to a publicly-traded corporation, which the
Company will be following consummation of the Offering, a change of ownership
resulting in a change in control occurs when there is an event that would
obligate that corporation to file a Current Report on Form 8-K with the
Securities and Exchange Commission (the "Commission") disclosing a change of
control. A change of ownership and control also could require an institution to
reaffirm its state authorization and accreditation. The requirements of state
and accrediting agencies with jurisdiction over the Company's schools vary
widely in this regard. See "Financial Aid and Regulation--Federal Oversight of
the Title IV Programs--Restrictions on Acquiring or Opening Additional Schools
and Adding Educational Programs."
If the Offering were determined to constitute a change of ownership resulting
in a change in control, the Company would be required to reestablish the state
authorization and accreditation of each of its U.S. campuses and apply to the
DOE to reestablish the certification of each of its institutions to participate
in the Title IV Programs. Based upon its review of the HEA, applicable federal
regulations and applicable state and accrediting agency standards, the Company
does not believe that the Offering will constitute a change of ownership
resulting in a change in control for purposes of the HEA or a change of
ownership and control for state authorization or accreditation purposes, except
as identified immediately below. The Offering will constitute a change of
ownership under the standards of ACICS, which provide that a change from a
privately owned corporation to a publicly traded corporation is considered a
change of ownership. As a result, ten of the Company's U.S. institutions will
be subject to review by ACICS to reaffirm their accreditation. Also, ACCSCT
will treat the Offering as a substantive change that requires its review. In
addition, the Offering will constitute a change of ownership under the
standards of the State of Arizona where the transfer of 20% or more of the
stock of an institution or its parent corporation is considered a change of
ownership, so that the Company will be required to reestablish the license of
Collins. A significant delay in reobtaining or the failure to reobtain state
authorization, accreditation or Title IV Program certification for any or all
of the Company's institutions could have a material adverse effect on the
Company's business, results of operations and financial condition.
Once the Company is deemed to be publicly traded, the potential adverse
implications of a change of ownership resulting in a change in control could
influence future decisions by the Company and its stockholders regarding the
sale, purchase, transfer, issuance or redemption of the Company's capital
stock.
Canadian Financial Aid and Regulation
The Company estimates that approximately 81% of the students attending IAMD-
Canada receive student financial assistance from Canadian federal and/or
provincial financial aid programs. The total financial assistance
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received from all Canadian sources in 1996 exceeded 78% of the revenue of
IAMD-Canada and 7% of the Company's 1996 Pro Forma Net Revenue. Specifically,
Canadian students, other than those who reside in the province of Quebec, are
eligible to receive loans under the Canada Student Loan ("CSL") program.
Students who are residents of the province of Quebec are eligible to receive
loans from the Quebec Loans and Bursaries Program ("QLBP"). Students who are
residents of the province of Ontario receive financial assistance under both
the CSL program and the Ontario Student Loans Plan ("OSLP").
With respect to students who reside in the province of Ontario, the Ministry
of Education and Training ("MET") provides financial assistance to eligible
students through the Ontario Student Assistance Program ("OSAP"), which
includes two main components, the CSL program and the OSLP program. To
maintain its right to administer OSAP, an institution, such as the IAMD-Canada
campus in Toronto, must, among other things, be registered and in good
standing under the Private Vocational Schools Act ("PVSA") and abide by the
rules, regulations and administrative manuals of the CSL, OSLP and other OSAP-
related programs. During the first two years of initial eligibility, the
institution must have its administration of OSAP independently audited, and
full eligibility will not be granted unless these audits establish that the
institution has properly administered OSAP. The institution can only
administer CSL funds, and cannot administer OSLP funds, until it has gained
full eligibility. Once an institution has gained OSAP eligibility, the
institution must advise MET before it takes any material action that may
result in its failure or inability to meet any rules, regulations or
requirements related to OSAP.
An institution cannot automatically acquire OSAP-designation through
acquisition of other OSAP-eligible institutions. When there is a change of
ownership, including a change in controlling interest, in a non-incorporated
OSAP-eligible institution, MET will require evidence of the institution's
continued capacity to properly administer the program before extending OSAP
designation to the new owner. The Company does not believe that the Offering
will be considered a change of ownership for purposes of OSAP. Given that MET
periodically revises its regulations and other requirements and changes its
interpretations of existing laws and regulations, there can be no assurance
that MET will agree with the Company's understanding of each MET requirement.
IAMD-Canada, in Toronto, is required to audit its OSAP administration
annually, and MET is authorized to conduct its own audits of the
administration of the OSAP programs by any OSAP-eligible institution. The
Company has complied with these requirements on a timely basis. Based on the
most recent annual compliance audits of IAMD-Canada, in Toronto, that
institution has been found to be in substantial compliance with the
requirements of OSAP and the Company believes that it continues to be in
substantial compliance with these requirements. MET has the authority to take
any measures it deems necessary to protect the integrity of the administration
of OSAP. If MET deems a failure to comply to be minor, MET will advise the
institution of the deficiency and provide the institution with the opportunity
to remedy the asserted deficiency. If MET deems the failure to comply to be
serious in nature, MET has the authority to: (i) condition the institution's
continued OSAP designation upon the institution's meeting specific
requirements during a specific time frame, (ii) refuse to extend the
institution's OSAP eligibility to the OSLP program, (iii) suspend the
institution's OSAP designation or (iv) revoke the institution's OSAP
designation. In addition, when MET determines that any non-compliance in an
institution's OSAP administration is serious, MET has the authority to
contract with an independent auditor, at the expense of the institution, to
conduct a full audit in order to quantify the deficiencies and to require
repayment of all loan amounts. In addition, MET may impose a penalty up to the
amount of the damages assessed in the independent audit.
As noted above, IAMD-Canada, in Toronto, is subject to the PVSA. The Company
may not operate a private vocational school in the province of Ontario unless
such school is registered by the Superintendent under the PVSA. Upon payment
of the prescribed fee and satisfaction of the conditions prescribed by the
regulations under the PVSA and by the Private Vocational School Unit of the
MET, an applicant or registrant such as IAMD-Canada, in Toronto, is entitled
to registration or renewal of registration to conduct or operate a private
vocational school unless the institution fails to meet certain general
criteria concerning financial responsibility and conduct of the institution's
operations. IAMD-Canada, in Toronto, is currently registered under the PVSA,
and the
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Company does not believe that there will be any impediment to renewal of such
registration on an annual basis. If a corporation is convicted of violating the
PVSA or the regulations under the PVSA, the maximum penalty that may be imposed
on the corporation is $25,000.
The PVSA provides that a "registration" is not transferable. However, the
Private Vocational Schools Unit of the MET takes the position that a purchase
of shares of a private vocational school does not invalidate the school's
registration under the PVSA. The Company does not believe that the Offering
will invalidate the registration of IAMD-Canada, in Toronto.
As noted above, students who reside in the province of Quebec are eligible to
receive funds under the QLBP subject to certain student eligibility criteria.
Under this program, student financial assistance is initially provided in the
form of a loan. In addition, IAMD-Canada, in Quebec, is subject to the Act
Respecting Private Education ("ARPE"). In accordance with ARPE, a company may
not operate a private educational institution without holding a permit issued
by the Minister of Education ("Minister") for the institution itself and for
the educational services to be provided. The Minister will issue the permit
after consulting with the Commission Consultative de l'Enseignement Prive
concerning the particular institution and the educational services to determine
if such institution and services meet certain conditions. Permits cannot be
transferred without the written authorization of the Minister, and any entity
holding a permit must advise the Minister of any amalgamation, sale or transfer
affecting such entity. The Minister, after consultation with the Commission,
has the authority to modify or revoke a permit where the holder of the permit,
among other things: (i) does not comply with the conditions, restrictions or
prohibitions relating to the institution or (ii) is, or is about to become,
insolvent.
The legislative, regulatory and other requirements relating to student
financial assistance programs in Ontario and Quebec are subject to change by
applicable governments due to political and budgetary pressures, and any such
change may affect the eligibility for student financial assistance of the
students attending IAMD-Canada which, in turn, could materially adversely
affect the Company's business, results of operations and financial condition.
LIMITED OPERATING HISTORY; RISKS OF INTEGRATING ACQUISITIONS
The Company was incorporated in January 1994 and has grown rapidly since that
date. Although all the Company's current schools have been in existence for
substantial periods of time, the Company itself has only a limited operating
history upon which to evaluate the Company and its prospects. Particularly
since 13 of the Company's 18 campuses have been acquired in 1997, the Company's
campuses have operated together, as parts of a combined entity, for a very
limited period of time. Although comprised of individuals with substantial
education industry experience, the Company's senior executive team has somewhat
limited experience in managing the Company's schools. In addition, the
Company's rapid growth could place a strain on the Company's management,
operations, employees and resources. There can be no assurance that the Company
will be able to maintain or accelerate its current growth rate, effectively
manage its expanding operations or achieve planned growth on a timely or
profitable basis. If the Company is unable to manage its growth effectively,
its business, results of operations, financial condition and regulatory
compliance could be materially adversely affected.
The anticipated benefits of the Company's most recent acquisitions may not be
achieved unless the Company successfully integrates these schools into its
operations and is able to effectively manage, market and apply its business
strategy to these schools. The difficulties of integration may initially be
increased by the necessity of integrating personnel with disparate business
backgrounds and corporate cultures. Management's focus on the integration of
acquired companies and on the application of the Company's business strategy to
these schools could interrupt, or cause loss of momentum in, other ongoing
activities of the Company, which could have a material adverse effect on the
Company's business, results of operations, financial condition and regulatory
compliance. See "Business--Overview."
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RELIANCE ON AND RISKS OF ACQUISITION STRATEGY
The Company expects to continue to rely on acquisitions as a key component
of its strategy for growth. There can be no assurance that the Company will
continue to be able to identify educational institutions that provide suitable
acquisition opportunities or to acquire any such institutions on favorable
terms. Furthermore, there can be no assurance that any acquired institutions
can be successfully integrated into the Company's operations or be operated
profitably. Acquisitions involve a number of special risks and challenges,
including the diversion of management's attention, assimilation of the
operations and personnel of acquired companies, adverse short-term effects on
reported operating results, possible loss of key employees and difficulty of
presenting a unified corporate image. Continued growth through acquisition may
also subject the Company to unanticipated business or regulatory uncertainties
or liabilities. No assurance can be given that any potential acquisition will
succeed in enhancing the Company's business and will not ultimately have a
material adverse effect on the Company. See "Business--Growth Strategy."
When the Company acquires an existing school, a significant portion of the
purchase price for such school typically will be allocated to goodwill and
intangibles (e.g., non-competition agreements). The Company amortizes goodwill
over a period of 40 years and intangible assets over periods of three to five
years. In addition, the Company's acquisition of a school would constitute a
change in ownership, resulting in a change of control with respect to such
school for purposes of eligibility to participate in the Title IV Programs.
Generally, the Company intends to acquire schools subject to the condition
that they be recertified promptly for such eligibility by the DOE. The failure
of the Company to manage its acquisition program effectively could have a
material adverse effect on the Company's business, results of operations,
financial condition and regulatory compliance. See "--Dependence on Financial
Aid; Potential Adverse Effects of Regulation--Regulatory Consequences of a
Change of Ownership or Control," "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Financial Aid and
Regulation--Federal Oversight of the Title IV Programs--Restrictions on
Acquiring or Opening Additional Schools and Adding Educational Programs."
RISKS ASSOCIATED WITH EXPANSION PLANS
Although to date the Company has added new schools only through
acquisitions, in the future the Company expects to develop, open and operate
new schools, most likely as additional locations of existing schools, but
possibly also as entirely separate, freestanding institutions. Establishing
new schools would pose unique challenges and require the Company to make
investments in management, capital expenditures, marketing expenses and other
resources different, and in some cases greater, than those required with
respect to the operation of acquired schools. In addition, in order to open a
new school, the Company would be required to obtain appropriate state or
provincial and accrediting agency authorizations and approvals. In addition,
to be eligible for Title IV Program funding, such schools would need federal
authorization and approvals. In the case of entirely separate, freestanding
U.S. institutions, a minimum of two years' operating history would be required
for them to be eligible for Title IV Program funding. Because the Company has
not yet established a new school, there can be no certainty as to the
Company's ability to be successful in any such endeavor or as to the ultimate
profitability of any such school. Additionally, while the Company expects that
its career-oriented school business will continue to provide the substantial
majority of its revenue in the near term, the Company plans to expand its
contract training business, currently only offered to a limited extent by a
few of the Company's schools, and may also decide to provide other education-
related services, such as distance learning or educational publishing. There
can be no assurance as to what, if any, new service areas the Company will
decide to enter nor as to the Company's ability to succeed in markets beyond
its current career-oriented school business. Any failure of the Company to
effectively manage the operations of newly established schools or service
areas, or any diversion of management's attention from the Company's core
career-oriented school operating activities, could have a material adverse
effect on the Company's business, results of operations, financial condition
and regulatory compliance. See "Business--Growth Strategy" and "Financial Aid
and Regulation--Federal Oversight of the Title IV Programs-- Restrictions on
Acquiring or Opening Additional Schools and Adding Educational Programs." The
Company may also consider acquiring or establishing operations outside of the
United States and Canada. See "--Risks of International Operations."
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RISK ASSOCIATED WITH CHANGES IN MARKET NEEDS AND TECHNOLOGY
Prospective employers of graduates of the Company's schools increasingly
demand that their entry-level employees possess appropriate technological
skills. Educational programs at these schools, particularly programs in
computer technologies and visual communications, must keep pace with such
shifting requirements. The inability of the Company to adequately respond to
changes in industry requirements for whatever reason could have a material
adverse effect on the Company's business, results of operations and financial
condition.
SEASONALITY
The Company's results of operations fluctuate primarily as a result of
changes in the level of student enrollment at the Company's schools. The
Company's schools experience a seasonal increase in new enrollments in the
fall, traditionally when the largest numbers of new high school graduates
begin postsecondary education. Furthermore, although the Company encourages
year-round attendance at all schools, Brooks has a traditional summer break
for its fashion design and interior design students. As a result of these
factors, total student enrollment and net revenue are typically highest in the
fourth quarter (October through December) and lowest in the second quarter
(April through June) of the Company's fiscal year. The Company's costs and
expenses do not, however, fluctuate as significantly on a quarterly basis. The
Company anticipates that these seasonal trends at its schools will continue.
See "Management's Discussion and Analysis of Financial Condition and Results
of Operations--Seasonality."
COMPETITIVE MARKET
The postsecondary education market is highly competitive. The Company's
schools compete with traditional public and private two-year and four-year
colleges and universities and other proprietary schools. Certain public and
private colleges and universities, as well as other private career-oriented
schools, may offer programs similar to those of the Company's schools.
Although tuition at private nonprofit institutions is, on average, higher than
tuition at CEC's schools, some public institutions are able to charge lower
tuition than CEC's schools, due in part to government subsidies, government
and foundation grants, tax-deductible contributions and other financial
sources not available to proprietary schools. Some of the Company's
competitors in both the public and private sectors have substantially greater
financial and other resources than the Company. See "Business--Competition."
RISKS OF INTERNATIONAL OPERATIONS
Although the Company's operations have thus far been limited to the U.S. and
Canada, the Company intends to explore opportunities outside those markets.
There may be difficulties and complexities associated with any expansion by
the Company into international markets, and there can be no assurance that the
Company's strategies will succeed beyond the U.S. and Canada. International
operations present inherent risks, including currency fluctuations, varying
political and economic conditions, unanticipated changes in regulation, trade
barriers, staffing and management problems and adverse tax consequences. Also,
in expanding internationally, the Company would be required to comply with
different, and potentially more onerous, regulatory requirements. There can be
no assurance that such factors will not have a material adverse effect on the
Company's business, results of operations or financial condition in the
future. See "Business--Growth Strategy."
OWNERSHIP AND SIGNIFICANT INFLUENCE OF PRINCIPAL STOCKHOLDERS
After consummation of the Offering, Heller Equity Capital Corporation
("Heller"), Electra Investment Trust P.L.C. and Electra Associates, Inc.
(collectively, "Electra"), and the current executive officers and directors of
the Company, collectively, will own approximately % of the outstanding
shares of Common Stock (approximately % if the Underwriters' over-
allotment option is exercised in full). As a result of such concentration of
ownership, if Heller, Electra and the current executive officers and directors
of the Company, or some combination thereof, vote together, they will have the
ability to control the policies and affairs of the Company and corporate
actions requiring stockholder approval, including the election of all members
of the
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Company's Board of Directors. This concentration of ownership could have the
effect of delaying, deferring or preventing a change of control of the
Company, including any business combination with an unaffiliated party, and
could also affect the price that investors might be willing to pay in the
future for shares of Common Stock. See "Security Ownership of Certain
Beneficial Owners and Management" and "Description of Capital Stock."
FUTURE CAPITAL NEEDS
The Company believes that funds from operations, cash on hand and
investments, and borrowings under the $80 million credit agreement, dated as
of May 30, 1997 and amended as of September 25, 1997 (the "Credit Agreement"),
among the Company, as borrower, the lenders named therein and LaSalle National
Bank, as agent, together with the net proceeds of the Offering, will be
adequate to fund the Company's current operating plans for the foreseeable
future. However, the Company may need additional debt or equity financing in
order to carry out its strategy of growth through acquisition. The amount and
timing of financing which the Company may need will vary principally depending
on the timing and size of acquisitions and the sellers' willingness to provide
financing themselves. To the extent that the Company requires additional
financing in the future and is unable to obtain such additional financing, it
may not be able to implement fully its growth strategy. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Liquidity and Capital Resources."
DEPENDENCE ON KEY PERSONNEL
The Company's success to date has depended in large part on the skills and
efforts of John M. Larson, the Company's co-founder, President and Chief
Executive Officer, William A. Klettke, the Company's Senior Vice President and
Chief Financial Officer, and the Company's other key personnel. Additionally,
the Company's success depends, in large part, upon its ability to attract and
retain highly qualified faculty, school presidents and administrators and
corporate management. Due to the nature of the Company's business, it may be
difficult to locate and hire qualified personnel, and to retain such personnel
once hired. None of the Company's employees is subject to an employment or
noncompetition agreement other than Mr. Larson and Lawrence Gross, the
Company's Managing Director of Operations--Canadian School Group. The loss of
the services of Mr. Larson, Mr. Klettke or any of the Company's other key
personnel, or the failure of the Company to attract and retain other qualified
and experienced personnel on acceptable terms, could have a material adverse
effect on the Company's business, results of operations and financial
condition. See "Management."
NO PRIOR PUBLIC MARKET FOR COMMON STOCK
Prior to the Offering, there has been no public market for the Common Stock
and there can be no assurance that an active trading market will develop or be
sustained after the Offering. The initial public offering price for the Common
Stock will be determined by negotiations between the Company and the
Underwriters, based upon several factors, and may not be indicative of the
price that will prevail in the public market. There can be no assurance that
the market price of the Common Stock will not decline from the initial public
offering price. After consummation of the Offering, the market price of the
Common Stock will be subject to fluctuations in response to a variety of
factors, including quarterly variations in the Company's operating results,
announcements of acquisitions by the Company or its competitors, new
regulations or interpretations of regulations applicable to the Company's
schools, changes in accounting treatments or principles and changes in
earnings estimates by securities analysts, as well as general political
economic and market conditions. The market price for the Common Stock may also
be affected by the Company's ability to meet or exceed analysts' or "street"
expectations, and any failure to meet such expectations, even if minor, could
have a material adverse effect on the market price of the Common Stock. In
addition, the stock market has from time to time experienced significant price
and volume fluctuations that have particularly affected the market prices of
equity securities of certain companies and that have often been unrelated to
the operating performance of such companies. In the past, following periods of
volatility in the market price of a company's securities, securities class
action litigation has often been instituted against such a company. Any such
litigation initiated against the Company could result in substantial costs and
a diversion of management's attention and resources, which could have a
material adverse effect on the Company's business, results of operations and
financial condition. See "Underwriting."
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ANTITAKEOVER EFFECTS OF CERTIFICATE OF INCORPORATION AND BYLAW PROVISIONS
Upon consummation of the Offering, the Company's Board of Directors will
have the authority to issue up to shares of undesignated preferred
stock and to determine the price, rights, preferences, privileges and
restrictions, including voting rights, of those shares without any further
vote or action by the Company's stockholders. The rights of the holders of
Common Stock will be subject to, and may be adversely affected by, the rights
of the holders of any preferred stock that may be issued in the future. The
issuance of preferred stock, while providing desirable flexibility in
connection with possible financings, acquisitions and other corporate
purposes, could have the effect of making it more difficult for a third party
to acquire a majority of the outstanding voting stock of the Company. The
Company has no present plans to issue such shares of preferred stock. Further,
certain provisions of the Company's Amended and Restated Certificate of
Incorporation and Amended and Restated Bylaws and of Delaware law could delay
or make more difficult a merger, tender offer or proxy contest involving the
Company. See "Description of Capital Stock."
SHARES ELIGIBLE FOR FUTURE SALE
The sale of a substantial number of shares of Common Stock, or the
perception that such sales could occur, could adversely affect prevailing
market prices for the Common Stock. Upon consummation of the Offering, the
Company will have a total of shares of Common Stock outstanding,
of which the shares offered hereby will be eligible for immediate
sale in the public market without restriction unless such shares are held by
"affiliates" of the Company within the meaning of Rule 144 under the
Securities Act of 1933, as amended (the "Securities Act"). The remaining
shares of Common Stock outstanding upon completion of the
Offering will be "restricted securities" within the meaning of Rule 144 under
the Securities Act (the "Restricted Shares"), and of such
Restricted Shares will be subject to lock-up agreements (the "Lock-Up
Agreements") under which the holders of such shares agree that they will not,
directly or indirectly, sell or otherwise dispose of any shares of Common
Stock, or securities or other rights convertible into or exchangeable or
exercisable for any shares of Common Stock, for 180 days after the date of the
Offering without the prior written consent of Credit Suisse First Boston
Corporation. An additional shares of Common Stock are issuable at
various dates upon exercise of options heretofore granted to certain
employees, officers, directors and consultants of the Company pursuant to
stock option agreements. Upon expiration of the Lock-Up Agreements (or earlier
upon the consent of Credit Suisse First Boston Corporation), of
the currently outstanding Restricted Shares will be eligible for sale under
Rule 144, subject to volume and other limitations of such rule. An additional
Restricted Shares will then be eligible for sale without any
volume or other limitations pursuant to Rule 144(k). Subject to the Lock-Up
Agreements, the holders of Restricted Shares of Common Stock also
have been accorded registration rights under the Securities Act. No prediction
can be made as to the effect, if any, that future sales of shares, or the
availability of shares for future sales, will have on the market price of the
Common Stock prevailing from time to time or on the Company's ability to raise
capital through an offering of its equity securities. See "Description of
Capital Stock," "Shares Eligible for Future Sale" and "Underwriting."
IMMEDIATE AND SUBSTANTIAL DILUTION
The initial public offering price of the Common Stock offered hereby is
substantially higher than the net book value of the currently outstanding
Common Stock. Therefore, purchasers of the Common Stock offered hereby will
experience immediate and substantial dilution in the net tangible book value
of the Common Stock. See "Dilution."
ABSENCE OF DIVIDENDS
The Company has never declared or paid any cash dividends or distributions
on its common stock. The Company currently intends to retain its earnings to
finance future growth and therefore does not anticipate paying any cash
dividends on the Common Stock in the foreseeable future. See "Dividend
Policy."
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THE TRANSACTIONS
The Company's outstanding capital stock currently consists of (i) four
classes of common stock: Class A Voting Common Stock, $.01 par value (the
"Class A Common Stock"); Class B Voting Common Stock, $.01 par value (the
"Class B Common Stock"); Class C Non-voting Common Stock, $.01 par value (the
"Class C Common Stock"); and Class E Non-voting Common Stock, $.01 par value
(the "Class E Common Stock") (the Class A Common Stock, Class B Common Stock,
Class C Common Stock and Class E Common Stock are collectively referred to as
the "Existing Common Stock"); and (ii) three classes of Preferred Stock:
Preferred Stock, Series A, $.01 par value (the "Series A Preferred Stock");
Preferred Stock, Series C, $.01 par value (the "Series C Preferred Stock");
and Preferred Stock, Series D, $.01 par value (the "Series D Preferred Stock")
(the Series A Preferred Stock, Series C Preferred Stock and Series D Preferred
Stock are collectively referred to as the "Existing Preferred Stock").
Prior to the consummation of the Offering, (i) all Existing Common Stock
will be converted into Class A Common Stock (which Class A Common Stock will
become shares of Common Stock after the Certificate Amendment, as
defined below); (ii) all outstanding warrants to purchase Class D Non-voting
Common Stock, $.01 par value (the "Class D Common Stock"), and Class E Common
Stock (collectively, the "Warrants") will be exercised (the "Warrant
Exercise") for an aggregate of shares of Class D Common Stock
(which Class D Common Stock will become shares of Common Stock
after the Certificate Amendment) and shares of Class E Common Stock
(which Class E Common Stock will become shares of Common Stock
after the Certificate Amendment), respectively; and (iii) the Amended and
Restated Certificate of Incorporation of the Company shall be amended to
provide, among other things, for (a) only two classes of capital stock,
consisting of the Common Stock and Preferred Stock, $.01 par value, (b) the
conversion of all shares of Existing Common Stock into Common Stock at the
rate of shares of Common Stock for every share of Existing Common
Stock and (c) the conversion of each Existing Preferred Stock into Common
Stock at a rate determined by dividing the liquidation value of the shares of
Existing Preferred Stock by the initial public offering price of the Common
Stock in the Offering (the "Preferred Stock Conversion") (the "Certificate
Amendment" and, together with the Warrant Exercise, the "Transactions"). The
consummation of the Offering and the Transactions are conditioned upon one
another.
PENDING ACQUISITION
On September 26, 1997, the Company entered into an agreement to acquire the
Los Angeles Culinary Institute ("LA Culinary") from Chefs Unlimited, Inc.
Student population at LA Culinary currently is approximately 80 students. The
cash purchase price for the proposed LA Culinary acquisition will not be
material to the Company and will be provided by borrowings under the Credit
Agreement. The completion of the proposed LA Culinary acquisition is subject
to a number of conditions, including approval by the California Council for
Private Postsecondary and Vocational Education. There can be no assurance as
to when the proposed LA Culinary acquisition will be completed, if at all.
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USE OF PROCEEDS
The net proceeds to the Company from the sale of the shares of Common Stock
offered by the Company hereby, after deduction of the estimated underwriting
discounts and commissions and offering expenses payable by the Company, are
estimated to be approximately $ million, assuming an initial public
offering price of $ per share (approximately $ million if the
Underwriters exercise in full the over-allotment option granted to them by the
Company and certain of its stockholders). The Company intends to use
approximately $29.4 million of its net proceeds from the Offering to repay the
outstanding revolving credit borrowings under the Credit Agreement (based upon
amounts outstanding as of June 30, 1997), approximately $4.1 million to repay
the remaining aggregate outstanding indebtedness on notes payable to the
former shareholders of IAMD-U.S. and IAMD-Canada, approximately $2.1 million
to pay the liquidation value of accrued paid-in-kind dividends on certain of
its Existing Preferred Stock (based upon dividends accrued as of June 30,
1997) (the "Dividend Payment") and the remaining approximately $ million
for general corporate purposes, including capital expenditures, possible
future acquisitions of schools and working capital. From time to time, the
Company is involved in the evaluation of, and discussions with, possible
acquisition candidates, although the Company currently has no agreements,
commitments or understandings with respect to any acquisitions, other than the
Company's proposed LA Culinary acquisition. See "Pending Acquisition."
The outstanding revolving credit borrowings under the Credit Agreement
(including borrowings under a predecessor credit agreement refinanced through
borrowings under the Credit Agreement) were incurred by the Company in
connection with its acquisitions of Gibbs, IAMD-U.S. and IAMD-Canada. Interest
is payable by the Company on outstanding obligations under the Credit
Agreement at various rates, as defined in the Credit Agreement (see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources"), and these obligations are
scheduled to mature on May 31, 2002. The notes payable to the former
shareholders of IAMD-U.S. and IAMD-Canada were issued by the Company in
connection with the acquisitions of these schools, bear interest at a rate of
7% per annum and mature on June 30, 2001. The notes payable to IAMD-U.S. and
IAMD-Canada are subject to mandatory repayment upon consummation of the
Offering.
If the Underwriters exercise the over-allotment option granted to them by
the Company and certain of its stockholders (the "Selling Stockholders"), the
Company will not receive any proceeds from the sale of the shares sold by the
Selling Stockholders. See "Security Ownership of Certain Beneficial Owners and
Management."
DIVIDEND POLICY
The Company has never declared or paid any cash dividends or distributions
on the Existing Common Stock. The Company does not anticipate paying cash
dividends or other distributions on the Common Stock in the foreseeable
future, but intends instead to retain any future earnings for reinvestment in
its business. Any future determination to pay cash dividends will be at the
discretion of the Company's Board of Directors and will be dependent upon the
Company's financial condition, results of operations, capital requirements and
such other factors as the Company's Board of Directors deems relevant. The
Company is prohibited from paying any dividends on the Common Stock under the
terms of the Credit Agreement.
23
<PAGE>
CAPITALIZATION
The following table sets forth the Company's cash and cash equivalents and
capitalization (long-term debt plus stockholders' equity) (i) as of June 30,
1997, (ii) pro forma to reflect the Transactions and (iii) pro forma as
adjusted to reflect the Transactions and the sale by the Company of
shares of Common Stock offered hereby at an assumed initial public offering
price of $ per share, after deducting estimated underwriting discounts and
commissions and offering expenses payable by the Company, and the application
of the net proceeds therefrom to repay certain indebtedness and for the
Dividend Payment as described under "Use of Proceeds." The information set
forth below should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the financial
statements and the related notes thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
JUNE 30, 1997
------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
------- --------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Cash and cash equivalents....................... $ 9,745 $ 9,745 $
======= ======= =======
Long-term debt, net of current maturities....... $47,651 $47,651 $
Redeemable preferred stock:
Series A Preferred Stock, $.01 par value,
50,000 shares authorized,
7,852 shares outstanding, at redemption
value, including $1,911 of unpaid dividends
(1).......................................... 9,763 --
Series C Preferred Stock, $.01 par value,
5,000 shares authorized,
4,954 shares outstanding, at redemption
value, including $0 of unpaid dividends (1).. 4,217 --
Series D Preferred Stock, $.01 per value,
25,000 shares authorized,
22,500 shares outstanding, at redemption
value, including $159 of unpaid dividends
(1).......................................... 17,717 --
Redeemable warrants:
Exercisable into 23,636 shares of Class D
Common Stock................................. 1,032 --
Exercisable into 3,514 shares of Class E
Common Stock................................. 260 --
Stockholders' investment:
Common Stock, $.01 par value, 1,100,000 shares
authorized;
81,898 shares issued and outstanding,
including 5,250 shares of Class A Common
Stock, 5,100 shares of Class B Common Stock,
69,900 shares of Class C Common Stock, no
shares of Class D Common Stock and 1,648
shares of Class E Common Stock, actual;
shares issued and outstanding, pro
forma and as adjusted (2).................... 1 1
Warrants...................................... 4,788 --
Additional paid-in capital.................... 60 37,837
Accumulated deficit........................... (3,761) (3,761)
------- ------- -------
Total stockholders' investment.............. 1,088 34,077
------- ------- -------
Total capitalization........................ $81,728 $81,728 $
======= ======= =======
</TABLE>
- --------
(1) Pursuant to the Preferred Stock Conversion, shares of
Preferred Stock will be converted into shares of Common Stock.
(2) Does not include as of June 30, 1997 (i) shares of Common Stock
issuable upon the exercise of outstanding options at a weighted average
exercise price of $ per share and (ii) shares of Common
Stock reserved for issuance under the Stock Plans (as defined under
"Management--Stock Plans"). See "Management--Stock Plans," "Description of
Capital Stock" and Note 1 of Notes to the Consolidated Financial
Statements.
24
<PAGE>
DILUTION
The net tangible book value of the Company as of June 30, 1997, after giving
effect to the Transactions, was approximately $ , or $
per share of Common Stock. Net tangible book value per share represents the
amount of total tangible assets of the Company reduced by the amount of its
total liabilities and divided by the total number of shares of Common Stock
outstanding. After giving effect to the sale of the shares of
Common Stock offered hereby at an assumed initial public offering price of
$ per share, and after deducting estimated underwriting discounts and
commissions and offering expenses payable by the Company, the pro forma net
tangible book value of the Company as of June 30, 1997 would have been
approximately $ , or $ per share of Common Stock. This
represents an immediate increase in net tangible book value of $ per
share to existing stockholders and an immediate dilution of $ per
share to new stockholders. The following table illustrates this per share
dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share......... $
Net tangible book value per share as of June 30, 1997.. $
Increase per share attributable to pro forma
adjustments...........................................
--------
Pro forma net tangible book value per share as of June
30, 1997...............................................
Increase per share attributable to new stockholders.....
Pro forma net tangible book value per share as of June
30, 1997 after the Offering............................
--------
Dilution per share to new stockholders.................. $
========
</TABLE>
The following table summarizes, on a pro forma basis as of June 30, 1997,
the difference between the existing stockholders and new investors with
respect to the number of shares of Common Stock purchased from the Company,
the total consideration paid to the Company and the average price per share
paid (before deducting estimated underwriting discounts and commissions and
offering expenses payable by the Company):
<TABLE>
<CAPTION>
SHARES
PURCHASED TOTAL CONSIDERATION AVERAGE
--------------- --------------------- PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
------- ------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C>
Existing stockholders....... % $ % $
New investors............... $
------- ----- ---------- ---------
Total................... 100.0% $ 100.0%
======= ===== ========== =========
</TABLE>
The foregoing calculations do not give effect to, as of June 30, 1997, (i)
shares of Common Stock issuable upon the exercise of outstanding
warrants at a weighted average exercise price of $ per share and (ii)
shares of Common Stock issuable upon the exercise of outstanding
options at a weighted average exercise price of $ per share. To the
extent any such options and warrants are exercised, there will be further
dilution to new investors. See "Capitalization," "Management--Stock Plans,"
"Description of Capital Stock" and Note 15 of the Notes to the Company's
Consolidated Financial Statements.
25
<PAGE>
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL DATA
The following unaudited pro forma condensed consolidated statements of
operations of the Company give effect to (1) the acquisitions of Western
Culinary, SCT, Gibbs, IAMD-U.S. and IAMD-Canada (the "Acquisitions"), (2) the
Transactions (as defined under "The Transactions") and (3) the sale by the
Company of shares of Common Stock in the Offering and the
application of the estimated net proceeds therefrom to repay certain
indebtedness and for the Dividend Payment as set forth under "Use of
Proceeds," as if they had occurred at the beginning of each period presented.
The unaudited pro forma condensed consolidated statement of operations for
the year ended December 31, 1996 reflects the audited statements of operations
of the Company, the unaudited historical statement of operations of SCT,
Gibbs, IAMD-U.S. and IAMD-Canada for the year then ended and the unaudited
historical statement of operations of Western Culinary for the nine months and
21 days ended October 21, 1996. The results of Western Culinary's operations
from the date of its acquisition, October 21, 1996, have been included in the
Company's historical financial statements. The unaudited pro forma condensed
consolidated statement of operations for the six months ended June 30, 1997
includes the audited statements of operations of the Company and the unaudited
historical statements of operations of IAMD-U.S. and IAMD-Canada for the six
months ended June 30, 1997, of SCT for the two months ended February 28, 1997
and of Gibbs for the five months ended May 31, 1997. The historical results of
operations of SCT and Gibbs have been included in the Company's financial
statements subsequent to the dates of their acquisition. For the purpose of
preparing the unaudited pro forma condensed consolidated statements of
operations only, the historical statements of operations for IAMD-Canada
described above were translated from Canadian dollars (IAMD-Canada's
functional currency) to U.S. dollars at the approximate average exchange rate
for the respective periods.
The unaudited pro forma financial data are a presentation of historical
results with accounting and other adjustments. The unaudited pro forma
financial data do not reflect the effects of any of the anticipated changes to
be made by the Company in its operations from the historical operations, are
presented for informational purposes only and should not be construed to be
indicating (i) the results of operations or the financial position of the
Company that actually would have occurred had the Acquisitions, the
Transactions and the Offering been consummated as of the dates indicated or
(ii) the results of operations or the financial position of the Company in the
future.
The unaudited pro forma financial data reflect the Acquisitions using the
purchase method of accounting. The acquired assets and liabilities of Western
Culinary, SCT, Gibbs, IAMD-U.S. and IAMD-Canada are stated at values
representing a preliminary allocation of the purchase cost based upon
estimated fair market values at the dates of acquisition. The final purchase
accounting allocations will be determined based upon final appraised values
and are not expected to differ significantly from the estimates used herein.
The following unaudited pro forma financial data and accompanying notes are
qualified in their entirety by reference to, and should be read in conjunction
with, "Management's Discussion and Analysis of Financial Condition and Results
of Operations," the financial statements and notes thereto of CEC, IAMD-U.S.
and
IAMD-Canada and the other historical financial information included elsewhere
in this Prospectus.
26
<PAGE>
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE TWELVE MONTHS ENDED DECEMBER 31, 1996
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
HISTORICAL
----------------------------------------------------
WESTERN
CULINARY
(THROUGH
OCTOBER 21, IAMD- IAMD- PRO FORMA OFFERING
CEC 1996) SCT GIBBS U.S. CANADA ADJUSTMENTS PRO FORMA ADJUSTMENTS
------- ----------- ------ ------- ------ ------- ----------- --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue:
Tuition and
registration
fees, net........ $29,269 $4,297 $6,206 $25,188 $6,404 $7,633 $ $78,997 $
Other, net........ 4,311 304 9 2,696 226 54 7,600
------- ------ ------ ------- ------ ------ ------- ------- -------
Total net
revenue........ 33,580 4,601 6,215 27,884 6,630 7,687 86,597
Operating Expenses:
Educational
services and
facilities....... 14,404 697 2,063 11,085 2,970 2,479 33,698
General and
administrative... 14,623 3,476 3,807 13,866 3,508 4,566 (1,011)(1) 42,835
Depreciation and
amortization..... 2,178 18 205 2,275 478 430 5,058 (2)(3) 10,642
------- ------ ------ ------- ------ ------ ------- ------- -------
Total operating
expenses....... 31,205 4,191 6,075 27,226 6,956 7,475 4,047 87,175
Income (loss)
from
operations..... 2,375 410 140 658 (326) 212 (4,047) (578)
Interest expense... 672 1 55 1,013 107 145 2,946 (4) 4,939 (8)
------- ------ ------ ------- ------ ------ ------- ------- -------
Income (loss)
before
provision
(benefit) for
income taxes... 1,703 409 85 (355) (433) 67 (6,993) (5,517)
Provision (benefit)
for income taxes.. 208 164 34 (142) (173) 27 (118)(5) -- (5)
------- ------ ------ ------- ------ ------ ------- ------- -------
Net Income (Loss).. 1,495 245 51 (213) (260) 40 (6,875) (5,517)
Dividends paid or
accrued on
preferred stock.. (1,128) -- -- -- -- -- 1,128 (6)(11) --
Accretion to
redemption value
of preferred
stock and
warrants......... (230) -- -- -- -- -- 230 (6)(11) --
------- ------ ------ ------- ------ ------ ------- ------- -------
Net income (loss)
attributable to
common
stockholders...... $ 137 $ 245 $ 51 $ (213) $ (260) $ 40 $(5,517) $(5,517) $
======= ====== ====== ======= ====== ====== ======= ======= =======
Net income (loss)
per share
attributable to
common
stockholders...... $
=======
Weighted average
number of shares
outstanding....... (7) (9)
======= =======
<CAPTION>
PRO FORMA
AS ADJUSTED
FOR THE
OFFERING
---------------
<S> <C>
Revenue:
Tuition and
registration
fees, net........ $
Other, net........
---------------
Total net
revenue........
Operating Expenses:
Educational
services and
facilities.......
General and
administrative...
Depreciation and
amortization.....
---------------
Total operating
expenses.......
Income (loss)
from
operations.....
Interest expense...
---------------
Income (loss)
before
provision
(benefit) for
income taxes...
Provision (benefit)
for income taxes..
---------------
Net Income (Loss)..
Dividends paid or
accrued on
preferred stock.. --
Accretion to
redemption value
of preferred
stock and
warrants......... --
---------------
Net income (loss)
attributable to
common
stockholders...... $
===============
Net income (loss)
per share
attributable to
common
stockholders...... $
===============
Weighted average
number of shares
outstanding....... (7)(9)
===============
</TABLE>
27
<PAGE>
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1997
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
HISTORICAL
---------------------------------------------
SCT GIBBS PRO FORMA
(THROUGH (THROUGH AS ADJUSTED
FEBRUARY 28, MAY 31, IAMD- IAMD- PRO FORMA OFFERING FOR THE
CEC 1997) 1997) U.S. CANADA ADJUSTMENTS PRO FORMA ADJUSTMENTS OFFERING
------- ------------ -------- ------ ------ ----------- --------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue:
Tuition and
registration fees,
net................... $23,073 $1,155 $11,606 $4,119 $7,841 $ $47,794 $ $
Other, net............ 2,579 -- 1,222 63 37 3,901
------- ------ ------- ------ ------ ------- ------- ------- -------
Total net revenue... 25,652 1,155 12,828 4,182 7,878 51,695
Operating Expenses:
Educational services
and facilities........ 11,090 408 5,029 1,966 3,007 21,500
General and
administrative........ 10,942 1,071 6,078 2,091 3,542 23,724
Depreciation and
amortization.......... 2,109 6 901 387 649 1,430 (1)(2) 5,482
------- ------ ------- ------ ------ ------- ------- ------- -------
Total operating
expenses............ 24,141 1,485 12,008 4,444 7,198 1,430 50,706
Income (loss) from
operations.......... 1,511 (330) 820 (262) 680 (1,430) 989
Interest expense....... 985 7 242 103 324 940 (3) 2,601 (7)
------- ------ ------- ------ ------ ------- ------- ------- -------
Income (loss) before
provision for income
taxes............... 526 (337) 578 (365) 356 (2,370) (1,612)
Provision (benefit) for
income taxes........... 210 (135) 231 (146) 142 (302)(4) -- (4)
------- ------ ------- ------ ------ ------- ------- ------- -------
Income (Loss) before
extraordinary item..... 316 (202) 347 (219) 214 (2,068) (1,612)
Dividends on
preferred stock....... (738) -- -- -- -- 738 (5) --
Accretion to
redemption value of
preferred stock and
warrants.............. (271) -- -- -- -- 271 (5) --
------- ------ ------- ------ ------ ------- ------- ------- -------
Income (loss) before
extraordinary item
attributable to common
stockholders........... $ (693) $ (202) $ 347 $ (219) $ 214 $(1,059) $(1,612) $ $
======= ====== ======= ====== ====== ======= ======= ======= =======
Income (loss) before
extraordinary item per
share attributable to
common stockholders.... $ (6) (8) $ (6)(8)
======= =======
Weighted average number
of shares outstanding..
======= ======= =======
</TABLE>
28
<PAGE>
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
AS OF JUNE 30, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
PRO FORMA
AS ADJUSTED
HISTORICAL PRO FORMA OFFERING FOR THE
CEC (10) ADJUSTMENTS PRO FORMA ADJUSTMENTS OFFERING
---------- ----------- --------- ----------- -----------
ASSETS
------
<S> <C> <C> <C> <C> <C>
Current assets.......... $ 19,154 $ -- $ 19,154 (8) $
Property and equipment,
net of accumulated
depreciation and
amortization........... 47,088 -- 47,088
Other assets:
Goodwill, net......... 20,208 -- 20,208
Covenants not to
compete, net......... 12,627 -- 12,627
Other noncurrent
assets............... 1,690 -- 1,690
-------- ------- -------- -------- --------
Total other assets.. 34,525 -- 34,525
-------- ------- -------- -------- --------
Total assets........ $100,767 $ -- $100,767 $ $
======== ======= ======== ======== ========
<CAPTION>
LIABILITIES AND
STOCKHOLDERS' INVESTMENT
- ------------------------
<S> <C> <C> <C> <C> <C>
Current liabilities..... $ 15,404 $ -- $ 15,404 (8)
Long-term debt, net of
current maturities..... 47,651 -- 47,651 (8)
Deferred income tax
liabilities............ 3,635 -- 3,635
-------- ------- -------- -------- --------
Total liabilities... 66,690 -- 66,690
Redeemable preferred
stock and warrants..... 32,989 (32,989)(11) --
Stockholders'
investment............. 1,088 32,989 (11) 34,077
-------- ------- -------- -------- --------
Total liabilities
and stockholders'
investment......... $100,767 $ -- $100,767 $ $
======== ======= ======== ======== ========
</TABLE>
29
<PAGE>
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
FINANCIAL DATA
The following notes identify the pro forma adjustments made to the
historical amounts in the unaudited pro forma condensed consolidated financial
data:
(1) Management fees charged to Western Culinary by its parent related to non-
recurring business activities totaling $1.0 million have been eliminated.
(2) The preliminary appraised values of the acquired fixed assets of Western
Culinary, SCT, Gibbs, IAMD-U.S. and IAMD-Canada have been assigned to the
respective assets. Depreciation of fixed assets based on appraised values
and their remaining estimated useful lives, which range from one to 31
years, in excess of the historical amounts is recorded as an adjustment.
(3) The historical intangible assets of Gibbs have been eliminated because
new values were assigned to intangible assets at the date of acquisition.
Intangible assets recorded in conjunction with the acquisitions of
Western Culinary, SCT, Gibbs, IAMD-U.S. and IAMD-Canada include goodwill
of $18.0 million, covenants not to compete of $13.2 million and student
contracts of $52,000. Goodwill is amortized on a straight-line basis over
its estimated useful life of 40 years. Covenants not to compete are
amortized over their estimated useful lives, which range from three to
five years, using the sum of years' digits method. Amortization expense
has been adjusted to reflect the new values and amortization of these
intangible assets for the entire periods presented, as opposed to
historical amounts, which were only recorded from date of the
acquisitions to the end of each period.
(4) This adjustment represents additional interest expense associated with
approximately $53.3 million of debt incurred to finance the acquisitions
of Western Culinary, SCT, Gibbs, IAMD-U.S., and IAMD-Canada which would
have been outstanding for the entire periods presented. Interest on bank
borrowings is imputed assuming a 9% borrowing rate for the twelve months
ended December 31, 1996 and the six months ended June 30, 1997.
(5) Due to the historical losses experienced by the Company and the pro forma
loss derived therefrom, the historical income tax provision/(benefit) has
been eliminated, and no income tax benefit has been reflected in the
unaudited pro forma consolidated condensed statements of operations for
the year ended December 31, 1996 and the six months ended June 30, 1997.
(6) Redeemable preferred stock (exclusive of accrued dividends) and warrants
will be converted into Common Stock prior to the consummation of the
Offering. Accrued dividends and any accretion to redemption value related
to shares of preferred stock and warrants assumed to have been issued at
the beginning of each period presented to consummate the acquisitions
would be added back to income attributable to common shareholders to
derive pro forma income attributable to common shareholders. Therefore,
such amounts are eliminated.
(7) Includes the dilutive effect of (i) actual Common Stock outstanding, (ii)
options and warrants issued during the preceding twelve months, (iii)
common stock equivalents and (iv) shares of Common Stock to be
issued upon the Transactions (as defined under "The Transactions") and
assumes that shares (representing the approximate number of
shares which are being sold by the Company at an assumed initial public
offering price of $ per share to fund the Dividend Payment (as
defined in "Use of Proceeds") of $2.1 million) of the Common Stock being
offered by the Company hereby were outstanding during the periods
indicated. See "The Transactions" and "Use of Proceeds."
(8) The Company's net proceeds from the Offering, estimated to be
$ net of expenses and fees, will be applied as described in
"Use of Proceeds."
(9) This adjustment represents the increase in the weighted average shares
outstanding related to proceeds from the issuance of shares of
Common Stock to be sold by the Company in the Offering, assumed to be
applied as described under "Use of Proceeds."
(10) The historical balance sheet of the Company at June 30, 1997 includes the
effect of all of the acquisitions because they were all consummated on or
before June 30, 1997.
(11) The redemption value of the preferred stock, except for the accrued
dividends, will be converted into common stock.
30
<PAGE>
SELECTED HISTORICAL CONSOLIDATED FINANCIAL AND OTHER DATA
The following selected historical consolidated financial and other data are
qualified by reference to, and should be read in conjunction with, the
financial statements and related notes thereto appearing elsewhere in this
Prospectus and "Management's Discussion and Analysis of Financial Condition
and Results of Operations." The selected statement of operations data set
forth below for the years ended December 31, 1994, 1995 and 1996 and the six
months ended June 30, 1997 and the balance sheet data as of December 31, 1995
and 1996 and June 30, 1997 are derived from the audited financial statements
of the Company included elsewhere in this Prospectus. The selected statement
of operations data set forth below for the six months ended June 30, 1996 are
derived from the unaudited financial statements of the Company included
elsewhere in this Prospectus, which in the opinion of management have been
prepared on the same basis as the audited financial statements and contain all
adjustments, consisting only of normal recurring adjustments, necessary for a
fair presentation of the Company's financial condition and results of
operations for those periods. The balance sheet data as of December 31, 1994
are derived from audited financial statements of the Company which are not
included in this Prospectus.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER SIX MONTHS ENDED
31, JUNE 30,
-------------------------- ------------------
1994(1) 1995 1996 1996 1997
------- ------- ------- -------- --------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE
AMOUNTS)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue:
Tuition and registration
fees, net.................... $ 5,794 $16,330 $29,269 $ 12,716 $ 23,073
Other, net.................... 1,692 3,066 4,311 2,074 2,579
------- ------- ------- -------- --------
Total net revenue........... 7,486 19,396 33,580 14,790 25,652
------- ------- ------- -------- --------
Operating Expenses:
Educational services and
facilities................... 3,074 8,565 14,404 6,320 11,090
General and administrative.... 4,887 9,097 14,622 7,406 10,942
Depreciation and
amortization................. 980 1,344 2,179 973 2,109
------- ------- ------- -------- --------
Total operating expenses.... 8,941 19,006 31,205 14,699 24,141
------- ------- ------- -------- --------
Income (loss) from operations.. (1,455) 390 2,375 91 1,511
Interest expense............... 134 297 672 225 985
------- ------- ------- -------- --------
Income (loss) before provision
for taxes and extraordinary
item.......................... (1,589) 93 1,703 (134) 526
Provision for income taxes..... -- 24 208 -- 210
------- ------- ------- -------- --------
Income (loss) before
extraordinary item............ (1,589) 69 1,495 (134) 316
Extraordinary loss on early
extinguishment of debt (net of
taxes of $233)................ -- -- -- -- 418
------- ------- ------- -------- --------
Net income (loss).............. $(1,589) $ 69 $ 1,495 $ (134) $ (102)
======= ======= ======= ======== ========
Income (loss) attributable to
common stockholders:
Income (loss) before
extraordinary item, as
reported..................... (1,589) 69 1,495 (134) 316
Accrued dividends on
preferred stock (2).......... (393) (777) (1,128) (557) (738)
Accretion to redemption value
of preferred stock and
warrants (3)................. -- (96) (230) (115) (271)
------- ------- ------- -------- --------
Income (loss) before
extraordinary item,
attributable to common
stockholders.................. (1,982) (804) 137 (806) (693)
Extraordinary loss, net....... -- -- -- -- 418
------- ------- ------- -------- --------
Net income (loss) attributable
to common stockholders........ $(1,982) $ (804) $ 137 $ (806) $ (1,111)
======= ======= ======= ======== ========
OTHER DATA:
EBITDA (4)..................... (475) 1,741 4,563 1,072 3,627
EBITDA margin (4).............. (6.3)% 9.0% 13.6% 7.2% 14.1%
Cash flow provided by (used
in):
Operating activities.......... (1,000) 235 5,275 570 (2,797)
Investing activities.......... (2,372) (3,478) (9,518) (365) (38,192)
Financing activities.......... 6,014 4,566 8,076 (1,703) 42,936
Capital expenditures, net...... 153 897 1,231 365 482
Student population (5)......... 1,131 3,361 4,537 2,273 7,697
Number of campuses (6)......... 2 4 5 4 18
</TABLE>
31
<PAGE>
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------- JUNE 30,
1994 1995 1996 1997
------- ------- ------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET
DATA:
Cash and cash
equivalents..... $ 2,642 $ 3,965 $ 7,798 $ 9,745
Working capital.. 578 1,314 1,379 3,750
Total assets..... 11,704 23,584 36,208 100,767
Long-term debt,
net of current
maturities...... 1,890 6,725 13,783 47,651
Redeemable
preferred stock
and warrants.... 8,243 13,628 14,561 32,989
Total
stockholders'
investment...... (1,982) (2,756) (2,589) 1,088
</TABLE>
- --------
(1) Commencing January 5, 1994, the date of the Company's incorporation.
(2) Represents the dividends paid on, or added to the redemption value of
outstanding preferred stock. See Note 2 of the Notes to the Company's
Consolidated Financial Statements.
(3) See Note 2 of the Notes to the Company's Consolidated Financial
Statements.
(4) For any period, EBITDA equals earnings before interest expense, taxes,
depreciation and amortization (including amortization of debt discount),
and EBITDA margin equals EBITDA as a percentage of net revenue. EBITDA and
EBITDA margin are presented because the Company believes they allow for a
more complete analysis of the Company's results of operations. EBITDA and
EBITDA margin should not be considered as alternatives to, nor is there
any implication that they are more meaningful than, any measure of
performance or liquidity as promulgated under GAAP.
(5) Represents the total student population at the Company's schools (a) in
the case of each full year, as of October 31 and (b) in the case of the
six months ended June 30, 1996 and 1997, as of June 30.
(6) Represents the total number of campuses operated by the Company as of the
end of the period.
32
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with the
Selected Historical Consolidated Financial Data and the Company's Consolidated
Financial Statements and Notes thereto appearing elsewhere in this Prospectus.
BACKGROUND AND OVERVIEW
CEC is one of the largest providers of private, for-profit postsecondary
education in North America, with more than students enrolled as
of October 31, 1997. CEC operates nine schools, with 18 campuses located in 13
states and two Canadian provinces. These schools enjoy long operating
histories and offer a variety of bachelor's degree, associate degree and non-
degree programs in career-oriented disciplines within the Company's core
curricula of (i) computer technologies, (ii) visual communication and design
technologies, (iii) business studies and (iv) culinary arts.
Net revenue, EBITDA and net income have increased in each of the years the
Company has operated. Net revenue increased 349%, to $33.6 million in 1996,
from $7.5 million in 1994; EBITDA increased to $4.6 million in 1996, from a
loss of $0.5 million in 1994; and net income increased to $1.5 million in
1996, from a loss of $1.6 million in 1994. Student population at the Company's
schools increased %, from approximately 3,361 students at October 31,
1995 to approximately students at October 31, 1997. During the
period 1994 to 1996, the Company acquired five schools (Allentown, Brooks,
Brown, Collins and Western Culinary). The Company has invested significant
amounts of capital in the hiring of additional personnel and increased
marketing and capital improvements at each of the acquired schools. The
increased costs of personnel and marketing are expensed as incurred and are
reflected in general and administrative expenses. Additional depreciation and
amortization are reflected as a result of the capital improvements.
The Company believes that EBITDA, while not a substitute for GAAP measures
of operating results, is an important measure of the financial performance of
the Company and its campuses. Management believes that EBITDA is particularly
meaningful due principally to the role acquisitions have played in the
Company's development. CEC's rapid growth through acquisitions has resulted in
significant non-cash amortization expenses, because a significant portion of
the purchase price of a school acquisition by CEC is generally allocated to
goodwill and other intangible assets. In a number of the Company's recent
acquisitions, a large portion of the purchase price has been allocated to non-
competition agreements. As a result of its ongoing acquisition strategy, non-
cash amortization expenses may continue to be substantial.
The Company's principal source of revenue is tuition collected from its
students. The academic year is at least 30 weeks in length, but varies both by
individual school and program of study. The academic year is divided by term,
which is determined by start dates which vary by school and program. Payment
of each term's tuition may be made by full cash payment, financial aid and/or
an installment payment plan. If a student withdraws from school prior to the
completion of the term, the Company refunds a portion of the tuition already
paid which is attributable to the period of the term that is not completed.
Revenue is recognized ratably over the period of the student's program.
The Company's campuses charge tuition at varying amounts, depending not only
on the particular school, but also upon the type of program (i.e., diploma,
associate or bachelor's) and the specific curriculum. Each of the Company's
campuses typically implements one or more tuition increases annually. The
sizes of these increases differ from year to year and among campuses and
programs. Tuition at the Company's campuses as of October 31, 1997 represented
an average increase of 5.2% over the same date in 1996.
Other revenue consists of bookstore sales, placement fees (Gibbs only),
dormitory and cafeteria fees (Brooks only), and restaurant revenue (Western
Culinary only). Other revenue is recognized during the period services are
rendered.
33
<PAGE>
The Company categorizes its expenses as educational services and facilities,
general and administrative and depreciation and amortization. Educational
services and facilities expense generally consists of expense directly
attributable to the educational activity of the schools, including salaries and
benefits of faculty, academic administrators, and student support personnel,
including financial aid personnel and registrars. Educational services and
facilities expense also includes costs of educational supplies and facilities
(including rents on school leases), certain costs of establishing and
maintaining computer laboratories, costs of student housing (Brooks and SCT
only) and all other physical plant and occupancy costs, with the exception of
costs attributable to the Company's corporate offices.
General and administrative expense includes salaries and benefits of
personnel in recruitment, admissions, accounting, personnel, compliance, and
corporate and school administration. Costs of promotion and development,
advertising and production of marketing materials, and occupancy of the
corporate offices are also included in this expense category.
Depreciation and amortization includes costs associated with the depreciation
of purchased computer laboratories, equipment, furniture and fixtures,
courseware, owned facilities, capitalized equipment leases and amortization of
intangible assets, primarily goodwill and non-competition agreements with
previous owners of the schools.
1997 ACQUISITIONS
In the first six months of 1997, the Company completed the following four
acquisitions, each of which was accounted for as a purchase:
On February 28, 1997, the Company acquired all of the outstanding capital
stock of SCT for a purchase price of approximately $5.5 million, subject to
adjustment. In addition, the Company paid $1.8 million to the former owners of
SCT pursuant to non-competition agreements.
Effective May 31, 1997, the Company acquired all of the outstanding capital
stock of Gibbs for a purchase price of approximately $20.0 million, subject to
adjustment. In addition, the Company paid $7.0 million to the former owner of
Gibbs pursuant to a non-competition agreement.
On June 30, 1997, the Company acquired all of the outstanding capital stock
of IAMD-U.S. for a purchase price of $3.0 million, which amount may be
increased by up to $5.0 million based on future revenues of IAMD-U.S.
operations and which amount is otherwise subject to adjustment. In addition,
the Company paid $2.0 million to the former owners of IAMD-U.S. pursuant to
non-competition agreements.
Also on June 30, 1997, the Company acquired all of the capital stock of IAMD-
Canada for a purchase price of $6.5 million, subject to adjustment. In
addition, the Company paid $2.0 million to the former owners of IAMD-Canada
pursuant to non-competition agreements.
34
<PAGE>
RESULTS OF OPERATIONS
The following table summarizes the Company's operating results as a
percentage of net revenue for the period indicated.
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED ENDED JUNE
DECEMBER 31, 30,
--------------------- -------------
1994 1995 1996 1996 1997
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Revenue:
Tuition and registration, net......... 77.4% 84.2% 87.2% 86.0% 89.9%
Other, net............................ 22.6 15.8 12.8 14.0 10.1
----- ----- ----- ----- -----
Net revenue......................... 100.0 100.0 100.0 100.0 100.0
----- ----- ----- ----- -----
Operating expenses:
Educational services and facilities... 41.1 44.2 42.9 42.7 43.2
General and administrative............ 65.2 46.9 43.5 50.1 42.7
Depreciation and amortization......... 13.1 6.9 6.5 6.6 8.2
----- ----- ----- ----- -----
Total operating expenses............ 119.4 98.0 92.9 99.4 94.1
----- ----- ----- ----- -----
Income (loss) from operations....... (19.4) 2.0 7.1 0.6 5.9
Interest expense........................ 1.8 1.5 2.0 1.5 3.8
Income (loss) before provision for
taxes and extraordinary item......... (21.2) 0.5 5.1 (0.9) 2.1
Provision (benefit) for income taxes.... -- 0.1 0.6 -- 0.9
----- ----- ----- ----- -----
Income (loss) before extraordinary item. (21.2) 0.4 4.5 (0.9) 1.2
Extraordinary loss on early
extinguishment of debt (net of taxes).. -- -- -- -- (1.6)
----- ----- ----- ----- -----
Net income (loss)....................... (21.2) 0.4 4.5 (0.9) (0.4)
===== ===== ===== ===== =====
Net income (loss) attributable to common
stockholders........................... (26.5)% (4.1)% 0.4% (5.4)% (4.3)%
===== ===== ===== ===== =====
</TABLE>
SIX MONTHS ENDED JUNE 30, 1997 COMPARED TO SIX MONTHS ENDED JUNE 30, 1996
Revenue. Net tuition revenue increased 81% from $12.7 million in the first
six months of 1996 to $23.1 million in the first six months of 1997, due to a
17% increase in the average number of students attending the schools which were
owned by the Company during the 1996 period and tuition increases effective in
1997 for these schools, as well as added net tuition revenue of $7.3 million
for schools acquired after 1996. Other net revenue increased 24%, from $2.1
million in the first six months of 1996 to $2.6 million in the first six months
of 1997, due to an increase in student population for schools owned during the
1996 period and the addition of $0.3 million from schools acquired after the
1996 period.
Educational Services and Facilities Expense. Educational services and
facilities expense increased 75%, from $6.3 million in the first six months of
1996 to $11.1 million in the first six months of 1997. Of this increase, $2.7
million was attributable to the increase in student population for schools
owned during the 1996 period and $2.1 million was attributable to the addition
of educational services and facilities for schools acquired after the 1996
period.
General and Administrative. General and administrative expense increased 48%,
from $7.4 million in the first six months of 1996 to $10.9 million in the first
six months of 1997. The increase was primarily attributable to costs totaling
$0.2 million related to increased personnel at the corporate level to enhance
the Company's infrastructure and increased advertising and marketing of $0.6
million for schools owned during the 1996 period, as well as the addition of
$2.0 million of expenses for schools acquired after the 1996 period. The
increase in advertising and marketing expenses reflects, in part, the fact that
the former owners of the acquired schools had reduced their expenditures in
these areas prior to their acquisition by the Company.
35
<PAGE>
Depreciation and Amortization. Depreciation and amortization expense
increased 117%, from $1.0 million in the first six months of 1996 to $2.1
million in the first six months of 1997. The increase was due to increased
capital expenditures for schools owned during the 1996 period and related
increased depreciation expense of $0.3 million in the first six months of
1997. Additionally, depreciation expense increased $0.3 million due to the
depreciation expense for schools acquired after the 1996 period. Amortization
expense increased 167%, from $0.3 million in the first six months of 1996 to
$0.8 million in the first six months of 1997, primarily due to additional
amortization of non-competition agreements for the acquisition of schools
after the 1996 period.
Interest Expense. Interest expense increased 338% from $0.2 million in the
first six months of 1996 to $1.0 million in the first six months of 1997. The
increase was primarily due to interest expense on borrowings used to finance
the acquisition of schools after the 1996 period.
Provision for Income Taxes. The provision for income taxes increased from an
immaterial amount in the first six months of 1996 to $0.2 million in the first
six months of 1997.
Income before Extraordinary Item. Net income before extraordinary item
increased to $0.3 million in the first six months of 1997 from a net loss of
$0.1 million in the first six months of 1996.
Extraordinary Item. During the first six months of 1997, the Company
recorded an extraordinary expense of $0.4 million, net of tax, due to the
early retirement of debt related to a credit facility which was terminated and
replaced by the Company's current facility.
Net Income (Loss). The Company had a net loss of $0.1 million in both the
first six months of 1996 and the first six months of 1997.
Net Income (Loss) Attributable to Common Stockholders. Net loss attributable
to common stockholders decreased from a loss of $0.8 million in the first six
months of 1996 to a loss of $1.1 million in the first six months of 1997. The
primary reasons for this decrease were the extraordinary item referred to
above; increased dividends on preferred stock, primarily due to the issuance
of additional shares; and increased accretion in the redemption value of
preferred stock and warrants as a result of the Company's growth. All
outstanding preferred stock will convert into Common Stock and all outstanding
warrants will be exercised prior to the consummation of the Offering. See "The
Transactions."
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
Revenue. Net tuition revenue increased 79%, from $16.3 million in 1995 to
$29.3 million in 1996, due to a 28% increase in the average number of students
attending the schools which were owned by the Company during 1995 and tuition
increases effective in 1996 for these schools, as well as added net revenue of
$1.1 million for schools acquired in 1996. Other net revenue increased 41%,
from $3.1 million in 1995 to $4.3 million in 1996, due to an increase in
student population for schools owned during 1995 and the addition of $0.1
million from schools acquired after 1995.
Educational Services and Facilities Expense. Educational services and
facilities expense increased 68%, from $8.6 million in 1995 to $14.4 million
in 1996. Of this increase, $5.3 million was attributable to the increase in
student population for schools owned during 1995 and $0.5 million was
attributable to the addition of educational services and facilities for
schools acquired in 1996.
General and Administrative. General and administrative expense increased
61%, from $9.1 million in 1995 to $14.6 million in 1996. The increase was
attributable to costs totaling $0.7 million related to increased personnel at
the corporate level to enhance the infrastructure and increased advertising
and marketing of $4.3 million for schools owned during 1995, as well as the
addition of $0.5 million of expense for schools acquired in 1996. The increase
in advertising and marketing expenses reflects, in part, the fact that the
former owners of the acquired schools had reduced their expenditures in these
areas prior to their acquisition by the Company.
36
<PAGE>
Depreciation and Amortization. Depreciation and amortization expense
increased 62%, from $1.3 million in 1995 to $2.2 million in 1996. The increase
was due to increased capital expenditures for schools owned during 1995 and
related increased depreciation expense of $0.7 million in 1996. Additionally,
depreciation expense increased $0.1 million due to the depreciation expense
for schools acquired in 1996. Amortization expense increased 14%, from $0.4
million in 1995 to $0.5 million in 1996, primarily due to additional
amortization of non-competition agreements for the acquisition of schools in
1996.
Interest Expense. Interest expense increased 126%, from $0.3 million in 1995
to $0.7 million in 1996. The increase was primarily due to interest expense on
borrowings used to finance the acquisition of schools in 1996.
Provision for Income Taxes. The provision for income taxes increased to $0.2
million in 1996 from an immaterial amount in 1995.
Net Income. Net income increased from an immaterial amount in 1995 to $1.5
million in 1996, due to the factors discussed above.
Net Income (Loss) Attributable to Common Stockholders. In 1996, net income
attributable to common stockholders was $0.1 million, as compared to a net
loss attributable to common stockholders of $0.8 million in 1995. This change
was attributable to the factors discussed above, offset in part by increased
dividends on preferred stock and increased accretion in the redemption value
of preferred stock and warrants.
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994
Revenue. Net tuition revenue increased 182%, from $5.8 million in 1994 to
$16.3 million in 1995, due to a 35% increase in the average number of students
attending the schools which were owned by the Company during 1994 and tuition
increases effective in 1995 for these schools, as well as added net revenue of
$5.4 million for schools acquired in 1995. Other net revenue increased 81%,
from $1.7 million in 1994 to $3.1 million in 1995, due to an increase in
student population for schools owned during 1994 and the addition of $0.2
million from schools acquired in 1995.
Educational Services and Facilities Expense. Educational services and
facilities expense increased 179%, from $3.1 million in 1994 to $8.6 million
in 1995. Of this increase, $3.0 million was attributable to the increase in
student population for schools owned during 1994 and $2.5 million was
attributable to the addition of educational services and facilities for
schools acquired in 1995.
General and Administrative. General and administrative expense increased
86%, from $4.9 million in 1994 to $9.1 million in 1995. The increase was
attributable to costs totaling $0.7 million related to increased personnel at
the corporate level to enhance the infrastructure and increased advertising
and marketing of $1.3 million for schools owned during 1994, as well as the
addition of $2.2 million of expense for schools acquired in 1995. The increase
in advertising and marketing expenses reflects, in part, the fact that the
former owners of the acquired schools had reduced their expenditures in these
areas prior to their acquisition by the Company.
Depreciation and Amortization. Depreciation and amortization expense
increased 37%, from $1.0 million in 1994 to $1.3 million in 1995. The increase
was due to increased capital expenditures for schools owned during 1994 and
related increased depreciation expense of $0.2 million in 1995. Additionally,
the Company incurred a slight increase in depreciation and amortization
expense related to schools acquired in 1995. Amortization expense decreased
26%, from $0.6 million in 1994 to $0.4 million in 1995, primarily due to
accelerated amortization of student contract intangibles.
Interest Expense. Interest expense increased 122%, from $0.1 million in 1994
to $0.3 million in 1995. The increase was primarily due to interest expense on
borrowings used to finance the acquisition of schools in 1995.
37
<PAGE>
Provision for Income Taxes. The provision for income taxes was immaterial in
both 1994 and 1995.
Net Income (Loss). The Company generated an immaterial amount of net income
in 1995, as compared to a net loss of $1.6 million in 1994, due to the factors
discussed above.
Net Income (Loss) Attributable to Common Stockholders. Net loss attributable
to common stockholders was $0.8 million in 1995, as compared to a net loss
attributable to common stockholders of $2.0 million in 1994. This change was
attributable to the factors discussed above, as well as increased dividends on
preferred stock and increased accretion in the redemption value of preferred
stock and warrants.
SEASONALITY
The Company's results of operations fluctuate primarily as a result of
changes in the level of student enrollment at the Company's schools. The
Company's schools experience a seasonal increase in new enrollments in the
fall, traditionally when the largest numbers of new high school graduates
begin postsecondary education. Furthermore, although the Company encourages
year-round attendance at all schools, Brooks has a traditional summer break
for its fashion design and interior design students. As a result of these
factors, total student enrollment and net revenue are typically highest in the
fourth quarter (October through December) and lowest in the second quarter
(April through June) of the Company's fiscal year. The Company's costs and
expenses do not, however, fluctuate as significantly on a quarterly basis. The
Company anticipates that these seasonal trends at its schools will continue.
LIQUIDITY AND CAPITAL RESOURCES
Since its formation, the Company has financed its operating activities
through cash generated from operations. Acquisitions have been financed
through a combination of additional equity investments and credit facilities.
Net cash provided by operating activities increased to $5.3 million in 1996
from $0.2 million in 1995 and $(1.0) million in 1994, due primarily to
increases in depreciation and amortization and net income. Net cash used in
operating activities was $2.8 million in the first six months of 1997,
compared to net cash provided by operating activities of $0.6 million in the
first six months of 1996, due primarily to post-acquisition expenditures
relating to SCT and Gibbs, along with the suspension of Title IV funding for
these schools while awaiting recertification.
Capital expenditures increased to $1.2 million in 1996 from $0.9 million in
1995 and $0.2 million in 1994, and increased to $0.5 million in the first six
months of 1997 as compared to $0.4 million in the first six months of 1996.
These increases were primarily due to investments in capital equipment as a
result of increasing student population. Capital expenditures are expected to
continue to increase as new schools are acquired, student population increases
and the Company continues to upgrade and expand current facilities and
equipment. The Company does not have any material commitments for capital
expenditures in 1998.
The Company's net receivables as a percentage of net revenue decreased to 9%
in 1996 from 14% in 1995 and 16% in 1994, and increased to 28% in the first
six months of 1997 as compared to 10% in the first six months of 1996. These
changes were primarily due to student receivables at acquired schools. Based
upon past experience and judgment, the Company establishes an allowance for
doubtful accounts with respect to tuition receivables. When a student
withdraws, the receivable balance attributable to such student is charged to
this allowance for doubtful accounts. The Company's historical bad debt
expense as a percentage of revenue for the years ended December 31, 1994, 1995
and 1996 was 5%, 3% and 2%, respectively, and for the six months ended June
30, 1997 was 3%.
On May 30, 1997, the Company entered into the Credit Agreement with LaSalle
National Bank and prepaid approximately $21.2 million of revolving credit
notes and term loans that were outstanding under its previous credit
agreement. The Credit Agreement was amended and syndicated on September 25,
1997. Pursuant to the Credit Agreement, the Company can borrow $65 million
under a revolving credit facility and $15 million under
38
<PAGE>
a term loan, and obtain up to $20 million in outstanding letters of credit.
Outstanding letters of credit reduce the revolving credit facility availability
under the Credit Agreement. The Credit Agreement matures on May 30, 2002;
however, availability under the revolving credit facility is reduced by $10
million on May 30, 2001. The term loan is payable in equal quarterly
installments of $0.75 million, commencing September 30, 1997. The Company's
borrowings under the Credit Agreement bear interest, payable quarterly, at
either (i) a base rate equal to the greater of the (a) bank's prime rate plus
.75% or (b) the federal funds rate plus .50%, or (ii) LIBOR plus 2.00%, at the
election of the Company. Under the Credit Agreement, the Company is required,
among other things, to maintain certain financial ratios with respect to debt
to EBITDA, interest coverage and fixed coverage and to maintain a specified
level of net worth. The Company is also subject to restrictions on, among other
things, payment of dividends, disposition of assets and incurrence of certain
additional indebtedness. The Company has pledged the stock of its subsidiaries
as collateral for the repayment of obligations under the Credit Facility. At
June 30, 1997, the Company had outstanding borrowings of $26.0 million under
the revolving loan facility and $12.5 million under the term loan.
Additionally, the Company had $11.5 million of outstanding letters of credit as
of such date.
The Company intends to use approximately $29.4 million of its net proceeds
from the Offering to repay outstanding revolving credit borrowings under the
Credit Agreement (based upon amounts outstanding as of June 30, 1997). The
Company does not intend to use any of its net proceeds to repay outstanding
borrowings under the term loan. The Company expects that its interest expense
in the period following the Offering, assuming no material acquisitions during
this period, will be lower, and will have a lesser proportionate impact on the
Company's net income, as compared to the period prior to the Offering.
The Company also intends to use approximately $4.1 million of its net
proceeds from the Offering to repay the remaining aggregate outstanding
indebtedness on notes payable to the former shareholders of IAMD-U.S. and IAMD-
Canada, approximately $2.1 million for the Dividend Payment and the remaining
approximately $ million for general corporate purposes, including capital
expenditures, possible future acquisitions of schools and working capital.
The DOE requires that Title IV Program funds collected by an institution for
unbilled tuition be kept in separate cash or cash equivalent accounts until the
students are billed for the portion of their program related to these Title IV
Program funds. In addition, all funds transferred to the Company through
electronic funds transfer programs are held in a separate cash account until
certain conditions are satisfied. As of June 30, 1997, the Company held
approximately $0.2 million in these separate accounts, which are reflected as
restricted cash, to comply with these requirements. These restrictions on cash
have not significantly affected the Company's ability to fund daily operations.
The HEA and its implementing regulations require each higher education
institution to meet an acid test ratio (defined as the ratio of cash, cash
equivalents, restricted cash and certain accounts receivable to total current
liabilities) of at least 1:1, calculated at the end of the institution's fiscal
year. The acid test ratios of all of the Company's institutions met this DOE
requirement at June 30, 1997.
The Company's cash flow from operations on a long-term basis is dependent on
the receipt of funds from the Title IV Programs. For 1996, the Company's U.S.
institutions derived approximately 52% to approximately 82% of their respective
tuition and fee revenue from the Title IV Programs. The HEA and its
implementing regulations establish specific standards of financial
responsibility that must be satisfied in order to qualify for participation in
the Title IV Programs. In connection with the Company's acquisitions of Western
Culinary, SCT, and Gibbs, the DOE has reviewed the Company's annual financial
statements and questioned the Company's accounting treatment for certain direct
marketing costs and courseware and other institutional materials and whether
the Company's financial statements are acceptable for purposes of determining
the Company's financial responsibility. Further, the DOE has asserted that the
Company did not satisfy the 1:1 acid test ratio based on its fiscal 1996
financial statements. However, the Company has maintained the eligibility of
Western Culinary and SCT to continue participating in the Title IV Programs by
posting irrevocable letters of credit in the aggregate
39
<PAGE>
amount of $2.7 million in favor of the DOE, which amount is set at
approximately 50% of the Title IV Program funds received by students enrolled
at Western Culinary in the prior award year. In September 1997, the DOE
increased the level of surety for SCT to, and established the level of surety
of Gibbs at, 100% of the Title IV Program funds received by students enrolled
at each such institution in the prior award year. The Company must post, no
later than November 9, 1997, a letter of credit in the amount of $15.2 million
with respect to Gibbs and anticipates that it will be required to post a letter
of credit in the approximate range of $3.0 million to $5.0 million with respect
to IAMD-U.S., representing 100% of the Title IV Program funds received by IAMD-
U.S. in the prior award year. In addition, the Company is considering the DOE's
request to increase SCT's letter of credit by $721,000 to maintain its
eligibility to participate in the Title IV Programs, which would have to be
done no later than November 15, 1997. As of , 1997, after accounting
for all these letters of credit in an aggregate amount of approximately $22.6
million and giving effect to the Offering and the application of the net
proceeds therefrom as described under "Use of Proceeds," the Company's
remaining credit availability under the Credit Agreement would be approximately
$ . The Company believes that proceeds to the Company from the
Offering and cash expected to be generated from operations during the remainder
of 1997 will significantly enhance the Company's financial position and will
enable the Company and each of its institutions to present audited 1997
financial statements which will satisfy the DOE's acid test ratio and tangible
net worth requirements with respect to each of these institutions. The Company
intends to seek the DOE's review of its audited 1997 financial statements on an
expedited basis in the spring of 1998. Once the DOE has determined that the
Company and its U.S. subsidiaries satisfy each of the DOE's standards of
financial responsibility, applicable law and regulations require the DOE to
release the Company from the requirement that it post the sureties and from the
limitations on Title IV Program funding in excess of surety amounts. To the
extent the letters of credit are reduced or eliminated, the Company will have
additional availability under the Credit Agreement. The Company believes that
it will have sufficient liquidity to increase the letters of credit should the
DOE so require. However, there can be no assurance that, if required, the
Company will be able to maintain its letters of credit or increase its letters
of credit in the future. See "Risk Factors--Dependence on Financial Aid;
Potential Adverse Effects of Regulation--Company Compliance with Financial
Responsibility Standards" and "Financial Aid and Regulation--Federal Oversight
of the Title IV Programs--Company Compliance with Financial Responsibility
Standards."
40
<PAGE>
BUSINESS
OVERVIEW
CEC is one of the largest providers of private, for-profit postsecondary
education in North America, with more than students enrolled as of
October 31, 1997. CEC operates nine schools, with 18 campuses located in 13
states and two Canadian provinces. These schools enjoy long operating histories
and offer a variety of bachelor's degree, associate degree and non-degree
programs in career-oriented disciplines within the Company's core curricula of
(i) computer technologies, (ii) visual communication and design technologies,
(iii) business studies and (iv) culinary arts.
CEC was founded in January 1994 by John M. Larson, the Company's President
and Chief Executive Officer, who has over 23 years of experience in the career-
oriented education industry. The Company was formed to capitalize on
opportunities in the large and highly fragmented postsecondary school industry.
Since its inception, CEC has completed nine acquisitions. The Company has
acquired schools that it believes possess strong curricula, leading reputations
and broad marketability but have been undermanaged from a marketing and
financial standpoint. The Company seeks to apply its expertise in operations,
marketing and curricula development, as well as its financial strength, to
improve the performance of these schools. The schools acquired by the Company
and their improved enrollment are summarized in the following table:
<TABLE>
<CAPTION>
STUDENT POPULATION
AT OCTOBER 31,
------------------
YEAR DATE PRINCIPAL ASSOCIATE DEGREE %
SCHOOL FOUNDED ACQUIRED CURRICULA (1) GRANTING (2) 1996 1997 INCREASE
------ ------- -------- -------------- ---------------- ---- ---- --------
<S> <C> <C> <C> <C> <C> <C> <C>
AL COLLINS
GRAPHIC DE-
SIGN SCHOOL 1978 1/94 VC, CT Yes (3)
Tempe, AZ 936 %
BROOKS COLLEGE 1970 6/94 VC Yes
Long Beach,
CA 960
ALLENTOWN
BUSINESS
SCHOOL 1869 7/95 B, VC, CT, S Yes
Allentown,
PA 781
BROWN INSTI-
TUTE 1946 7/95 VC, CT, RTB, E Yes
Minneapolis,
MN 1,391
WESTERN CULI-
NARY INSTI-
TUTE 1983 10/96 CA No
Portland, OR 453
SCHOOL OF COM-
PUTER TECH-
NOLOGY 1967 2/97 CT, CA, LS Yes
Fairmont, WV 165
Pittsburgh,
PA 737
THE KATHARINE
GIBBS SCHOOLS 1911 5/97 B, S, CT Yes
Boston, MA 411
Melville, NY 353
Montclair,
NJ 465
New York, NY 969
Norwalk, CT
(4) 248
Piscataway,
NJ (5) 217
Providence,
RI (5) 257
INTERNATIONAL
ACADEMY OF
MERCHANDISING
& DESIGN
(U.S.) 1977 6/97 VC, CT Yes (3)
Chicago, IL 746
Tampa, FL 461
INTERNATIONAL
ACADEMY OF
MERCHANDISING
& DESIGN
(CANADA) 1983 6/97 VC, CT No
Montreal,
PQ 396
Toronto, ON 834
------- ---------
Total . . . . . . . . . 10,780
======= =========
</TABLE>
- --------
(1) The programs offered by the Company's schools include visual communication
and design technologies ("VC"), computer technologies ("CT"), business
("B"), radio and television broadcasting ("RTB"), electronics ("E"),
culinary arts ("CA"), laser surgery technologies ("LS") and secretarial
studies ("S").
(2) All of the Company's schools, other than Brooks and IAMD-U.S., in Tampa,
also offer diploma (or certificate) programs.
(3) Also offers bachelor's degrees.
(4) The Gibbs campus in Norwalk, Connecticut, is now using the name Gibbs
College.
(5) Do not offer degree programs.
41
<PAGE>
The Company's success in completing acquisitions and improving the financial
performance of acquired schools has enabled it to achieve rapid growth. Net
revenue has increased from $7.5 million in 1994 to $33.6 million in 1996. For
the first six months of 1997, net revenue was $25.7 million. 1996 Pro Forma Net
Revenue would have been $86.6 million.
The Company's schools offer educational programs principally in four career-
related fields of study -- (i) computer technologies (including Internet and
intranet technologies), (ii) visual communication and design technologies,
(iii) business studies and (iv) culinary arts -- identified by the Company as
areas with highly interested and motivated students, strong entry-level
employment opportunities and ongoing career and salary advancement potential.
. Computer Technologies: These programs include PC/LAN, PC/Net, computer
applications, computer information systems and computer programming. The
Company recently extended the PC/Net program to Collins, commencing in
August 1997. Diplomas can be earned at selected schools and associate
degrees can be earned at Allentown, Brown, Collins, Gibbs-Melville and
SCT. According to the U.S. Department of Labor, approximately 755,000 new
jobs in the computer technology fields will be created by 2005. This
represents an increase of approximately 91% over the number of similar
jobs in 1994.
. Visual Communication and Design Technologies: These programs include
desktop publishing, graphic design, fashion design, interior design and
graphic imaging and are offered at Allentown, Brown, Collins, IAMD-Canada
and IAMD-U.S. In addition, Brooks added a visual communications program
in the summer of 1996, which now has the largest enrollment of any of
Brooks' programs. In addition to diplomas, which can be earned at
selected schools, students in these fields can earn associate degrees at
Allentown, Brooks, Brown, Collins and IAMD-U.S. and bachelor's degrees at
Collins and IAMD-U.S. The U.S. Bureau of Labor Statistics projects growth
of approximately 30%, a gain of over 80,000 jobs, for design-related
occupations between 1994 and 2005.
. Business Studies: These programs include business administration and
business operations. Allentown and Gibbs offer diploma and associate
degree programs in business-related areas of study. According to the U.S.
Bureau of Labor Statistics, over two million new jobs will be created
between 1994 and 2005 in the executive, administrative and managerial
fields.
. Culinary Arts: In these programs, students can earn a diploma in culinary
arts at Western Culinary and an associate degree in culinary arts at SCT.
The Company believes significant opportunities exist to offer culinary
arts programs at other schools, on a contract training basis and in a
short program format on weekends, and to offer additional related
programs. The U.S. Department of Labor projects approximately 14% growth
in the food preparation and service occupations by 2005. This represents
an increase of over one million jobs from 1994.
In addition to the core curricula, the Company's schools offer a number of
other programs. These include secretarial and allied health (medical assisting
and medical office management) programs at Allentown; broadcasting and
electronics programs at Brown; laser surgery technology programs at SCT; and
secretarial and hospitality programs at Gibbs.
INDUSTRY BACKGROUND
Based on estimates for 1995 by the DOE's National Center for Education
Statistics (the "NCES"), postsecondary education is a $200 billion industry in
the United States, with over 14 million students obtaining some form of
postsecondary education. Of this total, approximately 1.5 million students are
enrolled in approximately 3,000 proprietary postsecondary schools. Federal
funds available to support postsecondary education exceed $40 billion dollars
each year and have grown steadily over the last two decades. Additionally, the
federal government guaranteed over $92 billion in student loans in 1996 and is
expected to guarantee loans at comparable levels in the future. State, local
and private funds for career-oriented training are also available.
Several national economic, demographic and social trends are converging to
contribute to growing demand for career-oriented school education:
42
<PAGE>
Changes in Workplace Demands. The workplace is becoming increasingly
knowledge-intensive. Rapid advances in technology have increased demands on
employers and their employees, requiring many new workers to have some form of
training or education beyond the high school level. The increasing
technological requirements of entry level jobs are spurring demand for
specialized training which, in many cases, is not provided by traditional two-
and four-year colleges. The U.S. Department of Labor projects that jobs
requiring some form of postsecondary training are expected to increase
approximately 11% between 1994 and 2005. Furthermore, career-oriented schools
generally have the ability to react quickly to the changing needs of the
nation's business and industrial communities. Additionally, to meet the new
workplace demands, many major companies are now using career-oriented
institutions to provide customized training for their employees on a
contractual basis. Small- to medium-sized companies are also using proprietary
career-oriented schools to fill their needs for training to maintain or
increase the skill levels of their employees.
Increasing Numbers of High School Graduates. Currently, in the U.S., high
school graduates alone represent over 2.5 million new prospective postsecondary
students each year, the largest pool of potential enrollees. Over the 18 years
prior to 1993, the number of high school graduates had been declining. However,
this trend has changed favorably as children of the "baby boom" generation are
entering their high school years. These members of the "echo boom," as it is
commonly known, are expected to boost enrollment in postsecondary educational
programs to as high as 16.4 million students by 2006, an increase of 15.5% from
approximately 14.2 million in the fall of 1995.
Growing Demand for Higher Education. High school graduates and adults are
seeking higher education in increasing numbers. According to the U.S.
Department of Commerce, approximately 63% of all 1995 high school graduates
continued their education that same year, compared with 53% a decade earlier.
The U.S. Department of Labor projects the number of jobs requiring at least an
associate degree or higher to grow by more than 20% between 1994 and 2005. In
addition, enrollment in postsecondary programs is expected to increase
substantially as individuals seek to enhance their skills or re-train for new
job requirements. In part because of the recent trend toward corporate
downsizing, the NCES estimates that over the next several years initial
enrollments in postsecondary education institutions by working adults will
increase more rapidly than initial enrollments by recent high school graduates.
The number of adults enrolled in higher-education programs in the United States
is estimated by the NCES to reach 6.8 million by 1999, or 45% of the total
number of people enrolled.
Recognition of the Value of Higher Education. The Company believes that
prospective students are increasingly recognizing the income premium and other
improvements in career prospects associated with a postsecondary education. The
U.S. Census Bureau reported that, in 1995, a full-time male worker with an
associate degree earned an average of 37% more per year than a comparable
worker with only a high school diploma, while a full-time male worker with a
bachelor's degree earned an average of 72% more per year than a comparable
worker with only a high school diploma. Independent research studies have
demonstrated that prospective students consider these benefits in making their
education decisions.
Reduction in Public Education Funding. The reduction of federal, state or
provincial and local funding of public educational institutions in recent years
has forced educational institutions to cut back spending on general operations.
As a result, some schools have become underfunded and overcrowded. This trend
may provide an opportunity for proprietary postsecondary institutions to serve,
at more competitive prices, the higher education needs of certain individuals
who would have otherwise attended public schools.
Decreasing Size of Military Forces. Due to defense budget cuts and the
corresponding reduction in the U.S. armed forces, the U.S. military, a
traditional provider of technical and career-oriented training, is able to
provide fewer educational opportunities. According to the U.S. Department of
Defense, the aggregate number of U.S. military personnel has declined by 32%
since 1987, with the aggregate number of individuals on active duty in the U.S.
military services declining from 2.2 million in 1987 to 1.5 million in 1996.
This has left an educational void to be filled by other sources, including
proprietary career-oriented schools.
The Company believes that private, for-profit, career-oriented schools are
uniquely positioned to take advantage of these national trends. The Company
also believes that similar factors are creating a favorable climate for career-
oriented postsecondary education in Canada and other international markets.
43
<PAGE>
BUSINESS AND OPERATING STRATEGY
The Company was founded based upon a business and operating strategy which
it believes has enabled it to achieve significant improvements in the
performance of its acquired schools. The Company believes this strategy will
enable it to continue to capitalize on the favorable economic, demographic and
social trends which are driving demand for career-oriented education, thereby
strengthening its position as a premier, professionally managed system of
career-oriented postsecondary educational institutions. The key elements of
the Company's business and operating strategy are as follows:
Focusing on Core Curricula. The Company's schools offer educational programs
principally in four career-related fields of study: (i) computer technologies
(including Internet and intranet technologies) (offered at 16 campuses); (ii)
visual communication and design technologies (offered at three campuses);
(iii) business studies (offered at eight campuses) and (iv) culinary arts
(offered at three campuses). The Company perceives a growing demand by
employers for individuals possessing skills in these particular fields.
Accordingly, the Company believes there are many entry-level positions and
ongoing career and salary advancement potential for individuals who have
received advanced training in these areas. The Company recognizes that,
largely as a result of these employment opportunities, the identified areas of
study attract highly interested and motivated students. These students include
both recent high school graduates and adults seeking formal training in these
fields as well as degrees, diplomas and certificates evidencing their
attainment of the knowledge and skills sought by employers. The Company's
experience and expertise in these attractive areas of study enable it to
differentiate itself from many of its competitors and to effectively tailor
its acquisition and marketing plans.
Adapting and Expanding Educational Programs. The Company strives to meet the
changing needs of its students and the employment market. The Company
continually refines and adapts its courses to ensure that both students and
employers are satisfied with the quality and breadth of the Company's
educational programs. Through various means, including student and employer
surveys and curriculum advisory boards comprised of business community
members, the Company's schools regularly evaluate their program offerings and
consider revisions to existing classes and programs, as well as the
introduction of new courses and programs of study within the Company's core
curricula. The Company selectively duplicates programs that have been
successful at other schools within the CEC system. For example, the Company
recently introduced a visual communications program at Allentown similar to
those already offered at Brooks, Collins, IAMD-U.S. and IAMD-Canada and
introduced a computer technologies (PC/Net) program at Collins like those
offered at Allentown, Brown and SCT.
Direct Response Marketing. The Company seeks to increase school enrollment
and profitability through intensive local, regional and national direct
response marketing programs designed to maximize each school's market
penetration. Because many of the Company's schools have been significantly
undermarketed prior to their acquisition, the Company believes that major
benefits can result from carefully crafted, targeted marketing programs that
leverage schools' curriculum strength and brand name recognition. After every
school acquisition, the Company designs a marketing program tailored to the
particular school to highlight its strengths and to improve student lead
generation and student enrollment rates. Management uses a diversified media,
direct response approach, including direct mail, Internet-based advertising,
infomercials, other television-based advertising, newspaper advertising and
other print media, to attract targeted populations. The Company places
particular emphasis on high school recruitment because this market typically
produces a steady supply of new students.
Improving Student Retention. The Company emphasizes the retention of
students, from initial enrollment to completion of their courses of study, at
each of its schools. Because, as at any postsecondary educational institution,
a substantial portion of the Company's students never finish their educational
programs for personal, financial or academic reasons, substantial increases in
revenue and profitability can be achieved through modest improvements in
student retention rates. The costs to the Company of a school's efforts to
keep current students in school are much less than the expense of the
marketing efforts associated with attracting new students; therefore, such
student retention efforts, if successful, are extremely beneficial to
operating results. The Company
44
<PAGE>
strives to improve retention by treating students as valued customers. The
Company considers student retention the responsibility of the entire staff of
each school, from admissions to faculty and administration to career counseling
services, and provides resources and support for the retention efforts
developed by its local school administrators. School personnel typically employ
an approach based upon establishing personal relationships with students; for
example, students may receive a telephone call from a school counselor or
faculty member if they miss classes. In addition, the Company's corporate staff
regularly tracks retention rates at each school and provides feedback and
support to the efforts of local school administrators.
Emphasizing Employment of Graduates. The Company believes that the high rates
of employment for graduates of its schools enhances the overall reputation of
the schools as well as their ability to attract new students. Moreover, high
placement rates lead to low student loan default rates, which are necessary to
allow for the Company's schools continued participation in the Title IV
Programs. Accordingly, the Company considers student placement to be a high
priority and allocates a significant amount of time and resources to placement
services. Due, at least in part, to this emphasis, 87% of the 1996 graduates of
the Company's schools who were available for employment had found employment
relating to their fields of study within six months of graduation. The Company
is committed to maintaining or improving these graduate employment rates and
newly acquired schools will be expected to meet similar graduate employment
success standards.
Making Capital Investments. The Company makes substantial annual investments
in its facilities and equipment to attract, retain and prepare students for the
increasing technical demands of the workplace. The students at each of the
Company's campuses study in comfortable, modern facilities equipped with
current, industry-specific equipment and technology.
Emphasizing School Management Autonomy and Accountability. The Company
provides significant autonomy and appropriate performance-based incentives to
its campus-level managers, which the Company believes offers important benefits
for the organization. The Company believes these policies foster among campus-
level administrative personnel an important sense of personal responsibility
for achieving campus performance objectives. The Company also believes its
willingness to grant local autonomy provides the Company and its schools with a
significant advantage in recruiting and retaining highly-motivated individuals
with an entrepreneurial spirit. Management of each of the Company's campuses is
principally in the hands of a campus president and local managers, who are
accountable for the campuses' operations and profitability. Business strategy,
finance and consolidation accounting functions are, however, centralized at the
Company's executive offices in Hoffman Estates, Illinois. When a new school is
acquired, the Company evaluates the capabilities of existing campus management
personnel, and typically retains a significant portion, which contributes to
the Company's ability to rapidly integrate acquired schools into its system.
The Company also determines the acquired school's needs for additional or
stronger managers in key areas and, where necessary, takes appropriate action
by hiring new managers or assigning experienced staff to the school's campuses.
The Company believes that its application of this comprehensive business and
operating strategy has been a major factor in improving the operations of the
four schools owned by the Company as of July 1995: Allentown, Brooks, Brown and
Collins. At these schools, the aggregate number of students has increased
% over the past two years, from 3,361 at October 31, 1995 to
at October 31, 1997.
GROWTH STRATEGY
The Company believes it can achieve superior long-term growth in revenue and
profitability by (i) expanding existing operations, (ii) acquiring additional
schools in attractive North American markets, (iii) establishing new campuses,
(iv) entering new service areas and (v) expanding internationally as follows:
Expanding Existing Operations. The Company believes that the Company's
existing 18 campuses can achieve significant internal growth in enrollment,
revenue and profitability. The Company intends to accomplish this growth
through the execution of its business and operating strategy, including all of
the elements described above.
45
<PAGE>
Acquiring Additional North American Schools. To date, the Company has grown
by acquiring new schools in the U.S. and Canada and then applying its expertise
in marketing and school management to increase enrollment, revenue and
profitability at those schools. The Company expects that this process will
continue to be an important element of its growth strategy. The Company makes
selective acquisitions of for-profit, career-oriented schools which have a
capable senior faculty and operations staff, as well as quality educational
programs which stand to benefit from the Company's educational focus, marketing
and operating strengths. The Company targets schools which it believes have the
potential to generate superior financial performance. Generally, such schools
demonstrate the following characteristics:
. Success--Demonstrated ability to attract, retain and place students,
while meeting applicable federal and state regulatory criteria and
accreditation standards;
. ""Schools of Choice"--Leading reputations in career-oriented disciplines
within local, regional and national markets;
. Marketable Curricula--Offering programs with high value-added content and
relevant training to provide students with the skills necessary to obtain
attractive jobs and advance in their selected fields;
. Broad Marketability--Ability to attract students from each of the high
school, adult, foreign and contract training market segments; and
. Attractive Facilities and Geographic Locations--Providing geographically
desirable locations and modern facilities to attract students and
preparing them for the demands of the increasingly competitive work
place.
The Company believes that significant opportunities exist for growth through
acquisition. Some opportunities result from institutions having limited
resources to manage increasingly complex regulations or to fund the significant
cost of developing new educational programs necessary to meet changing demands
of the employment market. The Company believes that a substantial number of
schools exhibiting the characteristics described above exist in the U.S. market
and that such schools can be successfully integrated into the Company's
marketing and administrative structure.
The Company believes that there are also a significant number of potential
acquisition candidates and opportunities for growth in Canada. The Company
believes that favorable trends, similar to those occurring in the U.S., are
positively affecting the Canadian career-oriented postsecondary education
market, but that competition in Canada is not currently as intense as in the
United States. Few of the largest U.S. operators of postsecondary career-
oriented schools presently have a significant Canadian presence. The Company
believes that, given its existing Canadian operations, it is well-positioned to
take advantage of these opportunities.
The Company analyzes potential acquisition targets for their long-term profit
potential, enrollment potential and long-term demographic trends, concentration
of likely employers within the region, level of competition, facility costs and
availability and quality of management and faculty. The Company carefully
investigates any potential acquisition target for its history of regulatory
compliance, both as an indication of future regulatory costs and compliance
issues and as an indication of the school's overall condition. Significant
regulatory compliance issues in the school's past generally will remove a
school from the Company's consideration as an acquisition candidate.
After the Company has completed an acquisition of one or more schools, the
Company immediately begins to apply its business strategy to boost enrollment
and improve the acquired schools' profitability. The Company assists acquired
schools in achieving their potential through a highly focused and active
management role, as well as through capital contributions. The Company
selectively commits resources to improve marketing, advertising, administration
and regulatory compliance at each acquired school. Further resources may also
be committed to enhance management depth. The Company retains acquired schools'
brand names to take advantage of their established reputation in local,
regional and/or national markets as "schools of choice." Enrollments at schools
purchased by the Company have increased an average of % annually since
their acquisitions.
46
<PAGE>
By acquiring new schools, CEC is also able to realize economies of scale in
terms of its management information systems, accounting and audit functions,
employee benefits and insurance procurement. The Company also benefits from the
exchange of ideas among school administrators regarding teacher training,
student retention programs, recruitment, curriculum, financial aid and student
placement programs.
Establishing New Campuses. Although, to date, the Company has only added new
campuses through acquisitions, in the future the Company expects to develop,
open and operate new campuses itself. These new campuses will most likely be
established as additional locations of existing institutions, but also may be
established as entirely separate, free-standing institutions. Opening new
campuses would enable the Company to capitalize on new markets or geographic
locations that exhibit strong enrollment potential and/or the potential to
establish a successful operation in one of the Company's core curricula areas.
The Company believes that this strategy will allow it to continue to grow
rapidly even if appropriate acquisition opportunities are not readily
available.
Entering New Service Areas. While the Company expects that its current
career-oriented school operations will continue to provide the substantial
majority of its revenue in the near term, the Company plans to develop new
education-related services which the Company believes offer strong long-term
growth potential. Among the service areas being actively considered are
distance learning (offering educational products and services for working
adults through video, Internet and other distribution channels) and educational
publishing (producing and marketing educational publications). The Company also
plans to expand its contract training business (providing customized training
on a contract basis for business and government organizations), currently a
limited part of the operations of a few of its schools. Though the Company has
not yet actively targeted the growing market for contract training services,
the Company believes that contract training can become a much more significant
part of its business.
Expanding Internationally. The Company believes that trends similar to those
impacting the market for career-oriented postsecondary education in the U.S.
and Canada are occurring outside of North America. As a result, the Company
believes that there may be significant international opportunities in private,
for-profit postsecondary education. To take advantage of these opportunities,
the Company may acquire or establish operations outside North America.
STUDENT RECRUITMENT
The Company's schools seek to attract students with both the desire and
ability to complete their academic programs. Therefore, to produce interest
among potential students, each of the Company's schools engages in a wide
variety of marketing activities.
The Company believes that the reputation of its schools in local, regional
and national business communities and the recommendations of satisfied former
students are important factors contributing to success in recruiting new
students. CEC works to strengthen the qualities that make its schools "schools
of choice" within their geographic locations. Each school's admissions office
is charged with marketing its school's programs through a combination of
admissions representatives, direct mailings and radio, television and print
media advertising, in addition to providing the information needed by
prospective students to assist them in making their enrollment decisions.
The Company's schools employ approximately 185 admissions representatives,
each of whom focuses his or her efforts solely on the following areas: (i) out-
of-area (correspondent) recruiting, (ii) high school recruiting or (iii) in-
house (adult) recruiting. Correspondent representatives work with students who
live outside of the immediate school area to generate interest through
correspondence with potential enrollees who have learned of the school through
regional or national advertising. The Company believes it is able to
significantly boost enrollment by targeting students outside of the local
population. High school recruiting representatives conduct informational
programs at local secondary schools and follow up with interested students
outside of school, either at their homes or on the CEC school campus. The
interpersonal relationships formed with high school counselors
47
<PAGE>
may have significant influence over a potential student's choice of school. CEC
believes that the relationships of its schools' representatives with the
counseling departments of high schools are good and that the brand awareness
and placement rates of its schools assist representatives in gaining access to
counselors. In-house representatives are also available to speak with
prospective students who visit campuses and to respond to calls generated
through the school's advertising campaigns. Representatives interview and
advise students interested in specific careers to determine the likelihood of
their success in completing their educational programs. The admissions
representatives are full-time, salaried employees of the schools. Regulations
of the DOE prevent the Company from giving its employees incentive compensation
based, directly or indirectly, upon the number of students recruited.
The Company also engages in significant direct mail campaigns. Mailing lists
are purchased from a variety of sources, and brochures are mailed regularly
during the course of the year, with frequency determined by the number of
school starts in a given year. The Company believes direct mailings offer a
fast and cost-effective way to reach a targeted population.
In addition, each school develops advertising for a variety of media,
including radio, television and the Internet, which is run locally, regionally
and sometimes nationally. While multi-media advertising is generally more
appropriate for local markets, certain initiatives have been successfully
utilized on a national basis. CEC has found infomercials to be a particularly
effective tool nationally because their length enables schools to convey a
substantial amount of information about their students, their faculties, their
facilities and, most importantly, their course offerings. The Company also
believes that the personal flavor of the presentation typical of infomercials
is well-suited to attracting potential applicants. As an additional marketing
tool, all of the Company's schools have established web sites, which can be
easily accessed for information about these schools and their educational
programs. Although the Company retains independent advertising agencies, the
Company designs and produces a portion of its direct marketing and multi-media
advertising and communications in-house, through Market Direct, Inc., a wholly-
owned subsidiary ("Market Direct"). While a majority of Market Direct's
operations involve designing and producing advertising for the Company, Market
Direct also provides these services to other businesses outside of the
postsecondary education industry as opportunities arise.
The Company closely monitors the effectiveness of its marketing efforts. The
Company estimates that, in 1996, admissions representatives were responsible
for attracting approximately 25% of student enrollments, direct mailings were
responsible for approximately 14%, television, radio and print media
advertising were responsible for approximately 41%, and the remaining
approximately 20% was attributable to various other methods.
STUDENT ADMISSIONS AND RETENTION
The admissions and entrance standards of each school are designed to identify
those students who are best equipped to meet the requirements of their chosen
fields of study. The most important qualifications for students include a
strong desire to learn, passion for their area of interest, initiative and a
high likelihood of successfully completing their programs. These
characteristics are generally identified through personal interviews by
admissions representatives. The Company believes that a success-oriented
student body results in higher retention and placement rates, increased
satisfaction on the part of students and their employers and lower student
default rates on government loans. To be qualified for admission to one of the
Company's schools, each applicant must have a high school diploma or a General
Education Development (GED) certificate. Many of the Company's schools also
require that applicants obtain certain minimum scores on academic assessment
examinations. For 1996, approximately 28% of entering students at the Company's
campuses matriculated directly from high school.
The Company recognizes that its ability to retain students until graduation
is an important indicator of its success and that modest improvements in
retention rates can result in meaningful increases in school revenue and
profitability. As with other postsecondary educational institutions, many of
the Company's students do not
48
<PAGE>
complete their programs for a variety of personal, financial or academic
reasons. As a result, student retention is considered an entire school's
responsibility, from admissions to faculty and administration to career
counseling services. To minimize student withdrawals, faculty and staff members
at each of the Company's campuses strive to establish personal relationships
with students. Each campus devotes staff resources to advising students
regarding academic and financial matters, part-time employment and other
matters that may affect their success. However, while there may be many
contributors, each campus has one administrative employee specifically
responsible for monitoring and coordinating the student retention efforts. In
addition, the Company's senior management regularly tracks retention rates at
each campus and provides feedback and support to appropriate local campus
administrators. Shorter programs typically have higher completion rates than
longer programs.
CURRICULUM DEVELOPMENT AND FACULTY
The Company believes that curriculum is the single most important component
of its operations, because students choose, and employers recruit from, career-
oriented schools based on the type and quality of technical education offered.
The curriculum development efforts of the Company's schools are a product of
their operating partnership with students and the business and industrial
communities.
The relationship of each of the Company's schools with the business community
plays a significant role in the development and adaptation of school
curriculum. Each school has one or more curriculum advisory boards comprised of
members of the local and/or regional business community who are engaged in
businesses directly related to the educational programs provided by the school.
These boards provide valuable input to the school's education department, which
allows the school to keep its curriculum current and provide graduates with the
training and skills that these employers seek.
CEC also endeavors to enhance and maintain the relevancy of its curriculum by
soliciting ideas through student and employer surveys and by requiring students
in selected programs to complete an internship during their school experience.
CEC has developed a number of techniques designed both to gain valuable
industry insight for ongoing curriculum development and enhance the overall
student experience. These techniques include (i) classroom discussions with
industry executives, (ii) part-time job placement within a student's industry
of choice, and (iii) classroom case studies that are based upon actual industry
issues.
CEC's schools are in continuous contact with employers through their faculty,
who are industry professionals. The schools hire a significant number of part-
time faculty holding positions in business and industry because specialized
knowledge is required to teach many of the schools' courses and to provide
students with current, industry-specific training. The schedules of business
and industry professionals often permit them to teach the many evening courses
offered by the Company's schools. Unlike traditional four-year colleges,
instructors in the Company's schools are not awarded tenure and are evaluated
in part based upon student evaluations. As of October 31, 1997, the Company's
schools employed approximately faculty members, of which approximately
% were full-time employees of the Company and approximately % had
been hired on a part-time, adjunct basis.
SCHOOL ADMINISTRATION
CEC provides significant operational autonomy and appropriate performance-
based compensation to local school administrators who have demonstrated the
ability to undertake such responsibility, based on the Company's belief that
success is driven by performance at the local level through enrollment growth,
student retention rates and placement rates. In addition, each CEC school
requires, to a certain extent, different resources and operating tactics due to
a variety of factors, including curriculum, demographics, geographic location
and size. Management of each of the Company's schools is principally in the
hands of a school president who has accountability for the school's operations
and profitability. Each CEC school has five primary operating departments:
admissions, financial aid, education, placement and accounting.
49
<PAGE>
Business strategy, finance and consolidation accounting functions are
centralized at the Company's corporate headquarters. CEC's corporate staff
develops long-term and short-term operating strategies for the schools and
works closely with local administrators to accomplish their goals and ensure
adherence to Company strategy. CEC maintains stringent quality standards and
controls at both the corporate and individual school levels. Activities at the
corporate level include regular reporting processes which track the vital
statistics of each school's operations, including enrollments, placements,
leads, retention rates and financial data. These reports provide real-time
statistics which allow management to monitor the performance of each campus.
Each operating department at the campus level is also required to compile
certain statistical reports at regular intervals, including reports on
admissions, financial aid, academic performance and placement.
CEC uses a number of quality and financial controls. Information is tracked
through an advanced, PC-based management information system, which currently
runs on a decentralized basis, but also allows centralized access to account
information.
TUITION AND FEES
Effective with the fall of 1997, total tuition for completion (on a full-time
basis) of a 12-month diploma program offered by the Company's schools ranges
from $6,590 to $14,270, for completion of an associate degree program ranges
from $15,000 to $22,770, and for completion of a bachelor's degree program
ranges from $34,992 to $37,080. In addition to these tuition amounts, students
at the Company's schools typically must purchase textbooks and supplies as part
of their educational programs.
The Company's institutions bill students for their tuition and other
institutional charges based on the specific instructional format or formats of
the school's educational programs. Each institution's refund policies must meet
the requirements of the DOE and such institution's state and accrediting
agencies. Generally, under the DOE's requirements, if a first-time student
ceases attendance before the point in time that is 60% of the period of
enrollment for which the student has been charged, the institution will refund
institutional charges based on the amount of time for which the student paid
but did not attend. After a student has attended 60% or more of the term, the
institution will retain 100% of the institutional charges for that period of
enrollment. After the student's first enrollment period, the institution
refunds institutional charges for subsequent periods of enrollment based on the
number of weeks remaining in the period of enrollment in which the student
withdrew. Certain state refund requirements, where more beneficial to the
students, are applied when determining refunds for students.
GRADUATE EMPLOYMENT
The Company believes that employment of graduates of its schools in
occupations related to their fields of studies is critical to the reputation of
the schools and their ability to continue to recruit students successfully. The
Company believes that its schools' most successful form of recruiting is
through referrals from satisfied graduates. A strong placement office is
important to maintain and elevate the school's reputation, as well as managing
the rate at which former students default on their loans.
CEC devotes a significant amount of time and resources to student placement,
which the Company believes to be the ultimate indicator of its success. The
Company believes that its average placement rate (calculated according to the
criteria discussed below), which was in excess of 85% for calendar year 1996
graduates, is attractive to prospective students and provides a competitive
advantage. Student placement is a top priority of each CEC school beginning on
the first day of student enrollment. This approach heightens the students'
awareness of the placement department and keeps students focused on their
goal--job placement within their field of choice. Moreover, each CEC school
includes in its curriculum a career development course which provides
instruction in the preparation of resumes, cover letters, networking and other
essential communication tools. Placement office resources are regularly
available to CEC school graduates. With such assistance, the Company's
graduates find employment with a wide variety of businesses located not only in
the schools' local markets but also regionally and nationally.
50
<PAGE>
Each campus' placement department also plays a role in marketing the campus'
curriculum to the business community to produce job leads for graduates.
Approximately 50 employees work in the placement departments of the Company's
campuses. Placement counselors participate in professional organizations,
advisory boards, trade shows and community events to keep apprised of industry
trends and maintain relationships with key employers. Partnerships with local
and regional businesses are established through internships and curriculum
development programs and facilitate placement of graduates in local and
regional businesses. The placement department also assists current students in
finding part-time jobs while attending school. These part-time placements often
lead to permanent positions.
Based on information received from graduating students and employers (by
survey), the Company believes that students graduating from its schools during
the fiscal years ended December 31, 1994, 1995 and 1996 obtained employment in
fields related to their program of study as of June 30 or earlier of the year
following their graduation as indicated below:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED DECEMBER 31, 1996
--------------------------------------
NUMBER OF % WHO OBTAINED
SCHOOL AVAILABLE GRADUATES (1) EMPLOYMENT (2)
------ ----------------------- --------------
<S> <C> <C>
AL COLLINS GRAPHIC DESIGN SCHOOL
Tempe, AZ...................... 261 82.4%
ALLENTOWN BUSINESS SCHOOL
Allentown, PA.................. 443 91.7
BROOKS COLLEGE
Long Beach, CA................. 150 92.0
BROWN INSTITUTE
Minneapolis, MN................ 634 87.1
WESTERN CULINARY INSTITUTE
Portland, OR................... 363 97.0
SCHOOL OF COMPUTER TECHNOLOGY
Fairmont, WV and Pittsburgh,
PA............................ 135 93.9
THE KATHARINE GIBBS SCHOOLS
Boston, MA..................... 174 90.8
Melville, NY................... 361 89.8
Montclair, NJ.................. 281 84.7
New York, NY................... 467 79.2
Norwalk, CT.................... 275 86.2
Piscataway, NJ................. 263 78.3
Providence, RI................. 180 80.6
INTERNATIONAL ACADEMY OF
MERCHANDISING & DESIGN (U.S.)
Chicago, IL.................... 88 94.0
Tampa, FL...................... 90 95.6
INTERNATIONAL ACADEMY OF
MERCHANDISING & DESIGN (CANADA)
Montreal, PQ................... 110 91.0
Toronto, ON.................... 241 87.0
----- ----
TOTAL........................ 4,516 87.4%
===== ====
</TABLE>
- --------
(1) Available graduates excludes students who are continuing their education,
are in active military service or are disabled or deceased, as well as
students from foreign countries who are legally ineligible to work in the
United States.
(2) Represents the percentage of available graduates who obtained employment
related to their program of study within six months of graduation.
51
<PAGE>
The reputation of the Gibbs schools allows them to charge fees to employers
upon placement of many of its students. The Company's other schools do not
currently receive such placement fees, nor, the Company believes, do any of
the Company's principal proprietary competitors. The Company believes that, as
an additional source of revenue, it may be able to replicate the Gibbs
placement fee program at other CEC schools.
TECHNOLOGY
CEC is committed to providing its students access to the technology
necessary for developing skills required to succeed in the careers for which
they are training. Through regular consultation with business representatives,
the Company ensures that all its schools provide their students with state-of-
the-art computer hardware, computer software and equipment meeting industry-
specific technical standards. In each program, students use the types of
equipment that they will eventually use in their careers of choice. For
example, graphic animation students use sophisticated computer multimedia
animation and digital video editing equipment and supplies, and visual
communication and design technologies students make significant use of
technologies for computer-related design and layout and digital pre-press
applications.
EMPLOYEES
As of October 31, 1997, CEC and its schools had a total of
full-time and part-time employees. Neither the Company nor any of
its schools has any collective bargaining agreements with its employees. The
Company considers its relations with its employees to be good.
COMPETITION
The postsecondary education market, consisting in the U.S. of approximately
7,000 accredited universities, colleges and schools, is highly fragmented and
competitive, with no single institution having a significant market share.
CEC's schools compete with traditional public and private two-year and four-
year colleges and universities, other proprietary schools and alternatives to
higher education such as immediate employment and military service. Certain
private and public colleges and universities may offer courses of study
similar to those of the Company's schools. Some public institutions are able
to charge lower tuition than the Company's schools due in part to government
subsidies, government and foundation grants, tax-deductible contributions and
other financial sources not available to proprietary schools. However, tuition
at private, non-profit institutions is, on average, higher than the average
tuition rates of the Company's schools. Other proprietary career-oriented
schools also offer programs that compete with those of the Company's schools.
The Company believes that its schools compete with other educational
institutions principally based upon quality of their educational programs,
reputation in the business community, costs of programs and employability of
graduates. Some of the Company's competitors in both the public and private
sectors may have substantially greater financial and other resources than the
Company.
Changes in the regulatory environment have stimulated consolidation in the
postsecondary education industry. Regulations adopted in recent years have
tightened standards for educational content, established stricter permissible
student outcomes (i.e., completion, placement and federal loan default rates)
and created more stringent standards for the evaluation of a school's
financial responsibility and administrative capability. As a result, certain
career-oriented schools have been forced to close because they lacked
sufficient quality or financial resources or could not manage the increased
regulatory burden. At the same time, despite increasing demand, potential new
entrants face significant barriers to entry due to the highly regulated nature
of the industry and the considerable expense of start-up operations.
FACILITIES
CEC's corporate headquarters are located in Hoffman Estates, Illinois, near
Chicago, and its 18 campuses are located in 13 states and two Canadian
provinces. Each campus contains teaching facilities, including modern
classrooms, laboratories and, in the case of the schools with culinary arts
programs, large, well-equipped kitchens. Admissions and administrative offices
are also located at each campus. Additionally, Brooks' campus includes a
dormitory and student cafeteria, and Western Culinary leases and operates
three restaurants in conjunction with its culinary arts program.
52
<PAGE>
The Company leases all of its facilities, except the primary Gibbs facility
in Montclair, New Jersey, which is owned by the Company, and one building in
Minneapolis, Minnesota, which is owned by the Company and which the Company
intends to sell. The leases have remaining terms ranging from less than one to
eleven years. The following table sets forth certain information as of
September 30, 1997 with respect to the principal facilities of the Company:
<TABLE>
<CAPTION>
APPROXIMATE
FACILITY SQUARE FEET
------------------------------------------------------------- -----------
<S> <C>
CEC CORPORATE HEADQUARTERS
Hoffman Estates, IL........................................ 4,566
AL COLLINS GRAPHIC DESIGN SCHOOL
Tempe, AZ.................................................. 51,000
ALLENTOWN BUSINESS SCHOOL
Allentown, PA.............................................. 51,000
BROOKS COLLEGE
Long Beach, CA............................................. 34,000
BROWN INSTITUTE
Minneapolis, MN............................................ 118,000(1)
WESTERN CULINARY INSTITUTE
Portland, OR............................................... 26,000
SCHOOL OF COMPUTER TECHNOLOGY
Fairmont, WV............................................... 9,500
Pittsburgh, PA............................................. 42,714
THE KATHARINE GIBBS SCHOOLS
Boston, MA................................................. 26,999
Melville, NY............................................... 32,500
Montclair, NJ.............................................. 34,376
New York, NY............................................... 51,903
Norwalk, CT................................................ 17,000
Piscataway, NJ............................................. 16,745
Providence, RI............................................. 12,974
INTERNATIONAL ACADEMY OF MERCHANDISING & DESIGN (U.S.)
Chicago, IL................................................ 45,000
Tampa, FL.................................................. 29,500
INTERNATIONAL ACADEMY OF MERCHANDISING & DESIGN (CANADA)
Montreal, PQ............................................... 22,500(2)
Toronto, ON................................................ 56,000
</TABLE>
- --------
(1) Brown will move into this facility in October 1997.
(2) IAMD-Canada, in Montreal, expects to move into a new 41,000 square foot
leased facility in December 1997.
The Company actively monitors facility capacity in light of current
utilization and projected enrollment growth. The Company believes that the
facilities occupied by most of its schools can accommodate expected near-term
growth, but that certain of its schools may need to acquire additional space
within the next few years. The Company believes that its schools can acquire
any necessary additional capacity on reasonably acceptable terms. The Company
devotes capital resources to facility improvements and expansions as necessary.
LEGAL PROCEEDINGS
CEC is subject to occasional lawsuits, investigations and claims arising out
of the ordinary conduct of its business. Neither the Company nor any of its
subsidiaries is a party to any legal proceeding which the Company believes to
be material to the Company or its business.
53
<PAGE>
On February 24, 1997, 39 former and current students in Brown's PC/LAN
program brought a suit entitled Peter Alsides, et al. v. Brown Institute, Ltd.
(Fourth Judicial District, Hennepin County, Minnesota) against Brown alleging
breach of contract, fraud, and misrepresentation, violation of the Minnesota
Consumer Fraud Act, violation of the Minnesota Deceptive Trade Practices Act
and negligent misrepresentation. Plaintiffs allege that Brown failed to provide
them with the education for which they contracted and which had been
represented to them upon enrollment. Brown has answered the complaint, asserted
defenses and the parties have exchanged written discovery. One other former
student of Brown has commenced a separate individual action making similar
claims. Brown believes that all of these claims are frivolous and without merit
and is vigorously contesting the allegations.
54
<PAGE>
FINANCIAL AID AND REGULATION
ACCREDITATION
Accreditation is a process through which an institution submits itself to
qualitative review by an organization of peer institutions. Accrediting
agencies primarily examine the academic quality of the instructional programs
of an institution, and a grant of accreditation is generally viewed as
certification that an institution's programs meet generally accepted academic
standards. Accrediting agencies also review the administrative and financial
operations of the institutions they accredit to ensure that each institution
has the resources to perform its educational mission.
Pursuant to provisions of the HEA, the DOE relies on accrediting agencies to
determine whether institutions' educational programs qualify them to
participate in the Title IV Programs. The HEA specifies certain standards that
all recognized accrediting agencies must adopt in connection with their review
of postsecondary institutions. Accrediting agencies that meet the DOE standards
are recognized as reliable arbiters of educational quality. All of the
Company's U.S. campuses are accredited by an accrediting agency recognized by
the DOE. Twelve of the Company's campuses are accredited by the Accrediting
Council for Independent Colleges and Schools ("ACICS"), three of the Company's
campuses are accredited by the Accrediting Commission for Career Schools and
Colleges of Technology ("ACCSCT") and one of the Company's campuses is
accredited by the Accrediting Commission for Community and Junior Colleges of
the Western Association of Schools and Colleges ("WASC/ACCJC"). In addition,
four of the Company's campuses are accredited by the Foundation for Interior
Design Education Research ("FIDER") and two of the Company's campuses are
accredited by the American Culinary Federation Educational Institute
Accrediting Commission ("ACFEI"); FIDER and ACFEI are not recognized by the DOE
for Title IV Program eligibility purposes.
The accrediting agencies for each of the Company's U.S. campuses are set
forth in the following table:
<TABLE>
<CAPTION>
ACCREDITING
SCHOOL AGENCIES
-------------------------------------------------------- ----------------
<S> <C>
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
</TABLE>
The HEA requires each recognized accrediting agency to submit to a periodic
review of its procedures and practices by the DOE as a condition of its
continued recognition.
55
<PAGE>
The HEA requires accrediting agencies recognized by the DOE to review many
aspects of an institution's operations to ensure that the education or training
offered by the institution is of sufficient quality to achieve, for the
duration of the accreditation period, the stated objective for which the
education or training is offered. Under the HEA, a recognized accrediting
agency must perform regular inspections and reviews of institutions of higher
education, including unannounced site visits to institutions, that provide
career-oriented education and training. An accrediting agency may place an
institution on "reporting" status in order to monitor one or more specified
areas of the institution's performance. An institution placed on reporting
status is required to report periodically to its accrediting agency on that
institution's performance in the specified areas. While on reporting status, an
institution may be limited in opening and commencing teaching at new campuses
without first receiving a waiver from its accrediting agency.
STUDENT FINANCIAL ASSISTANCE
Students attending the Company's schools finance their education through a
combination of family contributions, individual resources (including earnings
from full or part-time employment) and government-sponsored financial aid. The
Company estimates that over 71% of the students at its U.S. schools receive
some government-sponsored (federal or state) financial aid. For the 1996-97
award year (July 1, 1996 to June 30, 1997), approximately 81% of the Company's
U.S. tuition and fee revenue was derived from some form of such financial aid
received by the students of its schools. In addition, students attending IAMD-
Canada receive government-sponsored financial aid.
To provide students access to financial assistance available through the
Title IV Programs, an institution, including its additional locations, must be
(i) authorized to offer its programs of instruction by the relevant agency of
the state in which it and its additional campuses, if any, are located, (ii)
accredited by an accrediting agency recognized by the DOE and (iii) certified
as eligible by the DOE. In addition, the institution must ensure that Title IV
Program funds are properly accounted for and disbursed in the correct amounts
to eligible students.
Under the HEA and its implementing regulations, each of the Company's
campuses that participates in the Title IV Programs must comply with certain
standards on an institutional basis, as more specifically identified below. For
purposes of these standards, the regulations define an institution as a main
campus and its additional locations, if any. Under this definition, each of the
Company's U.S. campuses is a separate institution, except for The Katharine
Gibbs School in Piscataway, New Jersey, which is an additional location of The
Katharine Gibbs School in Montclair, New Jersey, and the School of Computer
Technology in Fairmont, West Virginia, which is an additional location of the
School of Computer Technology in Pittsburgh, Pennsylvania.
NATURE OF FEDERAL SUPPORT FOR POSTSECONDARY EDUCATION IN THE U.S.
While many of the states support public colleges and universities primarily
through direct state subsidies, the federal government provides a substantial
part of its support for postsecondary education in the form of grants and loans
to students who can use this support at any institution that has been certified
as eligible by the DOE. The Title IV Programs have provided aid to students for
more than 30 years and, since the mid-1960's, the scope and size of such
programs have steadily increased. Since 1972, Congress has expanded the scope
of the HEA to provide for the needs of the changing national student population
by, among other things, (i) providing that students at proprietary
institutions, such as the Company's institutions, are eligible for assistance
under the Title IV Programs, (ii) establishing a program for loans to parents
of eligible students, (iii) opening the Title IV Programs to part-time
students, and (iv) increasing maximum loan limits and in some cases eliminating
the requirement that students demonstrate financial need to obtain federally
guaranteed student loans. Most recently, the FDL program was enacted, enabling
students to obtain loans from the federal government rather than from
commercial lenders.
Students at the Company's institutions receive grants and loans to fund their
education under several of the Title IV Programs, of which the two largest are
the FFEL and the Federal Pell Grant ("Pell") program. The Company's
institutions also participate in the Federal Supplemental Educational
Opportunity Grant ("FSEOG") program, and some of them participate in the
Perkins program and the Federal Work-Study ("FWS") program. One of the
Company's institutions is an active participant in the FDL program.
56
<PAGE>
Some aid under the Title IV Programs is awarded on the basis of financial
need, generally defined under the HEA as the difference between the cost of
attending an educational program and the amount a student can reasonably
contribute to that cost. All recipients of Title IV Program funds must maintain
a satisfactory grade point average and progress in a timely manner toward
completion of their program of study.
Pell. Pell grants are the primary component of the Title IV Programs under
which the DOE makes grants to students who demonstrate financial need. Every
eligible student is entitled to receive a Pell grant; there is no institutional
allocation or limit. For the 1997-98 award year, Pell grants range from $400 to
$2,700 per year. Amounts received by students enrolled in the Company's U.S.
institutions in the 1996-97 award year under the Pell program equaled
approximately 12% of the Company's U.S. tuition and fee revenue.
FSEOG. FSEOG awards are designed to supplement Pell grants for the neediest
students. FSEOG grants generally range in amount from $100 to $4,000 per year;
however, the availability of FSEOG awards is limited by the amount of those
funds allocated to an institution under a formula that takes into account the
size of the institution, its costs and the income levels of its students. The
Company is required to make a 25% matching contribution for all FSEOG program
funds disbursed. Resources for this institutional contribution may include
institutional grants, scholarships and other eligible funds (i.e., funds from
foundations and other charitable organizations) and, in certain states,
portions of state scholarships and awards. During the 1996-97 award year, the
Company's required 25% institutional match was met by approximately $110,000 in
funds from its institutions and approximately $177,000 in funds from state
scholarships and grants and from foundations and other charitable
organizations. Amounts received by students in the Company's institutions under
the federal share of the FSEOG programs in the 1996-97 award year equaled
approximately 1% of the Company's U.S. tuition and fee revenue.
FFEL and FDL. The FFEL program consists of two types of loans, Stafford
loans, which are made available to students regardless of financial need, and
PLUS loans, which are made available to parents of students classified as
dependents. Under the FDL program, students may obtain loans directly from the
DOE rather than commercial lenders. The conditions on FDL loans are generally
the same as on loans made under the FFEL program. Certain of the Company's
institutions have been selected by the DOE to participate in the FDL program.
Under the Stafford loan program, a student may borrow up to $2,625 for the
first academic year, $3,500 for the second academic year and, in some
educational programs, $5,500 for each of the third and fourth academic years.
Students with significant financial need qualify for interest subsidies while
in school and during grace periods. Students who are classified as independent
can increase their borrowing limits and receive additional unsubsidized
Stafford loans. Such students can obtain an additional $4,000 for each of the
first and second academic years and, depending upon the educational program, an
additional $5,000 for each of the third and fourth academic years. The
obligation to begin repaying Stafford loans does not commence until six months
after a student ceases enrollment as at least a half-time student. Amounts
received by students in the Company's institutions under the Stafford program
in the 1996-97 award year equaled approximately 44% of the Company's U.S.
tuition and fee revenue. PLUS loans may be obtained by the parents of a
dependent student in an amount not to exceed the difference between the total
cost of that student's education (including allowable expenses) and other aid
to which that student is entitled. Amounts received by students in the
Company's institutions under the PLUS program in the 1996-97 award year equaled
approximately 11% of the Company's U.S. tuition and fee revenue.
The Company's schools and their students use a wide variety of lenders and
guaranty agencies and have not experienced difficulties in identifying lenders
and guaranty agencies willing to make federal student loans. Additionally, the
HEA requires the establishment of lenders of last resort in every state to
ensure that students at any institution that cannot identify such lenders will
have access to the FFEL program loans.
Perkins. Eligible undergraduate students may borrow up to $3,000 under the
Perkins program during each academic year, with an aggregate maximum of
$15,000, at a 5% interest rate and with repayment delayed until nine months
after the borrower ceases to be enrolled on at least a half-time basis. Perkins
loans are made available to those students who demonstrate the greatest
financial need. Perkins loans are made from a revolving
57
<PAGE>
account, 75% of which was initially capitalized by the DOE. Subsequent federal
capital contributions in the same proportion may be received if an institution
meets certain requirements. Each institution collects payments on Perkins loans
from its former students and reloans those funds to currently enrolled
students. Collection and disbursement of Perkins loans is the responsibility of
each participating institution. During the 1996-97 award year, the Company
collected approximately $543,000 from its former students in repayment of
Perkins loans. In the 1996-97 award year, the Company's required matching
contribution was approximately $47,000. The Perkins loans disbursed to students
in the Company's institutions in the 1996-97 award year equaled approximately
1% of the Company's U.S. tuition and fee revenue. In 1995, the Gibbs
institutions voluntarily chose to discontinue participation in the Perkins
program.
FWS. Under the FWS program, federal funds are made available to pay up to 75%
of the cost of part-time employment of eligible students, based on their
financial need, to perform work for the institution or for off-campus public or
non-profit organizations. During the 1996-97 award year, the Company's
institutions and other organizations provided matching contributions totaling
approximately $70,000. At least 5% of an institution's FWS allocation must be
used to fund student employment in community service positions. In general, FWS
earnings are not used for tuition and fees. However, in the 1996-97 award year,
the federal share of FWS earnings represented 0.2% of the Company's U.S.
tuition and fee revenue.
FEDERAL OVERSIGHT OF THE TITLE IV PROGRAMS
The substantial amount of federal funds disbursed through the Title IV
Programs coupled with the large numbers of students and institutions
participating in those programs have led to instances of fraud, waste and
abuse. As a result, the United States Congress has required the DOE to increase
its level of regulatory oversight of institutions to ensure that public funds
are properly used. Each institution which participates in the Title IV Programs
must annually submit to the DOE an audit by an independent accounting firm of
that institution's compliance with the Title IV Program requirements, as well
as audited financial statements. The DOE also conducts compliance reviews,
which include on-site evaluations, of several hundred institutions each year,
and directs student loan guaranty agencies to conduct additional reviews
relating to the FFEL programs. In addition, the Office of the Inspector General
of the DOE conducts audits and investigations of institutions in certain
circumstances. Under the HEA, accrediting agencies and state licensing agencies
also have responsibilities for overseeing institutions' compliance with Title
IV Program requirements. As a result, each participating institution, including
each of the Company's institutions, is subject to frequent and detailed
oversight and must comply with a complex framework of laws and regulations or
risk being required to repay funds or becoming ineligible to participate in the
Title IV Programs.
Largely as a result of this increased oversight, the DOE has reported that
more than 800 institutions have either ceased to be eligible for or have
voluntarily relinquished their participation in some or all of the Title IV
Programs since October 1, 1992. This has reduced competition among institutions
with respect to certain markets and educational programs.
Cohort Default Rates. A significant component of the Congressional initiative
aimed at reducing fraud, waste and abuse was the imposition of limitations on
participation in the Title IV Programs by institutions whose former students
defaulted on the repayment of federally guaranteed or funded student loans at
an "excessive" rate. Since the DOE began to impose sanctions on institutions
with cohort default rates above certain levels, the DOE has reported that more
than 600 institutions have lost their eligibility to participate in some or all
of the Title IV Programs. However, many institutions, including all of the
Company's institutions, have responded by implementing aggressive student loan
default management programs aimed at reducing the likelihood of students
failing to repay their loans in a timely manner. An institution's cohort
default rates under the FFEL and FDL programs are calculated on an annual basis
as the rate at which student borrowers scheduled to begin repayment on their
loans in one federal fiscal year default on those loans by the end of the next
federal fiscal year. An institution that participates in both the FFEL and FDL
programs, including one of the Company's institutions, receives a single
"weighted average" cohort default rate in place of an FFEL or FDL cohort
default rate. Any institution whose cohort default rate equals or exceeds 25%
for any one of the three most recent federal fiscal
58
<PAGE>
years may be found by the DOE to lack administrative capability and, on that
basis, placed on provisional certification status for up to four years.
Provisional certification status does not limit an institution's access to
Title IV Program funds, but does subject that institution to closer review by
the DOE and possible summary adverse action if that institution commits
violations of the Title IV Program requirements. Any institution whose cohort
default rates equal or exceed 25% for three consecutive years will no longer be
eligible to participate in the FFEL or FDL programs for the remainder of the
federal fiscal year in which the DOE determines that such institution has lost
its eligibility and for the two subsequent federal fiscal years. In addition,
an institution whose cohort default rate for any federal fiscal year exceeds
40% may have its eligibility to participate in all of the Title IV Programs
limited, suspended or terminated. Since the calculation of cohort default rates
involves the collection of data from many non-governmental agencies (i.e.,
lenders, private guarantors or servicers), as well as the DOE, the HEA provides
a formal process for the review and appeal of the accuracy of cohort default
rates before the DOE takes any action against an institution based on such
rates.
None of the Company's institutions has had a published cohort default rate of
25% or greater for three consecutive federal fiscal years, and none has a
published cohort default rate of 25% or greater for federal fiscal year 1994,
which is the most recent year for which rates have been published. For federal
fiscal year 1994, the published cohort default rates for the Company's
institutions ranged from a low of 7.1% to a high of 19.6%. The average cohort
default rates for proprietary institutions nationally were 30.2%, 23.9% and
21.1% in federal fiscal years 1992, 1993 and 1994, respectively. Gibbs-Norwalk
is the only one of the Company's institutions that received a prepublication
cohort default rate for federal fiscal year 1995 that exceeds 25%, which
prepublication rate is 27.1%. This federal fiscal year 1995 prepublication
cohort default rate will be subject to revision by the DOE at the time that
final rates are officially published, which is expected to occur in the fall of
1997. The Company has reviewed the data with which the federal fiscal year 1995
prepublication cohort default rate for Gibbs-Norwalk was calculated and, while
the Company is seeking corrections to certain of that data pursuant to the DOE
regulations, it expects the cohort default rate for Gibbs-Norwalk to exceed 25%
when published as official. In addition, two of the Company's institutions have
had an FFEL cohort default rate exceeding 25% in either federal fiscal years
1992 or 1993. To date, neither of these institutions has been placed on
provisional certification status as a result of FFEL cohort default rates in
excess of 25%. The following table sets forth the cohort default rates for the
Company's institutions for federal fiscal years 1992, 1993 and 1994 and the
prepublication cohort default rate of the institutions for federal fiscal year
1995:
<TABLE>
<CAPTION>
COHORT DEFAULT
PREPUBLICATION RATE
1995 COHORT -----------------
SCHOOL DEFAULT RATE 1994 1993 1992
- --------------------------------------------- -------------- ----- ----- -----
<S> <C> <C> <C> <C>
AL COLLINS GRAPHIC DESIGN SCHOOL
Tempe, AZ.................................. 13.9% 19.3% 28.5% 20.0%
ALLENTOWN BUSINESS SCHOOL
Allentown, PA.............................. 10.8% 7.1% 14.9% 15.7%
BROOKS COLLEGE
Long Beach, CA............................. 18.2% 18.4% 16.2% 10.3%
BROWN INSTITUTE
Minneapolis, MN............................ 18.3% 19.6% 18.6% 19.7%
WESTERN CULINARY INSTITUTE
Portland, OR............................... 14.3% 11.4% 14.2% 26.1%
SCHOOL OF COMPUTER TECHNOLOGY
Pittsburgh, PA and Fairmont, WV............ 10.9% 9.3% 14.6% 16.5%
THE KATHARINE GIBBS SCHOOLS
Boston, MA................................. 19.3% 16.7% 18.6% 16.6%
Melville, NY............................... 16.1% 17.8% 18.2% 19.1%
Montclair, NJ and Piscataway, NJ........... 16.7% 16.0% 19.2% 18.6%
New York, NY............................... 14.6% 18.9% 17.5% 20.5%
Norwalk, CT................................ 27.1% 17.7% 24.0% 19.1%
Providence, RI............................. 14.7% 13.1% 17.3% 13.8%
INTERNATIONAL ACADEMY OF MERCHANDISING &
DESIGN (U.S.)
Chicago, IL................................ 15.7% 13.3% 15.0% 10.4%
Tampa, FL.................................. 13.3% 15.0% 17.3% 14.9%
</TABLE>
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In addition, if an institution's cohort default rate for loans under the
Perkins program exceeds 15% for any federal award year (i.e., July 1 through
June 30), that institution may be placed on provisional certification status
for up to four years. Nine of the Company's institutions have Perkins cohort
default rates in excess of 15% for students who were scheduled to begin
repayment in the 1996-97 federal award year, the most recent year for which
such rates have been calculated. These institutions are Allentown, Brown,
Collins, Gibbs-Boston, Gibbs-Melville, Gibbs-Montclair, Gibbs-New York, Gibbs-
Norwalk and Gibbs-Providence. The Perkins program cohort default rates for
these nine institutions ranged from 20.7% to 64.3%. Thus, these institutions
could be placed on provisional certification status, which would subject them
to closer review by the DOE and possible summary adverse action if they commit
any violation of the Title IV Program requirements. However, to date, none of
these institutions has been placed on such status for this reason.
Each of the Company's institutions has adopted a student loan default
management plan. Those plans emphasize the importance of meeting loan repayment
requirements and provide for extensive loan counseling, methods to increase
student persistence and completion rates and graduate employment rates, and
proactive borrower contacts after students cease enrollment. They may also
include the use of external agencies to assist the institution with loan
counseling and loan servicing if students cease attending the institution.
Those activities are in addition to the loan servicing and collection
activities of FFEL lenders and guaranty agencies and FDL servicers.
Increased Regulatory Scrutiny
The HEA provides for a three-part initiative, referred to as the Program
Integrity Triad, intended to increase regulatory scrutiny of postsecondary
education institutions. One part of the Program Integrity Triad expands the
role of accrediting agencies in the oversight of institutions participating in
the Title IV Programs. As a result, the accrediting agencies which review and
accredit the Company's campuses have increased the breadth of such reviews and
have expanded their examinations in such areas as financial responsibility and
timeliness of student refunds. The Program Integrity Triad provisions also
require each accrediting agency recognized by the DOE to undergo comprehensive
periodic reviews by the DOE to ascertain whether such accrediting agency is
adhering to required standards. Each accrediting agency that accredits any of
the Company's campuses has been reviewed by the DOE under these provisions and
has been approved for recognition by the DOE.
A second part of the Program Integrity Triad tightened the standards to be
applied by the DOE in evaluating the financial responsibility and
administrative capability of institutions participating in the Title IV
Programs. In addition, the Program Integrity Triad mandated that the DOE
periodically review the eligibility and certification to participate in the
Title IV Programs of every such eligible institution. By law, all institutions
are required to undergo such a recertification review by the DOE by 1997 and
every four years thereafter. Under these standards, each of the Company's
institutions will be evaluated by the DOE more frequently than in the past. A
denial of recertification would preclude an institution from continuing to
participate in the Title IV Programs.
A third part of the Program Integrity Triad required each state to establish
a State Postsecondary Review Entity ("SPRE") to review certain institutions
within that state to determine their eligibility to continue participating in
the Title IV Programs. However, no SPREs are actively functioning. The United
States Congress has declined to provide funding for the SPREs in appropriations
legislation that has been signed into law and the DOE has not requested any
future funding for the SPREs. In its most recent draft of proposals for the
1997 reauthorization of the HEA, the DOE has proposed that the Congress repeal
the SPRE program.
Financial Responsibility Standards
All institutions participating in the Title IV Programs must satisfy a series
of specific standards of financial responsibility. Institutions are evaluated
for compliance with those requirements in several circumstances, including as
part of the DOE's quadrennial recertification process and also annually as each
institution submits its audited financial statements to the DOE. One standard
requires each institution to demonstrate an acid test ratio (defined as the
ratio of cash, cash equivalents and current accounts receivable to current
liabilities) of at
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least 1:1 at the end of each fiscal year. Another standard requires that each
institution have a positive tangible net worth at the end of each fiscal year.
A third standard prohibits any institution from having a cumulative net
operating loss during its two most recent fiscal years that results in a
decline of more than 10% of that institution's tangible net worth as measured
at the beginning of that two-year period. In 1996, the DOE issued proposed
regulations that, if promulgated, would significantly revise the present
financial responsibility requirements, primarily by replacing the three
separate numeric ratios described above with a composite score based on three
new ratio calculations. The DOE has not yet issued new regulations in final
form, but has stated its intent to do so by December 1, 1997 and to make the
new regulations effective July 1, 1998. The DOE may measure an institution's
financial responsibility on the basis of the financial statements of the
institution itself or the financial statements of the institution's parent
company, and may also consider the financial condition of any other entity
related to the institution. In reviewing the Company's acquisitions in the last
12 months, it has been the DOE's practice to measure financial responsibility
on the basis of the financial statements of both the institutions and the
Company.
An institution that is determined by the DOE not to meet the standards of
financial responsibility on the basis of failing to meet one or more of the
specified financial requirements is nonetheless entitled to participate in the
Title IV Programs if it can demonstrate to the DOE that it is financially
responsible on an alternative basis. An institution may do so by posting surety
either in an amount equal to 50% (or greater, as the DOE may require) of the
total Title IV Program funds received by students enrolled at such institution
during the prior year or in an amount equal to 10% (or greater, as the DOE may
require) of such prior year's funds if the institution also agrees to transfer
to the reimbursement system of payment for its Title IV Program funds. The DOE
has interpreted this surety condition to require the posting of an irrevocable
letter of credit in favor of the DOE. Alternatively, an institution may
demonstrate, with the support of a statement from a certified public accountant
and other information specified in the regulations, that it was previously in
compliance with the numeric standards and that its continued operation is not
jeopardized by its financial condition.
Company Compliance with Financial Responsibility Standards
In its review of the Company's annual financial statements and interim
balance sheets, as filed with the DOE in connection with the Company's
applications for DOE certification of institutions acquired subsequent to
September 1996 to allow such institutions to participate in the Title IV
Programs, the DOE has questioned whether the Company's financial statements are
acceptable and therefore an authoritative basis upon which to determine the
Company's financial responsibility under the applicable DOE regulations.
Specifically, the DOE has questioned the Company's accounting for certain
direct marketing costs and courseware and other instructional materials.
Further, the DOE has asserted that the Company did not satisfy the 1:1 acid
test ratio based on its fiscal 1996 financial statements. The audited financial
statements included in this Registration Statement have been restated to
expense as incurred all direct marketing and advertising costs which had
previously been deferred. This change in accounting method is disclosed in the
audit opinion and footnotes to the financial statements and is permitted in
accordance with Accounting Principles Board Opinion No. 20.
In lieu of accepting the Company's previously filed 1996 audited financial
statements, the DOE has offered the Company the alternative of posting an
irrevocable letter of credit in favor of the Secretary of Education with
respect to each institution the Company has acquired since September 1996 in a
sum sufficient to secure the DOE's interest in the Title IV Program funds
administered by the applicable institution. While the Company continues to
disagree with the position taken by the DOE, in order to obtain certification
of the institutions to resume participation in the Title IV Programs in a
timely fashion, and thus to avoid any material interruption in Title IV Program
funding for the acquired institutions, the Company has posted and currently has
outstanding a letter of credit in the amount of $1.9 million, which expires on
September 30, 1998, with respect to Western Culinary, and a letter of credit in
the amount of $800,000, with an expiration date of July 31, 1998, with respect
to SCT.
The Company has agreed to the DOE's directive, dated September 9, 1997, to
submit a letter of credit in the amount of $15.2 million, to expire on October
31, 1998, with respect to the six Gibbs institutions.
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Consequently, the six Gibbs institutions were certified to resume participation
in the Title IV Programs as of October 1, 1997, and the Company must post the
letter of credit with the DOE no later than November 9, 1997. In addition, the
Company is considering the DOE's request to increase, no later than November
15, 1997, the letter of credit with respect to SCT by $721,000 in order to
maintain SCT's eligibility to participate in the Title IV Programs. Further,
upon the DOE's request, the Company is prepared to post an additional letter of
credit with respect to IAMD-U.S., which the Company estimates will be in the
range of $3.0 million to $5.0 million, in order to reestablish the eligibility
of the two IAMD-U.S. institutions to participate in the Title IV Programs in
the near future.
The original letters of credit for Western Culinary and SCT represented 50%
of each institution's Title IV Program funding in the prior award year. In
September 1997, the DOE increased the level of surety for SCT to, and
established the level of surety of Gibbs at, 100% of the Title IV Program funds
that students enrolled at each such institution received in the previous award
year. Beginning in September 1997, the DOE has imposed a condition that, for up
to the next 12 months, SCT and Gibbs may not disburse Title IV Program funds in
excess of the sum secured by the applicable letter of credit for each
institution. The DOE has advised the Company that the same conditions will
apply to the IAMD-U.S. institutions, and any other institutions that the
Company may acquire prior to a determination by the DOE that the Company
satisfies the standards of financial responsibility when such institutions
apply for recertification to participate in the Title IV Programs.
As a result of the DOE's requirement that the Company provide letters of
credit to secure the participation of newly acquired CEC institutions in the
Title IV Programs, the Company will have to utilize approximately $22.6 million
available under its credit agreement. In addition, if the DOE limits the
aggregate dollar value of the Title IV Program participation of SCT, Gibbs and
IAMD-U.S. to the amount of the letter of credit posted with respect to each
such institution, such a limitation could significantly reduce the Company's
ability to provide financial assistance to additional students at those
institutions, which in turn could reduce the Company's ability to enroll such
additional students. The inability of the Company to significantly increase
aggregate enrollment at the newly-acquired institutions could have a material
adverse effect on the Company's business, results of operations and financial
condition and on its ability to generate sufficient liquidity to continue to
fund growth in its operations and purchase other institutions. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operation--Liquidity and Capital Resources."
Subsequent to the October 1, 1997 certification of the Gibbs institutions and
the restoration of their participation in the Title IV Programs, the Company
and the DOE continue negotiations regarding the size and terms of the sureties
to allow for growth in the Company's operations. Therefore, before the Company
is required to post the expanded surety for SCT or any surety for Gibbs and
IAMD-U.S., agreement may be reached to provide for a material reduction in the
amounts and terms of such sureties and to provide a mechanism to allow the
Company to utilize additional Title IV Program funds in the event of increased
enrollments. However, there can be no assurance as to the outcome of such
continued negotiations.
As a result of the Offering, the Company expects to receive net proceeds of
approximately $ , which will significantly enhance the Company's
financial position. See "Use of Proceeds." The Company believes that such
proceeds and the cash expected to be generated from operations during the
remainder of 1997 will enhance its financial position and therefore enable the
Company and each of its U.S. subsidiaries to present audited 1997 financial
statements which will satisfy each of the DOE's standards of financial
responsibility, including the acid test ratio and tangible net worth test.
Applicable law and regulations require the DOE to consider only an
institution's most recent audited annual financial statements in making a
determination of the institution's financial responsibility. Accordingly, the
Company intends to seek the DOE's review of its audited 1997 financial
statements on an expedited basis in the spring of 1998. Once the DOE has
determined that the Company and its U.S. subsidiaries satisfy each of the DOE's
standards of financial responsibility, applicable law and regulations require
the DOE to release the Company from the requirement that it post the sureties
described above and from the limitations on Title IV Program funding in excess
of the surety amounts. However, there can be no assurance that the DOE will
expedite its review of the Company's 1997 financial statements, or of the
outcome of such review.
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<PAGE>
Under a separate standard of financial responsibility, if an institution has
made late Title IV Program refunds to students in its prior two years, the
institution is required to post a letter of credit in favor of the DOE in an
amount equal to 25% of the total Title IV Program refunds paid by the
institution in its prior fiscal year. Based on this standard, since July 1,
1997, the Company has posted a total of $310,000 in additional letters of
credit with respect to Brown, Collins, Gibbs-Montclair, Gibbs-New York, SCT and
Western Culinary. As of July 1, 1997, this standard has been modified to exempt
an institution if it has not been found to make late refunds to 5% or more of
its students in either of the two most recent fiscal years and has not been
cited for a reportable condition or material weakness in its internal controls
related to late refunds in either of its two most recent fiscal years. The
Company believes that its institutions satisfy this modified standard and
intends to allow its current letters of credit for late refunds to expire
without further action.
Restrictions on Acquiring or Opening Additional Schools and Adding
Educational Programs. An institution which undergoes a change of ownership
resulting in a change in control, including all the institutions the Company
has acquired or will acquire, must be reviewed and recertified for
participation in the Title IV Programs under its new ownership. Pending
recertification, the DOE suspends Title IV Program funding to that
institution's students except for certain Title IV Program funds that were
committed under the prior owner. If an institution is recertified following a
change of ownership, it will be on a provisional basis. During the time an
institution is provisionally certified, it may be subject to closer review by
the DOE and to summary adverse action for violations of Title IV Program
requirements, but provisional certification does not otherwise limit an
institution's access to Title IV Program funds.
In addition, the HEA generally requires that proprietary institutions be
fully operational for two years before applying to participate in the Title IV
Programs. However, under the HEA and applicable regulations, an institution
that is certified to participate in the Title IV Programs may establish an
additional location and apply to participate in the Title IV Programs at that
location without reference to the two-year requirement, if such additional
location satisfies all other applicable eligibility requirements. The Company's
expansion plans are based, in part, on its ability to acquire schools that can
be recertified and to open additional locations as part of its existing
institutions.
Generally, if an institution eligible to participate in the Title IV Programs
adds an educational program after it has been designated as an eligible
institution, the institution must apply to the DOE to have the additional
program designated as eligible. However, an institution is not obligated to
obtain DOE approval of an additional program that leads to an associate,
baccalaureate, professional or graduate degree or which prepares students for
gainful employment in the same or related recognized occupation as an
educational program that has previously been designated as an eligible program
at that institution and meets certain minimum length requirements. Furthermore,
short-term educational programs, which generally consist of those programs that
provide at least 300 but less than 600 clock hours of instruction, are eligible
only for FFEL funding and only if they have been offered for a year and the
institution can demonstrate, based on an attestation by its independent
auditor, that 70% of all students who enroll in such programs complete them
within a prescribed time and 70% of those students who graduate from such
programs obtain employment in the recognized occupation for which they were
trained within a prescribed time. Certain of the Gibbs institutions offer such
short-term programs, but students enrolled in such programs represent a small
percentage of the total enrollment of the Company's schools. To date, the
applicable institutions have been able to establish that their short-term
educational programs meet the required completion and placement percentages. In
the event that an institution erroneously determines that an educational
program is eligible for purposes of the Title IV Programs without the DOE's
express approval, the institution would likely be liable for repayment of Title
IV Program funds provided to students in that educational program. The Company
does not believe that the DOE's regulations will create significant obstacles
to its plans to add new programs.
Certain of the state authorizing agencies and accrediting agencies with
jurisdiction over the Company's campuses also have requirements that may, in
certain instances, limit the ability of the Company to open a new campus,
acquire an existing campus or establish an additional location of an existing
institution or begin offering
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<PAGE>
a new educational program. The Company does not believe that those standards
will have a material adverse effect on the Company or its expansion plans.
The "85/15 Rule." Under a provision of the HEA commonly referred to as the
"85/15 Rule," a proprietary institution, such as each of the Company's U.S.
institutions, would cease being eligible to participate in the Title IV
Programs if, on a cash accounting basis, more than 85% of its revenue for the
prior fiscal year was derived from the Title IV Programs. Any institution that
violates the 85/15 Rule immediately becomes ineligible to participate in the
Title IV Programs and is unable to apply to regain its eligibility until the
following fiscal year. The Company has calculated that, since this requirement
took effect in 1995, none of the Company's U.S. institutions has derived more
than 82% of its revenue from the Title IV Programs for any fiscal year, and
that for 1996 the range for the Company's U.S. institutions was from
approximately 52% to approximately 82%. For 1996, the independent auditors of
the Company or prior owner, if applicable, examined management's assertion that
each of the Company's U.S. institutions complied with these requirements and
opined that such assertion was fairly stated in all material respects. The
Company regularly monitors compliance with this requirement in order to
minimize the risk that any of its U.S. institutions would derive more than 85%
of its revenue from the Title IV Programs for any fiscal year. If an
institution appears likely to approach the 85% threshold, the Company would
evaluate the appropriateness of making changes in student funding and financing
to ensure compliance with the 85/15 Rule.
Restrictions on Payment of Bonuses, Commissions or Other Incentives. The HEA
prohibits an institution from providing any commission, bonus or other
incentive payment based directly or indirectly on success in securing
enrollments or financial aid to any person or entity engaged in any student
recruitment, admission or financial aid awarding activity for programs eligible
for Title IV Program funds. The Company believes that its current compensation
plans are in compliance with HEA standards, although the regulations of the DOE
do not establish clear criteria for compliance.
STATE AUTHORIZATION
Each of the Company's campuses is authorized to offer educational programs
and grant degrees or diplomas by the state in which such campus is located. The
level of regulatory oversight varies substantially from state to state. In some
states, the campuses are subject to licensure by the state education agency and
also by a separate higher education agency. State laws establish standards for
instruction, qualifications of faculty, location and nature of facilities,
financial policies and responsibility and other operational matters. State laws
and regulations may limit the ability of the Company to obtain authorization to
operate in certain states or to award degrees or diplomas or offer new degree
programs. Certain states prescribe standards of financial responsibility that
are different from those prescribed by the DOE. The Company believes that each
of its campuses is in substantial compliance with state authorizing and
licensure laws.
CANADIAN REGULATION
Canadian students, other than those who reside in the province of Quebec, are
eligible to receive loans under the CSL program. Students who are residents of
the province of Quebec are eligible to receive loans from the QLBP. Students
from the province of Ontario receive financial assistance under both the CSL
program and the OSLP program. CSL program loans are made by the Canadian
federal government.
With respect to students who reside in the province of Ontario, MET provides
financial assistance to eligible students through OSAP, which includes two main
components, the CSL program and the OSLP program. To maintain its right to
administer OSAP, an institution, such as the IAMD-Canada campus in Toronto,
must, among other things, be registered and in good standing under the PVSA and
abide by the rules, regulations and administrative manuals of the CSL, OSLP and
other OSAP-related programs. In order to attain initial eligibility, an
institution must establish, among other things, that it has been in good
standing under the PVSA for at least 12 months, that it has offered an eligible
program for at least 12 months, and that it has graduated at least one class in
an eligible program that satisfies specific requirements with respect to class
size and graduation rate.
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During the first two years of initial eligibility, the institution must have
its administration of OSAP independently audited, and full eligibility will not
be granted unless these audits establish that the institution has properly
administered OSAP. The institution can only administer CSL funds, and cannot
administer OSLP funds, until it has gained full eligibility. Once an
institution has gained OSAP eligibility, the institution must advise MET before
it takes any material action that may result in its failure or inability to
meet any rules, regulations or requirements related to OSAP.
In order for an OSAP-eligible institution to establish a new branch of an
existing eligible institution, it must obtain an OSAP-designation from MET,
either as a separate institution if the branch administers OSAP without the
involvement of the main campus or as part of the same institution if OSAP is
administered through the main campus of the institution. The Company does not
believe that OSAP's requirements will create significant obstacles to its plans
to acquire additional institutions or open new branches in Canada.
Institutions participating in OSAP, such as the IAMD-Canada campus in
Toronto, cannot submit applications for loans for students enrolled in
educational programs that have not been designated as OSAP-eligible by MET. To
be eligible, among other things, a program must be registered with the Private
Vocational Schools unit, must be of a certain minimum length and must lead to a
diploma or certificate. The Company does not anticipate that these program
approval requirements will create significant problems with respect to its
plans to add new educational programs.
An institution cannot automatically acquire OSAP-designation through
acquisition of other OSAP-eligible institutions. When there is a change of
ownership, including a change in controlling interest, in a non-incorporated
OSAP-eligible institution, MET will require evidence of the institution's
continued capacity to properly administer the program before extending OSAP
designation to the new owner. The Company does not believe that the Offering
will be considered a change of ownership for purposes of OSAP. Given that MET
periodically revises its regulations and other requirements and changes its
interpretations of existing laws and regulations, there can be no assurance
that MET will agree with the Company's understanding of each MET requirement.
IAMD-Canada, in Toronto, is required to audit its OSAP administration
annually and MET is authorized to conduct its own audits of the administration
of the OSAP programs by any OSAP-eligible institution. The Company has complied
with these requirements on a timely basis. Based on the most recent annual
compliance audits of IAMD-Canada, in Toronto, that institution has been found
to be in substantial compliance with the requirements of OSAP and the Company
believes that it continues to be in substantial compliance with these
requirements. MET has the authority to take any measures it deems necessary to
protect the integrity of the administration of OSAP. If MET deems a failure to
comply to be minor, MET will advise the institution of the deficiency and
provide the institution with the opportunity to remedy the asserted deficiency.
If MET deems the failure to comply to be serious in nature, MET has the
authority to: (i) condition the institution's continued OSAP designation upon
the institution's meeting specific requirements during a specific time frame;
(ii) refuse to extend the institution's OSAP eligibility to the OSLP program;
(iii) suspend the institution's OSAP designation or (iv) revoke the
institution's OSAP designation. In addition, when MET determines that any non-
compliance in an institution's OSAP administration is serious, MET has the
authority to contract with an independent auditor, at the expense of the
institution, to conduct a full audit in order to quantify the deficiencies and
to require repayment of all loan amounts. In addition, MET may impose a penalty
up to the amount of the damages assessed in the independent audit.
As noted above, IAMD-Canada, in Toronto, is subject to the PVSA. The Company
may not operate a private vocational school in the province of Ontario unless
such school is registered under the PVSA. Upon payment of the prescribed fee
and satisfaction of the conditions prescribed by the regulations under the PVSA
and by the Private Vocational Schools Unit of the MET, an applicant or
registrant such as IAMD-Canada, in Toronto, is entitled to registration or
renewal of registration to conduct or operate a private vocational school
unless: (1) it cannot reasonably be expected to be financially responsible in
the conduct of the private vocational school; (2) the past conduct of the
officers or directors provides reasonable grounds for belief that the
operations
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of the campus will not be carried on in accordance with relevant law and with
integrity and honesty; (3) it can reasonably be expected that the course or
courses of study or the method of training offered by the private vocational
school will not provide the skill and knowledge requisite for employment in the
vocation or vocations for which the applicant or registrant is offering
instruction; or (4) the applicant is carrying on activities that are, or will
be, if the applicant is registered, in contravention of the PVSA or the
regulations under the PVSA. An applicant for registration to conduct or operate
a private vocational school is required to submit with the application a bond
in an amount determined in accordance with the regulations under the PVSA.
IAMD-Canada, in Toronto, is currently registered under the PVSA, and the
Company does not believe that there will be any impediment to renewal of such
registration on an annual basis.
The PVSA provides that a "registration" is not transferable. However, the
Private Vocational Schools Unit of MET takes the position that a purchase of
shares of a private vocational school does not invalidate the school's
registration under the PVSA. The Company does not believe that the Offering
will invalidate the registration of IAMD-Canada, in Toronto.
If a corporation is convicted of violating the PVSA or the regulations under
the PVSA, the maximum penalty that may be imposed on the corporation is
$25,000.
Students who reside in the province of Quebec are eligible to receive funds
under the QLBP subject to certain student eligibility criteria. Under this
program, student financial assistance is initially provided in the form of a
loan. IAMD-Canada, in Quebec, is subject to the ARPE. In accordance with ARPE,
the Company may not operate a private educational institution without holding a
permit issued by the Minister for the institution itself and for the
educational services to be provided. The Minister will issue the permit after
consulting with the Commission Consultative de l'Enseignement Prive (the
"Commission") concerning the particular institution and the educational
services to determine if such institution and services meet certain conditions.
Permits cannot be transferred without the written authorization of the
Minister, and any entity holding a permit must advise the Minister of any
amalgamation, sale or transfer affecting such entity. The Minister, after
consultation with the Commission, has the authority to modify or revoke a
permit where the holder of the permit, among other things: (i) does not comply
with the conditions, restrictions or prohibitions relating to the institution
or (ii) is, or is about to become, insolvent. The Minister must provide the
institution with a chance to present its views before revoking a permit.
The legislative, regulatory and other requirements relating to student
financial assistance programs in Ontario and Quebec are subject to change by
applicable governments due to political and budgetary pressures and any such
change may affect the eligibility for student financial assistance of the
students attending IAMD-Canada which, in turn, could materially adversely
affect the Company's business, results of operations and financial condition.
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<PAGE>
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:
<TABLE>
<CAPTION>
NAME AGE POSITION
------------------------ --- ------------------------------------------------------------
<S> <C> <C>
John M. Larson.......... 46 President, Chief Executive Officer, Secretary and Director
William A. Klettke...... 45 Senior Vice President, Chief Financial Officer and Treasurer
Robert E. Dowdell....... 52 Director
Wallace O. Laub......... 72 Director
Patrick K. Pesch........ 40 Director
Scott D. Steele(1)...... 33 Director
Todd H. Steele.......... 35 Director
Thomas B. Lally......... 53 Nominee for Director
</TABLE>
- --------
(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.
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<PAGE>
WALLACE O. LAUB has been a director of the Company since October 1994. Mr.
Laub was a co-founder of NEC, where he served as Executive Vice President and
director from 1955 to 1993. From 1981 to 1990, Mr. Laub served as a director
of the Distance Education Training Council, a trade association and
accrediting agency for distance education companies. Mr. Laub is now retired.
PATRICK K. PESCH has been a director of the Company since 1995. Mr. Pesch
was designated as director of the Company by HECC. Since 1992, Mr. Pesch has
served as a Senior Vice President of Heller Financial, Inc. ("HFI"), the
parent of Heller Equity Capital Corporation ("HECC"), and also as an officer
of HECC, managing a portfolio of loan and equity investments. Mr. Pesch also
serves as a director of Kimpex, Inc., a Canadian company and as an officer and
director of Amersig Graphics, Inc.
SCOTT D. STEELE has been a director of the Company since October 1995. Mr.
Steele was designated as a director of the Company by Electra Investment Trust
P.L.C. ("EIT"). Since May 1993, he has been employed by Electra Fleming, Inc.,
an affiliate of EIT, making private equity investments, and he is currently a
principal of Electra Fleming, Inc. From August 1992 to May 1993, Mr. Steele
was an Associate with Coopers & Lybrand, providing corporate finance and
advisory services. Mr. Steele is also a director of Family Bookstores Company,
Inc., The Benjamin Company, Landmark Healthcare, Rehab Designs of America,
American Medical Plans, Inc. and Stevens Aviation.
TODD H. STEELE has been a director of the Company since its inception in
January 1994. Mr. Steele was designated as a director of the Company by HECC.
Since December 1996, he has served as Vice President of Baker, Fentress & Co.,
an investment company, making equity investments in private companies. From
May 1990 to November 1996, he served as a Vice President of Heller Financial,
Inc. and HECC, also making equity investments in private companies.
THOMAS B. LALLY will become a director of the Company upon the consummation
of the Offering. Mr. Lally has been designated to be a director of the Company
by HECC. He has been the President of HECC since 1996 and an Executive Vice
President of HFI since 1994, with direct responsibility for the asset quality
oversight of HFI's portfolio of loan and equity investments. Mr. Lally joined
HFI in 1974 and is currently a director of Kroy, Inc.
None of the executive officers and directors are related to one another.
CERTAIN OTHER SIGNIFICANT EMPLOYEES OF THE COMPANY
The following information is supplied with respect to certain other
significant employees of the Company.
J. PATRICK ANDREWS has served as Director of Advertising of the Company
since October 1995. From 1994 until he joined CEC corporate management, Mr.
Andrews was Advertising Manager for two of the Company's schools, Collins and
Brooks. For approximately 12 years prior to joining CEC, Mr. Andrews managed
the advertising and marketing functions for Spartan, a 2,800 student school in
Tulsa, Oklahoma. Mr. Andrews holds a Bachelor's of Arts in Journalism from the
University of South Carolina and a Masters in Marketing from the University of
Texas.
DR. JON R. COOVER joined CEC as National Director of Marketing in May 1997,
after serving for 14 months as Director of Education at the Company's largest
school, Brown. Dr. Coover's background in private career education includes
holding positions as Vice President of Marketing for the Rasmussen Business
Colleges, Minneapolis, Minnesota; Vice President of Operations at Virginia
College, Birmingham, Alabama; President of Dominion College, Roanoke,
Virginia; President of Nettle Junior College, Sioux Falls, South Dakota; Co-
Director of New York Restaurant School in New York City; and Regional Director
with DeVry Institute of Technology. Dr. Coover holds a Bachelor's of Science
degree in Business Administration and an M.B.A. from California Western
University and a Ph.D. in Business from California Coast University.
NICK FLUGE has served as Managing Director of Operations--Culinary Division
(Portland, Pittsburgh and Fairmont) of the Company since July 1997. Mr. Fluge
has served as Director and President of Western Culinary since 1989. From 1984
until 1988, Mr. Fluge was Director of Retail/Restaurants and a member of the
68
<PAGE>
management team of Western Culinary. With over 20 years of experience in the
hospitality/foodservice industry and as a Certified Culinary Educator with the
American Culinary Federation, Mr. Fluge has chaired American Culinary
Federation Food Salons, judged wine competitions and written columns for
various periodicals, including The National Culinary Review. Mr. Fluge has been
a Team Leader for the Accrediting Commission of Career Schools and Colleges of
Technology (ACCSCT) since 1992. Mr. Fluge is a member of the Oregon Department
of Education--Career College Division. Mr. Fluge holds a Bachelor's of Science
degree in Political Science from Portland State University.
LAWRENCE GROSS has served as Managing Director of Operations--Canadian School
Group (Toronto and Montreal) of the Company since June 1997. Mr. Gross has been
a Director and Manager of IAMD-Canada since 1981. He previously founded
National Carpet Mills and other companies in the home furnishings industry. Mr.
Gross is a graduate of the University of Chicago and earned his M.B.A. at the
University of Toronto Graduate School of Business.
JACOB P. GRUVER has served as Managing Director of Operations--Business
School Group (Allentown, Boston, Melville, Montclair, New York, Norwalk,
Piscataway and Providence) of the Company since May 1997. From August 1994 to
May 1997, Mr. Gruver served as the Company's Director of Finance. From 1989
until joining the Company, Mr. Gruver was Vice President and Controller of
Wyoming Technical Institute in Laramie, Wyoming, a moderately sized career-
oriented school. In such positions, he managed all financial functions,
including budgeting and implementation of management information/financial
systems. From 1978 to 1989, Mr. Gruver audited career-oriented schools and
other clients at a regional public accounting firm in Laramie, Wyoming. Mr.
Gruver received a Bachelor's degree in Accounting from National College.
PATRICIA KAPPER has served as Director of Education of the Company since
August 1997. From 1990 until joining the Company, Ms. Kapper was Dean of
Academic Affairs (Chief Academic Officer) of DeVry Institute of Technology,
Addison, Illinois. From 1986 until 1990, Ms. Kapper held academic management
positions with Milwaukee Area Technical College, from 1984 to 1986 as Associate
Dean of Business and Graphic and Applied Arts and from 1986 to 1990 as Dean of
Business and Graphic Arts. Ms. Kapper holds a Bachelor's of Arts degree in
Business Education from the University of Wisconsin--Eau Claire, a Master of
Science in Teaching degree from the University of Wisconsin--Whitewater, and is
in the process of completing her dissertation for her doctorate in Adult
Education at Northern Illinois University.
JAMES R. MCELLHINEY was appointed Director of Regulatory Compliance of the
Company in August 1997. Mr. McEllhiney served as Director of Education of the
Company from August 1994 until August 1997. Prior to joining CEC corporate
management in August 1994, Mr. McEllhiney was the Vice President of Academic
Affairs for Phillips Colleges, Inc. In this position, Mr. McEllhiney managed
regulatory compliance, including processing change of ownership applications
for over 60 acquisitions, and oversaw corporate educational administration for
this group of 92 schools. From 1975 to 1988, Mr. McEllhiney managed regulatory
compliance and served as Chief Academic Officer for MetriData Computing, a 40
unit career-oriented school company. Prior to joining MetriData, Mr. McEllhiney
was an instructor and Academic Dean at Northwood Institute. Mr. McEllhiney
holds a Bachelor's of Science in Education and a Masters of Science in
Psychology from Indiana State University.
ROBERT W. NACHTSHEIM has served as Controller of the Company since December
1995. Mr. Nachtsheim joined CEC's corporate management with 19 years of
accounting and financial analysis experience in multiple industries. From 1993
until 1995, Mr. Nachtsheim served as Controller for Century 21 North Central,
Inc., overseeing the financial performance of 600 midwestern Century 21
franchises. His prior experience includes six years as the Director of
Financial Analysis and Reporting for Newark Electronics, a nationwide
electronics distributor, and 11 years with Amoco Corporation in various
accounting positions. Mr. Nachtsheim holds a Bachelor's of Science degree in
Accountancy from the University of Missouri and an M.B.A. in Finance from
DePaul University.
JASON L. ROBERTS has served as Director of Management Information Systems of
the Company since August 1995. Mr. Roberts has several years of experience in
proprietary school management and information technology.
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<PAGE>
From 1993 to 1995, Mr. Roberts was a computer and networking consultant working
primarily with small businesses and proprietary schools. From 1991 to 1993, Mr.
Roberts was the Director of MIS for Wyoming Technical Institute, a moderately
sized automotive technology school owned by Phillips Colleges, Inc. Mr. Roberts
holds a Bachelor's of Science degree in Management Information Systems from the
University of Wyoming and has the industry recognized credential of Certified
Netware Engineer.
STEVE B. SOTRAIDIS has served as Managing Director of Operations-Visual
Communications Group (Long Beach, Tempe, Minneapolis, Chicago and Tampa) of the
Company since July 1, 1997. Mr. Sotraidis joined CEC's administrative
management team in June 1994. Mr. Sotraidis joined Brooks College in 1970 and
has managed Brooks' overall operations since 1975. Mr. Sotraidis holds a
Bachelor of Science degree in Psychology and completed two years of graduate
work in Industrial Psychology at California State University at Long Beach.
MARK J. TOBIN has served as Director of Student Finance of the Company since
March 1996. Mr. Tobin joined DeVry, Inc., in 1984 and, from 1989 until joining
CEC corporate management, Mr. Tobin was Director of Student Finance for DeVry,
Inc. In that position, Mr. Tobin was responsible for student finance policy
development, technical and operations assistance and performance monitoring for
the DeVry Institutes of Technology and the Keller Graduate School of
Management. From 1984 to 1989, Mr. Tobin held corporate financial and
management positions at DeVry, Inc. Prior to his tenure at DeVry, Inc. (1984-
1996), Mr. Tobin was Director of Financial Aid at Carthage College (1978-1984)
and Marian College (1973-1978). Mr. Tobin holds a Bachelor of Arts degree in
Psychology from Northeastern Illinois State College and a Master of Education
degree in Student Personnel Work in Higher Education from Loyola University of
Chicago.
BOARD OF DIRECTORS
The Company's Board of Directors is divided into three classes with staggered
three-year terms. The terms of Messrs. Dowdell and Pesch expire at the annual
meeting of the Company's stockholders in 1998, the terms of Messrs. Laub and
Todd Steele expire at the annual meeting of the Company's stockholders in 1999,
and the term of Mr. Larson expires at the annual meeting of the Company's
stockholders in 2000. Mr. Lally's term will expire at the annual meeting of
stockholders in 2000. At each annual meeting of the Company's stockholders, the
successors to the directors whose terms expire at such annual meeting will be
elected for a three-year term.
ARRANGEMENTS FOR NOMINATION AS DIRECTOR
In connection with sales of the Company's capital stock, the Company and
certain of its stockholders, including Heller and Electra, entered into the
Amended and Restated Stockholders' Agreement, dated as of July 31, 1995 and
amended as of February 28, 1997 and May 30, 1997 (the "Stockholders'
Agreement"), which provides, among other things, that the Board of Directors of
the Company shall have six members, consisting, subject to certain conditions,
of Larson, Dowdell, two persons designated by HECC, one person designated by
Electra and one person designated by the other directors. The Stockholders'
Agreement, including the rights and obligations of the aforementioned parties
to designate directors, will terminate upon the consummation of the Offering.
The Company and HECC are parties to an agreement, effective upon the
consummation of the Offering, pursuant to which HECC will be entitled to
designate two individuals for nomination to the Board of Directors. This
agreement provides that the Company will, among other things, cause such
individuals to be nominated and solicit proxies from the Company's stockholders
to vote in favor of such nominees, and will appoint the HECC designees to the
Compensation and Audit Committees of the Board. The number of directors HECC
will be entitled to designate will be reduced to one if HECC no longer owns at
least 25% of the aggregate voting power of the Company, and the agreement will
terminate if HECC no longer owns at least 10% of the aggregate voting power of
the Company. Messrs. Pesch and Lally will be the initial designees of Heller.
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<PAGE>
COMMITTEES OF THE BOARD OF DIRECTORS
The Board of Directors has established an Audit Committee and a Compensation
Committee. Both the Audit Committee and the Compensation Committee are
currently composed entirely of directors who are not officers or employees of
the Company.
The Audit Committee generally has responsibility for recommending
independent auditors to the Board of Directors for selection, reviewing the
plan and scope of the annual audit, reviewing the Company's audit and control
functions and reporting to the full Board of Directors regarding all of the
foregoing. The members of the Audit Committee are Robert E. Dowdell, Patrick
K. Pesch and Scott D. Steele. Scott Steele intends to resign from the Audit
Committee prior to the consummation of the Offering, and Mr. Lally will join
the Audit Committee.
The Compensation Committee generally has responsibility for recommending to
the Board guidelines and standards relating to the determination of executive
compensation, reviewing the Company's executive compensation policies and
reporting to the Board of Directors regarding the foregoing. The Compensation
Committee also has responsibility for administering the Company's incentive
compensation plans, determining the number of options to be granted to the
Company's executive officers pursuant to such plans and reporting to the Board
of Directors regarding the foregoing. The members of the Compensation
Committee are Wallace O. Laub, Patrick K. Pesch and Scott D. Steele. Scott
Steele intends to resign from the Compensation Committee prior to the
consummation of the Offering, and Mr. Lally will join the Compensation
Committee.
COMPENSATION OF DIRECTORS
Subsequent to the closing of the Offering, all directors who are not
employees of the Company will be paid an annual fee of $6,000 and will be paid
$1,000 for each Board meeting attended and $500 for each Board committee
meeting attended. Non-employee directors are also reimbursed for their
reasonable out-of-pocket expenses incurred in attending Board and committee
meetings. The Company has adopted the Career Education Corporation Non-
Employee Directors' Stock Option Plan, effective upon the closing of the
Offering, providing for annual option grants to each director who is not an
employee of the Company. See "--Stock Plans--1997 Directors Stock Option
Plan."
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Wallace O. Laub (collectively with Constance L. Laub, "Laub"), Patrick K.
Pesch ("Pesch") and Scott D. Steele ("Scott Steele") served as the members of
the Compensation Committee during 1996.
The following information reflects a 100-for-one split of the Company's
common stock effected as of July 31, 1995 and a 10-for-one split of the
Company's Series C Preferred Stock effected as of July 26, 1996. It does not
reflect the Transactions to be effected immediately prior to the consummation
of the Offering, as described under "The Transactions."
As of February 28, 1997, the Company entered into a Securities Purchase
Agreement (the "February 1997 Agreement") with HECC, which as of October 31,
1997 beneficially owned % of the outstanding Common Stock of the Company;
Electra Investment Trust P.L.C. ("EIT"), which as of October 31, 1997 owned,
together with an affiliate, Electra Associates, Inc. ("EAP" and, collectively
with EIT, "Electra"), % of the Common Stock of the Company; John M. Larson,
the President and Chief Executive Officer and a director of the Company
("Larson"); William A. Klettke, the Senior Vice President, Chief Financial
Officer and Treasurer of the Company ("Klettke"); Robert E. Dowdell, a
director of the Company; and Laub. Pesch is an officer of HECC and a Vice
President of HFI (collectively with HECC, "Heller"), the parent of HECC, and
was designated as a director of the Company by HECC. Todd H. Steele ("Todd
Steele"), who served as a Vice President of HFI and HECC from May 1990 to
November 1996, was also designated as a director of the Company by Heller.
Scott Steele is a principal of Electra Fleming Inc, an affiliate of EIT and
EAP, and was designated as a director of the Company by EIT.
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<PAGE>
On February 28, 1997, pursuant to the February 1997 Agreement, the Company
issued (i) 1,391 shares of Series D Preferred Stock and Warrants to purchase
1,655 shares of Class E Common Stock to HECC in exchange for total
consideration of $1,391,000, (ii) 468 shares of Series D Preferred Stock and
Warrants to purchase 558 shares of Class E Common Stock to Electra in exchange
for total consideration of $468,000, (iii) 84 shares of Series D Preferred
Stock and Warrants to purchase 99 shares of Series E Common Stock to Dowdell in
exchange for total consideration of $84,000, (iv) 16 shares of Series D
Preferred Stock and Warrants to purchase 19 shares of Class E Common Stock to
Larson in exchange for total consideration of $16,000, (v) 15 shares of Series
D Preferred Stock and Warrants to purchase 18 shares of Class E Common Stock to
Klettke in exchange for total consideration of $15,000, (vi) 26 shares of
Series D Preferred Stock and Warrants to purchase 31 shares of Class E Common
Stock to Laub in exchange for total consideration of $26,000.
On May 30, 1997, pursuant to the February 1997 Agreement, the Company issued
(i) 3,995 shares of Series D Preferred Stock and Warrants to purchase 4,754
shares of Class E Common Stock to HECC in exchange for total consideration of
$3,995,000, (ii) 1,348 shares of Series D Preferred Stock and Warrants to
purchase 1,603 shares of Class E Common Stock to Electra in exchange for total
consideration of $1,348,000, (iii) 44 shares of Series D Preferred Stock and
Warrants to purchase 52 shares of Class E Common Stock to Larson in exchange
for total consideration of $44,000, (iv) 42 shares of Series D Preferred Stock
and Warrants to purchase 50 shares of Class E Common Stock to Klettke in
exchange for total consideration of $42,000, (v) 71 shares of Series D
Preferred Stock and Warrants to purchase 85 shares of Class E Common Stock to
Laub in exchange for total consideration of $71,000.
As of May 30, 1997, the Company entered into a Securities Purchase Agreement
with Heller, Electra and Klettke (the "May 1997 Agreement" and, together with
the February 1997 Agreement, the "1997 Agreements"). On May 30, 1997, pursuant
to the May 1997 Agreement, the Company issued (i) 11,127 shares of Series D
Preferred Stock and Warrants to purchase 26,842 shares of Class E Common Stock
to Heller in exchange for total consideration of $11,127,000, (ii) 2,376 shares
of Series D Preferred Stock and Warrants to purchase 5,732 shares of Class E
Common Stock to Electra in exchange for total consideration of $2,376,000 and
(iii) 122 shares of Series D Preferred Stock and Warrants to purchase 295
shares of Class E Common Stock to Klettke in exchange for total consideration
of $122,000.
On June 30, 1997, pursuant to the May 1997 Agreement, the Company issued
1,375 shares of Series D Preferred Stock and Warrants to purchase 3,317 shares
of Class E Common Stock to Electra in exchange for total consideration of
$1,375,000.
The number of shares covered by each of the Warrants issued pursuant to the
1997 Agreements (collectively, the "Warrants") is subject to adjustment in
certain events described therein. The Warrants have an exercise price of $.01
per share and expire on July 31, 2005. The holders of the Warrants are required
to exercise them concurrently with the consummation of the Offering. It is
expected that the exercise price of each of the Warrants will be paid by
surrender of a portion of such Warrant. The Series D Preferred Stock issued
pursuant to the 1997 Agreements (exclusive of accrued dividends) will be
converted into shares of Common Stock at the rate of shares of
Common Stock for each share of Series D Preferred Stock. See "The
Transactions."
The Company and Electra are parties to a Registration Rights Agreement, dated
as of July 31, 1995 (the "Electra Registration Rights Agreement"). Under the
Electra Registration Rights Agreement, Electra is entitled, subject to certain
exceptions, to cause the Company to register shares of Common Stock held by
Electra in any registration by the Company for its own account or for the
account of other security holders. Additionally, at any time that the Company
is eligible to use Commission Form S-3 for registration of securities (expected
to initially occur on the first anniversary of this Prospectus), Electra will
be entitled, subject to certain exceptions, to cause the Company to register
shares held by Electra on a registration statement on Form S-3. The Company is
required to pay certain expenses relating to any registration effected pursuant
to the Electra Registration Rights Agreement and to indemnify Electra against
certain liabilities, including liabilities under the Securities Act.
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<PAGE>
The Company and Heller are parties to a Registration Rights Agreement, dated
as of October , 1997 (the "Heller Registration Rights Agreement"). Under the
Heller Registration Rights Agreement, Heller is entitled, subject to certain
exceptions, to cause the Company to register shares of Common Stock held by
Heller in any registration by the Company for its own account or for the
account of other security holders. Additionally, at any time that the Company
is eligible to use Commission Form S-3 for registration of securities, Heller
will be entitled, subject to certain exceptions, to cause the Company to
register shares held by Heller on a registration statement on Form S-3. The
Company is required to pay certain expenses relating to any registration
effected pursuant to the Heller Registration Rights Agreement and to indemnify
Heller against certain liabilities, including liabilities under the Securities
Act.
Pursuant to a Securities Purchase Agreement dated as of July 31, 1995, among
the Company and Electra, the Company is required to pay Electra an annual
portfolio administration fee in the amount of $75,000. This obligation will
terminate upon the consummation of the Transactions as described under "The
Transactions."
The Company and Dowdell were parties to a Consulting and Non-Competition
Agreement dated as of January 31, 1994 (the "Consulting Agreement") which
provided, among other things, for Mr. Dowdell to provide consulting services
related to the management and operations of the Company and prohibited Mr.
Dowdell from engaging in certain activities competitive with the Company. In
1996, pursuant to the Consulting Agreement, the Company provided an aggregate
of $50,000 in compensation to Mr. Dowdell. The Consulting Agreement expired on
January 1, 1997.
The Company has agreed that it will, upon consummation of the Offering and
from the proceeds thereof, pay to certain holders of the Existing Preferred
Stock, including Electra, Larson and Dowdell, amounts equal to the liquidation
value of accrued paid-in-kind dividends on such Existing Preferred Stock. The
amount payable to each holder will be determined by dividing the liquidation
value attributable to dividends on the Existing Preferred Stock held by such
holder by the public offering price of the Common Stock in the Offering. Based
upon an assumed initial public offering price of $ per share, the
Company anticipates paying approximately $ , $ and $ to
Electra, Larson and Dowdell, respectively. See "Use of Proceeds."
EXECUTIVE COMPENSATION
The following table sets forth information with respect to all compensation
paid by the Company for services rendered during the fiscal year ended December
31, 1996, to its Chief Executive Officer and the other executive officer of the
Company (each, a "Named Executive Officer").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL LONG TERM
COMPENSATION COMPENSATION
---------------- ------------
SECURITIES ALL OTHER
SALARY BONUS UNDERLYING COMPENSATION
NAME AND PRINCIPAL POSITIONS ($) ($) OPTIONS (#) ($)
---------------------------- ------ ------- ------------ ------------
<S> <C> <C> <C> <C>
John M. Larson,
President and Chief Executive
Officer........................... $185,417 $96,602 $6,951(1)
William A. Klettke,
Senior Vice President and Chief
Financial Officer................. $116,667 $43,764 $2,996(2)
</TABLE>
- --------
(1) Includes $6,615 in 401(k) matching contributions by the Company and $336 in
term life insurance premium payments by the Company.
(2) Includes $2,800 in 401(k) matching contributions by the Company and $196 in
term life insurance premium payments by the Company.
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<PAGE>
OPTION GRANTS IN 1996
The following table contains information concerning the grant of stock
options by the Company to the Named Executive Officers during 1996.
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED
PERCENTAGE ANNUAL RATES OF
NUMBER OF OF TOTAL STOCK PRICE
SHARES OPTIONS APPRECIATION FOR
UNDERLYING GRANTED TO EXERCISE OR OPTION TERM (3)
OPTIONS EMPLOYEES IN BASE PRICE EXPIRATION -----------------------
NAME GRANTED (#) (1) FISCAL YEAR ($/SH) (2) DATE 5% ($) 10% ($)
---- --------------- ------------ ----------- ---------- ------ ----------
<S> <C> <C> <C> <C> <C> <C>
John M. Larson..........
William A. Klettke......
</TABLE>
- --------
(1) The options granted to the Named Executive Officers in 1996 were granted
under the Career Education Corporation 1995 Stock Option Plan. Each of
these options is an incentive stock option and vests in five equal annual
installments on each of the first five anniversaries of the grant date;
provided, however, that these options became exercisable in full upon
stockholder approval of the Offering. See "--Stock Plans--Career Education
Corporation 1995 Stock Option Plan."
(2) The exercise price of each option equals the fair market value of the
option shares on the date of grant, as determined by the Company's Board of
Directors based on the most recent price prior to the grant date at which
the Company sold or agreed to sell Preferred Stock in capital raising
transactions.
(3) Potential realizable value is presented net of the option exercise price,
but before any federal or state income taxes associated with exercise, and
is calculated assuming that the fair market value on the date of the grant,
which equals the exercise price, appreciates at the indicated annual rates
(set by the Securities and Exchange Commission (the "Commission")),
compounded annually, for the term of the option. The 5% and 10% assumed
rates of appreciation are mandated by the rules of the Commission and do
not represent the Company's estimate or projection of future increases in
the price of the Common Stock. Actual gains are dependent on the future
performance of the Common Stock and the option holder's continued
employment throughout the vesting periods. The amounts reflected in the
table may not necessarily be achieved. Using the assumed initial public
offering price of $ for purposes of this calculation (pursuant to the
rules of the Commission), the potential realizable values of the options
granted in 1996 to Messrs. Larson and Klettke are approximately
$ and $ , respectively, at a 5% assumed annual
appreciation rate, and approximately $ and $ ,
respectively, at a 10% assumed annual appreciation rate.
FISCAL YEAR-END OPTION VALUES
The following table contains information regarding the Named Executive
Officers' unexercised options as of December 31, 1996. Neither of the Named
Executive Officers exercised any options during 1996.
<TABLE>
<CAPTION>
NUMBER OF SHARES UNDERLYING UNEXERCISED VALUE OF UNEXERCISED IN-THE-MONEY
OPTIONS AS OF DECEMBER 31, 1996 (#) OPTIONS AS OF DECEMBER 31, 1996 ($) (1)
--------------------------------------- ---------------------------------------
NAME EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
---- --------------------------------------- ---------------------------------------
<S> <C> <C>
John M. Larson.......... / $ /$
William A. Klettke...... / /
</TABLE>
- --------
(1) The value per option is calculated by subtracting the exercise price of the
option from the fair market value of the option shares at December 31, 1996
of $ per share, as determined by the Company's Board of Directors
based on the most recent price prior to December 31, 1996 at which the
Company had sold Preferred Stock in capital raising transactions.
EMPLOYMENT AGREEMENT
The Company has entered into an Employment and Non-Competition Agreement with
Mr. Larson, dated as of October 9, 1997 (the "Larson Employment Agreement"),
which has an initial term ending July 31, 2000. The Larson Employment Agreement
is subject to successive, automatic employer extensions if the Company gives
written notice at least 90 days prior to the expiration date. The Larson
Employment Agreement provides for an initial base salary of $250,000 plus bonus
compensation established by the Company's Board of Directors. The Larson
Employment Agreement provides for continuation of salary, bonus and benefits
for one year following Mr. Larson's termination of employment with the Company,
other than termination by the Company for "Cause" (as defined in the Larson
Employment Agreement) or termination by Mr. Larson without "Good Reason" (as
defined in the Larson Employment Agreement). Good Reason includes a Change of
Control (as
74
<PAGE>
defined in the Larson Employment Agreement) of the Company. The Larson
Employment Agreement also prohibits Mr. Larson from disclosing confidential
information and prohibits him from engaging in activities competitive with the
Company for a period which includes the term of his employment with the Company
or service as a director of the Company and continues for two years thereafter.
However, if Mr. Larson's employment with the Company is terminated by the
Company without "Cause" or by Mr. Larson for "Good Reason," the non-competition
period will expire on the later of the termination of Mr. Larson's service as a
director with the Company or six months after the termination of his
employment. In such case, the Company may extend the non-competition period up
to an additional 18 months if it pays Mr. Larson's base salary, a portion his
of bonus and benefits during this additional period. If the term of the Larson
Employment Agreement expires and the Company refuses its renewal or Mr. Larson
refuses its renewal for Good Reason, the non-competition period will expire on
the later of the termination of Mr. Larson's employment or the termination of
his service as a director. In such case, the Company may extend the non-
competition period for up to an additional two years if it pays Mr. Larson's
base salary, a portion of his bonus and benefits during this additional period.
STOCK PLANS
Career Education Corporation 1995 Stock Option Plan
Effective August 1, 1995, the Company's Board of Directors adopted the Career
Education Corporation 1995 Stock Option Plan (the "1995 Plan"), pursuant to
which options to acquire up to shares of Common Stock may be granted to
employees, advisors, consultants and non-employee directors as may be
determined by a committee of the Board of Directors (the "Option Committee").
The Compensation Committee of the Board of Directors serves as the Option
Committee and administers the 1995 Plan and determines with respect to each
grant the number of shares subject to the option, the exercise price, the
period of the option and the time at which the option may be exercised, as well
as any terms and conditions of the option amount. Exercise prices may not be
less than the fair market value of the Common Stock as determined by the Option
Committee as of the date of issuance of each stock option. Options may be
granted as either (i) incentive stock options (as defined in the Code), for
which the option price must be at least 100% of the fair market value of the
shares subject to the option on the grant date (110% in the case of an option
granted to a person holding more than 10% of the voting power of all classes of
stock of the Company (a "10% Holder") and which are not exercisable after ten
years from the grant date (five years in the event of an option granted to a
10% Holder), or (ii) non-qualified stock options, which are not subject to such
restrictions.
Career Education Corporation 1997 Employee Incentive Compensation Plan
The Company's Board of Directors and stockholders have approved the adoption
of the Career Education 1997 Employee Incentive Compensation Plan ("1997
Plan"), effective upon the consummation of the Offering. The 1997 Plan is a
flexible plan that provides the Compensation Committee of the Board of
Directors (the "Compensation Committee") broad discretion to fashion the terms
of the awards to provide eligible participants with stock-based and
performance-related incentives as the Committee deems appropriate. The 1997
Plan permits the issuance of awards in a variety of forms, including: (i)
nonqualified and incentive stock options for the purchase of Common Stock, (ii)
stock appreciation rights, (iii) restricted stock, (iv) deferred stock, (v)
bonus stock and awards in lieu of obligations, (vi) dividend equivalents, (vii)
other stock-based awards and (viii) performance awards and cash incentive
awards. Options granted will provide for the purchase of Common Stock at prices
determined by the Compensation Committee.
The persons eligible to participate in the Employee Plan are officers,
employees and consultants of the Company or any subsidiary of the Company who,
in the opinion of the Committee, contribute to the growth and success of the
Company or its subsidiaries. The purpose of the 1997 Plan is to promote the
overall financial objectives of the Company and its stockholders by motivating
eligible participants to achieve long-term growth in stockholder equity in the
Company and to retain the association of these individuals. The 1997 Plan is
administered by the Compensation Committee.
75
<PAGE>
The 1997 Plan provides for the award of up to shares of Common
Stock. At the discretion of the Compensation Committee, shares of Common Stock
subject to an award under the 1997 Plan that remain unissued upon termination
of such award, are forfeited or are received by the Company as consideration
for the exercise or payment of an award may be reissued under the 1997 Plan. In
the event of a stock dividend, stock split, recapitalization, sale of
substantially all of the assets of the Company, reorganization or other similar
event, the Compensation Committee will adjust the aggregate number of shares of
Common Stock subject to the 1997 Plan and the number, class and price of shares
subject to outstanding awards.
Career Education Corporation Non-Employee Directors' Stock Option Plan
The Company's Board of Directors and stockholders have approved the adoption
of the Career Education Corporation Non-Employee Directors' Stock Option Plan
(the "Directors' Plan"), effective upon the consummation of the Offering. The
Directors' Plan grants nonqualified stock options for the purchase of Common
Stock to directors who are not employees of the Company. Messrs. Dowdell, Laub,
Pesch and Todd Steele will be the initial participants in the Directors' Plan.
The purpose of the Directors' Plan is to promote the overall financial
objectives of the Company and its stockholders by motivating directors to
achieve long-term growth in stockholder equity in the Company, to further align
the interest of such directors with those of the Company's stockholders and to
retain the association of these directors. The Directors' Plan is administered
by the Compensation Committee.
The Directors' Plan provides for the award of up to shares of
Common Stock. The Directors' Plan provides for (i) the grant of an option to
purchase shares of Common Stock to each participant who is a non-
employee director of the Company on the date of the closing of the Offering or,
if after such closing date, the date such individual is first elected or
appointed as a non-employee director of the Company and (ii) a grant of an
option to purchase shares of Common Stock on the date of each
regular annual stockholder meeting after the effective date of the Directors'
Plan to each participant who is a non-employee director upon such date and
either is continuing as a non-employee director subsequent to the meeting or
who is elected at such meeting to serve as a non-employee director (other than
a meeting in the year of such participant's initial election or appointment).
Options granted under the Directors' Plan provide for the purchase of Common
Stock at the fair market value on the date of grant. No stock option granted
under the Directors' Plan may be exercisable later than the tenth anniversary
date of its grant.
Career Education Corporation 1998 Employee Stock Purchase Plan
The Company's Board of Directors and stockholders have approved the adoption
of the Career Education Corporation 1998 Employee Stock Purchase Plan (the
"Stock Purchase Plan"), effective as of January 1, 1998. A total of
shares of Common Stock have been reserved for issuance under the Stock Purchase
Plan. The Stock Purchase Plan, which is intended to qualify under Section 423
of the Code, permits eligible employees of the Company to purchase Common Stock
through payroll deductions with all such deductions credited to an account
under the Stock Purchase Plan. Payroll deductions may not exceed $25,000 for
all purchase periods within any calendar year.
The Stock Purchase Plan operates on a calendar year basis. To be eligible to
participate in the Stock Purchase Plan, an employee must file all requisite
forms prior to a specified due date known as a "Grant Date." Initially, the
first day of each calendar quarter of each year (January 1, April 1, July 1 and
October 1) will be a Grant Date and the last day of each calendar quarter of
each year (March 31, June 30, September 30 and December 31) will be an Exercise
Date (an "Exercise Date"). However, the determination of the Grant Dates and
the Exercise Dates are completely within the discretion of the Compensation
Committee of the Board of Directors. On each Exercise Date, participants'
payroll deductions credited to their accounts will be automatically applied to
the purchase price of Common Stock at a price per share equal to 85% of the
fair market value of the Common Stock on the Exercise Date. Employees may end
their participation in the Stock Purchase Plan at any time during an offering
period, and their payroll deductions to date will be refunded. Participation
ends automatically upon termination of employment with the Company.
76
<PAGE>
Employees are eligible to participate in the Stock Purchase Plan if they are
customarily employed by the Company or a designated subsidiary for at least 20
hours per week and for more than five months in any calendar year. No person
will be able to purchase Common Stock under the Stock Purchase Plan if such
person, immediately after the purchase, would own stock possessing 5% or more
of the total combined voting power or value of all outstanding shares of all
classes of stock of the Company.
LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS
Pursuant to the provisions of the Delaware General Corporation Law ("DGCL"),
the Company will adopt certain provisions in its Amended and Restated
Certificate of Incorporation which eliminate the personal liability of its
directors to the Company or its stockholders for monetary damages for breach
of their fiduciary duty as a director to the fullest extent permitted by the
DGCL except for liability (i) for any breach of their duty of loyalty to the
Company or its stockholders, (ii) for acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation of law, (iii) for
unlawful payments of dividends or unlawful stock repurchases or redemptions,
or (iv) for any transaction from which the director derived an improper
personal benefit. The provisions of the Company's Amended and Restated
Certificate of Incorporation will not affect a director's responsibilities
under any other laws, such as the federal securities laws or state or federal
environmental laws.
The Company's Amended and Restated Certificate of Incorporation will also
contain provisions which require the Company to indemnify its directors, and
permit the Company to indemnify its officers and employees, to the fullest
extent permitted by Delaware law, including those circumstances in which
indemnification would otherwise be discretionary, except that the Company
shall not be obligated to indemnify any such person (i) with respect to
proceedings, claims or actions initiated or brought voluntarily by any such
person and not by way of defense, or (ii) for any amounts paid in settlement
of an action indemnified against by the Company without the prior written
consent of the Company. The Company has obtained directors' and officers'
liability insurance and, prior to consummation of the Offering, the Company
intends to enter into indemnity agreements with each of its directors
providing for the indemnification described above.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In addition to the transactions described under "Compensation Committee
Interlocks and Insider Participation," the Company has entered into the
following arrangements with one of its executive officers:
In December 1996, the Company issued 824 shares of Class E Common Stock and
70 shares of Series A Preferred Stock to William A. Klettke, the Company's
Senior Vice President, Chief Financial Officer and Treasurer, in exchange for
total consideration of $100,000. At that time, the Company made an interest-
free loan in the amount of $100,000 to Mr. Klettke to be used to purchase
these shares. This loan was repaid by Mr. Klettke in full in January 1997.
The Company intends that any future transactions between the Company and its
officers, directors and affiliates will be on terms no less favorable to the
Company than can be obtained on an arm's length basis from unaffiliated third
parties and that any transactions with such persons will be approved by a
majority of the Company's outside directors or will be consistent with
policies approved by such outside directors.
77
<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table (including the Notes thereto) sets forth certain
information regarding the beneficial ownership of the Common Stock as of
October 31, 1997 (after giving effect to the Transactions) and as adjusted to
reflect the sale of the shares of Common Stock being offered hereby by: (i)
each person (or group of affiliated persons) known by the Company to
beneficially own more than 5% of the outstanding shares of Common Stock, (ii)
each director and director nominee of the Company, (iii) each of the Named
Executive Officers, and (iv) all of the Company's directors and executive
officers as a group. Unless otherwise indicated below, the persons in the table
have sole voting and investment power with respect to all shares shown as
beneficially owned by them.
<TABLE>
<CAPTION>
SHARES OF COMMON
STOCK SHARES OF COMMON
BENEFICIALLY STOCK
OWNED PRIOR TO BENEFICIALLY
THE OFFERING OWNED AFTER THE
(1)(2) OFFERING (1)(2)
----------------- --------------------
NAME (2) NUMBER PERCENT NUMBER PERCENT
-------- --------- ------- --------- -------
<S> <C> <C> <C> <C>
Heller Equity Capital Corporation
(3)............................... % %
Electra Investment Trust P.L.C.
(4)...............................
Electra Associates, Inc. (4).......
The Provident Bank................. (5)
John M. Larson (6).................
William A. Klettke (7).............
Robert E. Dowdell (8).............. (9) (9)
Thomas B. Lally....................
Wallace O. Laub....................
Patrick K. Pesch...................
Scott D. Steele....................
Todd H. Steele.....................
All directors and executive
officers
as a group (7 persons)............
</TABLE>
- --------
* Less than 1%.
(1) Beneficial ownership is determined in accordance with the rules of the
Commission. The number of shares beneficially owned by a person and the
percentage ownership of that person includes shares of Common Stock subject
to options or warrants held by that person that are currently exercisable
or exercisable within 60 days of September 30, 1997.
(2) Assumes no exercise of the Underwriters' over-allotment option. If the
Underwriters' over-allotment option is exercised in full, the following
stockholders will sell, pursuant to such option, the number of shares of
Common Stock set forth opposite their names:
<TABLE>
<CAPTION>
SHARES OF
COMMON
STOCK SHARES OF
BENEFICIALLY COMMON STOCK
OWNED PRIOR TO BENEFICIALLY
THE OWNED AFTER THE
OFFERING SHARES OFFERING
--------------- TO BE ---------------
NUMBER PERCENT SOLD NUMBER PERCENT
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Mark A. Bounds....................
Brian A. Demkowicz................
John M. Goense....................
Ned Jesson........................
John H. Underwood.................
</TABLE>
These stockholders are all former officers of HECC and received their
shares from HECC pursuant to an equity plan.
(3) The address of HECC is 500 West Monroe Street, Chicago, Illinois 60661.
(4) The address of EIT and Electra Associates, Inc. ("EAI") is c/o EIT, 65
Kingsway, London, England WC2B 6QT.
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<PAGE>
(5) Assumes no exercise of the Underwriters' over-allotment option. If the
over-allotment option is exercised in full, the total number of shares of
Common Stock to be sold by Provident would be shares and it
would own no shares of Common Stock after the Offering.
(6) Includes shares of Common Stock which may be acquired by
Larson upon the exercise of currently exercisable stock options. The
address of Mr. Larson is c/o CEC, 2800 West Higgins Road, Hoffman Estates,
Illinois 60195.
(7) Includes shares of Common Stock which may be acquired by
Klettke upon the exercise of currently exercisable stock options.
(8) Includes shares of Common Stock held by Mr. Dowdell, as
Custodian for Brian M. Dowdell under the Uniform Transfers to Minors Act;
shares of Common Stock held by Mr. Dowdell, as Custodian for Sharon
T. Dowdell under the Uniform Transfers to Minors Act; shares of
Common Stock held by Robert E. Dowdell Defined Benefit Plan and Trust,
under Agreement dated 12/9/96; shares of Common Stock held by
Robert E. Dowdell and Grace C. Dowdell, as Trustees under Trust Agreement
dated July 1, 1991; and shares of Common Stock which may be
acquired by Mr. Dowdell upon the exercise of currently exercisable stock
options. The address of Mr. Dowdell is 1951 Calle Roja, Santa Ana,
California 92705.
(9) Assumes no exercise of the Underwriters' over-allotment option. If the
over-allotment option is exercised in full, the total number of shares of
Common Stock to be sold by Mr. Dowdell would be shares and he would
own shares of Common Stock, or % of the outstanding Common Stock,
after the Offering.
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<PAGE>
DESCRIPTION OF CAPITAL STOCK
Upon consummation of the Offering, the authorized capital stock of the
Company will consist of shares of Common Stock, $.01 par value per
share ("Common Stock"), and shares of Preferred Stock, $.01 par
value per share ("Preferred Stock").
The following summary of certain provisions relating to the Common Stock and
Preferred Stock does not purport to be complete and is subject to, and
qualified in its entirety by, provisions of applicable law, and by the
provisions of the Company's Amended and Restated Certificate of Incorporation
and Amended and Restated Bylaws that are included as exhibits to the
Registration Statement of which this Prospectus is a part.
COMMON STOCK
As of , 1997, shares of Common Stock were outstanding
and held by holders of record. shares of Common Stock will be
outstanding upon consummation of the Offering. Subject to the rights of holders
of preferred stock, the holders of outstanding shares of Common Stock are
entitled to share ratably in dividends declared out of assets legally available
therefor at such time and in such amounts as the Board of Directors may from
time to time lawfully determine. Each holder of Common Stock is entitled to one
vote for each share held. Subject to the rights of holders of any outstanding
Preferred Stock, upon liquidation, dissolution or winding up of the Company,
any assets legally available for distribution to stockholders as such are to be
distributed ratably among the holders of the Common Stock at that time
outstanding. All shares of Common Stock currently outstanding are, and all
shares of Common Stock offered by the Company hereby when duly issued and paid
for will be, fully paid and nonassessable, not subject to redemption and
assessment and without conversion, preemptive or other rights to subscribe for
or purchase any proportionate part of any new or additional issues of any class
or of securities convertible into stock of any class.
PREFERRED STOCK
Preferred stock may be issued by the Company in series from time to time with
such designations, relative rights, priorities, preferences, qualifications,
limitations and restrictions thereof, to the extent that such are not fixed in
the Company's Amended and Restated Certificate of Incorporation, as the Board
of Directors determines. The rights, preferences, limitations and restrictions
of different series of Preferred Stock may differ with respect to dividend
rates, amounts payable on liquidation, voting rights, conversion rights,
redemption provisions, sinking fund provisions and other matters. The Board of
Directors may authorize the issuance of Preferred Stock which ranks senior to
the Common Stock with respect to the payment of dividends and the distribution
of assets on liquidation. In addition, the Board of Directors is authorized to
fix the limitations and restrictions, if any, upon the payment of dividends on
Common Stock to be effective while any shares of Preferred Stock are
outstanding. The Board of Directors, without stockholder approval, may issue
Preferred Stock with voting and conversion rights which could adversely affect
the voting power of the holders of Common Stock. The issuance of Preferred
Stock may have the effect of delaying, deferring or preventing a change in
control of the Company. The Company has no present intention to issue shares of
Preferred Stock.
CERTAIN CORPORATE PROVISIONS
Upon the consummation of the Offering, the Company will be subject to the
provisions of Section 203 of the DGCL. In general, this statute prohibits a
publicly held Delaware corporation from engaging, under certain circumstances,
in a "business combination" with an "interested stockholder" for a period of
three years after the date of the transaction in which the person becomes an
interested stockholder, unless either (i) prior to the date at which the
stockholder became an interested stockholder the board of directors approved
either the business combination or the transaction in which the person becomes
an interested stockholder, (ii) the stockholder acquires more than 85% of the
outstanding voting stock of the corporation (excluding shares held by directors
who are officers or held in certain employee stock plans) upon consummation of
the transaction in which the stockholder becomes an interested stockholder or
(iii) the business combination is approved by the
80
<PAGE>
board of directors and by two-thirds of the outstanding voting stock of the
corporation (excluding shares held by the interested stockholder) at a meeting
of the stockholders (and not by written consent) held on or subsequent to the
date of the business combination. An "interested stockholder" is a person who,
together with affiliates and associates, owns (or at any time within the prior
three years did own) 15% or more of the corporation's voting stock. Section
203 defines a "business combination" to include, without limitation, mergers,
consolidations, stock sales and asset based transactions and other
transactions resulting in a financial benefit to the interested stockholder. A
business combination by the Company with Heller or Electra would not be
prohibited by Section 203.
The Company's Certificate of Incorporation and Bylaws contain a number of
provisions relating to corporate governance and to the rights of stockholders.
Certain of these provisions may be deemed to have a potential "anti-takeover"
effect in that such provisions may delay, defer or prevent a change of control
of the Company. These provisions include (i) a requirement that stockholder
action may be taken only at stockholder meetings; (ii) notice requirements in
the Bylaws relating to nominations to the Board of Directors and to the
raising of business matters at stockholders meetings; and (iii) the
classification of the Board of Directors into three classes, each serving for
staggered three year terms. See "Management--Executive Officers and
Directors."
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is .
SHARES ELIGIBLE FOR FUTURE SALE
Prior to the Offering, there has been no public market for the Common Stock.
Sales of substantial amounts of Common Stock in the public market, or the
availability of such shares for sale, could adversely affect the market price
of the Common Stock.
Upon completion of the Offering, the Company will have an aggregate of
shares of Common Stock outstanding, assuming no exercise of the
Underwriters' over-allotment option and no exercise of outstanding options or
warrants after . Of these shares, the shares sold
in the Offering will be freely tradable without restriction or further
registration under the Securities Act, unless held by "affiliates" of the
Company, as that term is defined in Rule 144 promulgated under the Securities
Act. The remaining shares of Common Stock outstanding upon
completion of the Offering will be Restricted Shares.
All directors and officers and certain other stockholders of the Company
have agreed with the Underwriters that, for a period of 180 days from the date
of this Prospectus, they will not offer to sell or otherwise sell, dispose of
or grant rights with respect to any shares of Common Stock, now owned or
hereafter acquired directly by such holders or with respect to which they have
the power of disposition, otherwise than with the prior written consent of
Credit Suisse First Boston Corporation. As a result of these contractual
restrictions, notwithstanding possible earlier eligibility for sale under the
provisions of Rules 144, 144(k) and 701 of the Securities Act, shares subject
to Lock-Up Agreements will not be salable until the agreements expire or
unless prior written consent is received from First Boston. Any early waiver
of the Lock-Up Agreements by the underwriters, which, if granted, could permit
sales of a substantial number of shares and could adversely affect the trading
price of the Company's shares, may not be accompanied by an advance public
announcement by the Company. See "Underwriting."
Taking into account the Lock-Up Agreements, the number of shares that will
be available for sale in the public market under the provisions of Rules 144
and 144(k), will be as follows: (i) approximately Restricted
Shares will be eligible for sale immediately after the effective date of the
Registration Statement, and (ii) the remaining Restricted
Shares will become eligible for public resale following expiration of the
Lock-Up Agreements, subject in some cases to vesting provisions and volume and
manner of sale limitations.
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<PAGE>
In general, under Rule 144 a person (or persons whose shares are aggregated)
who has beneficially owned Restricted Shares for at least one year, including
persons who may be deemed "affiliates" of the Company, would be entitled to
sell within any three-month period a number of shares that does not exceed the
greater of one percent of the number of shares of Common Stock then outstanding
or the average weekly trading volume of the Common Stock during the four
calendar weeks preceding the filing of a Form 144 with respect to such sale.
Sales under Rule 144 are also subject to certain manner of sale provisions and
notice requirements and to the availability of current public information about
the Company. In addition, a person who is not deemed to have been an affiliate
of the Company at any time during the 90 days preceding a sale, and who has
beneficially owned for at least two years the shares proposed to be sold, would
be entitled to sell such shares under Rule 144(k) without regard to the
requirements described above. The Company is unable to estimate accurately the
number of Restricted Shares that will be sold under Rule 144 because this will
depend in part on the market price for the Common Stock, the personal
circumstances of the seller and other factors.
Pursuant to Rule 144 and upon expiration of the one-year holding period, an
additional shares of Common Stock will be available for sale upon
the exercise of outstanding warrants. As of , options to purchase
shares were issued and outstanding under the Stock Plans. See
"Management--Stock Plans."
In addition, beginning 90 days after the date of this Prospectus, certain
shares issued or issuable upon exercise of options granted by the Company prior
to the effective date of the Registration Statement will also be eligible for
sale in the public market pursuant to Rule 701 under the Securities Act,
subject to the Lock-Up Agreements. In general, Rule 701 permits resales of
shares issued pursuant to certain compensatory benefit plans and contracts
commencing 90 days after the issuer becomes subject to the reporting
requirements of the Securities Exchange Act of 1934, as amended, in reliance
upon Rule 144 but without compliance with certain restrictions, including the
holding period requirements, contained in Rule 144.
Following the Offering, the Company intends to file under the Securities Act
one or more registration statements on Form S-8 to register all of the shares
of Common Stock (i) subject to outstanding options and reserved for future
option grants under the Stock Plans and (ii) that the Company intends to offer
for sale to its employees pursuant to the Stock Purchase Plan. These
registration statements are expected to become effective upon filing and shares
covered by these registration statements will be eligible for sale, subject, in
the case of affiliates only, to the restrictions of Rule 144, other than the
holding period requirement, and subject to expiration of the lock-up agreements
with the Underwriters. As of , 1997, outstanding options to acquire
an aggregate of shares of Common Stock were currently exercisable.
REGISTRATION RIGHTS
The Company and Electra are parties to the Electra Registration Rights
Agreement. Under the Electra Registration Rights Agreement, Electra is
entitled, subject to certain exceptions, to cause the Company to register
shares of Common Stock held by Electra in any registration by the Company for
its own account or for the account of other security holders. Additionally, at
any time that the Company is eligible to use Commission Form S-3 for
registration of securities, Electra will be entitled, subject to certain
exceptions, to cause the Company to register shares held by Electra on
registration statement on Form S-3. As of October 31, 1997, Electra held
shares covered by the Electra Registration Rights Agreement.
The Company and Heller are parties to the Heller Registration Rights
Agreement. Under the Heller Registration Rights Agreement, Heller is entitled,
subject to certain exceptions, to cause the Company to register shares of
Common Stock held by Heller in any registration by the Company for its own
account or for the account of other security holders. Additionally, at any time
that the Company is eligible to use Commission Form S-3 for registration of
securities. Heller will be entitled, subject to certain exceptions, to cause
the Company to register shares held by Heller on a registration statement on
Form S-3. As of October 31, 1997, Heller held shares covered by
the Registration Rights Agreement. See "Management--Compensation Committee
Interlocks and Insider Participation."
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<PAGE>
Pursuant to a Warrant Agreement dated as of July 31, 1995, between the
Company and Provident, the Company has agreed to include, subject to certain
exceptions, shares of Common Stock held by The Provident Bank ("Provident") in
any registration statement filed by the Company for its own account or for the
account of other security holders. As of October 31, 1997, the
shares of Common Stock underlying the Provident Warrants were covered by these
registration rights, including shares to be sold pursuant to this
Prospectus if the Underwriters exercise their over-allotment option in full.
See "Security Ownership of Certain Beneficial Owners and Management."
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<PAGE>
UNDERWRITING
Upon the terms and subject to the conditions contained in an Underwriting
Agreement dated , 1997 (the "Underwriting Agreement"), the underwriters named
below (the "Underwriters"), for whom Credit Suisse First Boston Corporation,
Smith Barney Inc. and ABN AMRO Chicago Corporation are acting as
representatives (the "Representatives"), have severally but not jointly agreed
to purchase from the Company the following respective numbers of shares of
Common Stock:
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
----------- ---------
<S> <C>
Credit Suisse First Boston Corporation..........................
Smith Barney Inc................................................
ABN AMRO Chicago Corporation....................................
---------
Total.......................................................
=========
</TABLE>
The Underwriting Agreement provides that the obligations of the Underwriters
are subject to certain conditions precedent and that the Underwriters will be
obligated to purchase all the shares of Common Stock offered hereby (other than
those shares covered by the over-allotment option described below) if any are
purchased. The Underwriting Agreement provides that, in the event of a default
by an Underwriter, in certain circumstances the purchase commitments of non-
defaulting Underwriters may be increased or the Underwriting Agreement may be
terminated.
The Selling Stockholders have granted to the Underwriters an option, expiring
at the close of business on the 30th day after the date of this Prospectus, to
purchase up to an aggregate of additional shares from the Selling
Stockholders at the initial public offering price, less the underwriting
discount and commissions, all as set forth on the cover page of this
Prospectus. Such option may be exercised only to cover over-allotments in the
sale of the shares of Common Stock offered hereby. To the extent such option is
exercised, each Underwriter will become obligated, subject to certain
conditions, to purchase approximately the same percentage of such additional
shares of Common Stock as it was obligated to purchase pursuant to the
Underwriting Agreement.
The Company and the Selling Stockholders have been advised by the
Representatives that the Underwriters propose to offer shares of Common Stock
to the public initially at the public offering price set forth on the cover
page of this Prospectus and, through the Representatives, to certain dealers at
such price less a concession of $ per share, and the Underwriters and such
dealers may allow a discount of $ per share on sales to certain other
dealers. After the initial public offering, the public offering price and
concession and discount to dealers may be changed by the Representatives.
The Representatives have informed the Company that they do not expect
discretionary sales by the Underwriters to exceed 5% of the shares of Common
Stock being offered hereby.
The Company, its officers and directors, the Selling Stockholders and certain
other stockholders who, immediately following the consummation of the Offering,
will own in the aggregate shares of Common Stock and vested and
exercisable options to purchase an additional shares of Common
Stock in the aggregate have agreed not to offer, sell, contract to sell, pledge
or otherwise dispose of, directly or indirectly, or file or cause to be filed
with the Commission a registration statement under the Securities Act relating
to, any shares of Common Stock or securities or other rights convertible into
or exchangeable or exercisable for any shares of Common Stock or publicly
disclose the intention to make any such offer, sale, pledge, disposal or
filing, without the prior written consent of Credit Suisse First Boston
Corporation, for a period
84
<PAGE>
of 180 days after the date of this Prospectus except, in the case of the
Company issuance of Common Stock pursuant to the conversion or exchange of
convertible or exchangeable securities or the exercise of warrants or options,
in each case outstanding on the date of this Prospectus, or grants of employee
stock options pursuant to the terms of a plan in effect on the date of the
Prospectus or issuance of common stock pursuant to the exercise of such
options.
The Company and the Selling Stockholders have agreed to indemnify the
Underwriters against certain liabilities, including civil liabilities under the
Securities Act, or to contribute to payments that the Underwriters may be
required to make in respect thereof.
ABN AMRO Chicago Corporation is affiliated with LaSalle National Bank, N.A.
("LaSalle"), which is a lender to the Company under the Credit Agreement, an
$80 million revolving line of credit (see "Risk Factors-- Future Capital
Needs"). LaSalle or its affiliates participate from time to time in various
general financing and banking transactions for the Company and its affiliates.
To date, LaSalle has advanced approximately $50 million to the Company under
the terms of the Credit Agreement, approximately $29.4 million of which will be
paid down with the proceeds of the Offering, and the Company is in compliance
with the terms of the Credit Agreement. The decision of ABN AMRO Chicago
Corporation to underwrite the Offering was made independently of LaSalle, which
had no involvement in determining whether or when to underwrite the Offering or
the terms of the Offering. ABN AMRO Chicago Corporation will not receive any
benefit from the Offering other than its respective portion of the underwriting
discounts and commissions payable by the Company.
Since it is anticipated that more than 10% of the proceeds from the sale of
the Common Stock, not including underwriting compensation, will be received by
LaSalle in connection with the Credit Agreement, and LaSalle is an affiliate of
ABN AMRO Chicago Corporation, a member of the National Association of
Securities Dealers, Inc. (the "NASD") and one of the Underwriters, the Offering
is being conducted pursuant to Rule 2710(c)(8) of the NASD. In accordance with
such rule, Credit Suisse First Boston Corporation has agreed to act as a
qualified independent underwriter pursuant to the requirements of Rule
2720(c)(3) of the NASD. In connection with Rule 2720(c)(3), the initial public
offering price of the Common Stock will be set at a price which is no higher
than that recommended by Credit Suisse First Boston Corporation, as a qualified
independent underwriter. Moreover, Credit Suisse First Boston Corporation, as a
qualified independent underwriter in connection with the Offering, has
performed due diligence investigations and has reviewed and participated in the
preparation of this Prospectus.
The Company will apply for listing of the Common Stock on the Nasdaq National
Market under the symbol "CECO."
Prior to the Offering, there has been no public market for the Common Stock.
Accordingly, the initial public offering price for the Shares will be
determined by negotiation among the Company, the Selling Stockholders and the
Representatives. In determining such price, consideration will be given to
various factors, including market conditions for initial public offerings, the
history of and prospects for the Company's business, the Company's past and
present operations, its past and present earnings and current financial
position, an assessment of the Company's management, the market for securities
of companies in businesses similar to those of the Company, the general
condition of the securities markets and other relevant factors. There can be no
assurance, however, that the initial public offering price will correspond to
the price at which the Common Stock will trade in the public market subsequent
to the Offering or that an active trading market for the Common Stock will
develop and continue after the Offering.
The Representatives, on behalf of the Underwriters, may engage in over-
allotment, stabilizing transactions, syndicate covering transactions and
penalty bids in accordance with Regulation M under the Exchange Act. Over-
allotment involves syndicate sales in excess of the offering size, which
creates a syndicate short position. Stabilizing transactions permit bids for
and purchases of the Common Stock so long as the stabilizing bids do not exceed
a specified maximum. Syndicate covering transactions involve purchases of the
Common Stock in the open market after the distribution has been completed in
order to cover syndicate short positions. Penalty
85
<PAGE>
bids permit the Underwriters to reclaim a selling concession from a syndicate
member when the Common Stock originally sold by such syndicate member is
purchased in a stabilizing transaction or syndicate covering transaction to
cover syndicate short position. Such stabilizing transactions, syndicate
covering transactions and penalty bids may cause the price of the Common Stock
to be higher than it would otherwise be in the absence of such transactions.
These transactions may be effected on the Nasdaq National Market or otherwise
and, if commenced, may be discontinued at any time.
NOTICE TO CANADIAN RESIDENTS
RESALE RESTRICTIONS
The distribution of the Common Stock in Canada is being made only on a
private placement basis exempt from the requirement that the Company and the
Selling Stockholders prepare and file a prospectus with the securities
regulatory authorities in each province where trades of Common Stock are
effected. Accordingly, any resale of the Common Stock in Canada must be made in
accordance with applicable securities laws which will vary depending on the
relevant jurisdiction, and which may require resales to be made in accordance
with available statutory exemptions or pursuant to a discretionary exemption
granted by the applicable Canadian securities regulatory authority. Purchasers
are advised to seek legal advice prior to any resale of the Common Stock.
REPRESENTATIONS OF PURCHASERS
Each purchaser of Common Stock in Canada who receives a purchase confirmation
will be deemed to represent to the Company and the Selling Stockholders and the
dealer from whom such purchase confirmation is received that (i) such purchaser
is entitled under applicable provincial securities laws to purchase such Common
Stock without the benefit of a prospectus qualified under such securities laws,
(ii) where required by law, that such purchaser is purchasing as principal and
not as agent, and (iii) such purchaser has reviewed the text above under
"Resale Restrictions."
RIGHTS OF ACTION (ONTARIO PURCHASERS)
The securities being offered are those of a foreign issuer and Ontario
purchasers will not receive the contractual right of action prescribed by
section 32 of the Regulation under the Securities Act (Ontario). As a result,
Ontario purchasers must rely on other remedies that may be available, including
common law rights of action for damages or rescission or rights of action under
the civil liability provisions of the U.S. federal securities laws.
ENFORCEMENT OF LEGAL RIGHTS
All of the issuer's directors and officers as well as the experts named
herein and the Selling Stockholders may be located outside of Canada and, as a
result, it may not be possible for Canadian purchasers to effect service of
process within Canada upon the issuer or such persons. All or a substantial
portion of the assets of the issuer and such persons may be located outside of
Canada and as a result, it may not be possible to satisfy a judgment against
the issuer or such persons in Canada or to enforce a judgment obtained in
Canadian courts against such issuer or persons outside of Canada.
NOTICE TO BRITISH COLUMBIA RESIDENTS
A purchaser of Common Stock to whom the Securities Act (British Columbia)
applies is advised that such purchaser is required to file with the British
Columbia Securities Commission a report within ten days of the sale of any
Common Stock acquired by such purchaser pursuant to the Offering. Such report
must be in the form attached to British Columbia Securities Commission Blanket
Order BOR #95/17, a copy of which may be obtained from the Company. Only one
such report must be filed in respect of Common Stock acquired on the same date
and under the same prospectus exemption.
86
<PAGE>
TAXATION AND ELIGIBILITY FOR INVESTMENT
Canadian purchasers of Common Stock should consult their own legal and tax
advisors with respect to the tax consequences of an investment in the Common
Stock in their particular circumstances and with respect to the eligibility of
the Common Stock for investment by the purchaser under relevant Canadian
Legislation.
LEGAL MATTERS
The validity of the Common Stock offered hereby and certain other legal
matters will be passed upon for the Company by Katten Muchin & Zavis, Chicago,
Illinois, a partnership including professional corporations. Certain legal
matters in connection with the Offering will be passed upon for the
Underwriters by Sidley & Austin, Chicago, Illinois.
EXPERTS
The Consolidated Financial Statements and schedules of the Company and its
subsidiaries as of December 31, 1995, December 31, 1996 and June 30, 1997, and
for each of the three years in the period ended December 31, 1996 and for the
six months ended June 30, 1997, included in this Prospectus and elsewhere in
the Registration Statement, have been audited by Arthur Andersen LLP,
independent public accountants, as indicated in their reports with respect
thereto, and are included herein in reliance upon the authority of said firm as
experts in giving said reports.
ADDITIONAL INFORMATION
The Company has filed with the Commission in Washington, D.C., a Registration
Statement on Form S-1 (of which this Prospectus is a part) under the Securities
Act with respect to the Common Stock offered hereby. This Prospectus does not
contain all the information set forth in the Registration Statement and the
exhibits and schedules thereto, certain portions of which have been omitted as
permitted by the rules and regulations of the Commission. For further
information with respect to the Company and the Common Stock offered hereby,
reference is made to the Registration Statement and such exhibits and
schedules. Statements contained in this Prospectus regarding the contents of
any agreement or other document referred to are not necessarily complete, and
in each instance, reference is made to a copy of such agreement or other
document filed as an exhibit to the Registration Statement. Each such statement
is qualified in all respects by such reference. The Registration Statement and
the exhibits and schedules thereto may be inspected without charge at the
public reference facilities maintained by the Commission, including at the
Commission's Public Reference Room, 450 Fifth Street, N.W., Judiciary Plaza,
Washington, D.C. 20549 and at the Commission's Regional Offices at 7 World
Trade Center, Suite 1300, New York, New York 10048 and Citicorp Center, 500
West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies may be
obtained at prescribed rates from the Public Reference Section of the
Commission at its principal office in Washington, D.C. Such materials also may
be accessed electronically by means of the Commission's web site at
http://www.sec.gov.
87
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
CONSOLIDATED FINANCIAL STATEMENTS OF CAREER EDUCATION CORPORATION AND
SUBSIDIARIES:
Report of Independent Public Accountants............................ F-2
Consolidated Balance Sheets as of December 31, 1995 and 1996 and
June 30, 1997...................................................... F-3
Consolidated Statements of Operations for the years ended December
31, 1994, 1995 and 1996 and the six months ended June 30, 1996
(unaudited) and June 30, 1997...................................... F-6
Consolidated Statements of Cash Flows for the years ended December
31, 1994, 1995 and 1996 and the six months ended June 30, 1996
(unaudited) and June 30, 1997...................................... F-7
Consolidated Statements of Stockholders' Investment for the years
ended December 31, 1994, 1995 and 1996, and the six months ended
June 30, 1997...................................................... F-8
Notes to Consolidated Financial Statements.......................... F-10
CONSOLIDATED FINANCIAL STATEMENTS OF IAMD, LIMITED AND SUBSIDIARIES:
Consolidated Balance Sheets as of June 30, 1996 and 1997............ F-34
Consolidated Statements of Operations for the years ended June 30,
1996 and 1997...................................................... F-35
Consolidated Statements of Cash Flows for the years ended June 30,
1996 and 1997...................................................... F-36
Consolidated Statements of Stockholders' Investment for the years
ended June 30, 1996 and 1997....................................... F-37
Notes to Consolidated Financial Statements.......................... F-38
CONSOLIDATED FINANCIAL STATEMENTS OF THE INTERNATIONAL ACADEMY OF
MERCHANDISING & DESIGN (CANADA) LTD. AND SUBSIDIARY:
Consolidated Balance Sheets as of August 31, 1996 and June 30, 1997. F-45
Consolidated Statements of Operations for the year ended August 31,
1996 and for the ten months ended June 30, 1997.................... F-46
Consolidated Statements of Cash Flows for the year ended August 31,
1996 and for the ten months ended June 30, 1997.................... F-47
Consolidated Statements of Stockholders' Investment for the year
ended August 31, 1996 and for the ten months ended June 30, 1997... F-48
Notes to Consolidated Financial Statements.......................... F-49
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders of
Career Education Corporation:
We have audited the accompanying consolidated balance sheets of CAREER
EDUCATION CORPORATION (a Delaware corporation) AND SUBSIDIARIES as of December
31, 1995, December 31, 1996 and June 30, 1997 and the related consolidated
statements of operations, stockholders' investment and cash flows for each of
the three years in the period ended December 31, 1996 and six months ended
June 30, 1997. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Career Education
Corporation and Subsidiaries as of December 31, 1995, December 31, 1996 and
June 30, 1997 and the results of their operations and their cash flows for
each of the three years in the period ended December 31, 1996 and six months
ended June 30, 1997 in conformity with generally accepted accounting
principles.
As explained in Note 15 to the consolidated financial statements, the
Company has given retroactive effect to the change in accounting for deferred
marketing and advertising costs.
Arthur Andersen LLP
Chicago, Illinois
October 7, 1997
F-2
<PAGE>
CAREER EDUCATION CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31 JUNE 30
--------------- -----------------------
PRO FORMA
1995 1996 1997 1997 (NOTE 13)
------- ------- -------- --------------
ASSETS (UNAUDITED)
<S> <C> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents (including
restricted cash of $72, $0 and $186
at December 31, 1995 and 1996 and
June 30, 1997, respectively)........ $ 3,965 $ 7,798 $ 9,745 $--
Receivables--
Students, net of allowance for
doubtful accounts of $258, $455
and $1,026 at December 31, 1995
and 1996 and June 30, 1997,
respectively...................... 2,414 2,159 5,007 --
From former owners of acquired
businesses........................ -- 523 845 --
Stockholder........................ -- 100 -- --
Other.............................. 250 120 1,280 --
Inventories.......................... 167 213 427 --
Prepaid expenses and other current
assets.............................. 505 725 1,207 --
Deferred income tax assets........... -- 194 643 --
------- ------- -------- ----
Total current assets............. 7,301 11,832 19,154 --
------- ------- -------- ----
PROPERTY AND EQUIPMENT, net of
accumulated depreciation and
amortization........................ 12,841 19,560 47,088 --
------- ------- -------- ----
OTHER ASSETS:
Deferred income tax assets........... -- 195 -- --
Intangible assets, net............... 2,813 3,407 32,835 --
Deposits............................. 113 154 467 --
Perkins program fund, net............ 225 262 274 --
Deferred financing costs, net........ 151 346 533 --
Organization costs, net.............. 140 452 416 --
------- ------- -------- ----
Total other assets............... 3,442 4,816 34,525 --
------- ------- -------- ----
TOTAL ASSETS........................... $23,584 $36,208 $100,767 $--
======= ======= ======== ====
</TABLE>
F-3
<PAGE>
CAREER EDUCATION CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31 JUNE 30
------------- ---------------------
PRO FORMA
1995 1996 1997 1997 (NOTE 13)
------ ------ ------ --------------
LIABILITIES AND STOCKHOLDERS' INVESTMENT (UNAUDITED)
<S> <C> <C> <C> <C>
CURRENT LIABILITIES:
Current maturities of long-term debt.......... $1,309 $2,676 $3,477 $--
Book overdraft................................ -- 683 388 --
Accounts payable.............................. 640 502 2,489 --
Accrued expenses--
Payroll and related benefits................ 505 678 922 --
Other....................................... 747 1,658 3,136 --
Deferred tuition revenue...................... 2,786 4,256 4,992 --
------ ------ ------ ----
Total current liabilities................. 5,987 10,453 15,404 --
------ ------ ------ ----
LONG TERM DEBT, net of current maturities shown
above.......................................... 6,725 13,783 47,651 --
------ ------ ------ ----
DEFERRED INCOME TAX LIABILITIES................. -- -- 3,635 --
------ ------ ------ ----
COMMITMENTS AND CONTINGENCIES
REDEEMABLE PREFERRED STOCK AND WARRANTS
Redeemable Series A preferred stock, $0.01 par
value; 50,000 shares authorized; 7,782 shares
outstanding at December 31, 1995, 7,852
shares outstanding at December 31, 1996, and
June 30, 1997, respectively, at redemption
value including dividends of $1,911.......... 8,729 9,432 9,763 --
Redeemable Series B preferred stock, $0.01 par
value; 1,000 shares authorized; no shares
outstanding.................................. -- -- -- --
Redeemable Series C preferred stock, $0.01 par
value; 5,000 shares authorized; 4,954 shares
outstanding at December 31, 1995 and 1996,
and June 30, 1997, at redemption value....... 4,065 4,259 4,217 --
Redeemable Series D preferred stock, $0.01 par
value; 25,000 shares authorized; no shares
outstanding at December 31, 1995 and 1996,
22,500 shares outstanding at June 30, 1997,
at redemption value including dividends of
$159......................................... -- -- 17,717 --
Warrants exercisable into 27,484 shares of
Class D common stock at December 31, 1995 and
1996, and 23,636 shares of Class D common
stock at June 30, 1997, at an exercise price
of $0.01 per share, at estimated redemption
value........................................ 834 870 1,032 --
Warrants exercisable into 3,514 shares of
Class E common stock at June 30, 1997, at an
exercise price of $0.01 per share, at
estimated redemption value................... -- -- 260 --
------ ------ ------ ----
Total redeemable preferred stock and
warrants................................. 13,628 14,561 32,989 --
------ ------ ------ ----
</TABLE>
F-4
<PAGE>
CAREER EDUCATION CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31 JUNE 30
---------------- ------------------------
PRO FORMA
1995 1996 1997 1997 (NOTE 13)
------- ------- -------- --------------
STOCKHOLDERS' INVESTMENT: (UNAUDITED)
<S> <C> <C> <C> <C>
Class A common stock, $0.01 par
value; 600,000 shares authorized;
5,250 shares issued and
outstanding at December 31, 1995
and 1996, and June 30, 1997....... -- -- -- --
Class B common stock, $0.01 par
value; 100,000 shares authorized;
5,100 shares issued and
outstanding at December 13, 1995
and 1996, and June 30, 1997....... -- -- -- --
Class C common stock, $0.01 par
value; 100,000 shares authorized;
69,900 shares issued and
outstanding at December 31, 1995
and 1996, and June 30, 1997....... 1 1 1 --
Class D common stock, $0.01 par
value; 100,000 shares authorized;
no shares issued and outstanding
at December 31, 1995 and 1996, and
June 30, 1997..................... -- -- -- --
Class E common stock, $0.01 par
value; 200,000 shares authorized;
824 issued and outstanding at
December 31, 1995, 1,648 shares
issued and outstanding at December
31, 1996, and June 30, 1997....... -- -- -- --
Warrants........................... -- -- 4,788 --
Additional paid-in capital......... 30 60 60 --
Accumulated deficit................ (2,787) (2,650) (3,761) --
------- ------- -------- ----
Total stockholders' investment... (2,756) (2,589) 1,088 --
------- ------- -------- ----
TOTAL LIABILITIES AND STOCKHOLDERS'
INVESTMENT.......................... $23,584 $36,208 $100,767 --
======= ======= ======== ====
</TABLE>
The accompanying notes are an integral part of these statements.
F-5
<PAGE>
CAREER EDUCATION CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED FOR THE SIX MONTHS
DECEMBER 31 ENDED JUNE 30
------------------------- -------------------
1994 1995 1996 1996 1997
------- ------- ------- ----------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUE:
Tuition and registration
fees, net.................... $ 5,794 $16,330 $29,269 $12,716 $23,073
Other, net.................... 1,692 3,066 4,311 2,074 2,579
------- ------- ------- ------- -------
Total net revenue......... 7,486 19,396 33,580 14,790 25,652
------- ------- ------- ------- -------
OPERATING EXPENSES:
Educational services and
facilities................... 3,074 8,565 14,404 6,320 11,090
General and administrative.... 4,887 9,097 14,622 7,406 10,942
Depreciation and
amortization................. 980 1,344 2,179 973 2,109
------- ------- ------- ------- -------
Total operating expenses.. 8,941 19,006 31,205 14,699 24,141
------- ------- ------- ------- -------
Income (loss) from
operations............... (1,455) 390 2,375 91 1,511
------- ------- ------- ------- -------
INTEREST EXPENSE............... 134 297 672 225 985
------- ------- ------- ------- -------
Income (loss) before
provision for income
taxes and extraordinary
item..................... (1,589) 93 1,703 (134) 526
PROVISION FOR INCOME TAXES..... -- 24 208 -- 210
------- ------- ------- ------- -------
Income (loss) before
extraordinary item....... (1,589) 69 1,495 (134) 316
EXTRAORDINARY LOSS ON EARLY
EXTINGUISHMENT OF DEBT (net of
taxes of $233, Note 4)........ -- -- -- -- 418
------- ------- ------- ------- -------
NET INCOME (LOSS).............. $(1,589) $ 69 $ 1,495 $ (134) $ (102)
======= ======= ======= ======= =======
INCOME (LOSS) ATTRIBUTABLE TO
COMMON STOCKHOLDERS (Note 2):
Income (loss) before
extraordinary item........... $(1,589) $ 69 $ 1,495 $ (134) $ 316
Dividends on preferred stock.. (393) (777) (1,128) (557) (738)
Accretion to redemption value
of preferred stock and
warrants..................... -- (96) (230) (115) (271)
------- ------- ------- ------- -------
Income (loss) before
extraordinary item
attributable to common
stockholders............. (1,982) (804) 137 (806) (693)
Extraordinary loss............ -- -- -- -- 418
------- ------- ------- ------- -------
Net income (loss)
attributable to common
stockholders............. $(1,982) $ (804) $ 137 $ (806) $(1,111)
======= ======= ======= ======= =======
PRO FORMA (UNAUDITED):
Income (loss) before
extraordinary item
attributable to common
stockholders, as reported.... $(1,982) $ (804) $ 137 $ (806) $ (693)
Dividends on preferred
stock...................... 393 777 1,128 557 738
Accretion to redemption
value of preferred stock
and warrants............... -- 96 230 115 271
------- ------- ------- ------- -------
Pro forma income (loss) before
extraordinary item
attributable to common
stockholders.................. $(1,589) $ 69 $ 1,495 $ (134) $ 316
======= ======= =======
Extraordinary loss............ -- 418
------- -------
Pro forma net income (loss)
attributable to common
stockholders.................. 1,495 (102)
======= =======
Pro forma income (loss) before
extraordinary item per share.. $ -- $ --
======= =======
Pro forma net income (loss) per
share attributable to common
stockholders.................. $ -- $ --
======= =======
Pro forma weighted average
number of common and common
stock equivalent shares
outstanding................... -- --
======= =======
</TABLE>
The accompanying notes are an integral part of these statements.
F-6
<PAGE>
CAREER EDUCATION CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED FOR THE SIX MONTHS ENDED
DECEMBER 31 JUNE 30
------------------------- -----------------------------
1994 1995 1996 1996 1997
------- ------- ------- --------------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM
OPERATING ACTIVITIES:
Net income (loss)..... $(1,589) $ 69 $ 1,495 $ (134) $ (102)
Adjustments to
reconcile net income
(loss) to net cash
provided by
(used in) operating
activities--
Depreciation,
amortization and
debt discount...... 980 1,351 2,188 981 2,116
Warrants issued to a
bank............... -- -- -- -- 180
Deferred income
taxes.............. -- -- (273) 554 (203)
Loss on sale of
assets............. 2 -- -- -- --
Extraordinary loss.. -- -- -- -- 651
Changes in operating
assets and
liabilities, net of
acquisitions--
Receivables, net.. (708) (869) 385 1,167 998
Inventories,
prepaid expenses
and other current
assets........... (101) (246) (245) (95) (424)
Deposits.......... (116) 33 8 (19) (9)
Accounts payable.. (14) 118 (138) (221) 594
Accrued expenses.. (142) (233) 817 (720) (1,016)
Deferred tuition 688 12 1,038 (943) (5,582)
revenue.......... ------- ------- ------- ----------- -------------
Net cash
provided by
(used in)
operating (1,000) 235 5,275 570 (2,797)
activities..... ------- ------- ------- ----------- -------------
CASH FLOWS FROM
INVESTING ACTIVITIES:
Business acquisitions,
net of cash.......... (1,985) (1,622) (8,250) -- (37,717)
Acquisition and
organizational costs. (234) (959) -- -- --
Purchase of property
and equipment, net... (153) (897) (1,231) (365) (482)
Investment in Perkins -- -- (37) -- 7
program fund......... ------- ------- ------- ----------- -------------
Net cash used in
investing (2,372) (3,478) (9,518) (365) (38,192)
activities..... ------- ------- ------- ----------- -------------
CASH FLOWS FROM
FINANCING ACTIVITIES:
Issuance of common
stock................ -- 30 -- -- 30
Issuance of warrants.. -- -- -- -- 4,788
Issuance of redeemable
preferred stock and
warrants............. 7,850 5,070 -- -- 17,557
Redemption of
preferred stock...... -- (200) -- -- --
Dividends paid on
preferred stock...... -- (207) (495) (248) (248)
Equity and debt
financing costs...... -- (535) (553) -- (542)
Book overdraft........ -- -- 683 -- (295)
Payments of long-term
debt................. (1,836) (6,363) (1,309) (4,705) (313)
Net proceeds from
(repayment of)
revolving credit
facility............. -- 6,771 1,500 3,250 (8,246)
Proceeds from term
loan facility........ -- -- 8,250 -- 3,400
Repayments of term
loan facility........ -- -- -- -- (11,650)
Net proceeds from
revolving loans under
Credit Agreement..... -- -- -- -- 25,955
Proceeds from issuance
of term loans under -- -- -- -- 12,500
Credit Agreement..... ------- ------- ------- ----------- -------------
Net cash
provided by
(used in)
financing 6,014 4,566 8,076 (1,703) 42,936
activities..... ------- ------- ------- ----------- -------------
NET INCREASE (DECREASE)
IN CASH AND CASH
EQUIVALENTS............ 2,642 1,323 3,833 (1,498) 1,947
CASH AND CASH
EQUIVALENTS, BEGINNING
OF YEAR................ -- 2,642 3,965 3,965 7,798
CASH AND CASH
EQUIVALENTS, END OF
YEAR................... $ 2,642 $ 3,965 $ 7,798 $ 2,467 $ 9,745
======= ======= ======= =========== =============
SUPPLEMENTAL DISCLOSURES
OF CASH FLOW
INFORMATION:
Cash paid during the
year for--
Interest.............. $ 119 $ 327 $ 407 $ 225 $ 958
Taxes paid............ -- -- 80 -- 2,480
======= ======= ======= =========== =============
NON-CASH INVESTING AND
FINANCING ACTIVITIES:
Accretion to
redemption value of
preferred stock and
warrants............. $ -- $ 96 $ 230 $ 115 $ 271
Dividends on preferred
stock added to
liquidation value.... 393 570 632 309 490
======= ======= ======= =========== =============
</TABLE>
The accompanying notes are an integral part of these statements.
F-7
<PAGE>
CAREER EDUCATION CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' INVESTMENT
<TABLE>
<CAPTION>
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
---------- ----- ---------- ----- ---------- ----- ---------- ----- ---------- ----- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, January 5,
1994 -- $-- -- $-- -- $-- -- $-- -- $-- $--
Issuance of stock..... 5,250 53 5,100 51 69,900 699 -- -- -- -- 803
Dividends on preferred
stock for the year... -- -- -- -- -- -- -- -- -- -- --
Net loss.............. -- -- -- -- -- -- -- -- -- -- --
----- ---- ----- ---- ------ ---- --- ---- ----- ---- ----
BALANCE, December 31,
1994.................. 5,250 $ 53 5,100 $ 51 69,900 $699 -- $-- -- $-- $803
Issuance of stock and
warrants............. -- -- -- -- -- -- -- -- 824 8 8
Dividends paid........ -- -- -- -- -- -- -- -- -- -- --
Dividends on preferred
stock for the year... -- -- -- -- -- -- -- -- -- -- --
Preferred stock and
warrant accretion.... -- -- -- -- -- -- -- -- -- -- --
Net income............ -- -- -- -- -- -- -- -- -- -- --
----- ---- ----- ---- ------ ---- --- ---- ----- ---- ----
BALANCE, December 31,
1995.................. 5,250 53 5,100 51 69,900 699 -- -- 824 8 811
Issuance of stock..... -- -- -- -- -- -- -- -- 824 8 8
Dividends paid........ -- -- -- -- -- -- -- -- -- -- --
Dividends on preferred
stock for the year... -- -- -- -- -- -- -- -- -- -- --
Preferred stock and
warrant accretion.... -- -- -- -- -- -- -- -- -- -- --
Net income............ -- -- -- -- -- -- -- -- -- -- --
----- ---- ----- ---- ------ ---- --- ---- ----- ---- ----
BALANCE, December 31,
1996.................. 5,250 53 5,100 51 69,900 699 -- -- 1,648 16 819
Issuance of warrants.. -- -- -- -- -- -- -- -- -- -- --
Dividends paid........ -- -- -- -- -- -- -- -- -- -- --
Dividends on preferred
stock for the period. -- -- -- -- -- -- -- -- -- -- --
Preferred stock and
warrant accretion.... -- -- -- -- -- -- -- -- -- -- --
Net loss.............. -- -- -- -- -- -- -- -- -- -- --
----- ---- ----- ---- ------ ---- --- ---- ----- ---- ----
BALANCE, June 30, 1997. 5,250 $ 53 5,100 $ 51 69,900 $699 -- $-- 1,648 $ 16 $819
===== ==== ===== ==== ====== ==== === ==== ===== ==== ====
</TABLE>
The accompanying notes are an integral part of these statements.
F-8
<PAGE>
CAREER EDUCATION CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' INVESTMENT (CONTINUED)
<TABLE>
<CAPTION>
WARRANTS
----------
CLASS E ADDITIONAL TOTAL
COMMON PAID-IN ACCUMULATED STOCKHOLDERS'
STOCK CAPITAL DEFICIT INVESTMENT
---------- ---------- ----------- -------------
<S> <C> <C> <C> <C>
BALANCE, January 5, 1994...... $ -- $ -- $ -- $ --
Issuance of stock........... -- -- (795) 8
Dividends on preferred stock
for the year............... -- -- (392,790) (392,790)
Net loss.................... -- -- (1,589,171) (1,589,171)
---------- ------- ----------- -----------
BALANCE, December 31, 1994.... $ -- $ -- $(1,982,756) $(1,981,953)
Issuance of stock........... -- 29,974 -- 29,982
Dividends paid.............. -- -- (206,800) (206,800)
Dividends on preferred stock
for the year............... -- -- (570,277) (570,277)
Preferred stock and warrant
accretion.................. -- -- (95,822) (95,822)
Net income.................. -- -- 68,543 68,543
---------- ------- ----------- -----------
BALANCE, December 31, 1995.... -- 29,974 (2,787,112) (2,756,327)
Issuance of stock........... -- 29,974 -- 29,982
Dividends paid.............. -- -- (495,400) (495,400)
Dividends on preferred stock
for the year............... -- -- (632,417) (632,417)
Preferred stock and warrant
accretion.................. -- -- (229,975) (229,975)
Net income.................. -- -- 1,494,666 1,494,666
---------- ------- ----------- -----------
BALANCE, December 31, 1996.... -- 59,948 (2,650,238) (2,589,471)
Issuance of warrants........ 4,788,563 -- -- 4,788,563
Dividends paid.............. -- -- (247,700) (247,700)
Dividends on preferred stock
for the period............. -- -- (490,493) (490,493)
Preferred stock and warrant
accretion.................. -- -- (270,642) (270,642)
Net loss.................... -- -- (102,047) (102,047)
---------- ------- ----------- -----------
BALANCE, June 30, 1997........ $4,788,563 $59,948 $(3,761,120) $ 1,088,210
========== ======= =========== ===========
</TABLE>
F-9
<PAGE>
CAREER EDUCATION CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION FOR THE SIX MONTHS ENDED JUNE 30, 1996 IS UNAUDITED)
1. DESCRIPTION OF THE BUSINESS
Career Education Corporation (the "Company") was incorporated in January
1994, for the purpose of acquiring operations of various for-profit
postsecondary schools. The Company manages and operates the educational
institutions acquired through its wholly-owned subsidiaries, Al Collins
Graphic Design School, Ltd. ("Collins"), Brooks College, Ltd. ("Brooks"),
Allentown Business School, Ltd. ("Allentown"), Brown Institute, Ltd.
("Brown"), Western Culinary Institute, Inc. ("Western Culinary"), School of
Computer Technology, Inc. ("SCT"), The Katherine Gibbs Schools, Inc.
("Gibbs"), IAMD, Limited and Subsidiaries, (The International Academy of
Merchandising and Design; "IAMD-U.S."), and The International Academy of
Merchandising & Design (Canada) Ltd. and Subsidiary ("IAMD-Canada").
The Collins campus is located in Tempe, Arizona, and offers associate and
bachelor degrees in visual communications and a certificate in desktop
publishing. The Brooks campus is located in Long Beach, California, and offers
associate degrees in fashion design, fashion merchandising, interior design
and visual communications. The Allentown campus is located in Allentown,
Pennsylvania, and offers associate degrees in business administration,
accounting, marketing, secretarial, fashion merchandising and medical-related
fields, and offers diplomas in business operations, PC/LAN, office assistant
and medical-related fields. The Brown campus is located in Minneapolis,
Minnesota, and offers certificates and/or associate degrees in allied health,
visual communications, business administration, information systems
management, computer programming, electronics technology and radio/television
broadcasting. The Western Culinary campus is located in Portland, Oregon, and
offers diplomas in culinary arts. SCT is headquartered in Pittsburgh,
Pennsylvania and has campuses in Pittsburgh, Pennsylvania and Fairmont, West
Virginia and offers associate degrees and diplomas in computer technology,
laser technology and specialized culinary arts. Gibbs is headquartered in New
York, New York and has campuses located in various cities through out New
York, New Jersey, and New England and offers associate degrees in secretarial
arts and business administration. IAMD-U.S. has campuses located in Chicago,
Illinois and Tampa, Florida. IAMD-Canada has campuses located in Toronto,
Canada and Montreal, Canada. Both IAMD-U.S. and IAMD-Canada offer associate
and bachelor degrees in various fields of merchandising management, fashion
design, interior design, and computer graphics.
2. SIGNIFICANT ACCOUNTING POLICIES
The financial statements and related notes thereto for the six months ended
June 30, 1996 are unaudited and have been prepared on the same basis as the
audited financial statements included herein. In the opinion of management,
such unaudited financial statements include all adjustments (consisting of
normal recurring adjustments) necessary to present fairly the information set
forth herein. Operating results for the six months ended June 30, 1997 are not
necessarily indicative of results that may be expected for the fiscal year
ended December 31, 1997. The principal accounting policies of the Company are
as follows:
a. Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries. All significant intercompany transactions
and balances have been eliminated in the consolidation. The results of
operations of all acquired businesses have been consolidated for all periods
subsequent to the date of acquisition.
b. Concentration of Credit Risk
The Company extends unsecured credit for tuition to a significant portion of
the students who are in attendance at the campuses operated by its
subsidiaries. A substantial portion of credit extended to students is repaid
through the student's participation in various federally funded financial aid
programs under Title IV of
F-10
<PAGE>
CAREER EDUCATION CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION FOR THE SIX MONTHS ENDED JUNE 30, 1996 IS UNAUDITED)
the Higher Education Act of 1965 ("Title IV Programs"), as amended.
Approximately 70%, 73%, 72%, 72% and 64%, respectively, of the Company's net
revenue was collected from Title IV Program funds in fiscal 1994, 1995 and
1996 and for the six months ended June 30, 1996 and 1997. The Company
generally completes and approves the financial aid packet of each student who
qualifies for financial aid prior to the student beginning class in an effort
to enhance the collectibility of its unsecured credit. Transfers of funds from
the financial aid programs to the Company are made in accordance with the
United States Department of Education ("DOE") requirements. Changes in DOE
funding federal student financial aid programs could impact the Company's
ability to attract students.
c. Cash and Cash Equivalents
Cash and cash equivalents consists of cash in banks and certificates of
deposit with maturities of less than 30 days.
d. Restricted Cash
Cash received from the U. S. Government under various student aid grant and
loan programs is considered to be restricted. Restricted cash is held in
separate bank accounts and does not become available for general use by the
Company until the financial aid is credited to the accounts of students and
the cash is transferred to an operating account.
e. Perkins Matching Funds
The Company participates in the Perkins Loan program in order to provide
continuing long-term, low interest loans to qualifying students in need of
financial assistance. Perkins loans are available on the basis of student
financial need and are subject to the availability of Perkins loan funds at
the institution. As previous borrowers repay their Perkins loans, their
payments are used to fund new loans thus creating a permanent revolving loan
fund. There is a 25% institutional matching requirement for Perkins loans. The
Company carries its investments at cost, net of allowances for losses and
collections. At December 31, 1995, December 31, 1996 and June 30, 1997, the
Company had estimated that approximately $225,000, $262,000 and $274,000,
respectively, of contributions to the program are expected to be returned if
the program should cease.
f. Marketing and Advertising Costs
Marketing and advertising costs are expensed as incurred. Marketing and
advertising costs included in general and administrative expenses were
$971,000, $2,715,000, $3,494,000, $2,007,000 and $2,894,000 for the years
ended December 31, 1994, December 31, 1995, December 31, 1996 and the six
months ended June 30, 1996 and 1997, respectively.
g. Inventories
Inventories consisting principally of program materials, books and supplies
are stated at the lower of cost, determined on a first-in, first-out, basis or
market.
h. Property and Equipment
Property and equipment are stated at cost. Depreciation and amortization are
recognized utilizing the straight-line method over the related assets useful
lives. Leasehold improvements and assets recorded under
F-11
<PAGE>
CAREER EDUCATION CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION FOR THE SIX MONTHS ENDED JUNE 30, 1996 IS UNAUDITED)
capital leases are amortized on a straight-line basis over their estimated
useful lives or lease terms, whichever is shorter. Maintenance, repairs and
minor renewals and betterments are expensed; major improvements are
capitalized. The estimated useful lives and cost basis of property and
equipment at December 31, 1995, December 31, 1996 and June 30, 1997, are as
follows (dollars in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------- JUNE 30,
1995 1996 1997 LIFE
------- ------- -------- ----------
<S> <C> <C> <C> <C>
Buildings............................... $ 350 $ 350 $ 1,190 31 years
Classroom equipment, courseware and
other
instructional materials................ 10,237 17,905 35,712 3-15 years
Furniture, fixtures and equipment....... 2,653 2,926 9,696 3-10 years
Leasehold improvements.................. 843 1,296 4,585 1-7 years
Vehicles................................ 40 40 40 5 years
------- ------- -------
14,123 22,517 51,223
Less-Accumulated depreciation and amor-
tization............................... 1,282 2,957 4,135
------- ------- -------
$12,841 $19,560 $47,088
======= ======= =======
</TABLE>
The gross cost of assets recorded under capital leases included above
amounted to $39,000, $39,000 and $2,835,000 at December 31, 1995, December 31,
1996 and June 30, 1997, respectively.
i. Intangible Assets
Intangible assets include the excess of cost over fair market value of
identifiable assets acquired through the business purchases described in Note
3. Goodwill and student contracts are being amortized on a straight-line basis
over their estimated useful life. Covenants not-to-compete entered into before
1997 are being amortized on a straight-line basis over their useful life.
Those entered into during 1997 and thereafter are being amortized on an
accelerated method over their estimated useful life. At December 31, 1995,
December 31, 1996 and June 30, 1997, the cost basis and useful lives of
intangible assets consist of the following (dollars in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------- JUNE 30, ESTIMATED
1995 1996 1997 LIVES
------ ------ -------- ---------
<S> <C> <C> <C> <C>
Goodwill.................................... $2,592 $3,128 $20,445 40 years
Covenants not-to-compete.................... 100 500 13,250 3-5 years
Student contracts........................... 1,055 1,107 -- 1 year
------ ------ -------
3,747 4,735 33,695
Less-Accumulated amortization............... 934 1,328 860
------ ------ -------
$2,813 $3,407 $32,835
====== ====== =======
</TABLE>
On an ongoing basis, the Company reviews intangible assets and other long-
lived assets for impairment whenever events or circumstances indicate that
carrying amounts may not be recoverable. To date, no such events or changes in
circumstances have occurred. If such events or changes in circumstances occur,
the Company will recognize an impairment loss if the undiscounted future cash
flows expected to be generated by the asset (or acquired business) are less
than the carrying value of the related asset. The impairment loss would adjust
the asset to its fair value.
F-12
<PAGE>
CAREER EDUCATION CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION FOR THE SIX MONTHS ENDED JUNE 30, 1996 IS UNAUDITED)
j. Organizational Costs
Costs incurred in conjunction with the organization of the Company and its
subsidiaries are being amortized on a straight-line basis over an estimated
useful life of five years. Accumulated amortization as of December 31, 1995,
December 31, 1996 and June 30, 1997, was $94,000, $153,000 and $215,000,
respectively.
k. Deferred Financing Costs
Costs incurred in connection with obtaining financing are capitalized and
amortized over the maturity period of the debt. Accumulated amortization as of
December 31, 1995, December 31, 1996 and June 30, 1997, was $14,000, $59,000
and $69,000, respectively.
l. Revenue Recognition
Revenue is derived primarily from courses taught at the schools. Tuition
revenue is recognized on a straight-line basis over the length of the
applicable course. Dormitory and cafeteria revenues charged to students are
recognized on a straight-line basis over the length of the students' program.
Other dormitory and cafeteria revenues are recognized as earned. Textbook
sales and other revenues are recognized as services are performed. If a
student withdraws, future revenue is reduced by the amount of refund due to
the student. Refunds are calculated in accordance with federal, state and
accrediting agency standards. Deferred tuition revenue represents the portion
of payments received but not earned and is reflected as a current liability in
the accompanying consolidated balance sheets as such amount is expected to be
earned within the next year.
m. Management's Use of Estimates
The preparation of financial statements in conformity with Generally
Accepted Accounting Principles requires management to make certain estimates
and assumptions that affect the reported amounts of assets and liabilities and
the disclosure of contingent liabilities at the date of the financial
statements and reported amounts of revenues and expenses during the reported
period. Actual results could differ from those estimates.
n. Income Taxes
The Company files a consolidated federal income tax return. The Company
provides for deferred income taxes under the asset and liability method of
accounting. This method requires the recognition of deferred income taxes
based upon the tax consequences of "temporary differences" by applying enacted
statutory tax rates applicable to future years to differences between the
financial statement carrying amounts and the tax basis of existing assets and
liabilities.
o. Financial Instruments
The carrying value for current assets and liabilities reasonably
approximates their fair value due to their short maturity periods. The
carrying value of the Company's debt obligations reasonably approximates fair
value as the stated interest rate approximates current market interest rates
of debt with similar terms.
p. Accretion to Redemption Value of Preferred Stock and Warrants
Accretion to redemption value of redeemable preferred stock and warrants
represents the change in the redemption value of outstanding preferred stock
and warrants in each period which is being accreted to its redemption value
over the earliest period redemption can occur using the effective interest
method. The redemption values are based on the estimated fair market values of
the classes of stock and consider the amounts the Company has received for the
sale of equity instruments, prices paid for acquired businesses and operations
of the Company.
F-13
<PAGE>
CAREER EDUCATION CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION FOR THE SIX MONTHS ENDED JUNE 30, 1996 IS UNAUDITED)
q. Pro Forma Income (Loss) before Extraordinary Item per Share Attributable
to Common Stockholders, Supplemental Pro Forma Income (Loss) before
Extraordinary Item per Share Attributable to Common Stockholders and
Supplemental Pro Forma Net Income (Loss) per Share Attributable to Common
Stockholders
Pro forma income (loss) before extraordinary item per share available to
common stockholders is based on the weighted average number of shares of
common stock and common stock equivalents outstanding after giving retroactive
adjustments for stock splits described in Notes 5 and 15 for all periods
presented, retroactively reflects the shares of redeemable preferred stock and
warrants converted into shares of common stock, retroactively reflects the
conversion of all shares of common stock into Class A common stock and
includes shares being sold in the offering to fund payment for the
dividend as described in Note 15. Common stock equivalents represent stock
options and warrants using the treasury stock method for all periods
presented. All common stock options and warrants issued within one year prior
to the initial public filing with a price below the estimated initial public
offering price have been included as outstanding shares for all periods
presented, reduced by the number of shares which could be purchased with
proceeds from the exercise of the options and warrants.
Supplemental pro forma loss before extraordinary item per share attributable
to common stockholders for the year ended December 31, 1996 and for the six
months ended June 30, 1997 of $ and $ respectively, is computed based
upon (i) pro forma income (loss) before extraordinary item attributable to
common stockholders adjusted for the reduction in interest expense (net of tax
benefit) resulting from the application of net proceeds of the contemplated
offering to reduce indebtedness of the Company and (ii) the pro forma weighted
average number of shares of common stock outstanding adjusted to reflect the
sale by the Company of approximately shares of common stock in the
offering resulting in net proceeds sufficient to pay indebtedness as described
in Note 15. Supplemental pro forma net income (loss) per share attributable to
common stockholders of $ and $ for the year ended December 31, 1996
and for the six months ended June 30, 1997, respectively, is based upon the
pro forma income (loss) before extraordinary item adjusted for the
extraordinary loss on the early extinguishment of debt.
r. Stock-Based Compensation
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-
Based Compensation" ("SFAS No. 123"), was issued in October, 1995. SFAS No.
123 provides an alternative method of accounting for stock-based compensation
arrangements, based on fair value of the stock-based compensation utilizing
various assumptions regarding the underlying attributes of the options and
stock, rather than the existing method of accounting for stock-based
compensation which is provided in Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB No. 25"). The Financial
Accounting Standards Board encourages entities to adopt the fair-value based
method but does not require adoption of this method. The Company will continue
its current accounting policy and has adopted the disclosure-only provisions
of SFAS No. 123 for options and warrants issued to employees and directors.
Expense associated with stock options and warrants issued to non-
employees/non-directors is recorded in accordance with SFAS No. 123.
s. New Accounting Pronouncements
Earnings Per Share
In February 1997, the Financial Accounting Standards Board issued Financial
Accounting Standard No. 128 ("SFAS No. 128"), addressing earnings per share.
SFAS No. 128 changed the methodology of calculating earnings per share and
renamed the two calculations, basic earnings per share (currently primary) and
diluted earnings per share (currently fully diluted). The calculations differ
by eliminating any common stock equivalents (such as stock options, warrants,
and convertible preferred stock) from basic earnings per share and changes
certain calculations when computing diluted earnings per share. The weighted
average number of common shares for the basic earnings per common share
calculation includes (i) all common stock outstanding during each
F-14
<PAGE>
CAREER EDUCATION CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION FOR THE SIX MONTHS ENDED JUNE 30, 1996 IS UNAUDITED)
period presented, (ii) all common stock options and warrants issued within one
year prior to the initial public filing with a price below the estimated
initial public offering price, reduced by the number of shares which could be
purchased with proceeds from the exercise of the options and warrants, (iii)
the common stock that will be issued upon the preferred stock conversion, and
(iv) the common stock that will be used to fund payment of the estimated
dividends as described in Note 15. The weighted average number of common
shares for the diluted earnings per common share calculation is based on
similar assumptions and is adjusted for all other common stock equivalents
that were outstanding during each period presented. SFAS No. 128 is effective
for reporting periods ending after December 15, 1997. For the year ended
December 31, 1996 and the six months ended June 30, 1997, had the Company
calculated earnings per share using SFAS No. 128, the basic earnings per share
would have been $ , and $ , respectively, and the diluted earnings per
share would have been $ , and $ , respectively. The Company will adopt
SFAS No. 128 on December 31, 1997.
Capital Structure
In February 1997, the Financial Accounting Standards Board issued SFAS No.
129, "Disclosure of Information about Capital Structure" ("SFAS No. 129"),
which requires all companies to disclose all relevant information regarding
their capital structure. SFAS No. 129 presentation is required for reporting
periods ending after December 15, 1997. Based on the capital structure
disclosures presented in the accompanying consolidated financial statements
and notes thereto, the Company does not believe that any additional
disclosures will be required as a result of adopting this pronouncement.
Comprehensive Income
In June 1997, the Financial Accounting Standards Board issued SFAS No. 130,
"Reporting Comprehensive Income" ("SFAS No. 130"), which establishes standards
for reporting of comprehensive income. This pronouncement requires that all
items recognized under accounting standards as components of comprehensive
income, as defined in the pronouncement, be reported in a financial statement
that is displayed with the same prominence as other financial statements.
Comprehensive income includes all changes in equity during a period except
those resulting from investments by owners and distributions to owners. The
financial statement presentation required under SFAS No. 130 is effective for
all fiscal years beginning after December 15, 1997. The Company will adopt
SFAS No. 130 in 1998. As of June 30, 1997, the impact of adopting this
pronouncement has not been determined; however, the Company will be affected
by it because it maintains a subsidiary which has operations in Canada.
Segment Reporting
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
"Disclosure about Segments of an Enterprise and Related Information" ("SFAS
No. 131"), which amends the requirements for a public enterprise to report
financial and descriptive information about its reportable operating segments.
Operating segments, as defined in the pronouncement, are components of an
enterprise about which separate financial information is available that is
evaluated regularly by the Company in deciding how to allocate resources and
in assessing performance. The financial information is required to be reported
on the basis that is used internally for evaluating segment performance and
deciding how to allocate resources to segments. The disclosures required by
SFAS No. 131 are effective for all fiscal years beginning after December 15,
1997. The Company will adopt SFAS No. 131 in 1998. This pronouncement will
have an effect on the Company's reporting in the subsequent periods; however,
as of June 30, 1997, the impact of this pronouncement has not been determined.
F-15
<PAGE>
CAREER EDUCATION CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION FOR THE SIX MONTHS ENDED JUNE 30, 1996 IS UNAUDITED)
t. Foreign Currency Translation
The Company's wholly owned Canadian subsidiary, IAMD-Canada, acquired an
entity with operations in Canada on June 30, 1997. For periods subsequent to
June 30, 1997, revenues and expenses related to these operations will be
translated at average exchange rates in effect at the time the underlying
transactions occur. Transaction gains or losses will be included in income.
Assets and liabilities of this subsidiary will be translated at year-end
exchange rates with gains and losses resulting from such translation being
included in stockholders' investment.
3. BUSINESS ACQUISITIONS
COLLINS
On January 31, 1994, Collins acquired certain assets and assumed certain
liabilities of the Al Collins Graphic Design School. This acquisition was
accounted for as a purchase and, accordingly, the purchased assets and assumed
liabilities have been recorded at their estimated fair market values at the
date of the acquisition. The purchase price of $2,260,000 exceeded the fair
market value of assets acquired and liabilities assumed, resulting in goodwill
of approximately $906,000.
BROOKS
On June 20, 1994, Brooks acquired certain assets and assumed certain
liabilities of Brooks College. This acquisition was accounted for as a
purchase and, accordingly, the purchased assets and assumed liabilities have
been recorded at their estimated fair market values at the date of the
acquisition. The purchase price of $4,100,000 exceeded the fair market value
of assets acquired and liabilities assumed resulting in goodwill of
approximately $1,075,000.
ALLENTOWN AND BROWN
On July 31, 1995, Brown acquired certain assets and assumed certain
liabilities of Brown Institute Campus of National Education Centers, Inc., and
Allentown acquired certain assets and assumed certain liabilities of Allentown
Business School Campus of National Education Centers, Inc. These acquisitions
were accounted for as purchases and, accordingly, the purchased assets and
assumed liabilities have been recorded at their estimated fair market values
at the date of the acquisition. The total purchase price of approximately
$6,993,000, exceeded the fair market value of the assets acquired, resulting
in goodwill of approximately $843,000. In connection with the purchase, the
former owner of the schools entered into a three-year covenant not-to-compete
agreement with the Company.
WESTERN CULINARY
On October 21, 1996, Western Culinary acquired certain assets and assumed
certain liabilities of Western Culinary Institute, a wholly owned subsidiary
of Phillips College, Inc. This acquisition was accounted for as a purchase
and, accordingly, the purchased assets and assumed liabilities have been
recorded at their estimated fair market values at the date of the acquisition.
The purchase price, subject to certain adjustments, of approximately
$8,000,000 exceeded the fair market value of net assets acquired, resulting in
goodwill of approximately $646,000. In connection with the purchase, the
former owner of the school entered into a four-year covenant not-to-compete
agreement with the Company for a total price of $400,000.
At closing, the Company paid $7,000,000 to the former owner, assumed a
$150,000 obligation and deposited $1,250,000 into escrow. At December 31,
1996, the Company estimated that approximately $523,000 would be returned to
the Company as a result of purchase price adjustments and has reflected such
amount as due from former owners of acquired businesses in the accompanying
December 31, 1996 consolidated balance sheet. This amount was collected in
January 1997.
F-16
<PAGE>
CAREER EDUCATION CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION FOR THE SIX MONTHS ENDED JUNE 30, 1996 IS UNAUDITED)
SCT
On February 28, 1997, the Company, through SCT Acquisition, Ltd., acquired
100% of the outstanding shares of capital stock of School of Computer
Technology, Inc. This acquisition was accounted for as a purchase and,
accordingly, the acquired assets and assumed liabilities have been recorded at
their estimated fair market values at the date of the acquisition. The
estimated fair market values of certain assets are based upon preliminary
appraisal reports. The purchase price, subject to certain modifications, of
approximately $5,450,000 exceeded the estimated fair market value of net
assets acquired, resulting in goodwill of approximately $3,032,000. In
connection with the purchase, the former owners of the school each entered
into three-year covenant not-to-compete agreements with the Company for a
total price of $1,750,000.
At closing, the Company paid $400,000 to the former owners, deposited
$5,000,000 into escrow, and assumed a $1,800,000 note payable due to the
former owners. Funds paid were raised through the issuance of $2,000,000 of
Series D preferred stock and warrants and $3,400,000 of bank borrowings. The
amount in escrow will be distributed, subject to certain adjustments for
events occurring after the closing date, in 1997. Accordingly, subsequent
adjustments to the purchase price may result in changes to the purchase price
allocation. Management does not believe that such adjustments will be
material. At June 30, 1997, the Company estimates that approximately $506,000
will be returned to the Company as a result of such purchase price adjustments
and has reflected such amount as due from former owners of acquired businesses
in the accompanying June 30, 1997 consolidated balance.
GIBBS
On May 31, 1997, the Company acquired 100% of the outstanding shares of
capital stock of The Katharine Gibbs Schools, Inc. The Katharine Gibbs
Schools, Inc. has seven wholly-owned subsidiaries, each of which owns and
operates separate campuses. This acquisition was accounted for as a purchase
and, accordingly, the acquired assets and assumed liabilities have been
recorded at their estimated fair market values at the date of the acquisition.
The estimated fair market values of certain assets are based upon preliminary
appraisal reports. The purchase price, subject to certain modifications, of
approximately $20,000,000 exceeded the fair market value of net assets
acquired, resulting in goodwill of approximately $7,776,000. Subsequent
adjustments to the purchase price may result in changes to the purchase price
allocation. At June 30, 1997, the Company has reduced the purchase price by
approximately $1,093,000 as a result of estimated purchase price adjustments.
In connection with the purchase, the former owner of the schools also
entered into a covenant not-to-compete agreement with the Company for a total
price of $7,000,000. The covenant not-to-compete restricts the former owners'
ability to own or operate certain types of for-profit postsecondary schools
for five years.
At closing, the Company paid $5,400,000 to the former owner and deposited
$18,850,000 into escrow with borrowings of $12,500,000 from its new bank
financing arrangement and $15,000,000 which was raised through the issuance of
Series D preferred stock. The amount in escrow will be paid, subject to
certain adjustments for events occurring after the closing date, in 1997. At
June 30, 1997, the Company estimates that $1,657,000 is still owed to the
seller.
The Company has the right to rescind the transaction upon the occurrence of
certain conditions, subject to the seller's right to cure. This right expires
the earlier of November 30, 1997, or the issuance of applicable DOE approval
notices.
F-17
<PAGE>
CAREER EDUCATION CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION FOR THE SIX MONTHS ENDED JUNE 30, 1996 IS UNAUDITED)
IAMD-U.S.
On June 30, 1997, the Company, through IAMD, Acquisition I, Ltd. acquired
100% of the outstanding shares of capital stock of IAMD, Limited for
$3,000,000. Subsequent to the purchase, IAMD Acquisition I, Ltd. merged with
and into IAMD, Limited and assumed its name ("IAMD-U.S."). The purchase price
may be increased by up to $5,000,000 based upon the amount by which revenue of
the acquired operations for the 12 month period ended June 30, 1998 exceeds
$8,000,000, as provided for in an earn-out provision in the purchase
agreement. IAMD-U.S. generated revenue of $7,493,000 for the year ended June
30, 1997. The purchase price of the acquisition is subject to certain
modifications in addition to the earn-out provision. This acquisition was
accounted for as a purchase and, accordingly, the acquired assets and assumed
liabilities have been recorded at their estimated fair market values at the
date of the acquisition. The estimated fair market values of certain assets
are based upon preliminary appraisal reports. The purchase price, subject to
certain modifications, exceeded the fair market value of net assets acquired,
resulting in goodwill of approximately $1,968,000. At June 30, 1997, the
Company estimates that the purchase price will be reduced by approximately
$214,000 as a result of purchase price adjustments and has reflected such
amount as due from former owners of acquired businesses in the accompanying
June 30, 1997 consolidated balance sheet.
In connection with the purchase, the former owners of the school also
entered into covenant not-to-compete agreements with the Company in exchange
for $2,000,000. The covenant not-to-compete restricts the former owners'
ability to own or operate certain types of for-profit postsecondary schools
for four years.
On June 30, 1997, the Company paid $100,000 to the former owners, issued
$1,500,000 in notes payable to the former owners and issued letters of credit
totaling $3,400,000 to secure amounts owed to the former owners to consummate
these transactions. The funds to consummate these transactions were obtained
through the issuance of Series D preferred stock and warrants and bank
borrowings. The notes, secured by letters of credit, bear interest, payable
quarterly, at 7% per annum, and the entire principal balance is due on June
30, 2001 or earlier in the event of an initial public offering of the Company.
The Company has the right to rescind the transaction upon the occurrence of
certain conditions, subject to the seller's right to cure. This right expires
the earlier of October 3, 1997 or the issuance of applicable DOE approval
notices.
IAMD-CANADA
On June 30, 1997, the Company purchased 100% of the capital stock of IAMD-
Canada for $6,500,000. This acquisition was accounted for as a purchase and,
accordingly, the acquired assets and assumed liabilities have been recorded at
their estimated fair market values at the date of the acquisition. The
estimated fair market values of certain assets are based upon preliminary
appraisal reports. The purchase price, subject to certain modifications,
exceeded the fair market value of net assets acquired, resulting in goodwill
of approximately $4,543,000. At June 30, 1997, the Company estimates that the
purchase price will be decreased by approximately $125,000 as a result of
purchase price adjustments and has reflected such amount as due from former
owners of acquired businesses in the accompanying June 30, 1997 consolidated
balance sheet.
In connection with the purchase, the former owners of the school entered
into covenant not-to-compete agreements with the Company in exchange for
$2,000,000. The covenant not-to-compete restricts the former owners' ability
to own or operate certain types of postsecondary vocational schools for four
years.
On June 30, 1997, the Company paid $3,820,000 to the former owners,
deposited $2,120,000 into escrow, and issued $2,550,000 in notes payable to
the former owners to consummate these transactions. The funds to
F-18
<PAGE>
CAREER EDUCATION CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION FOR THE SIX MONTHS ENDED JUNE 30, 1996 IS UNAUDITED)
consummate these transactions were obtained through the issuance of Series D
preferred stock and warrants and bank borrowings. The notes are secured by
letters of credit, bear interest, payable quarterly, at 7% per annum, and the
entire principal balance is due on June 30, 2001 or earlier in the event of an
initial public offering of the Company.
The following unaudited pro forma results of operations data for the years
ended December 31, 1994, December 31, 1995 and December 31, 1996, and the six
months ended June 30, 1997, assume the business acquisitions subsequent to
January 1, 1995 described above occurred at the beginning of the year
preceding the year of the acquisition. The pro forma results below are based
on historical results of operations and do not necessarily reflect actual
results that would have occurred. The pro forma results for the six months
ended June 30, 1997, are not necessarily indicative of results that may be
expected for the fiscal year ending December 31, 1997 (in thousands).
<TABLE>
<CAPTION>
FOR THE
SIX MONTHS
FOR THE YEARS ENDED ENDED
DECEMBER 31 JUNE 30
------------------------ ----------
1994 1995 1996 1997
------- ------- ------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Net revenue.......................... $23,243 $32,175 $86,597 $51,695
Income (loss) before extraordinary
item................................ (902) 1,070 (5,517) (1,612)
Net income (loss).................... (902) 1,070 (5,517) (2,030)
</TABLE>
F-19
<PAGE>
CAREER EDUCATION CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION FOR THE SIX MONTHS ENDED JUNE 30, 1996 IS UNAUDITED)
4. DEBT
Debt of the Company at December 31, 1995, December 31, 1996 and June 30,
1997, consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31
-------------- JUNE 30
1995 1996 1997
------ ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Borrowings under Credit Agreement with a syndicate of
banks as discussed below--
Revolving loans....................................... $ -- $ -- $25,955
Term loan............................................. -- -- 12,500
Revolving credit notes with a bank, as discussed below,
net of debt discount of $73,000 and $57,000, as of
December 31, 1995 and December 31, 1996, respectively.. 6,698 8,182 --
Bank term loan, as discussed below...................... -- 8,250 --
Notes payable to former owner of Allentown Business
School and Brown Institute; paid in January, 1996...... 1,286 -- --
Notes payable to former owners of SCT, bearing annual
interest of 7%, interest only payable quarterly,
principal due February 28, 2001, secured by bank
letters of credit...................................... -- -- 1,800
Amount due to former owner of Gibbs, currently payable,
non-interest-bearing and unsecured..................... -- -- 1,657
Notes payable to former owners of IAMD-U.S., bearing
annual interest of 7%, interest only payable quarterly,
principal due June 30, 2001 (or earlier upon the
occurrence of an initial public offering), secured by
bank letters of credit................................. -- -- 1,500
Amounts due to former owners of IAMD-U.S., currently
payable, non-interest-bearing, secured by bank letters
of credit.............................................. -- -- 3,400
Notes payable to former owners of IAMD-Canada, bearing
annual interest of 7%, interest only payable quarterly,
principal due June 30, 2001 (or earlier upon the
occurrence of an initial public offering), secured by
bank letters of credit................................. -- -- 2,550
Equipment under capital leases, discounted at interest
rates ranging from 6.6% to 21.5%....................... 50 27 1,756
Other................................................... -- -- 10
------ ------- -------
8,034 16,459 51,128
Less--Current portion................................... 1,309 2,676 3,477
------ ------- -------
$6,725 $13,783 $47,651
====== ======= =======
</TABLE>
On May 30, 1997, the Company and its subsidiaries entered into a new credit
agreement (the Credit Agreement) with a bank and prepaid approximately
$21,187,000 of outstanding revolving credit notes, term loans and other
obligations under its previous credit agreement. On September 25, 1997, the
Credit Agreement was amended and syndicated. The amended Credit Agreement
provides for the Company and its subsidiaries to borrow up to an aggregate of
$80,000,000 on a consolidated basis, including $65,000,000 under a revolving
credit facility ("Revolving Loans") and $15,000,000 through a term loan
facility ("Term Loan"), and the ability to obtain up to $20,000,000 in
outstanding letters of credit. Outstanding letters of credit reduce revolving
credit
F-20
<PAGE>
CAREER EDUCATION CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION FOR THE SIX MONTHS ENDED JUNE 30, 1996 IS UNAUDITED)
facility availability under the amended Credit Agreement. The amended Credit
Agreement matures on May 30, 2002; however, availability under the revolving
credit facility is reduced by $10,000,000 on May 30, 2001. The Term Loan is
payable in equal quarterly installments of $625,000. Beginning September 30,
1997, these quarterly installments may increase to a maximum of $750,000 if
the Company borrows $15,000,000 under the amended term loan facility. The
Company's borrowings under the amended Credit Agreement bear interest, payable
quarterly, at the amended Credit Agreement's Base Rate (defined as the greater
of the bank's prime rate plus 0.75%, 9.25% at June 30, 1997, or the Federal
Funds Rate plus 0.50%, 6.87% at June 30, 1997) or at LIBOR plus 2% (7.9375% at
June 30, 1997), at the Company's election. Interest rates are subject to
change based upon the Company's funded debt levels relative to consolidated
earnings before interest, taxes, depreciation and amortization on a pro forma
basis for the last four fiscal quarters. The Company is also required to pay
annual commitment fees of 0.375% on unused availability.
At June 30, 1997, the Company had outstanding, under the amended Credit
Agreement, $25,955,000 in revolving credit borrowings and a $12,500,000 term
loan and had issued various letters of credit totaling approximately
$11,545,000 (to meet certain Department of Education financial responsibility
requirements and to guarantee certain purchase price payments). At June 30,
1997, borrowings totaling $13,455,000 were at the bank's prime rate plus
0.75%, and borrowings totaling $25,000,000 were at LIBOR plus 2%.
During 1995, the Company and its subsidiaries entered into a credit
agreement (the "Agreement") with a bank. The Agreement provided for the
Company and its subsidiaries to borrow, on a consolidated basis, $8,000,000
under a revolving credit note and $12,000,000 through a term loan. In
connection with the Agreement, the Company also issued warrants to purchase
2,199 shares of Class D common stock and recorded a debt discount of $79,977
for the value of the warrants. The debt discount is amortized over the five
year maturity of the related debt. On May 30, 1997, in connection with
entering into the Credit Agreement and prepaying all amounts outstanding under
the Agreement, the Company expensed the remaining unamortized debt discount
totaling $51,000, prepayment penalty fees totaling $294,000 and the remaining
unamortized deferred financing costs totaling $306,000. The loss on the early
extinguishment of debt of $651,000, net of related tax benefit of $233,000,
has been reflected as an extraordinary item in the accompanying consolidated
statement of operations for the six months ended June 30, 1997.
At December 31, 1996, the Company, under the Agreement, had $8,239,057
outstanding under revolving credit notes and had issued various letters of
credit totaling approximately $270,000 to meet certain Department of Education
financial responsibility requirements. The revolving credit facility
availability is reduced by these amounts. Amounts outstanding under the
revolving credit notes bear interest either at the bank's prime rate plus
1.25% (9.50% at December 31, 1996), or LIBOR plus 3.5% (8.875% at December 31,
1996), and are reduced annually over a five-year period with the balance due
in July, 2000. Interest is payable monthly. At December 31, 1996, $5,239,057
in borrowings were at the bank's prime rate plus 1.25%, and $3,000,000 in
borrowings were at LIBOR plus 3.5% rate. The term loan is payable in 35 equal
monthly installments beginning a year from the origination date of the term
loan, October 21, 1996, with any unpaid balance due in full in July, 2000.
Amounts outstanding bear monthly interest either at the bank's prime rate plus
1.25%, or LIBOR plus 3.5%. At December 31, 1996, the Company had $8,250,000
outstanding under the term loan.
The Company and its subsidiaries have collectively guaranteed repayment of
amounts outstanding under the Credit Agreement. In addition, the Company has
pledged the stock of its subsidiaries as collateral for repayment of the debt.
The Company may voluntarily make principal prepayments. Mandatory principal
prepayments are required if the Company generates excess cash flows, as
defined, sells certain assets, or upon the occurrence of certain other events.
The Company is restricted from paying dividends, as defined, selling or
disposing of certain assets or subsidiaries, making annual rental payments in
excess of $14,000,000, and issuing
F-21
<PAGE>
CAREER EDUCATION CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION FOR THE SIX MONTHS ENDED JUNE 30, 1996 IS UNAUDITED)
subordinated debt in excess of $5,000,000, among other things. The Company is
required to maintain certain financial ratios, including a quarterly fixed
coverage ratio of at least 1.25:1, a quarterly interest coverage ratio of at
least 3:1, certain levels of consolidated tangible net worth, consolidated net
worth, and funded debt to consolidated earnings before interest, taxes,
depreciation, and amortization, on a pro forma basis for the last four fiscal
quarters, of 3.75:1 through June 30, 1998, among others. At June 30, 1997, the
Company was in compliance with the covenants of the Credit Agreement, as
amended.
As of June 30, 1997, the Company intends to refinance amounts owed to former
owners of acquired businesses as noted above through availability under its
amended Credit Agreement and, therefore, such amounts have been classified as
long-term.
At June 30, 1997, future annual principal payments of long-term debt mature
as follows (in thousands):
<TABLE>
<S> <C>
For the 12 months ended June 30,
1999........................................... $ 3,016
2000........................................... 2,705
2001........................................... 8,406
2002........................................... 2,511
2003 and thereafter............................ 31,013
-------
$47,651
=======
</TABLE>
5. STOCKHOLDERS' INVESTMENT
COMMON STOCK
Class A and Class B common stock maintain voting rights while Class C, D and
E common stock is nonvoting. Class B common stock is convertible into shares of
Class A common stock at any time at the discretion of the holder at a ratio of
1:1. Class C common stock is convertible into shares of either Class A common
stock or Class B common stock at any time at the discretion of the holder at a
ratio of 1:1. Class D common stock is convertible into shares of Class A common
stock, subject to certain restrictions. Class E common stock may only be
converted into shares of Class A common stock upon the occurrence of certain
events.
In July 1995, the Company increased the number of authorized shares of common
stock and completed a 100-for-1 stock split. The par value of the additional
shares arising from these splits has been reclassified from additional paid in
capital or accumulated deficit (as appropriate) to common stock. The stock
splits have been retroactively reflected in the accompanying consolidated
financial statements. All references to per share amounts in this report have
been restated to reflect the stock splits.
In 1996, the Company entered into a stock subscription agreement with an
employee, whereby the employee may purchase up to $100,000 of common and
preferred stock. A receivable and the common and preferred stock to be issued
under the agreement have been recorded at December 31, 1996. This receivable
was paid in February 1997.
F-22
<PAGE>
CAREER EDUCATION CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION FOR THE SIX MONTHS ENDED JUNE 30, 1996 IS UNAUDITED)
6. REDEEMABLE PREFERRED STOCK
SERIES A
Series A preferred stock has a stated value of $1,000 per share, and its
holders are entitled to receive dividends at an annual rate of 7% of the
liquidation value per share, as defined. Dividends are paid in equal
semiannual installments on January 31 and July 31 of each year by increasing
the liquidation value of the Series A preferred stock. The mandatory
redemption value of the Series A preferred stock has been increased to reflect
these dividends. The Company may call the Series A preferred stock at any time
and is required to redeem the stock on August 31, 2003, at its liquidation
value. The liquidation value is $1,000 per share plus dividends, as defined.
Shares of Series A preferred stock were issued at $1,000 per share during
1995 and 1994. The Company also redeemed 138 shares of Series A preferred
stock at $1,000 per share plus dividends during 1995.
SERIES B
Series B preferred stock has a stated value of $1,000 per share, and its
holders are not entitled to any dividends on any outstanding shares. Series B
preferred stock may be called at the option of the Company at any time and
must be redeemed by the Company on August 31, 2003, at its liquidation value
($1,000 per share). At June 30, 1997, there were no shares of Series B
preferred stock issued or outstanding.
SERIES C
Series C preferred stock has a stated value of $1,000 per share, and its
holders are entitled to receive cash dividends at an annual rate of 10% of the
liquidation value per share, as defined. Dividends are payable in equal
quarterly installments on each March 31, June 30, September 30 and December
31. To the extent dividends are declared and not paid, they are added to the
liquidation value. The Company has paid all dividends through June 30, 1997 on
Series C preferred stock. The Company may call Series C preferred stock at any
time and is required to redeem the stock, at its liquidation value, upon the
earlier of July 31, 2003, a sale of substantially all of the assets of the
Company or a qualified initial public offering. The liquidation value is
$1,000 per share plus undeclared dividends, as defined.
In July 1995, the Company issued shares of Series C preferred stocks and
redeemable warrants described in Note 7. The proceeds, totaling $5,000,000,
have been allocated to preferred stock and warrants based upon their relative
market values after considering issuance costs.
In July 1996, the Company increased the number of authorized shares of
Series C preferred stock and completed a 10-for-1 stock split. The stock split
has been retroactively reflected in the accompanying financial statements.
SERIES D
Series D preferred stock has a stated value of $1,000 per share, and its
holders are entitled to receive dividends at an annual rate of 7% of the
liquidation value per share, as defined. Dividends are paid in equal
semiannual installments on January 31 and July 31 of each year by increasing
the liquidation value of the Series D preferred stock. The mandatory
redemption value of the Series D preferred stock has been increased to reflect
these dividends. The Company may call the Series D preferred stock at any time
and is required to redeem the stock on September 30, 2003, at its liquidation
value. The liquidation value is $1,000 per share plus dividends, as defined.
F-23
<PAGE>
CAREER EDUCATION CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION FOR THE SIX MONTHS ENDED JUNE 30, 1996 IS UNAUDITED)
On February 28, 1997, the Company entered into a securities purchase
agreement with existing common and preferred stockholders to raise funds for
acquisitions. The securities purchase agreement gives them the right to
purchase up to 7,500 shares of Series D preferred stock for $1,000 per share
and receive warrants, currently exercisable, for the purchase of 8,924 shares
of Class E common stock at an exercise price of $.01 per share.
Under the February 28, 1997, securities purchase agreement, the Company
issued 2,000 shares of Series D preferred stock and warrants to purchase 2,380
shares of Class E common stock to existing stockholders in connection with the
acquisition of the School of Computer Technology, Inc. On May 30, 1997, the
Company issued the remaining 5,500 shares of Series D preferred stock and
warrants to purchase 6,544 shares of Class E common stock to existing
stockholders. The proceeds (totaling $7,500,000) were used for the acquisition
of SCT and Gibbs and have been allocated to preferred stock and warrants based
upon their relative market values after considering issuance costs.
On May 30, 1997, the Company also entered into another securities purchase
agreement with existing common and preferred stockholders to raise funds for
additional acquisitions. The securities purchase agreement gives them the
right to purchase up to an additional 15,000 shares of Series D preferred
stock for $1,000 per share and receive warrants, currently exercisable, for
the purchase of 36,186 shares of Class E common stock at an exercise price of
$.01 per share.
Under the May 30, 1997, securities purchase agreement, the Company issued
15,000 shares of Series D preferred stock and warrants to purchase 36,186
shares of Class E common stock to existing stockholders in connection with the
acquisitions of Gibbs, IAMD-U.S. and IAMD-Canada. The proceeds, totaling
$15,000,000, have been allocated to preferred stock and warrants based upon
their relative market values after considering issuance costs.
7. REDEEMABLE WARRANTS
In connection with the issuance of Series C preferred stock during 1995, the
Company issued warrants exercisable into 25,285 shares of Class D common
stock. These warrants, which are exercisable at any time, have an exercise
price of $.01 per share and expire in July 2005. The number of warrants is
subject to adjustment upon the occurrence of certain events. In any event, the
total number of shares the warrant may be exercised into may not be reduced by
more than 9,894 shares. Based upon the results of operations through June 30,
1997, the total number of shares of Class D common stock into which these
warrants are exercisable was adjusted to be 23,636. The Company is required to
redeem these warrants upon the occurrence of certain events and in any event
no later than March 31, 2001, at a price based upon specified formulas and a
valuation of the Company. The holder of the warrants is required to exercise
them upon a qualified public offering, as defined. The Company is accreting
the difference between the value of the warrants at the date of issuance and
their expected redemption value over the period to the earliest date
redemption can occur using the effective interest method.
In connection with the Company's previous credit agreement entered into
during 1995 (Note 4), the Company issued warrants exercisable into 2,199
shares of Class D common stock. The warrants, which are exercisable at any
time, have an exercise price of $.01 per share and expire in July 2005. The
number of warrants is subject to adjustment under certain circumstances. The
warrants may be called by the Company at any time after one year and can be
put to the Company after July 31, 2001, or upon occurrence of certain other
events. Based upon the terms and provisions of the credit and warrant
agreements, the Company assigned a value of $79,997 to these warrants. In
connection with the sales of Series D preferred stock through the various
securities
F-24
<PAGE>
CAREER EDUCATION CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION FOR THE SIX MONTHS ENDED JUNE 30, 1996 IS UNAUDITED)
purchase agreements, the outstanding warrants to purchase 2,199 shares of
Class D common stock were exchanged for warrants (with similar put and call
features) to purchase 2,199 shares of Class E common stock and also increased
to include additional warrants to purchase 1,315 shares of Class E common
stock. The value of these additional warrants, totaling approximately $180,000
was recorded as interest expense in 1997.
8. STOCK OPTIONS AND WARRANTS
STOCK OPTIONS
During 1994, certain stockholders were granted options to purchase shares of
common stock of the Company up to a total of approximately 13.5% of the
outstanding shares of common stock. These options, which have an exercise
price of $.01 per share, are earned and become exercisable based upon certain
financial returns earned by certain stockholders and are subject to other
conditions. As of June 30, 1997, options exercisable into 3,114 shares of
common stock had been earned and issued. They vest over a five-year period. At
December 31, 1995, December 31, 1996, and June 30, 1997, 440, 880, and 1,868
options, respectively, had vested.
During 1995, the Company adopted the 1995 Stock Option Plan. The plan
provides for the Company to grant up to 17,135 options exercisable into shares
of Class E common stock to certain members of management. The options vest and
become exercisable in five equal annual installments commencing with the first
anniversary of the grant, and expire 10 years from the date of grant, or
earlier under certain circumstances. All granted options become fully vested
upon a qualified public offering, as defined.
Stock option activity for the Company's 1995 Stock Option Plan for the years
ended December 31, 1995 and 1996, and for the six months ended June 30, 1997,
was as follows:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
EXERCISE
SHARES PRICE RANGE PRICE
------ ------------- --------
<S> <C> <C> <C>
Outstanding as of January 1, 1995........... -- $ -- $ --
Granted................................... 6,791 36.38 36.38
Cancelled................................. (996) 36.38 36.38
------
Outstanding as of December 31, 1995......... 5,795 36.38 36.38
Granted................................... 3,298 36.38 36.38
------
Outstanding as of December 31, 1996......... 9,093 36.38 36.38
Granted................................... 7,074 129.85-137.95 136.79
Cancelled................................. (285) 36.38 36.38
------
Outstanding as of June 30, 1997............. 15,882 $36.38-137.95 $81.10
====== ============= ======
Stock options exercisable at 1,102 $36.38 $36.38
December 31, 1996.......................... ====== ====== ======
June 30, 1997.............................. 1,558 $36.38 $36.38
====== ====== ======
</TABLE>
F-25
<PAGE>
CAREER EDUCATION CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION FOR THE SIX MONTHS ENDED JUNE 30, 1996 IS UNAUDITED)
The following table summarizes information about all stock options
outstanding as of June 30, 1997:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------------------- ----------------------------
NUMBER NUMBER
OUTSTANDING WEIGHTED WEIGHTED AVERAGE EXERCISABLE WEIGHTED
AS OF AVERAGE REMAINING AT AVERAGE
EXERCISE PRICE RANGES JUNE 30, 1997 EXERCISE PRICE CONTRACTUAL LIFE JUNE 30, 1997 EXERCISE PRICE
- --------------------- ------------- -------------- ---------------- ------------- --------------
<S> <C> <C> <C> <C> <C>
$0.01-$0.01............. 3,114 $ 0.01 6.6 1,868 0.01
$36.38-$36.38........... 8,808 36.38 8.6 1,558 36.38
$129.85-$137.95......... 7,074 136.79 10.0 -- --
------ ------- ---- ----- -----
$0.01-$137.95........... 18,996 67.81 8.8 3,426 16.54
====== ======= ==== ===== =====
</TABLE>
For purposes of determining the pro forma effect of these options, the fair
value of each option is estimated on the date of grant based on the Black-
Scholes option pricing model assuming, among other things, no dividend yield,
a range of risk-free interest rates of 5.7% to 6.8%, no volatility and an
expected life of 10 years. The weighted average fair value of the options
granted during the years ended December 31, 1995, December 31, 1996, and for
the six months ended June 30, 1997, was approximately $16.58, $16.87 and
$24.06, respectively. As of June 30, 1997, the remaining actual life of all
options was approximately 9.2 years.
WARRANTS
In connection with the issuance of Class D preferred stock through the
various securities purchase agreements, the Company issued warrants
exercisable into a total of 45,110 shares of Class E common stock during 1997.
These warrants, which are exercisable at any time, have an exercise price of
$.01 per share and expire in July 2005. The number of warrants is subject to
adjustment under certain circumstances. The Company may call the warrants,
which were valued at approximately $6,204,000 on the date of their issuance,
at any time after one year. The holders of these warrants are required to
exercise them upon a qualified public offering, as defined.
F-26
<PAGE>
CAREER EDUCATION CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION FOR THE SIX MONTHS ENDED JUNE 30, 1996 IS UNAUDITED)
A summary of warrant activity, including redeemable warrants, for the years
ended December 31, 1995, December 31, 1996, and for the six months ended June
30, 1997, is as follows:
<TABLE>
<CAPTION>
SHARES UNDER WARRANT
--------------------------
CLASS D CLASS E
COMMON STOCK COMMON STOCK
------------- ------------
SHARES PRICE SHARES PRICE
------ ----- ------ -----
<S> <C> <C> <C> <C>
Outstanding as of January 1, 1995................ -- $ -- -- $ --
Issued......................................... 27,484 0.01 -- --
------ ------
Outstanding as of December 31, 1995.............. 27,484 0.01 -- --
Issued......................................... -- -- -- --
------ ------
Outstanding as of December 31, 1996.............. 27,484 0.01 -- --
Issued......................................... -- -- 46,425 0.01
Cancelled...................................... (1,649) 0.01 -- --
Exchanged...................................... (2,199) 0.01 2,199 0.01
------ ------
Outstanding as of June 30, 1997.................. 23,636 0.01 48,624 0.01
====== ===== ====== =====
Warrants exercisable at December 31, 1996........ 27,484 $0.01 -- $ --
====== ===== ====== =====
Warrants exercisable at June 30, 1997............ 23,636 $0.01 48,624 $0.01
====== ===== ====== =====
</TABLE>
The fair value of each warrant is estimated on the date of grant based on
the Black-Scholes option pricing model assuming among other things, no
dividend yield, a risk-free interest rate of 6.59%, an expected volatility of
0.70 and expected life of 8-10 years.
The weighted average fair value of warrants to purchase Class D common stock
issued during the year ended December 31, 1995, was approximately $36.38. As
of June 30, 1997, the remaining contractual life of these warrants was
approximately 8.1 years. The weighted average fair value of warrants to
purchase Class E common stock issued for the six months ended June 30, 1997
was approximately $132.93. As of June 30, 1997, the remaining contractual life
of these warrants was approximately 8.1 years.
PRO FORMA RESULTS
Had the Company accounted for its stock options in accordance with FASB No.
123, pro forma income (loss) before extraordinary item attributable to common
stockholders and pro forma income (loss) before extraordinary item per share
attributable to common stockholders would have been as follows:
<TABLE>
<CAPTION>
DECEMBER 31 JUNE 30
------------------ --------------------
1995 1996 1996 1997
------- ---------- ----------- --------
(UNAUDITED)
<S> <C> <C> <C> <C>
Pro forma income (loss) before
extraordinary item attributable
to common stockholders.......... $64,441 $1,475,004 $(142,657) $302,341
Pro forma income (loss) before
extraordinary item per share at-
tributable to common stockhold-
ers............................. $ $ $ $
</TABLE>
F-27
<PAGE>
CAREER EDUCATION CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION FOR THE SIX MONTHS ENDED JUNE 30, 1996 IS UNAUDITED)
The pro forma disclosure is not likely to be indicative of pro forma results
which may be expected in future years because of the fact that options vest
over several years, pro forma compensation expense is recognized as the options
vest and additional awards may also be granted.
OTHER
The Company has the right to purchase the shares of certain common and
preferred stock upon the termination, disability or death of certain
stockholders.
9. INCOME TAXES
The provision for income taxes for the years ended December 31, 1994,
December 31, 1995, December 31, 1996, and for the six months ended June 30,
1996 and 1997 consists of the following (in thousands):
<TABLE>
<CAPTION>
FOR THE YEAR FOR THE SIX
ENDED MONTHS ENDED
DECEMBER 31 JUNE 30
-------------- -------------
1994 1995 1996 1996 1997
---- ---- ---- ------ ------
<S> <C> <C> <C> <C> <C>
Current--
Federal........................................ $-- $-- $150 $ -- $ --
State and local................................ -- 24 260 -- 225
---- ---- ---- ------ ------
Total current................................ -- 24 410 -- 225
---- ---- ---- ------ ------
Deferred--
Federal........................................ -- -- (172) -- --
State and local................................ -- -- (30) -- (15)
---- ---- ---- ------ ------
Total deferred............................... -- -- (202) -- (15)
---- ---- ---- ------ ------
Total provision for income taxes................. $-- $ 24 $208 $ -- $ 210
==== ==== ==== ====== ======
</TABLE>
A reconciliation of the statutory U.S. federal income tax rate to the
effective income tax rate for the years ended December 31, 1994, December 31,
1995, December 31, 1996, and for the six months ended June 30, 1996 and 1997,
is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER SIX MONTHS
31 ENDED JUNE 30
---------------------- -----------------
1994 1995 1996 1996 1997
------ ------ ------ ----------- -----
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Statutory U.S. Federal income tax
rate............................... 34.0% 34.0% 34.0% 34.0% 34.0%
State income taxes, net of Federal
benefit............................ 4.6% 17.0% 10.0% 8.8% 8.8%
Permanent differences and other..... 1.4% (11.2%) 4.8% (2.8%) (2.8%)
Valuation allowance................. (40.0%) (14.0%) (36.6%) (40%) -- %
------ ------ ------ ----- -----
Effective income tax rate........... -- % 25.8% 12.2% -- % 40.0%
====== ====== ====== ===== =====
</TABLE>
F-28
<PAGE>
CAREER EDUCATION CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION FOR THE SIX MONTHS ENDED JUNE 30, 1996 IS UNAUDITED)
Components of deferred income tax assets and liabilities consist of the
following at December 31, 1995, December 31, 1996, and June 30, 1997 (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31 JUNE 30
------------- -------
1995 1996 1997
------- ---- -------
<S> <C> <C> <C>
Deferred tax assets:
Tax net operating loss carryforwards............... $ 967 $281 $ 796
Allowance for doubtful accounts.................... 103 182 410
Other.............................................. 114 49 322
------- ---- ------
Total deferred tax assets........................ 1,184 512 1,528
------- ---- ------
Deferred tax liabilities:
Depreciation and amortization...................... 137 86 4,431
Other.............................................. 2 37 89
------- ---- ------
Total deferred tax liabilities................... 139 123 4,520
Valuation allowance................................ (1,045) -- --
------- ---- ------
Net deferred income tax.......................... $ -- $389 $2,992
======= ==== ======
</TABLE>
The Company has generated a tax net operating loss carryforward and has also
purchased certain tax net operating loss carryforwards in connection with its
business acquisitions. At June 30, 1997, such tax net operating loss
carryforwards totalled $1,990,000 and begin to expire in 2010.
10. COMMITMENTS AND CONTINGENCIES
CONSULTING AGREEMENT
In conjunction with the acquisition of Collins, the Company entered into a
three-year consulting agreement with one of the former stockholders. Under the
terms of this agreement, which expired in January, 1997, the Company was
obligated to compensate the former stockholder $135,000 per annum in exchange
for consulting services. Total expenses under this agreement for the years
ended December 31, 1994, December 31, 1995, December 31, 1996, and the six
months ended June 30, 1996 and 1997 was $124,000, $135,000, $135,000, $68,000
and $11,000, respectively.
LITIGATION
The Company is subject to occasional lawsuits, investigations and claims
arising out of the normal conduct of its business. In certain cases, claims
against acquired businesses relating to events which occurred during the
periods the Company did not own the acquired businesses are indemnified by the
former owners. Management does not believe the outcome of any pending claims
will have a material adverse impact on the Company's financial position or
results of operations.
LEASES
The Company rents its school facilities and certain equipment under non-
cancelable operating leases expiring at various dates through July, 2006. The
facility leases require the Company to make monthly payments covering rent,
taxes, insurance and maintenance costs. Rent expense, exclusive of taxes,
insurance and maintenance of the facilities and equipment for the years ended
December 31, 1994, December 31, 1995, and December 31, 1996, and for the six
months ended June 30, 1996 and 1997, was approximately $595,000, $1,589,000,
$2,649,000, $1,406,000, and $1,570,000, respectively.
F-29
<PAGE>
CAREER EDUCATION CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION FOR THE SIX MONTHS ENDED JUNE 30, 1996 IS UNAUDITED)
Future minimum lease payments under these leases as of June 30, 1997, are as
follows (in thousands):
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES TOTAL
------- --------- -------
<S> <C> <C> <C>
Remainder of--
1997.......................................... $ 826 $ 5,550 $ 6,376
1998.......................................... 1,096 9,593 10,689
1999.......................................... 347 8,602 8,949
2000.......................................... 74 7,554 7,628
2001.......................................... 13 6,780 6,793
2002 and thereafter........................... 2 13,185 13,187
------ ------- -------
2,358 $51,264 $53,622
======= =======
Less--Portion representing interest at a 602
weighted average rate of 21.9%................. ------
Principal payments.............................. 1,756
Less--Current portion........................... 977
------
$ 779
======
</TABLE>
11. REGULATORY
The Company and its U.S. schools are subject to extensive regulation by
federal and state governmental agencies and accrediting bodies. In particular,
the Higher Education Act of 1965, as amended (the "HEA"), and the regulations
promulgated thereunder by the DOE subject the Company's U.S. schools to
significant regulatory scrutiny on the basis of numerous standards that
schools must satisfy in order to participate in the various federal student
financial assistance programs under Title IV of the HEA (the "Title IV
Programs"). Under the HEA and its implementing regulations, certain financial
responsibility and other regulatory standards must be complied with on an
institutional basis in order to qualify to participate in the Title IV
Programs. Under such standards, each institution must, among other things: (i)
have an acid test ratio (defined as the ratio of cash, cash equivalents, and
current accounts receivable to current liabilities) of at least 1:1 at the end
of each fiscal year, (ii) have a positive tangible net worth at the end of
each fiscal year, (iii) not have a cumulative net operating loss during its
two most recent fiscal years that results in a decline of more than 10% of the
institution's tangible net worth at the beginning of that two-year period,
(iv) collect 85% or less of its revenues from Title IV Program funds in any
fiscal year, and (v) not have cohort default rates on federally funded or
federally guaranteed student loans of 25% or greater for three consecutive
federal fiscal years. Any regulatory violation could be the basis for the
initiation of a suspension, limitation or termination proceeding against the
Company or any of its U.S. institutions. To minimize risks associated with
noncompliance with DOE requirements, the Company conducts periodic financial
reviews of its subsidiaries.
In 1996, the DOE issued proposed regulations that, if promulgated, would
significantly revise the present financial responsibility requirements,
primarily by replacing the three separate numeric ratios described above with
a composite score based on the three new ratio calculations. The DOE has not
yet issued new regulations in final form, but has stated its intent to do so
by December 1, 1997 and to make the new regulations effective July 1, 1998.
The process of reauthorizing the HEA by the U.S. Congress, which takes place
every five years, has begun and is expected to be completed by 1998. It is not
possible to predict the outcome of the reauthorization process. Although there
is no present indication that the Congress will decline to reauthorize the
Title IV Programs, there can be no assurance that government funding for the
Title IV Programs will continue to be available or maintained at current
levels, nor can there be assurance that current requirements for student and
institutional participation in the Title IV Programs will be unchanged. Thus,
the reauthorization process could result in revisions to the HEA that increase
the compliance burden on the Company's institutions. A reduction in funding
levels for federal student financial assistance programs could impact the
Company's ability to attract students.
F-30
<PAGE>
CAREER EDUCATION CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION FOR THE SIX MONTHS ENDED JUNE 30, 1996 IS UNAUDITED)
In order to operate and award degrees, diplomas and certificates and to
participate in the Title IV Programs, a campus must be licensed or authorized
to offer its programs of instruction by the relevant agency of the state in
which such campus is located. Each of the Company's U.S. campuses is licensed
or authorized by the relevant agency of the state in which such campus is
located. In addition, in order to participate in the Title IV Programs, an
institution must be accredited by an accrediting agency recognized by the DOE.
Each of the Company's campuses is accredited by an accrediting agency
recognized by the DOE.
With each acquisition of an institution that is eligible to participate in
the Title IV Programs, that institution undergoes a change of ownership that
results in a change of control, as defined in the HEA and applicable
regulations. In such event, that institution becomes ineligible to participate
in the Title IV Programs and may receive and disburse only previously
committed Title IV Program funds to its students until it has applied for and
received from the DOE recertification under the Company's ownership. The
Company is waiting to receive such recertification for IAMD-U.S.
In its review of the Company's annual financial statements and interim
balance sheets, as filed with the DOE in connection with the Company's
applications for DOE certification of institutions acquired subsequent to
September 1996, to allow such institutions to participate in the Title IV
Programs, the DOE has questioned whether the Company's financial statements
are acceptable and therefore an authoritative basis upon which to determine
the Company's financial responsibility under the applicable DOE regulations.
Specifically, the DOE has questioned the Company's accounting for certain
direct marketing costs and courseware and other instructional materials.
Further, the DOE has asserted that the Company did not satisfy the 1:1 acid
test ratio based on its fiscal 1996 financial statements. The financial
statements included herein have been restated to expense as incurred all
direct marketing and advertising costs which had previously been deferred.
This change in accounting method is permitted in accordance with Accounting
Principles Board Opinion No. 20. (Note 14)
In lieu of accepting the Company's previously filed 1996 audited financial
statements, the DOE has offered the Company the alternative of posting an
irrevocable letter of credit in favor of the Secretary of Education with
respect to each institution the Company has acquired since September 1996 in a
sum sufficient to secure the DOE's interest in the Title IV Program funds
administered by the applicable institution. While the Company continues to
disagree with the position taken by the DOE, in order to obtain certification
of the institutions to resume participation in the Title IV Programs in a
timely fashion, and thus to avoid any material interruption in Title IV
Program funding for the acquired institutions, the Company has posted and
currently has outstanding a letter of credit in the amount of $1.9 million,
which expires on September 30, 1998, with respect to Western Culinary, and a
letter of credit in the amount of $800,000, with an expiration date of July
31, 1998, with respect to SCT.
The Company has agreed to the DOE's directive, dated September 9, 1997, to
submit a letter of credit in the amount of $15.2 million, to expire on October
31, 1998, with respect to the six Gibbs institutions. Consequently, the six
Gibbs institutions were certified to resume participation in the Title IV
Programs as of October 1, 1997 and the Company must post the letter of credit
with the DOE no later than November 9, 1997. In addition, the Company is
considering the DOE's request to increase, no later than November 15, 1997,
the letter of credit with respect to SCT by $721,000 in order to maintain
SCT's eligibility to participate in the Title IV Programs. Further, upon the
DOE's request, the Company is prepared to post an additional letter of credit
with respect to IAMD-U.S., which the Company estimates will be in the range of
$3.0 million to $5.0 million, in order to reestablish the eligibility of the
two IAMD-U.S. institutions to participate in the Title IV Programs in the near
future.
The original letters of credit for Western Culinary and SCT represented 50%
of each institution's Title IV Program funding in the prior award year. In
September 1997, the DOE increased the level of surety for SCT to,
F-31
<PAGE>
CAREER EDUCATION CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION FOR THE SIX MONTHS ENDED JUNE 30, 1996 IS UNAUDITED)
and established the level of surety of Gibbs at, 100% of the Title IV Program
funds that students enrolled at each such institution received in the previous
award year. Beginning in September 1997, the DOE has imposed a condition that,
for up to the next 12 months, SCT and Gibbs may not disburse Title IV Program
funds in excess of the sum secured by the applicable letter of credit for each
institution. The DOE has advised the Company that the same conditions will
apply to the IAMD-U.S. institutions, and any other institutions that the
Company may acquire prior to a determination by the DOE that the Company
satisfies the standards of financial responsibility when such institutions
apply for recertification to participate in the Title IV Programs.
The Company expects that the consummation of the offering described in Note
15 will significantly enhance its financial position. The Company believes
that such proceeds and the cash expected to be generated from operations
during the remainder of 1997 will enable the Company and each of its U.S.
subsidiaries to present audited 1997 financial statements which will satisfy
each of the DOE's standards of financial responsibility, including the acid
test ratio and tangible net worth test. Applicable law and regulations require
the DOE to consider only an institution's most recent audited annual financial
statements in making a determination of the institution's financial
responsibility. Accordingly, the Company intends to seek the DOE's review of
its audited 1997 financial statements on an expedited basis in the spring of
1998. Once the DOE has determined that the Company and its U.S. subsidiaries
satisfy each of the DOE's standards of financial responsibility, applicable
law and regulations require the DOE to release the Company from the
requirement that it post the sureties described above and from the limitations
on Title IV Program funding in excess of the surety amounts. However, there
can be no assurance that the DOE will expedite its review of the Company's
1997 financial statements, or of the outcome of such review.
12. RELATED-PARTY TRANSACTIONS
The Company maintains short-term employment and consulting agreements with
certain stockholders. Total expenses under these agreements were approximately
$200,000, $292,000, $298,000, $113,000, and $200,000 for the years ended
December 31, 1994, 1995, 1996 and the six months ended June 30, 1996 and 1997,
respectively.
In July 1995, the Company entered into an agreement with a stockholder
whereby the stockholder provides certain consulting services to the Company.
Total expenses under this agreement were $31,000, $75,000, $37,500 and $37,500
for the years ended December 31, 1995, 1996 and the six months ended June 30,
1996 and 1997, respectively.
The Company has also entered into a stock subscription agreement with an
employee, as discussed in Note 5.
13. EMPLOYEE BENEFIT PLAN
The Company maintains a CEC contributory profit sharing plan established
pursuant to the provisions of Section 401(k) of the Internal Revenue Code
which provides retirement benefits for eligible employees of the Company. This
plan requires matching contributions to eligible employees. The Company's
matching contributions were $6,000, $89,000, $279,000, $130,000 and $183,000,
for the years ended December 31, 1994, 1995, 1996 and the six months ended
June 30, 1996 and 1997, respectively.
F-32
<PAGE>
CAREER EDUCATION CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION FOR THE SIX MONTHS ENDED JUNE 30, 1996 IS UNAUDITED)
14. CHANGE IN ACCOUNTING METHOD
The Company had previously deferred certain marketing and advertising costs.
In connection with the initial public offering, the Company changed its
accounting for such costs to a more preferable method of expensing marketing
and advertising costs as incurred. The Company has restated the accompanying
financial statements for all periods presented.
15. SUBSEQUENT EVENTS AND PRO FORMA DATA (UNAUDITED)
On October 10, 1997, the Company filed a registration statement on Form S-1
under the Securities and Exchange Act of 1933 to sell shares of its
Class common stock in an initial public stock offering. The Company intends
to pay a dividend of $ to holders of all series of preferred stock, repay
outstanding revolving credit loans under its amended Credit Agreement totaling
$ , and repay approximately $ of amounts owed to former owners of
acquired businesses. The unaudited pro forma balance sheet and statement of
operations information gives effect to (i) the conversion of all outstanding
shares of all series of preferred stock into Class A common stock (ii) the
conversion of all shares of common stock into Class A common stock and (iii)
exercise of all warrants. No other contemplated transactions in connection
with the proposed offering are included in the unaudited pro forma balance
sheet.
On , 1997, the Company adopted the Non-Employee Directors' Stock
Option Plan. The plan provides for the Company to grant up to options
exercisable into shares of common stock to certain nonemployee
directors. Each person who is a director on the effective date shall become a
participant and shall be granted an option to purchase shares of common
stock. Each person who is subsequently elected as a director shall become a
participant and shall, on his date of election, be granted an option to
purchase shares of common stock. Each participant shall receive
additional grants in subsequent years.
On , 1997, the Company adopted the Stock Incentive Compensation Plan.
The plan provides for the Company to grant stock options, stock appreciation
rights, deferred stock and other awards (stock bonus and awards in lieu of
obligations) which are exercisable into shares of common stock to certain
directors, officers and employees of the Company. The option period of each
stock option and the term of the stock appreciation right shall be fixed by
the Company; provided that no stock option or appreciation right shall be
exercisable more than ten years after the date of grant. Stock options may be
either incentive stock options or nonqualified stock options. During any
calendar year, stock options and stock appreciation rights to purchase no more
than and , respectively, shares of common stock shall be granted to
any participant.
On 1997, the Company adopted the Employee Stock Purchase Plan.
The plan provides for employees of the Company to purchase shares of common
stock through payroll deductions (not to exceed $25,000 per person within any
calendar year).
In , 1997, the Company increased the number of authorized shares
of common stock to and completed a -for-1 stock split.
F-33
<PAGE>
IAMD, LIMITED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 30, 1996 AND 1997
<TABLE>
<CAPTION>
1996 1997
---------- ----------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash................................................. $ 407,433 $ 25,869
Receivables--
Students, less allowance for doubtful accounts of
approximately $83,500 and $56,000 in 1996 and
1997, respectively................................ 203,274 195,384
Other.............................................. 61,136 4,625
Refundable income taxes.............................. -- 180,749
Inventories.......................................... 43,751 59,765
Prepaid expenses and other current assets............ 69,277 30,445
Deferred income taxes................................ 183,800 215,927
---------- ----------
Total current assets............................. 968,671 712,764
---------- ----------
PROPERTY AND EQUIPMENT, net............................ 658,388 1,407,511
---------- ----------
OTHER ASSETS:
Deposits and other assets............................ 45,889 28,450
Cash surrender value of life insurance policy........ -- 35,869
Deferred income tax assets........................... 48,600 297,549
---------- ----------
Total other assets............................... 94,489 361,868
---------- ----------
TOTAL ASSETS........................................... $1,721,548 $2,482,143
========== ==========
LIABILITIES AND STOCKHOLDERS' INVESTMENT
CURRENT LIABILITIES:
Current maturities of long-term debt................. $ 227,811 $1,091,086
Accounts payable..................................... 145,549 125,439
Accrued expenses..................................... 120,692 181,712
Student deposits..................................... 592,252 934,135
---------- ----------
Total current liabilities........................ 1,086,304 2,332,372
---------- ----------
LONG-TERM LIABILITIES:
Long-term debt, net of current maturities shown
above............................................... 718,360 769,367
Deferred rent........................................ 174,980 258,331
---------- ----------
Total long-term liabilities...................... 893,340 1,027,698
---------- ----------
STOCKHOLDERS' INVESTMENT:
Preferred stock, $100 par value; 1,450 shares
authorized; 1,268 shares issued and outstanding..... 126,885 126,885
Common stock, no par value; 27,300 shares authorized;
20,360 shares issued and outstanding................ 848,220 848,220
Stockholder notes receivable......................... (143,850) --
Accumulated deficit.................................. (1,089,351) (1,853,032)
---------- ----------
Total stockholders' investment................... (258,096) (877,927)
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' INVESTMENT......... $1,721,548 $2,482,143
========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
F-34
<PAGE>
IAMD, LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED JUNE 30, 1996 AND 1997
<TABLE>
<CAPTION>
1996 1997
---------- -----------
<S> <C> <C>
REVENUE:
Tuition and registration fees, net.................. $6,192,335 $ 6,849,785
Other, net.......................................... 152,891 642,900
---------- -----------
Total net revenue................................. 6,345,226 7,492,685
---------- -----------
OPERATING EXPENSES:
Educational services and facilities................. 4,137,733 4,508,604
General and administrative.......................... 1,954,283 2,994,915
Depreciation and amortization....................... 304,339 679,318
---------- -----------
Total operating expenses.......................... 6,396,355 8,182,837
---------- -----------
Loss from operations.............................. (51,129) (690,152)
OTHER EXPENSES:
Interest expense.................................... 95,072 288,301
Loss on sale of property............................ -- 30,978
---------- -----------
Total other expenses.............................. 95,072 319,279
---------- -----------
Loss before benefit for income taxes.............. (146,201) (1,009,431)
BENEFIT FOR INCOME TAXES.............................. (53,735) (389,600)
---------- -----------
NET LOSS.............................................. $ (92,466) $ (619,831)
========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-35
<PAGE>
IAMD, LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JUNE 30, 1996 AND 1997
<TABLE>
<CAPTION>
1996 1997
-------- ----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss............................................... $(92,466) $ (619,831)
Adjustments to reconcile net loss to net cash provided
by operating activities--
Depreciation and amortization........................ 312,545 679,318
Deferred income taxes................................ 78,798 (281,076)
Loss on sale of property............................. -- 30,978
Changes in operating assets and liabilities--
Receivables, net................................... (16,966) 64,401
Refundable income taxes............................ -- (180,749)
Inventories........................................ 12,841 (16,014)
Prepaid expenses and other current assets.......... (198,316) 38,832
Deposits and other assets.......................... (17,439) 17,439
Cash surrender value of life insurance policy...... -- (35,869)
Accounts payable................................... 46,030 (20,110)
Income taxes payable............................... (19,730) --
Accrued expenses................................... 54,272 61,020
Student deposits................................... 177,840 341,883
Deferred rent...................................... -- 83,351
-------- ----------
Net cash provided by operating activities........ 337,409 163,573
-------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment, net............... (85,642) (1,459,419)
-------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under long-term debt........................ 25,000 1,450,236
Payments on long-term debt............................. (142,582) (535,954)
Proceeds form issuance of capital lease................ 5,000 --
Obligations under capital leases....................... (108,446) --
-------- ----------
Net cash (used in) provided by financing
activities...................................... (221,028) 914,282
-------- ----------
NET INCREASE (DECREASE) IN CASH.......................... 30,739 (381,564)
CASH, BEGINNING OF YEAR.................................. 376,694 407,433
-------- ----------
CASH, END OF YEAR........................................ $407,433 $ 25,869
======== ==========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for--
Interest............................................. $ 85,428 $ 714,185
Taxes................................................ 85,218 318,393
======== ==========
Noncash financing activities--
Acquisition of machinery and equipment under capital
leases.............................................. $101,164 $ --
Distribution of stockholders' notes receivable....... -- 143,850
======== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
F-36
<PAGE>
IAMD, LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' INVESTMENT
FOR THE YEARS ENDED JUNE 30, 1996 AND 1997
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK
---------------------- ----------------------- STOCKHOLDERS'
1,450 SHARES $100 27,300 SHARES NO NOTES ACCUMULATED
AUTHORIZED PAR VALUE AUTHORIZED PAR VALUE RECEIVABLE DEFICIT TOTAL
------------ --------- ------------- --------- ------------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
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)
===== ======== ====== ======== ========= =========== =========
</TABLE>
The accompanying notes are an integral part of these statements.
F-37
<PAGE>
IAMD, LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1996 AND 1997
1. DESCRIPTION OF THE BUSINESS
IAMD, Limited and Subsidiaries ("International Academy of Merchandising and
Design" or the "Company") is headquartered in Chicago, Illinois, and has
wholly owned subsidiaries which own and operate campuses in Chicago, Illinois,
and Tampa, Florida, and bookstores at each campus. These private,
postsecondary vocational schools are engaged in the instruction of
merchandising and design programs leading toward associate and baccalaureate
degrees in the fields of merchandising management, fashion design, interior
design, advertising design, interactive media and computer graphics.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries. All significant intercompany transactions
and balances have been eliminated.
CONCENTRATION OF CREDIT RISK
The Company extends unsecured credit for tuition to a significant number of
students who are in attendance at the schools. A substantial portion of credit
extended to students is repaid through the students' participation in
federally funded financial aid programs. The Company generally completes and
has approved the financial aid packet of each student who qualifies for
financial aid prior to the student beginning class in an effort to enhance the
collectibility of its unsecured credit. Transfers of funds from the financial
aid programs to the Company are made in accordance with the United States
Department of Education (the "DOE") requirements.
The Company participates in various federal student financial aid programs
under Title IV of the Higher Education Act of 1965 ("Title IV Programs"), as
amended. Approximately 68% and 75% of the Company's revenue for the years
ended June 30, 1996 and 1997 was collected from funds distributed under these
programs.
RESTRICTED CASH
Cash received from the U.S. Government under various student aid grant and
loan programs is considered to be restricted. Restricted cash is held in
separate bank accounts and does not become available for general use by the
Company until the financial aid is credited to the accounts of students and
the cash is transferred to an operating account. As of June 30, 1997, there
was no restricted cash.
INVENTORIES
Inventories consisting principally of program materials, books and supplies
are stated at the lower of cost, determined on a first-in, first-out basis, or
market.
F-38
<PAGE>
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:
<TABLE>
<CAPTION>
ASSET DESCRIPTION 1996 1997 LIFE
----------------- ---------- ---------- ----------
<S> <C> <C> <C>
Classroom equipment, courseware and other
instructional materials................. $2,037,766 $3,132,730 3-13 years
Equipment and leasehold improvements..... 83,492 436,313 5 years
---------- ----------
2,121,258 3,569,043
Less--accumulated depreciation........... 1,462,870 2,161,532
---------- ----------
Property and equipment, net.............. $ 658,388 $1,407,511
========== ==========
</TABLE>
DEFERRED RENT OBLIGATIONS
Certain of the Company's schools' facility leases included rental
concessions, as defined in the various lease agreements. The Company
recognizes rent expense on a straight-line basis over the terms of the various
leases, ranging from 7 to 10 years. Rent expense recognized differs from the
actual cash payments required to be made under these lease agreements.
REVENUE RECOGNITION
Revenue is derived primarily from courses taught at the schools. Tuition
revenue is recognized on a straight-line basis over the length of the
applicable course. Textbook sales and other revenues are recognized as
services are performed. If a student withdraws, future revenue is reduced by
the amount of the refund due to the student. Refunds are calculated in
accordance with federal, state and accrediting agency standards. Student
deposits represent payments received in excess of amounts billed and is
reflected as a current liability on the balance sheet.
USE OF ESTIMATES
The preparation of financial statements, in conformity with Generally
Accepted Accounting Principles, requires management to make certain estimates
and assumptions that affect the reported amounts of assets and liabilities and
the disclosure of contingent liabilities at the date of the financial
statements and reported amounts of revenues and expenses during the reported
period. Actual results could differ from those estimates.
F-39
<PAGE>
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:
<TABLE>
<CAPTION>
1996 1997
-------- ----------
<S> <C> <C>
Notes payable to a bank, interest at 1% above the prime
rate due August 1997
(8.5% at June 30, 1997)................................... $400,000 $ 700,000
Bank note payable, repaid in 1997.......................... 256,128 --
Bank note payable in monthly principal and interest in-
stallments of $2,104,
through December 1998, bearing interest at 9.25%.......... -- 36,919
Bank note payable in monthly principal and interest in-
stallments of $12,213,
through April 1998, bearing interest at 9.25%............. -- 137,890
Bank note payable in monthly principal and interest in-
stallments of $32,984,
through September 1999, bearing interest at 9.25%......... -- 823,638
Bank note payable in monthly principal and interest in-
stallments of $4,873,
through March 1999, bearing interest at 16.21%............ -- 95,807
Bank note payable in monthly principal and interest in-
stallments of $805,
through March 1999, bearing interest at 16.21%............ -- 15,838
Capital lease obligations-interest ranging from 9.25% to
18.9%, expiring
through 1999.............................................. 290,043 50,361
-------- ----------
946,171 1,860,453
Less-Current portion....................................... 227,811 1,091,086
-------- ----------
$718,360 $ 769,367
======== ==========
</TABLE>
At June 30, 1997, future principal payments of long-term debt mature as
follows:
<TABLE>
<S> <C>
1998.............................. $1,091,086
1999.............................. 769,367
----------
$1,860,453
==========
</TABLE>
LINE OF CREDIT
The line of credit consists of a note payable to a bank collateralized by
substantially all the Company's assets, bearing interest at 1% above prime
rate (8.5% at June 30, 1997). Repayment of $400,000 of the line is due in
August 1997, and in the event of a sale the Company, $300,000 is payable
immediately upon the sale. All outstanding debt of the Company was repaid in
connection with the sale of the Company (Note 8).
4. STOCKHOLDERS' INVESTMENT
PREFERRED STOCK
Holders of preferred stock are entitled to cumulative dividends at a rate of
18%. The Company may call preferred stock at any time after October 1992, at
par plus accumulated dividends in arrears.
F-40
<PAGE>
IAMD, LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JUNE 30, 1996 AND 1997
STOCKHOLDERS' NOTES RECEIVABLE
In 1991, the Company issued notes receivable totaling $143,850 to certain
stockholders. The notes bear interest at 8.5% and were to be repaid upon
demand. These notes receivable were transferred into escrow during 1997 in
connection with the sale of the Company. This transaction was treated as a
dividend to the stockholders of the Company. The amount is reflected as a
reduction in accumulated deficit during 1997.
5. COMMITMENTS AND CONTINGENCIES
REGULATORY
The Company has federal financial assistance programs which are subject to
ongoing program reviews by the Department of Education (the "DOE") and Title
IV program audits by external auditors. Based upon the results of such audits
and reviews, the Company may have to repay funds previously granted to its
students through loans and grants, and pay interest, fines and/or penalties.
Management believes such amounts would be minimal and does not expect them to
have a material effect on the results of operations of the Company.
The Company is also required to meet certain financial and other standards
in order to qualify to participate in Title IV programs. These include
maintaining an acid test ratio (defined as cash, cash equivalents, and current
accounts receivable to current liabilities) of at least 1:1, having a positive
tangible net worth at the end of each fiscal year, collecting less than 85% of
its education revenues from Title IV funds on an annual basis, not having
cumulative net operating losses during the most recent fiscal years that
result in a decline of more than 10% of the Company's tangible net worth at
the beginning of that two-year period, and having a student default rate on
their federal student loans of not more than 25% for any three-year
consecutive period, amongst others. At June 30, 1997, the Company was not in
compliance with all of the regulatory requirements.
OPERATING LEASE COMMITMENTS
The Company leases its administrative and classroom facilities and certain
equipment under noncancellable operating leases which expire at various times
through 2006. The facility leases require the Company to make monthly payments
covering rent, taxes, insurance and maintenance costs. Rent expense, exclusive
of taxes, insurance, and maintenance of the facilities and equipment for the
years ended June 30, 1996 and 1997, was approximately $738,773 and $1,136,889,
respectively.
Future minimum lease payments under these operating leases as of June 30,
1997, are as follows:
<TABLE>
<S> <C>
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
==========
</TABLE>
F-41
<PAGE>
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:
<TABLE>
<CAPTION>
1996 1997
-------- ---------
<S> <C> <C>
Current--
Federal........................................... $ 10,256 $ (68,898)
State and local................................... 14,807 (39,626)
-------- ---------
Total current................................... 25,063 (108,524)
-------- ---------
Deferred--
Federal........................................... (66,978) (238,914)
State and local................................... (11,820) (42,162)
-------- ---------
Total deferred.................................. (78,798) (281,076)
-------- ---------
Total provision (benefit) for income taxes...... $(53,735) $(389,600)
======== =========
</TABLE>
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:
<TABLE>
<CAPTION>
1996 1997
---- ----
<S> <C> <C>
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%
==== ====
</TABLE>
F-42
<PAGE>
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:
<TABLE>
<CAPTION>
1996 1997
-------- --------
<S> <C> <C>
Deferred tax assets--
Net operating loss carryforward..................... $ -- $204,000
Recruiting and marketing costs...................... 154,000 225,000
Deferred rent....................................... 59,400 103,000
Bad debt allowance.................................. 33,400 23,000
Other............................................... 200 7,976
-------- --------
Total deferred tax assets......................... 247,000 562,976
Deferred tax liabilities--
Depreciation........................................ (10,800) (10,800)
Other............................................... (3,800) (38,700)
-------- --------
Total deferred tax liabilities.................... (14,600) (49,500)
-------- --------
Net deferred tax asset............................ $232,400 $513,476
======== ========
</TABLE>
Realization of deferred tax assets associated with the Company's future
deductible temporary differences and net operating loss carryforwards is
dependent upon generating sufficient taxable income prior to their expiration.
Although realization of the deferred tax assets is not assured, management
believes it is more likely than not that the deferred tax assets will be
realized through future taxable income. Management will assess whether it
remains more likely than not that the deferred tax assets will be realized. If
management determines that is no longer more likely than not that the deferred
tax assets will be realized, a valuation allowance will be required against
some or all of the deferred tax assets.
7. RELATED-PARTY TRANSACTIONS
A shareholder of the Company provides legal services for the Company. Total
expenses billed to the Company for such services were $35,000 in 1997.
8. SUBSEQUENT EVENTS
On June 30, 1997, the shareholders of IAMD, Limited sold 100% of the
outstanding shares of capital stock of the Company to Career Education
Corporation ("CEC") for $3,000,000. The purchase price may be increased by up
to $5,000,000 based upon the amount by which revenue of the Company for the
twelve-month period ended June 30, 1998, exceeds $8,000,000, as provided for
in an earn-out provision in the purchase agreement. The purchase price of the
acquisition is subject to certain modifications in addition to the earn-out
provision. Also, in connection with the purchase, the former owners of the
schools also entered into covenant not-to-compete agreements with CEC for
total proceeds of $2,000,000. The covenants not-to-compete restrict the former
owners' ability to own or operate certain types of postsecondary vocational
schools for four years. In connection with the sale, CEC repaid all
outstanding long-term debt of the Company.
9. RECLASSIFICATIONS
Certain reclassifications have been made to the June 30, 1996 financial
statements in order for them to be in conformity with the June 30, 1997
presentation.
F-43
<PAGE>
IAMD, LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JUNE 30, 1996 AND 1997
10. RESTATEMENT
The Company had historically deferred certain marketing costs. During 1997,
the Company changed its method of accounting for deferred marketing costs to
the preferred method of expensing marketing costs as incurred. The Company has
retroactively restated its statements of operations for the year ended June
30, 1996 and stockholders' investment as of June 30, 1996 to reflect the
change in this method. The effect of this change was to reduce retained
earnings by approximately $136,000, net of a deferred tax benefit of $91,000
as of June 30, 1995.
F-44
<PAGE>
INTERNATIONAL ACADEMY OF MERCHANDISING &
DESIGN (CANADA) LTD. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
AS OF AUGUST 31, 1996, AND JUNE 30, 1997
<TABLE>
<CAPTION>
AUGUST 31, JUNE 30,
1996 1997
---------- ----------
<S> <C> <C>
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
========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
F-45
<PAGE>
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
<TABLE>
<CAPTION>
AUGUST 31, JUNE 30,
1996 1997
---------- ----------
<S> <C> <C>
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)
========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
F-46
<PAGE>
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
<TABLE>
<CAPTION>
AUGUST JUNE 30,
31, 1996 1997
--------- ----------
<S> <C> <C>
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
========= ==========
</TABLE>
The accompanying notes are an integral part of these statements.
F-47
<PAGE>
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
<TABLE>
<CAPTION>
UNLIMITED ADDITIONAL CUMULATIVE
SHARES PAID-IN TRANSLATION RETAINED TOTAL
AUTHORIZED CAPITAL ADJUSTMENT EARNINGS AMOUNT
---------- ---------- ----------- --------- ---------
<S> <C> <C> <C> <C> <C>
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
====== ======== ======= ========= =========
</TABLE>
The accompanying notes are an integral part of these statements.
F-48
<PAGE>
INTERNATIONAL ACADEMY OF MERCHANDISING & DESIGN (CANADA) LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AUGUST 31, 1996, AND JUNE 30, 1997
1. DESCRIPTION OF THE BUSINESS
International Academy of Merchandising & Design (Canada) Ltd. ("the Company"
or "IAMD-Canada") is located and operates a campus in Toronto, Ontario and has
a wholly owned subsidiary (International Academy of Design Inc.), which
operates a campus in Montreal, Quebec. These private, postsecondary vocational
schools are engaged in the instruction of merchandising and design programs in
the fields of merchandising management, fashion design, interior design,
advertising design, interactive media and computer graphics. The assets and
liabilities relating to the Montreal campus were transferred to International
Academy of Design Inc. on September 1, 1996. Prior to that date, the
operations of the Montreal campus were included as a division of the Company.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the consolidated accounts of
the Company and its wholly owned subsidiary. All significant intercompany
transactions and accounts have been eliminated. For presentation purposes,
both periods reflect the Montreal accounts as being consolidated.
The Company's accounts are recorded in Canadian dollars ("$CD") and the
balance sheets at August 31, 1996 and June 30, 1997 have been translated to
U.S. dollars at the exchange rate of 0.73 and 0.72. At August 31, 1996, and
June 30, 1997, respectively. The income statements for the year ended August
31, 1996, and the ten months ended June 30, 1997, have been translated at an
average annual exchange rate of 0.74 and 0.73, respectively.
FINANCIAL AID
The Company extends credit for tuition to a significant number of students
who are in attendance at the schools. A substantial portion of credit extended
to students is repaid through the students' participation in federally funded
financial aid programs.
Approximately 98% of Montreal's and 67% of Toronto's net revenue were
collected from Canadian governmental funding. Governmental funding is provided
by Canada Student Loans and State Loans from Ontario and Quebec. The Company
pays an annual premium to an insurance company which provides an insurance
policy to secure the governmental funding. The insurance policy insures
liability amounts of $152,061 ($CD 210,000) for Toronto and $72,410 ($CD
100,000) for the Montreal campus. Shareholders have also issued personal
guarantees related to such policies at June 30, 1997.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is recognized
utilizing tax accelerated methods for financial reporting and income tax
purposes over their estimated useful lives. Leasehold improvements and assets
recorded under capital leases are amortized on a straight-line basis over
their estimated useful lives or lease term, whichever is shorter. Maintenance,
repairs and minor renewals and betterments are expensed as incurred; major
F-49
<PAGE>
INTERNATIONAL ACADEMY OF MERCHANDISING &
DESIGN (CANADA) LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
improvements are capitalized. The estimated useful lives and cost basis of
property and equipment at August 31, 1996, and June 30, 1997, are as follows:
<TABLE>
<CAPTION>
AUGUST 31, JUNE 30,
ASSET DESCRIPTION 1996 1997 LIFE
----------------- ---------- ---------- ---------
<S> <C> <C> <C>
Furniture and fixtures..................... $ 337,233 $ 363,123 5-8 years
Machinery and equipment.................... 1,105,535 1,100,636 4-6 years
Leasehold improvements..................... 599,503 787,958 5 years
Computer software.......................... -- 22,631 1 year
Capital lease equipment.................... 958,085 2,460,635 4-6 years
---------- ----------
3,000,356 4,734,983
Less--Accumulated depreciation............. 1,440,768 2,236,215
---------- ----------
Property and equipment, net................ $1,559,588 $2,498,768
========== ==========
</TABLE>
DEFERRED RENT
Certain of the Company's leases include rental concessions, as defined in
the various lease agreements. The Company recognizes rent expense on a
straight-line basis over the terms of the various leases, ranging from 2 to 7
years. Rent expense recognized differs from the actual cash payments required
to be made under these lease agreements.
REVENUE RECOGNITION
Revenue is derived primarily from courses taught at the schools. Tuition
revenue is recognized on a straight-line basis over the length of the
applicable course. If a student withdraws, future revenue is reduced by the
amount of the refund due to the student. Student deposits represent payments
received in excess of amounts billed and are reflected as a current liability
in the accompanying consolidated balance sheet.
USE OF ESTIMATES
The preparation of financial statements, in conformity with generally
accepted accounting principles, requires management to make certain estimates
and assumptions that affect the reported amounts of assets and liabilities and
the disclosure of contingent liabilities at the date of the financial
statements and reported amounts of revenues and expenses during the reported
period. Actual results could differ from those estimates.
3. LONG-TERM DEBT
At August 31, 1996, and June 30, 1997, long-term debt of the Company consists
of the following:
<TABLE>
<CAPTION>
AUGUST JUNE 30,
31, 1996 1997
-------- ---------
<S> <C> <C>
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
======== =========
</TABLE>
F-50
<PAGE>
INTERNATIONAL ACADEMY OF MERCHANDISING &
DESIGN (CANADA) LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
In February 1997, the Company amended its credit agreement with a Canadian
bank. Under the amended agreement, the total amount the Company may borrow
through operating lines of credit and business improvement loans cannot, at
any time, exceed $243,117 ($CD 335,750). Amounts outstanding under lines of
credit are limited to the lesser of $181,025 ($CD 250,000) or 75% of the
receivables, as defined, less priority claims and receivables over 90 days.
Outstanding borrowings under the line of credit and business improvement loans
bear interest at the Canadian prime rate (4.75% at June 30, 1997) plus 1% and
the Canadian prime rate (6.25% at June 30, 1997) plus 1.5%, respectively.
Accounts receivable, inventory, equipment and all other assets serve as
collateral for amounts outstanding under the agreement.
Under the amended agreement, the Company must maintain certain covenants
under the credit agreement including debt to effective equity ratio, as
defined, of not more than 3:1, capital expenditures for the current fiscal
year not to exceed $1,013,740 ($CD 1,400,000) and that no lien on present or
future company assets can be obtained without the Bank's consent.
4. STOCKHOLDERS' EQUITY
In fiscal 1996, the Company advanced $93,807 ($CD 126,000) to its
stockholders. In 1997, the Company redeemed and retired 1,680 shares of common
stock from these stockholders. The advances to stockholders were collected in
exchange for these shares.
5. RELATED-PARTY TRANSACTIONS
The Company leases one of its campus facilities from an entity with common
ownership. Rent expense under this lease amounted to approximately $197,000
and $159,000 for the year ended August 31, 1996, and the ten months ended June
30, 1997, respectively.
See stockholder loans as described in Note 3 and stockholder advances as
discussed in Note 4.
6. COMMITMENTS AND CONTINGENCIES
LEASES
The Company leases equipment under capital leases expiring in various years
through 2002. Also, the Company leases its facilities and certain equipment
under operating leases through 2002. Rent expense, exclusive of taxes,
insurance, and maintenance of the facilities and equipment for the year ended
August 31, 1996, and the ten months ended June 30, 1997, was approximately
$553,275 and $600,759, respectively. The following is a schedule by year of
future minimum payments under these capital and operating leases:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES TOTAL
---------- ---------- ----------
<S> <C> <C> <C>
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
==========
</TABLE>
F-51
<PAGE>
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:
<TABLE>
<CAPTION>
AUGUST JUNE 30,
31, 1996 1997
-------- --------
<S> <C> <C>
Current income taxes.................................. $110,108 $256,258
Deferred income taxes (benefit)....................... (17,759) (326,077)
-------- --------
Net income tax provision (benefit).................... $ 92,349 $(69,819)
======== ========
</TABLE>
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:
<TABLE>
<CAPTION>
AUGUST 31, JUNE 30,
1996 1997
---------- --------
<S> <C> <C>
Tax provision (benefit) for income taxes based on
federal statutory tax rates......................... 29.1% (26.8)%
Provincial income taxes, net of federal benefit...... 15.2 (15.2)
Permanent difference and other....................... (1.9) 6.9
---- -----
Effective income tax rate............................ 42.4% (35.1)%
==== =====
</TABLE>
At August 31, 1996, and June 30, 1997, deferred income taxes consist of the
following:
<TABLE>
<CAPTION>
AUGUST 31, JUNE 30,
1996 1997
---------- --------
<S> <C> <C>
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
======= ========
</TABLE>
F-52
<PAGE>
INTERNATIONAL ACADEMY OF MERCHANDISING &
DESIGN (CANADA) LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
AUGUST 31, 1996 AND JUNE 30, 1997
Realization of deferred tax assets associated with the Company's future
deductible temporary differences and net operating loss carryforwards is
dependent upon generating sufficient taxable income prior to their expiration.
Although realization of the deferred tax assets is not assured, management
believes it is more likely than not that the deferred tax assets will be
realized through future taxable income. Management will assess whether it
remains more likely than not that the deferred tax assets will be realized. If
management determines that is no longer more likely than not that the deferred
tax assets will be realized, a valuation allowance will be required against
some or all of the deferred tax assets.
8. BENEFIT PLAN
The Company maintains a benefit plan for eligible employees. The plan
requires matching contributions (58% of the costs) for eligible employees. The
Company's matching contributions were $38,613 and $44,354 for the year and
period ended August 31, 1996, and June 30, 1997, respectively.
9. NONRECURRING CHARGES
During 1996, the Company identified an employee who was found to have
defrauded the Company of approximately $87,000. The individual resigned from
the Company. The Company has taken action to enhance internal controls to
prevent such acts from occurring in the future. These expenses have been
included in the accompanying statement of operations and are classified as
general and administrative expenses.
10. SUBSEQUENT EVENTS
On June 30, 1997, the shareholders of IAMD-Canada sold 100% of the
outstanding shares of capital stock of the Company to Career Education
Corporation ("CEC") for $6,500,000. In connection with the purchase, the former
owners of the school also entered into covenant not-to-compete agreements with
CEC for at total price of $2,000,000. The covenant not-to-compete agreements
restrict the former owners' ability to own or operate certain types of
postsecondary vocational schools for four years. The note payable to a former
stockholder and all bank loans were repaid in connection with the sale.
11. RECLASSIFICATIONS
Certain reclassifications have been made to the June 30, 1996 financial
statements in order for them to be in conformity with the June 30, 1997
presentation.
F-53
<PAGE>
CAREER EDUCATION CORPORATION AND SUBSIDIARIES
FINANCIAL STATEMENT SCHEDULE
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
Our audit was made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The Valuation and Qualifying Account
Schedule is presented for purposes of additional analysis and is not a required
part of the basic financial statements. This information has been subjected to
the auditing procedures applied in our audit of the basic financial statements
and, in our opinion, is fairly stated in all material respects in relation to
the basic financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Chicago, Illinois
October 7, 1997
S-1
<PAGE>
CAREER EDUCATION CORPORATION AND SUBSIDIARIES
FINANCIAL STATEMENT SCHEDULE
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
BALANCE NET CHARGES
AT TO INCREASE DUE BALANCE AT
BEGINNING OPERATING TO END OF
OF PERIOD EXPENSES ACQUISITIONS PERIOD
--------- ----------- ------------ ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Student receivable allowance
activity for the year ended
December 31, 1994............. $624 $ (91) $-- $ 533
Student receivable allowance
activity for the year ended
December 31, 1995............. 533 (433) 158 258
Student receivable allowance
activity for the year ended
December 31, 1996............. 258 167 30 455
Student receivable allowance
activity for the six months
ended June 30, 1997........... 455 378 193 1,026
</TABLE>
S-2
<PAGE>
- --------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFOR-
MATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS, AND, IF
GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED BY THE COMPANY, ANY SELLING STOCKHOLDER OR ANY UNDER-
WRITER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION
OF AN OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY IN ANY JURISDICTION TO
ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER IN SUCH JURISDICTION. NEI-
THER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER
ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMATION HEREIN IS COR-
RECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF OR THAT THERE HAS BEEN NO
CHANGE IN THE AFFAIRS OF THE COMPANY SINCE SUCH DATE.
-----------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary........................................................ 3
Risk Factors.............................................................. 8
The Transactions.......................................................... 22
Pending Acquisition....................................................... 22
Use of Proceeds........................................................... 23
Dividend Policy........................................................... 23
Capitalization............................................................ 24
Dilution.................................................................. 25
Unaudited Pro Forma Condensed Consolidated Financial Data................. 26
Selected Historical Consolidated Financial and Other Data................. 31
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 33
Business.................................................................. 42
Financial Aid and Regulation.............................................. 56
Management................................................................ 69
Certain Relationships and Related Transactions............................ 79
Security Ownership of Certain Beneficial Owners and Management............ 80
Description of Capital Stock.............................................. 82
Shares Eligible for Future Sale........................................... 83
Underwriting.............................................................. 85
Notice to Canadian Residents.............................................. 87
Legal Matters............................................................. 88
Experts................................................................... 88
Additional Information.................................................... 88
Index to Financial Statements............................................. F-1
Financial Statement Schedule.............................................. S-1
</TABLE>
-----------
UNTIL , 1997 (25 DAYS AFTER THE DATE OF THE OFFERING), ALL DEALERS EF-
FECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT PARTICIPATING
IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN
ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS
UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Shares
LOGO
Common Stock
PROSPECTUS
CREDIT SUISSE FIRST BOSTON
SMITH BARNEY INC.
ABN AMRO CHICAGO CORPORATION
- --------------------------------------------------------------------------------
<PAGE>
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.
<TABLE>
<CAPTION>
APPROXIMATE
AMOUNT
-----------
<S> <C>
Securities and Exchange Commission registration fee........... $15,682
NASD filing fee............................................... 5,675
Nasdaq National Market application fee........................ *
Accountants' fees and expenses................................ *
Blue Sky fees and expenses.................................... *
Legal fees and expenses....................................... *
Transfer Agent and Registrar fees and expenses................ *
Printing and engraving........................................ *
Miscellaneous expenses........................................ *
-------
Total..................................................... $ *
=======
</TABLE>
- --------
*To be provided by amendment
All expenses other than the Securities and Exchange Commission registration
fee and NASD filing fee are estimated.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Article XII of the Registrant's Amended and Restated Certificate of
Incorporation will provide that the Registrant shall indemnify its directors
to the full extent permitted by the General Corporation Law of the State of
Delaware and may indemnify its officers and employees to such extent, except
that the Registrant shall not be obligated to indemnify any such person (i)
with respect to proceedings, claims or actions initiated or brought
voluntarily by any such person and not by way of defense, or (ii) for any
amounts paid in settlement of an action indemnified against by the Registrant
without the prior written consent of the Registrant. Prior to consummation of
the Offering, the Registrant will enter into indemnity agreements with each of
its directors. These agreements may require the Registrant, among other
things, to indemnify such directors against certain liabilities that may arise
by reason of their status or service as directors, to advance expenses to them
as they are incurred, provided that they undertake to repay the amount
advanced if it is ultimately determined by a court that they are not entitled
to indemnification, and to obtain directors' liability insurance if available
on reasonable terms.
In addition, Article XII of the Registrant's Amended and Restated
Certificate of Incorporation will also provide that a director of the
Registrant shall not be personally liable to the Registrant or its
stockholders for monetary damages for breach of his or her fiduciary duty as a
director, except for liability (i) for any breach of the director's duty of
loyalty to the Registrant or its stockholders, (ii) for acts or omissions not
in good faith or which involve intentional misconduct or a knowing violation
of law, (iii) for willful or negligent conduct in paying dividends or
repurchasing stock out of other than lawfully available funds or (iv) for any
transaction from which the director derives an improper personal benefit.
Reference is made to Section 145 of the General Corporation Law of the State
of Delaware which provides for indemnification of directors and officers in
certain circumstances.
II-1
<PAGE>
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
<PAGE>
On May 30, 1997, pursuant to the February 1997 Agreement, the Registrant
issued (i) 3,995 shares of Series D Preferred Stock and Warrants to purchase
4,754 shares of Class E Common Stock to Heller in exchange for total
consideration of $3,995,000, (ii) 1,348 shares of Series D Preferred Stock and
Warrants to purchase 1,603 shares of Class E Common Stock to Electra in
exchange for total consideration of $1,348,000, (iii) 44 shares of Series D
Preferred Stock and Warrants to purchase 52 shares of Class E Common Stock to
Larson in exchange for total consideration of $44,000, (iv) 42 shares of
Series D Preferred Stock and Warrants to purchase 50 shares of Class E Common
Stock to Klettke in exchange for total consideration of $42,000, (v) 71 shares
of Series D Preferred Stock and Warrants to purchase 85 shares of Class E
Common Stock to Laub in exchange for total consideration of $71,000.
On May 30, 1997, pursuant to a Securities Purchase Agreement dated as of May
30, 1997 (the "May 1997 Agreement"), the Registrant issued (i) 11,127 shares
of Series D Preferred Stock and Warrants to purchase 26,842 shares of Class E
Common Stock to HECC in exchange for total consideration of $11,127,000, (ii)
2,376 shares of Series D Preferred Stock and Warrants to purchase 5,732 shares
of Class E Common Stock to Electra in exchange for total consideration of
$2,376,000 and (iii) 122 shares of Series D Preferred Stock and Warrants to
purchase 295 shares of Class E Common Stock to Klettke in exchange for total
consideration of $122,000.
On June 30, 1997, pursuant to the May 1997 Agreement, the Registrant issued
1,375 shares of Series D Preferred Stock and Warrants to purchase 3,317 shares
of Class E Common Stock to Electra in exchange for total consideration of
$1,375,000.
No underwriters were involved in any of the transactions described above.
All of the securities issued in the foregoing transactions were issued by the
Registrant in reliance upon the exemption from registration available under
Section 4(2) of the Securities Act, including Regulation D promulgated
thereunder.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) EXHIBITS.
<TABLE>
<C> <S>
1* Form of Underwriting Agreement.
2.1 Asset Purchase Agreement dated as of September 30, 1996, among
the Registrant, WCI Acquisition, Ltd., Phillips Educational
Group of Portland, Inc., and Phillips Colleges, Inc. Schedules
and exhibits to this Asset Purchase Agreement have not been
included herewith, but will be furnished supplementally to the
Commission upon request.
2.2 Stock Sale Agreement dated as of April 7, 1997, between K-III
Prime Corporation, Inc. and the Registrant. Schedules and
exhibits to this Stock Sale Agreement have not been included
herewith, but will be furnished supplementally to the Commission
upon request.
2.3 Stock Purchase Agreement dated as of June 30, 1997, among IAMD
Acquisition I, Ltd. and Clem Stein, Jr., Marion Stein, Leonard
Rutstein, Barbara Ann Scott King, Thomas V. King, William W.
Wirtz and David Powell. Schedules and exhibits to this Stock
Purchase Agreement have not been included herewith, but will be
furnished supplementally to the Commission upon request.
2.4 Share Purchase Agreement dated as of June 30, 1997, among the
Registrant and Clem Stein, Jr., Leonard Rutstein, Barbara Ann
Scott King and Lawrence N. Gross. Schedules and exhibits to this
Share Purchase Agreement have not been included herewith, but
will be furnished supplementally to the Commission upon request.
3.1* Form of Amended and Restated Certificate of Incorporation of the
Registrant.
3.2* Form of Amended and Restated By-laws of the Registrant.
4.1* Specimen stock certificate representing Common Stock.
4.2 Credit Agreement dated as of May 30, 1997 among the Registrant,
as borrower, the lenders named therein and LaSalle National
Bank, as agent, as amended.
5* Opinion of Katten Muchin & Zavis as to the legality of the
securities being registered (including consent).
10.1* Career Education Corporation 1995 Stock Option Plan, as amended.
10.2* Form of Option Agreement under the Registrant's 1995 Stock
Option Plan.
10.3* Career Education Corporation 1997 Employee Incentive
Compensation Plan.
</TABLE>
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<PAGE>
<TABLE>
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10.4* Form of Option Agreement under the Registrant's 1997 Employee
Incentive Compensation Plan.
10.5* Career Education Corporation 1997 Non-Employee Directors' Stock
Option Plan.
10.6* Form of Option Agreement under the Registrant's 1997 Non-
Employee Directors' Stock Option Plan.
10.7* Career Education Corporation 1998 Employee Stock Purchase Plan.
10.8* Second Amended and Restated Option Agreement dated as of October
, 1997, between the Registrant and John M. Larson.
10.9 Supplemental Option Agreement dated July 31, 1995, between the
Registrant and John M. Larson.
10.10* Second Amended and Restated Option Agreement dated as of
October, 1997, between the Registrant and Robert E. Dowdell.
10.11* Employment and Non-Competition Agreement dated as of October 9,
1997, between the Registrant and John M. Larson.
10.12* Form of Indemnification Agreement for Directors and Executive
Officers.
10.13 Career Education Corporation Amended and Restated Stockholders'
Agreement dated as of July 31, 1995, as amended on February 28,
1997 and May 30, 1997.
10.14* Registration Rights Agreement dated as of July 31, 1995, between
the Registrant, Electra Investment Trust P.L.C. and Electra
Associates, Inc.
10.15 Warrant Agreement dated as of July 31, 1995, between the
Registrant and The Provident Bank, and related Warrant
Certificate.
10.16 Securities Purchase Agreement dated as of July 31, 1995 among
the Registrant, Electra Investment Trust P.L.C. and Electra
Associates, Inc. (the "Electra 1995 Agreement").
10.17 Form of Warrant Certificate issued pursuant to the Electra 1995
Agreement.
10.18 Securities Purchase Agreement dated as of February 28, 1997,
among the Registrant, Heller Equity Capital Corporation, Electra
Investment Trust P.L.C., Robert E. Dowdell, John M. Larson,
Wallace O. Laub and Constance L. Laub and William A. Klettke
(the "February 1997 Agreement").
10.19 Securities Purchase Agreement dated as of May 30, 1997 among the
Registrant, Heller Equity Capital Corporation, Electra
Investment Trust P.L.C. and William A. Klettke (the "May 1997
Agreement").
10.20 Form of Warrant Certificate issued pursuant to the February 1997
Agreement and the May 1997 Agreement.
10.21 Form of Management Fee Agreement between the Registrant and each
of its subsidiaries.
10.22 Form of Tax Sharing Agreement between the Registrant and each of
its subsidiaries.
10.23* Registration Rights Agreement dated as of October , 1997,
between the Registrant and Heller Equity Capital Corporation.
10.24* Agreement dated as of October , 1997, between the Registrant
and Heller Equity Capital Corporation, regarding designation of
directors of the Registrant.
11* Statement regarding computation of per share earnings.
21 Subsidiaries of the Registrant.
23.1 Consent of Arthur Andersen LLP with respect to financial
statements of the Registrant.
</TABLE>
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<PAGE>
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23.2* Consent of Katten Muchin & Zavis (contained in its opinion to be filed as Exhibit 5 hereto).
23.3 Consent of Thomas B. Lally
24 Power of Attorney (included on the signature page hereto).
27 Financial Data Schedule
</TABLE>
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*To be filed by amendment.
(b) FINANCIAL STATEMENT SCHEDULES.
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Report of Independent Public Accountants S-1
Schedule II--Valuation and Qualifying Accounts S-2
</TABLE>
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.
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<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
HAS DULY CAUSED THIS REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF CHICAGO, AND STATE OF
ILLINOIS ON THE 9TH DAY OF OCTOBER, 1997.
Career Education Corporation
/s/ John M. Larson
By: _________________________________
John M. Larson
President and Chief Executive
Officer
POWER OF ATTORNEY
EACH PERSON WHOSE SIGNATURE APPEARS BELOW HEREBY CONSTITUTES AND APPOINTS
JOHN M. LARSON AND WILLIAM A. KLETTKE, AND EACH OF THEM, HIS TRUE AND LAWFUL
ATTORNEYS-IN-FACT AND AGENTS, WITH FULL POWER OF SUBSTITUTION, TO SIGN ON HIS
BEHALF, INDIVIDUALLY AND IN EACH CAPACITY STATED BELOW, ALL AMENDMENTS AND
POST-EFFECTIVE AMENDMENTS TO THIS REGISTRATION STATEMENT ON FORM S-1
(INCLUDING ANY REGISTRATION STATEMENT FILED PURSUANT TO RULE 462(B) UNDER THE
SECURITIES ACT OF 1933, AND ALL AMENDMENTS THERETO) AND TO FILE THE SAME, WITH
ALL EXHIBITS THERETO AND ANY OTHER DOCUMENTS IN CONNECTION THEREWITH, WITH THE
SECURITIES AND EXCHANGE COMMISSION UNDER THE SECURITIES ACT OF 1933, GRANTING
UNTO SAID ATTORNEYS-IN-FACT AND AGENTS FULL POWER AND AUTHORITY TO DO AND
PERFORM EACH AND EVERY ACT AND THING REQUISITE AND NECESSARY TO BE DONE IN AND
ABOUT THE PREMISES, AS FULLY AND TO ALL INTENTS AND PURPOSES AS EACH MIGHT OR
COULD DO IN PERSON, HEREBY RATIFYING AND CONFIRMING EACH ACT THAT SAID
ATTORNEYS-IN-FACT AND AGENTS MAY LAWFULLY DO OR CAUSE TO BE DONE BY VIRTUE
THEREOF.
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS
REGISTRATION STATEMENT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS IN THE
CAPACITIES INDICATED ON OCTOBER 9, 1997.
<TABLE>
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SIGNATURE TITLE
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<S> <C>
/s/ John M. Larson President, Chief Executive Officer
___________________________________________ (Principal Executive Officer) and a
John M. Larson Director
/s/ William A. Klettke Senior Vice President and Chief Financial
___________________________________________ Officer (Principal Financial and
William A. Klettke Accounting Officer)
/s/ Robert E. Dowdell Director
___________________________________________
Robert E. Dowdell
/s/ Wallace O. Laub Director
___________________________________________
Wallace O. Laub
/s/ Patrick K. Pesch Director
___________________________________________
Patrick K. Pesch
/s/ Scott D. Steele Director
___________________________________________
Scott D. Steele
/s/ Todd Steele Director
___________________________________________
Todd Steele
</TABLE>
II-6
<PAGE>
EXHIBIT 2.1
ASSET PURCHASE AGREEMENT
by and among
CAREER EDUCATION CORPORATION,
WCI ACQUISITION, LTD.,
PHILLIPS EDUCATIONAL GROUP OF PORTLAND, INC.
and
PHILLIPS COLLEGES, INC.
Dated: September 30, 1996
<PAGE>
TABLE OF CONTENTS
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1. Certain Definitions...................................................... 1
2. Purchase and Sale of Assets; Assumed Liabilities......................... 8
2.1. Purchase and Sale of Assets................................... 8
2.2. Accounts Receivable and Deferred Tuition Balance.............. 9
2.3. Assumed Liabilities........................................... 10
2.4. Retention of Cash and Payment of Certain Operating Expenses
Prior to Closing............................................. 12
2.5. Purchase Price................................................ 12
2.6. Closing....................................................... 16
2.7. Service Agreement............................................. 16
2.8. Accounts Payable.............................................. 16
2.9. EBITDA Adjustment............................................. 17
2.10. Employees..................................................... 17
2.11. Title IV Reimbursement........................................ 18
2.12. Funding of School Operations Pending DOE Approval............. 18
2.13. Refunds/Enrollment Contracts.................................. 19
2.14. Use of "Phillips Colleges, Inc." Name Marked on Inventories... 19
2.15. Prorations.................................................... 19
3. Closing Deliveries....................................................... 19
3.1. Deliveries to Purchaser....................................... 19
3.2. Closing Deliveries to Seller and Parent....................... 21
3.3. Closing Deliveries to Escrow, in respect of the Indemnity
Escrow Amount and the Deferred Payment Escrow Amount......... 22
3.4. Post-Closing Covenants........................................ 22
4. Representations and Warranties of Seller and Parent...................... 25
4.1. Organization and Corporate Power.............................. 25
4.2. Ownership of Seller and School................................ 25
4.3. Capacity; Authorization; Binding Effect, Etc.................. 25
4.4. No Conflicts, Etc............................................. 26
4.5. Subsidiaries; Investments..................................... 26
4.6. Compliance with Laws; Licenses and Permits.................... 26
4.7. Recruitment; Admissions Procedures; Attendance; Reports....... 27
4.8. Cohort Default Rate........................................... 28
4.9. Title to the Assets........................................... 28
4.10. Material Miscellaneous Contracts.............................. 30
4.11. Tradenames; Confidential Information.......................... 30
4.12. Financial Statements.......................................... 31
4.13. Receivables................................................... 32
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4.14. Inventories................................................... 32
4.15. [Intentionally omitted]....................................... 32
4.16. Litigation, Etc............................................... 32
4.17. Insurance..................................................... 33
4.18. Environmental Matters......................................... 33
4.19. Employee Benefit Plans........................................ 34
4.20. Employment Matters............................................ 35
4.21. Tax Matters................................................... 36
4.22. Brokerage..................................................... 36
4.23. Affiliate Transactions........................................ 36
4.24. Absence of Certain Changes.................................... 36
4.25. Indebtedness.................................................. 37
4.26. Delivery of Documents......................................... 37
4.27. Disclosure.................................................... 38
5. Representations and Warranties of Purchaser and CEC...................... 38
5.1. Organization and Corporate Power.............................. 38
5.2. Capacity; Authorization, Binding Effect, Etc.................. 38
5.3. No Conflicts, Etc............................................. 39
5.4. Litigation.................................................... 39
5.5. Brokerage..................................................... 39
5.6. Title IV Program Liabilities.................................. 39
5.7. Disclosure.................................................... 40
6. Noncompetition; Non-Solicitation; Confidential Information, Exclusive
Dealing................................................................. 40
6.1. Noncompetition Agreement...................................... 40
6.2. Non-Solicitation Agreement.................................... 40
6.3. Confidential Information...................................... 41
6.4. Remedies...................................................... 41
6.5. Scope of Restriction.......................................... 42
6.6. Termination Upon Recission.................................... 42
6.7. Additional Covenants of Seller and Parent Pending Closing..... 42
6.8. Key Employees................................................. 43
6.9. Exclusive Dealing............................................. 43
6.10. Additional Covenants of CEC and Purchaser Pending Closing..... 43
7. Conditions to Purchaser's Obligations.................................... 44
7.1. Cohort Default Rates.......................................... 44
7.2. Truth of Representations and Warranties....................... 44
7.3. Performance of Agreements..................................... 44
7.4. No Material Adverse Change.................................... 44
7.5. Litigation.................................................... 45
7.6. Proceedings................................................... 45
7.7. Consents and Approvals........................................ 45
7.8. Agreement with DOE............................................ 45
</TABLE>
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<CAPTION>
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8. Conditions to Seller's and Parent's Obligations.......................... 46
8.1. Truth of Representations and Warranties...................... 46
8.2. Performance of Agreements.................................... 46
8.3. Litigation................................................... 46
8.4. Proceedings.................................................. 46
8.5. Consents and Approvals....................................... 47
8.6. Agreement with DOE........................................... 47
9. Indemnification.......................................................... 47
9.1. Survival of Representations, Warranties, Covenants and
Agreements.................................................. 47
9.2. Indemnification by Seller and Parent......................... 48
9.3. Indemnification by Purchaser................................. 48
9.4. Procedures................................................... 48
9.5. Prevailing Party to be Awarded Legal Fees.................... 49
9.6. Limitations on Amount of Indemnification Liability........... 49
9.7. Remedies..................................................... 49
9.8. Limitation on Personal Liability of Affiliates............... 50
9.9. Indemnity Escrow Amount...................................... 50
10. Recission of Transactions............................................... 50
11. Miscellaneous........................................................... 51
11.1. Termination.................................................. 51
11.2. Expenses..................................................... 52
11.3. Successors and Assigns....................................... 52
11.4. Severability................................................. 52
11.5. Counterparts................................................. 53
11.6. Descriptive Headings; Interpretation......................... 53
11.7. Governing Laws............................................... 53
11.8. Consent to Jurisdiction and Service of Process............... 53
11.9. Waiver of Jury Trial. Arbitration............................ 54
11.10. Notices...................................................... 54
11.11. Guaranty by CEC.............................................. 56
11.12. Entire Agreement............................................. 56
</TABLE>
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<PAGE>
ASSET PURCHASE AGREEMENT
THIS ASSET PURCHASE AGREEMENT (this "Agreement") is made as of
September 30, 1996, by and among Career Education Corporation, a Delaware
corporation ("CEC"), and WCI Acquisition, Ltd., a Delaware corporation and
wholly-owned subsidiary of CEC ("Purchaser"), on the one hand, and Phillips
Educational Group of Portland, Inc., an Oregon corporation ("Seller"), and
Phillips Colleges, Inc., a Mississippi corporation of which Seller is a wholly-
owned subsidiary ("Parent"), on the other hand. Except as otherwise indicated,
capitalized terms used herein are defined in Section 1.
BACKGROUND
Seller is engaged in the operation of private, post-secondary schools,
one of which is a culinary school located in Portland, Oregon known as Western
Culinary Institute (the "School"). Purchaser has been organized for the purpose
of acquiring the assets and goodwill of the School and assuming certain
liabilities in connection therewith. Parent owns all of the outstanding capital
stock of Seller and, subject to the terms and conditions set forth herein, has
agreed to cause Seller to sell the assets constituting the School to Purchaser
and to make certain representations and warranties, provide certain
indemnifications, and enter into certain non-competition and other agreements in
connection therewith.
AGREEMENT
NOW, THEREFORE, in consideration of the mutual representations,
warranties, covenants and agreements set forth herein, the parties hereto agree
as follows:
1. Certain Definitions.
For the purposes of this Agreement, the following terms have the
meanings set forth below:
"Accounts Payable Adjustment" shall have the meaning ascribed to such
term in Section 2.8.
"Accounts Payable Escrow Amount" shall have the meaning ascribed to
such term in Section 2.5(b).
"Accounts Receivable Adjustment" means (a) the difference between the
Deferred Tuition Balance per the QA1 and the Student Receivable Balance per
the QA1, plus (b) the Title IV Reimbursement Receivable, as of the Closing
Date as determined pursuant to Section 2.2 in accordance with Schedule 2.2.
"Accounts Receivable Escrow Amount" shall have the meaning ascribed to
such term in Section 2.5(b).
<PAGE>
"Accrediting Body" means any entity or organization, which engages in
granting or withholding accreditation for private post-secondary schools,
in accordance with standards relating to the performance, operation, and/or
financial condition of private post-secondary schools, and has granted
Accreditation to the School as of the Closing Date, including the
Accrediting Commission of Career Schools and Colleges of Technology and the
Accrediting Commission of the American Culinary Federation Educational
Institute.
"Accreditation" means any authorization or similar approval granted by
any Accrediting Body.
"Additional Location" means any Facility where classes are regularly
conducted by the School other than the Leased Facilities.
"Affiliate" means, with respect to any Person, any individual related
by blood or marriage to such Person or any Person controlling, controlled
by or under common control with such Person.
"Assets" shall have the meaning ascribed to such term in Section 2.1.
"Assignment and Assumption Agreement" shall have the meaning ascribed
to such term in Section 2.3(a).
"Assumed Liabilities" shall have the meaning ascribed to such term in
Section 2.3.
"Best of Purchaser's knowledge" means the collective actual knowledge
of the executive officers of Purchaser and CEC holding offices of vice-
president or higher, following due inquiry of appropriate officers,
employees and consultants of Purchaser and CEC.
"Best of Seller's knowledge" means the collective actual knowledge of
the executive officers of Seller and Parent holding offices of vice-
president or higher, following due inquiry of appropriate officers,
employees and consultants of Seller and Parent, and the president and the
financial aid director of the School.
"CEC" shall have the meaning ascribed to such term in the preamble to
this Agreement.
"Closing" shall have the meaning ascribed to such term in Section 2.6.
"Closing Date" shall mean the date of the Closing.
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<PAGE>
"Closing Payment" shall have the meaning ascribed to such term in
Section 2.5(a).
"Competitive Activities" shall have the meaning ascribed to such term
in Section 6.1.
"Compliance Audit Escrow Amount" shall have the meaning ascribed to
such term in Section 2.5(c).
"Compliance Reports" shall have the meaning ascribed to such term in
Section 4.7.
"Confidential Information" shall have the meaning ascribed to such
term in Section 6.3.
"Curricula" means copyrighted and proprietary uncopyrighted materials
used in any courses currently and solely offered at the School and owned by
Seller.
"Deferred Payment Escrow Amount" shall have the meaning ascribed to
such term in Section 2.5(a).
"Deferred Tuition Balance" means deferred tuition revenue of the
School as of the Closing Date per the QA1 determined in accordance with the
practices and procedures used to determine such amount for the calculation
set forth on Schedule 2.2.
"DOE" means the United States Department of Education and any
successor agency administering student financial assistance under Title IV.
"DOE Approval Notice" means a fully-executed Provisional Program
Participation Agreement issued by DOE.
"DOE Program Review Escrow Amount" shall have the meaning ascribed to
such term in Section 2.5(c).
"Earned Accounts Receivable" means "earned accounts receivable" of
Parent, Seller or the School outstanding as of the Closing Date which
relate to business conducted at the School prior to the Closing Date,
calculated in accordance with Schedule 2.2 attached hereto, including
without limitation the unpaid amounts of student financial assistance funds
from any governmental or non-governmental sources, including funds
administered under Title IV, due to Seller, Parent or the School in respect
of instruction provided to students of the School prior to the Closing
(including without limitation the Title IV Reimbursement Receivable).
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<PAGE>
"EBITDA" means the result of the following calculation for any period,
with each item listed to be presented and calculated in accordance with the
practices and procedures, and consistent with the methodology used to
determine such amounts, in Schedule 2.9(a) attached hereto: (a) net income
of the School ("Net Income"); plus (b) expenses identified as Management
Fees and GAAP Management Fees deducted in the determination of Net Income,
consistent with the methodology set forth on Schedule 2.9(a); plus (c) any
provisions for (or minus any benefit from) income taxes, deducted (or
added) in the determination of Net Income, consistent with the methodology
set forth on Schedule 2.9(a); plus (d) expenses identified as Interest
deducted in the determination of Net Income, consistent with the
methodology set forth on Schedule 2.9(a); plus (e) amortization and
depreciation deducted in the determination of Net Income, as identified in
the report to be provided in accordance with Section 2.9(b) of this
Agreement.
"EBITDA Adjustment" means an amount equal to seventy-five percent
(75%) of EBITDA for the Interim Period as determined and in accordance with
Section 2.9 of this Agreement.
"Environmental Law" means any present federal, state or local law,
statute, rule, regulation or ordinance pertaining to any Hazardous
Substance or otherwise pertaining to the environment or protection of any
natural resources, including, without limitation, air, soil or water.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended.
"Escrow" shall have the meaning ascribed to such term in Section
2.5(a).
"Escrow Agreement" shall have the meaning ascribed to such term in
Section 2.5(a).
"Excluded Assets" shall have the meaning ascribed to such term in
Section 2.1.
"Facility" shall mean any real property owned or operated by Seller
solely and exclusively in relation to the activities of the School,
including without limitation the Leased Facilities.
"Financial Statements" means (i) the audited balance sheets and the
related statements of income and retained earnings and related statements
of cash flows, of the School, as at and for the fiscal years ended December
31, 1992 and 1993, (ii) the unaudited balance sheets and related statements
of income for the School set forth in the audited consolidated financial
statements and supplemental consolidating information of Parent and its
subsidiaries, as at
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<PAGE>
and for the fiscal years ended December 31, 1994 and 1995, and (iii)
the unaudited balance sheets and the related statements of income for the
School (the "Interim Financial Statements") (a) prepared by Seller as at
and for the six (6) month period ended June 30, 1996 and (b) prepared by
Seller as at and for the eight (8) month period ended August 31, 1996 (the
"Interim Balance Sheet Date").
"GAAP" means generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board of the
American Institute of Certified Public Accountants, and statements and
pronouncements of the Financial Accounting Standards Board and the Emerging
Issues Task Force (or any successor authority) that are applicable as of
the date of determination, all as consistently applied in the preparation
of the Financial Statements.
"General Indemnity Escrow Amount" shall have the meaning ascribed to
such term in Section 2.5(c).
"Hazardous Substance" shall include any substances included within the
definitions of "hazardous substances," "hazardous materials," "toxic
substances," "waste" or similar terms in any applicable federal, state or
local statute, ordinance, rule or regulation relating to environmental
protection, remediation or liability, including clean air, clean water,
waste disposal and hazardous substance transportation or disposal,
including, without limitation, petroleum, asbestos, polychlorinated
biphenyls, flammable explosives and radioactive materials.
"Indemnity Escrow Amount" shall have the meaning ascribed to such term
in Section 2.5(a).
"Indemnifiable Losses" shall have the meaning ascribed to such term in
Section 9.2.
"Intellectual Property" means the patents, trademarks, tradenames
(including the School's name), servicemarks, copyrights, know-how,
Curricula and trade secrets owned by Seller and used exclusively in
connection with the operation of the School, but excluding the names
"Phillips Colleges" and "Western Business College," any derivatives
thereof, and any trademarks, tradenames or servicemarks related thereto.
"Interim Period" means the period commencing October 1, 1996, and
ending on the Closing Date.
"Investment" as applied to any Person means (i) any direct or indirect
ownership by such Person of any notes, obligations, instruments, stock,
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<PAGE>
securities or ownership interest of any other Person, and (ii) any capital
contribution by such Person to any other Person.
"Leases" shall have the meaning ascribed to such term in Section
4.9(b).
"Leased Facilities" shall have the meaning ascribed to such term in
Section 4.9(b).
"Licenses and Permits" shall have the meaning ascribed to such term in
Section 4.6.
"Material Miscellaneous Contracts" shall have the meaning ascribed to
such term in Section 4.10.
"Noncompetition Period" shall have the meaning ascribed to such term
in Section 6.1.
"Operations Statement" shall have the meaning ascribed to such term in
Section 2.9.
"Out-of-School Receivables Balances" means amounts not subject to
refund, offset or similar reduction due as of the Closing Date from
students who have withdrawn from the School prior to the Closing.
"Parent" shall have the meaning ascribed to such term in the preamble
to this Agreement.
"Person" means an individual, a partnership, a corporation, an
association, a limited liability company, a joint stock company, a trust, a
joint venture, an unincorporated organization or other similar entity.
"Plans" means all employee benefit plans, whether qualified or
nonqualified, whether funded or unfunded and whether or not subject to
ERISA, affecting employees of the School and all collective bargaining
agreements relating to employee benefits affecting employees of the School
with respect to which Seller or Parent may incur any future or contingent
obligations, including, without limitation, all written plans relating to
deferred compensation, pensions, profit sharing, retirement income or other
benefits, stock purchase and stock option plans, bonus plans, severance
arrangements, health benefits, retiree health benefits, insurance benefits
and all other employee benefits or fringe benefits, including any employee
welfare benefit plans and employee pension benefit plans within the meaning
of Sections 3(1) and 3(2) of ERISA, and including any written plans with
respect to provision of or reimbursement of expenses.
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"Policy Guidelines" shall have the meaning ascribed to such term in
Section 4.7.
"Pre-Closing Financial Aid Irregularities" shall have the meaning
ascribed to such term in Section 2.3(b).
"Prepaid Tuition" means the obligations of the School in respect of
Student Deposits and payments held by Seller or Parent as of the Closing
Date which relate to the business and operations of the School to be
conducted subsequent to the Closing Date, as calculated in accordance with
Schedule 2.2.
"Purchase Price" shall have the meaning ascribed to such term in
Section 2.5.
"Purchaser" shall have the meaning ascribed to such term in the
preamble to this Agreement.
"Purchaser Inadequacy" shall have the meaning ascribed to such term in
Section 10.
"QA1" means the student receivable subsidiary system currently in use
by the Seller and Parent.
"Retained Schools" shall have the meaning ascribed to such term in
Section 6.1.
"School" shall have the meaning ascribed to such term in the
background section to this Agreement.
"School's Accounts Payable" shall have the meaning ascribed to such
term in Section 2.8.
"Seller" shall have the meaning ascribed to such term in the preamble
to this Agreement.
"Seller Inadequacy" shall have the meaning ascribed to such term in
Section 10.
"Service Agreement" shall have the meaning ascribed to such term in
Section 2.7(b).
"Student Deposits" means any refundable deposits made by students of
the School.
"Student Receivable Balance" means the Student Receivable Balance of
the School as of the Closing Date per the QA1 determined in accordance
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with the practices and procedures used to determine such amount for the
calculation set forth on Schedule 2.2.
"Subsidiary" means any corporation of which the securities having a
majority of the ordinary voting power in electing the board of directors
are, at the time as of which any determination is being made, owned by a
Person either directly or indirectly.
"Taxes" means all taxes, levies or other like assessments, charges or
fees, including, without limitation income, gross receipts, excise,
property (including, without limitation, any special assessments), sales,
license, payroll and franchise or other governmental taxes, imposed by the
United States, or any state, county, local or foreign government or
subdivision or agency thereof on Seller and/or any of its business
activities; and such term shall include any interest, penalties or
additions or other amounts payable in connection with any Taxes.
"Title IV" means Chapter 28, Subchapter IV of the Higher Education Act
of 1965, as amended, 20 U.S.C.A. (S) 1070a, and any amendments or successor
statutes thereto.
"Title IV Escrow Amount" shall have the meaning ascribed to such term
in Section 2.5(b)(ii).
"Title IV Reimbursement Receivable" means the Title IV Reimbursement
Receivable of the School as of the Closing Date determined in accordance
with the practices and procedures used to determine such amount for the
calculation set forth on Schedule 2.2.
"Tradenames" shall have the meaning ascribed to such term in Section
4.11(a).
"Unearned Accounts Receivable" means all accounts receivable of
Parent, Seller and the School outstanding as of the Closing Date which
relate to the business conducted at the School which are not Earned
Accounts Receivable and which are included in the Assets.
2. Purchase and Sale of Assets; Assumed Liabilities.
2.1. Purchase and Sale of Assets.
Seller agrees to sell, transfer and convey to Purchaser at Closing all
of Seller's assets, properties and business, tangible and intangible, used
exclusively in connection with or otherwise necessary to the business and
operations of the School, including without limitation, Unearned Accounts
Receivable, deposits made by Seller relating to the School with third parties
(including deposits made with landlords under the Leases), prepaid expenses
(except as
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identified on Schedule 2.1), leasehold interests (including interests in the
Leased Facilities) and improvements, furniture, fixtures, equipment, personal
property, inventory, supplies, licenses, permits, memberships, rights,
franchises, Accreditations, program participation agreements and other approvals
from any applicable Accrediting Body, the DOE, and any other board or agency or
governmental entity from which approval is necessary for the operations of the
School (provided, that such licenses, permits, memberships, rights, franchises,
Accreditations, program participation agreements and other approvals shall be
included in the Assets only to the extent the same are transferable to
Purchaser), those contracts and agreements included in Assumed Liabilities,
Seller's Intellectual Property, goodwill, and operating books and records (but
excluding any records that relate in whole or in part to the Excluded Assets or
Excluded Liabilities, corporate minute books, corporate or tax records or the
original form of general ledgers and supporting documentation including, without
limitation, original invoices and original personnel records, provided, that to
the extent any of the foregoing records contain information which relates to the
Assets, copies of the portions of such records relating to the Assets shall be
included in the Assets), other than Excluded Assets (collectively the "Assets"),
free and clear of all liens, claims, encumbrances, options, rights and
restrictions other than Assumed Liabilities. "Excluded Assets" shall mean (a)
cash (including, without limitation, cash in respect of Student Deposits and
other Prepaid Tuition), cash equivalents, bank account balances, escrow account
balances and other escrow account rights (excluding any amounts deposited into
the Escrow pursuant hereto which will likewise not be considered Assets in this
transaction), marketable securities, Earned Accounts Receivable, and Out-of-
School Receivables Balances, (b) all assets subject to capitalized or operating
leases which are not being assumed by Purchaser pursuant to Section 2.3 hereof
or which Purchaser has not otherwise expressly agreed in writing to assume prior
to the Closing Date, (c) any license, permit, membership, right, franchise,
Accreditation, program participation agreement or approval from any Accrediting
Body, the DOE or other board, agency or governmental entity which is not
transferable by its terms, (d) intercompany accounts receivable between the
School and its Affiliates, (e) books and records not required in connection with
the operation of the School, (f) prepaid expenses identified on Schedule 2.1,
and (g) other rights and assets specifically identified on Schedule 2.1.
Purchaser agrees, on the terms and conditions set forth in this Agreement, to
purchase from Seller at the Closing, the Assets, free and clear of all liens,
claims, encumbrances, options, rights and restrictions other than Assumed
Liabilities.
2.2. Accounts Receivable and Deferred Tuition Balance.
(a) As soon as possible following the Closing, and in any event not
later than thirty (30) days after the Closing Date, Purchaser shall cause
Arthur Andersen, L.L.P. to complete an audit of the balance sheet of the
School on a stand-alone basis as of the Closing Date. Purchaser shall
deliver to Seller a copy of such audited balance sheet, together with (i) a
report which presents, in summary, the Deferred Tuition Balance, the
Student Receivable Balance, and the Title IV Reimbursement Receivable (each
as determined in accordance with Schedule 2.2) and (ii) a calculation of
the Accounts Receivable Adjustment in accordance with Schedule 2.2 hereto,
within such thirty (30) day period. Such balance sheet and other documents
shall be deemed to have
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been accepted by, and be binding upon, Seller if Seller fails to deliver
written objections to Purchaser within ten (10) business days after the
receipt of such balance sheet and other documents. If Seller objects to
such balance sheet and other documents, and such objections are not
resolved to Seller's satisfaction within five (5) business days after
delivery of such written objections, then Price Waterhouse, L.L.P., or
another nationally recognized certified public accounting firm not
otherwise engaged by either Seller or Purchaser or their Affiliates
mutually selected by Seller and Purchaser (the "Independent Auditor") shall
review such balance sheet and other documents, and all related work papers.
Such review shall be completed by the Independent Auditor within ten (10)
business days following its engagement, and the determinations of the
Independent Auditor shall be final and binding upon all parties. The costs
of the engagement of the Independent Auditor shall be borne by Seller,
unless the Independent Auditor's determination results in an adjustment in
Seller's favor of at least $38,000, in which event the costs of the
engagement of the Independent Auditor shall be borne by Purchaser.
(b) In the event the Accounts Receivable Adjustment calculation
results in a determination of Prepaid Tuition the absolute value of which
is greater than the Accounts Receivable Escrow Amount, Seller and Parent
shall promptly pay to Purchaser in immediately available funds an amount
equal to the difference between such amounts, which payment shall be in
addition to the amount to be disbursed to Purchaser pursuant to Section
2.5(b)(i).
(c) In the event that the Accounts Receivable Adjustment calculation
results in a determination of Earned Accounts Receivable, Purchaser shall
promptly pay to Seller or Parent, as designated by Seller, in immediately
available funds the amount of such Earned Accounts Receivable, which
payment shall be in addition to the amount to be disbursed to Seller or
Parent pursuant to Section 2.5(b)(i); provided, that such payment shall be
reduced by payments, if any, in respect of such Earned Accounts Receivable
previously made to Seller or Parent pursuant to Section 2.11.
2.3. Assumed Liabilities.
(a) Purchaser agrees at the Closing to assume and to perform, pay and
discharge, when due, the following, and only the following, liabilities and
obligations of Seller (the "Assumed Liabilities"): (i) all of Seller's
obligations relating to the School in respect of student enrollment
contracts and other executory contracts entered into with students, (ii)
Seller's obligations under the Leases and the other contracts (including
without limitation, the Material Miscellaneous Contracts), operating leases
and other agreements reflected on the Schedules to this Agreement relating
solely to the operation of the School (or, if not reflected on the
Schedules to this Agreement, obligations under contracts, operating leases
and other agreements relating solely to the School
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pursuant to which the assumed obligations consist solely of future payment
obligations which do not exceed $1,000 in the case of any single agreement
or $12,000 in the aggregate) to the extent, in each case, that such
obligations are not in material default, (iii) accounts payable with third
party vendors that are not Affiliates incurred or made in the ordinary
course of the School's business for equipment and textbooks with invoice
dates on or subsequent to forty-five (45) days prior to the Closing, (iv)
all existing mortgages, pledges, liens, claims, restrictions, encumbrances
and security interests set forth on Schedule 2.3(a) attached hereto, (v)
all liabilities imposed by the DOE, applicable state regulatory agencies,
guaranty agencies and any other governmental or non-governmental entity,
including, without limitation, Accrediting Bodies, related to periods from
and after Closing, (vi) standard, ordinary course vacation, sick and
personal pay benefits of employees of Seller to be hired by Purchaser
hereunder which accrued and remain unpaid in the normal course of business
on the Closing Date, (vii) other liabilities and obligations set forth on
Schedule 2.3(a) attached hereto, and (viii) all liens for current Taxes not
yet due and payable affecting the Assets (provided, that the obligation to
pay such Taxes, to the extent accrued prior to the Closing Date and not
specifically included in Assumed Liabilities, shall remain the obligation
of Seller) and (ix) all liabilities for Taxes constituting transfer, sales
and use taxes in connection with accounts payable included in Assumed
Liabilities and Taxes relating to the period after Closing in connection
with the Assumed Liabilities. In connection with the foregoing, Purchaser
shall execute and deliver to Seller an Assignment and Assumption Agreement
in the form of Exhibit A attached hereto (the "Assignment and Assumption
Agreement").
(b) Except as expressly set forth in Section 2.3(a), Assumed
Liabilities shall not include (i) any debt, obligation or liability of
Seller, Parent or the School, or any claim against any of the foregoing, of
any kind, whether known or unknown, contingent, absolute or otherwise,
including, without limitation, any liability for Taxes (other than Taxes
constituting transfer, sales and use taxes in connection with accounts
payable included in Assumed Liabilities and Taxes relating to the period
after Closing in connection with the Assumed Liabilities), (ii) any
contingent or otherwise indeterminate liabilities of Seller or Parent
relating to the conduct of Seller's business prior to Closing, and (iii)
any other liability of Seller, Parent or the School not expressly assumed
hereunder. It is expressly acknowledged that pursuant to the foregoing, and
without limitation thereof, Purchaser shall not assume and shall not be
responsible for any obligations or liabilities in respect of (i) pending or
threatened litigation affecting Seller, Parent or the School as of the
Closing Date, or arising out of actions occurring prior to the Closing
Date, (ii) Plans of Seller or Parent, or (iii) financial aid irregularities
relating to the operation of the School prior to the Closing Date,
including, without limitation, any audit disallowances, improperly
disbursed student financial assistance program funds
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or similar determinations or actions ("Pre-Closing Financial Aid
Irregularities"); provided, however, that Purchaser acknowledges that DOE
will require Purchaser to assume, in accordance with the terms of that
certain letter dated March, 12 1996 from DOE to Parent, a copy of which is
attached hereto as Exhibit B, those Pre-Closing Financial Aid
Irregularities related to Title IV that have not been identified at the
time of the Closing, as a part of the process of Purchaser obtaining its
DOE Approval Notice; and further provided, that such assumption of Pre-
Closing Financial Aid Irregularities by Purchaser shall not relieve Seller
and Parent of liability therefor or of their indemnification obligations in
respect thereof pursuant to Section 9.2 of this Agreement).
2.4. Retention of Cash and Payment of Certain Operating Expenses Prior
to Closing.
Seller and Parent have agreed and hereby represent and warrant that as
of the date of this Agreement, Parent has or will have cash in an amount
sufficient to repay to Seller sufficient amounts to permit the School to pay all
its operating expenses currently outstanding or reasonably anticipated to be
incurred prior to the Closing (including, without limitation, payroll expenses,
payroll taxes and other employee-related expenses incurred in the ordinary
course of the business of the School, and accounts payable to be paid prior to
Closing in accordance with Section 2.8). Seller shall pay or cause to be paid
all accrued but unpaid and undisputed payroll of the School (other than standard
ordinary course vacation and sick or personal days which are included in Assumed
Liabilities pursuant to Section 2.3), payroll taxes and other employee-related
expenses and liabilities incurred in the ordinary course of the business of the
School prior to Closing, and, within twenty (20) days of Closing, shall provide
Purchaser with evidence satisfactory to Purchaser that such expenses and
liabilities have been paid.
2.5. Purchase Price.
(a) Amount and Payment. In full consideration for the sale of the
Assets by Seller to Purchaser, and the other agreements of Seller and
Parent hereunder, and in addition to the assumption of the Assumed
Liabilities, Purchaser agrees to pay to Seller and Parent, in accordance
with the directions of Seller and Parent, the sum of $8,250,000 (the
"Purchase Price") subject to adjustment as set forth in Section 2.5(b),
payable as follows:
(i) $7,000,000 (the "Closing Payment") in cash, which amount
shall be delivered to Seller or its designee by wire
transfer of immediately available funds at Closing;
(ii) $750,000 (the "Deferred Payment Escrow Amount"), which
amount shall be deposited into an escrow account (the
"Escrow"), established
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pursuant and subject to the terms of an escrow agreement
(the "Escrow Agreement"), in substantially the form of
Exhibit C attached hereto, and which amount shall be
disbursed in accordance with the terms of the Escrow
Agreement and Section 2.5(b) below;
(iii) $500,000 (the "Indemnity Escrow Amount"), which amount
shall be deposited by Purchaser into the Escrow; and
which amount shall be disbursed in accordance with the
terms of the Escrow Agreement and Section 2.5(c) below.
Purchaser's obligations to fund the Escrow in full at Closing pursuant
to clauses (ii) and (iii) above shall not be subject to any right of offset
against amounts Purchaser may claim it is owed under this Agreement; provided,
that such obligation to fund the Escrow at Closing shall in no way limit
Purchaser's rights to disbursement of proceeds from the Escrow in accordance
with the terms of this Agreement and the Escrow Agreement, nor shall it limit
Purchaser's rights to bring claims for indemnification pursuant to Section 9.
(b) Disbursement of Deferred Payment Escrow Amount. The Deferred
Payment Escrow Amount shall be disbursed from the Escrow, in accordance
with and subject to the terms of the Escrow Agreement, as follows:
(i) $380,000 (the "Accounts Receivable Escrow Amount"), less
the absolute value of Prepaid Tuition, if any, resulting
from the calculation of the Accounts Receivable
Adjustment, shall be disbursed to Seller or its designee
upon final determination of the Accounts Receivable
Adjustment in accordance with Section 2.2(a), at which
time the difference between $380,000 and the amount so
disbursed to Seller or its designee shall be disbursed
to Purchaser;
(ii) $120,000 (the "Title IV Escrow Amount") shall be
disbursed to Seller or its designee upon the earlier to
occur of (A) delivery by DOE of a DOE Approval Notice to
Purchaser or (B) ninety (90) days following the Closing
Date; provided, that the escrow agent has not received a
written certification from Purchaser prior to ninety
(90) days after the Closing Date that Purchaser has
grounds to and has elected to rescind the
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transactions consummated hereunder in accordance with
Section 10;
(iii) $250,000 (the "Accounts Payable Escrow Amount"), less
the Accounts Payable Adjustment, if any, shall be
disbursed to Seller or its designee upon final
determination of the Accounts Payable Adjustment in
accordance with Section 2.8, at which time the
difference between $250,000 and the amount so disbursed
to Seller or its designee shall be disbursed to
Purchaser to pay unpaid School's Accounts Payable in
accordance with the terms of the Escrow Agreement.
(c) Disbursement of Indemnity Escrow Amount. The Indemnity Escrow
Amount shall be disbursed from the Escrow, in accordance with and subject
to the terms of the Escrow Agreement, as follows:
(i) $200,000 (the "Compliance Audit Escrow Amount") shall be
disbursed to Seller or its designee upon completion of a
compliance audit of the School covering the period July
1, 1995 through June 30, 1996 as required by the
provisions of 34 C.F.R. (S) 668.23, which Purchaser
shall complete and deliver to Seller no later than
February 28, 1997; provided, however, in the event that
such compliance audit establishes a claim for
indemnification under Section 9.2 of this Agreement, the
Compliance Audit Escrow Amount to be disbursed to Seller
or its designee hereunder shall be reduced by an amount
sufficient to satisfy such claim up to the amount of
$200,000, which retained amount, less any amount
necessary to satisfy such claim determined in accordance
with Section 9, shall be released upon final resolution
of such compliance audit claim in accordance with
Section 9 and the Escrow Agreement, and provided further
that in the event that the draft of such compliance
audit establishes a potential liability in the amount of
$10,000 or more, Purchaser will provide Seller with a
copy of such draft compliance audit and an opportunity
to resolve the potential liability prior to submission
of the compliance audit to DOE;
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(ii) $200,000 (the "General Indemnity Escrow Amount") shall
be disbursed to Seller or its designee on the second
(2nd) anniversary of the Closing Date; provided,
however, that the General Indemnity Escrow Amount to be
disbursed to Seller or its designee hereunder shall be
reduced by an amount sufficient to satisfy any
indemnification claims for which notice has been
delivered in accordance with Section 9.4 of this
Agreement up to the amount of $200,000, which retained
amount, less any amount necessary to satisfy such
claim(s) determined in accordance with Section 9, shall
be released upon final resolution of such pending
indemnification claims in accordance with Section 9 and
the Escrow Agreement; and
(iii) $100,000 (the "DOE Program Review Escrow Amount") shall
be disbursed to Seller or its designee on the earlier of
the following: (1) conduct of a program review of the
School by DOE pursuant to which DOE does not assert Pre-
Closing Financial Aid Irregularities, (2) in the event
no DOE program review has commenced prior to the second
(2nd) anniversary of the Closing Date, on the second
(2nd) anniversary of the Closing Date, and (3) in the
event a DOE program review has commenced prior to the
second (2nd) anniversary of the Closing Date, fifteen
(15) days following notice that the program review will
not assert any Pre-Closing Financial Aid Irregularities;
provided, however, in the event that Purchaser receives
written notice that the program review will assert Pre-
Closing Financial Aid Irregularities, the DOE Program
Review Escrow Amount to be disbursed to Seller or its
designee hereunder shall be reduced by an amount
sufficient to satisfy any claims subject to
indemnification related to the DOE Program Review for
which notice has been delivered in accordance with
Section 9.4 of this Agreement up to the amount of
$100,000, which retained amount, less any amount
necessary to satisfy such claims determined in
accordance with Section 9,
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shall be released upon final resolution of such pending
claims in accordance with Section 9 and the Escrow
Agreement.
(d) Interest on Escrow. Interest accruing on all amounts deposited
into the Escrow pursuant to this Agreement shall accrue for the benefit of
the party hereunder to whom such amount is ultimately disbursed in
accordance with the provisions of this Section 2.5 and the Escrow
Agreement, and such interest shall be disbursed simultaneously with the
disbursement of the applicable escrowed amount pursuant to the terms of
this Agreement and the Escrow Agreement.
(e) Allocation of Purchase Price. The aggregate Purchase Price shall
be allocated as follows: (i) to all items of tangible personal property,
including leasehold improvements, purchased from Seller $7,120,000; (ii) to
the noncompetition covenant contained in Section 6.1, $400,000 (of which
$300,000 shall be allocated to Parent and $100,000 to Seller); and (iii) to
all other items of intangible personal property, including the Tradename,
Confidential Information and goodwill, the balance of the Purchase Price.
2.6. Closing.
Subject to the terms of this Section 2.6, the parties hereto shall
close the purchase and sale of the Assets and the consummation of the other
actions contemplated by this Agreement to occur in connection therewith at the
closing (the "Closing"), which shall take place at the offices of Purchaser's
counsel, Goldberg, Kohn, Bell, Black, Rosenbloom & Moritz, Ltd., 55 East Monroe
Street, Suite 3700, Chicago, Illinois 60603, on October 4, 1996, or within five
(5) days after such later date as all the conditions to the Closing set forth in
Section 7 hereto have been satisfied, but in no event later than December 31,
1996, or such other date to which the parties hereto shall mutually agree in
writing.
2.7. Service Agreement.
At the Closing, Purchaser, Seller and Parent shall enter into a
Service Agreement in substantially the form of Exhibit D attached hereto (the
"Service Agreement"), providing for Seller and Parent to provide certain
specified services during a transition period following the Closing not to
exceed thirty (30) days in connection with the operation by Purchaser of the
School, on the terms and in accordance with the conditions set forth in such
Service Agreement.
2.8. Accounts Payable.
Seller shall use its best efforts to pay in full, not later than ten
(10) days following the Closing Date, all accounts payable of Seller relating to
the School outstanding as of the Closing Date which are not subject to any good
faith dispute concerning the amount or validity of such accounts payable and
which relate to the business and operations of the School
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prior to the Closing Date other than (i) accounts payable for equipment and
textbooks with an invoice date forty-five (45) days or less prior to the Closing
Date, which accounts payable are Assumed Liabilities pursuant to Section 2.3,
and (ii) all accounts payable which Seller and Purchaser have agreed in writing
prior to the Closing that Seller may contest in good faith, which shall
nonetheless remain obligations of Seller and shall not be included in Assumed
Liabilities (collectively, "School's Accounts Payable"). On the tenth day
following the Closing Date, Seller and Purchaser shall mutually review the
status of payment of all School's Accounts Payable (including, without
limitation, any School's Accounts Payable invoiced after the Closing Date), and
shall mutually determine the amount, if any, of School's Accounts Payable which
remains unpaid, deducting therefrom all amounts paid by or on behalf of Seller
in respect of accounts payable for equipment and textbooks with an invoice date
forty-five (45) days or less prior to the Closing Date (the "Accounts Payable
Adjustment"). Upon final determination of the Accounts Payable Adjustment in
accordance with this Section 2.8, Seller and Purchaser shall deliver joint
notice thereof to the escrow agent under the Escrow Agreement, who shall
disburse the Accounts Payable Escrow Amount portion of the Deferred Payment
Escrow Amount in accordance with the terms of Section 2.5(b) and the Escrow
Agreement. Notwithstanding the foregoing, nothing herein shall relieve Seller of
its obligation to pay any School's Accounts Payable in excess of the Accounts
Payable Escrow Amount, nor of its obligation to pay any School's Accounts
Payable not taken into account in determination of the Accounts Payable
Adjustment.
2.9. EBITDA Adjustment.
In the event the Closing occurs on or after October 1, 1996, as soon
as possible following the Closing, and in any event not later than thirty (30)
days after the last day of the month of the Closing Date, Seller shall deliver
to Purchaser (a) an operations statement (the "Operations Statement") which
reflects EBITDA for the Interim Period calculated consistent with the
methodology of Schedule 2.9(a); and (b) a report which presents the amount of
amortization and depreciation for the Interim Period in the form of Schedule
2.9(b). Promptly following receipt of the documents described in the preceding
sentence, Seller and Parent shall pay to Purchaser in immediately available
funds an amount equal to the EBITDA Adjustment. In the event the Closing occurs
on or before September 30, 1996, this Section 2.9 shall be null and void, and of
no force or effect.
2.10. Employees.
At the Closing, Purchaser shall offer employment to all employees of
Seller or Parent employed by Seller solely at the School in connection with the
operation of the School, at the same salary paid to such employees immediately
prior to the Closing Date, on the terms and subject to the conditions of
Purchaser's employment standards and policies. Purchaser shall not assume any
liability whatsoever with respect to any employees and former employees of
Seller who do not accept employment with Purchaser, including, but not limited
to, providing health continuation benefits pursuant to the Consolidated Omnibus
Budget Reconciliation Act of 1995, as amended ("COBRA"), and Seller shall
retain, bear and discharge all liabilities with respect to all employees and
former employees of Seller who do not accept employment with
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Purchaser. Notwithstanding anything in this paragraph to the contrary, all
employees who accept employment by Purchaser pursuant to the above shall be
employed at will and may be terminated by Purchaser at any time, for any reason,
or for no reason at all. Such employees who accept employment with Purchaser
shall be entitled to other benefits on a basis substantially similar to those
offered by Purchaser and its Affiliates to employees of comparable position,
experience and seniority. Notwithstanding anything in the foregoing to the
contrary, Purchaser shall retain the right to amend, modify or terminate any
Purchaser Plan in accordance with its terms and applicable law. Notwithstanding
the foregoing, Purchaser shall not assume any liability in respect of nor shall
it be obligated to continue any Plans of Seller. With respect to each employee
who accepts employment with Purchaser under the terms herein, Seller, through
and subject to the terms of its Plans, shall be responsible for costs and
expenses incurred prior to the Closing Date, and shall also be responsible for
payment to such employees of wages accrued through the Closing Date, which wages
shall be paid promptly following the Closing. Purchaser shall assume Seller's
and Parent's obligations to employees of the School who accept employment with
Purchaser with respect to accrued sick/personal days and vacation days earned
prior to the Closing Date and shall include all such employees in a medical plan
which provides for a waiver of waiting time and pre-existing conditions. Seller
shall deliver any and all notices to be delivered to employees of the School in
connection with the transactions contemplated by this Agreement as required by
applicable state and local law.
2.11. Title IV Reimbursement.
To the extent that following the Closing, under applicable DOE
regulations, the School remains eligible to receive and retain certain Federal
student financial assistance funds under Title IV relating to operation of the
School prior to the Closing, including without limitation, Federal Pell Grant
funds, Seller and Parent hereby agree that any such Title IV funds so received
constitute Assets sold to Purchaser under this Agreement, unless such funds
represent Earned Accounts Receivable. Purchaser further agrees to use
commercially reasonable efforts to collect all Title IV funds which the School
is eligible to receive following the Closing. As part of this commercially
reasonable effort, during the sixty (60) day period following the Closing Date,
Purchaser shall take all appropriate actions and make all requests necessary to
collect or "draw" all Title IV funds owed to the School and shall promptly
deliver to Seller upon receipt all such Title IV funds which are Earned Accounts
Receivable.
2.12. Funding of School Operations Pending DOE Approval.
From and after the date of the Closing and until the date the DOE
approves resumption of Title IV funding for the School as operated by Purchaser
pursuant to a DOE Approval Notice, Purchaser shall provide such working capital
as necessary to enable the School to continue to operate in the same manner and
at the same level of operations as Seller is currently operating the School.
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2.13. Refunds/Enrollment Contracts.
Purchaser agrees to (a) abide by the refund policy in effect at the
School prior to the Closing Date to the extent required by applicable federal or
state law, or Accrediting Body requirements, and (b) honor student enrollment
contracts entered into in the ordinary course of business of the School which
are included in Assumed Liabilities.
2.14. Use of "Phillips Colleges, Inc." Name Marked on Inventories.
In recognition of the fact that certain of the Assets constituting
inventories may have imprinted or otherwise marked thereon the name "Phillips
Colleges, Inc." or derivatives thereof, and trademarks and servicemarks relating
thereto and certain associated logotypes, Parent and Seller hereby agree that
Purchaser may use and distribute such inventories until they have been exhausted
and hereby grant to Purchaser a non-exclusive, royalty-free license to use such
names, trademarks, servicemarks and logotypes in connection therewith; provided,
however, that Purchaser must place a notification on all such materials that
Phillips Colleges, Inc. is no longer the owner of the School, identifying
Purchaser as the new owner and stating the effective date of such change of
ownership.
2.15. Prorations.
Notwithstanding any provision of this Agreement to the contrary,
Seller and Purchaser hereby agree that payments made or to be made pursuant to
the Leases, including without limitation payments in respect of rent, common
area maintenance fees, utilities and real estate taxes, shall be prorated as of
the Closing Date. As soon as possible following the Closing, and in any event
not later than thirty (30) days after the Closing Date, Purchaser and Seller
shall agree on the amount of such prorations (which, in the case of real estate
taxes, may be based on the most recently available tax bill), and promptly
thereafter Purchaser shall pay to Seller, or Seller shall pay to Purchaser, as
applicable, the net difference between prorations in favor of Seller and
prorations in favor of Purchaser. In the event Seller and Purchaser are unable
to reach agreement with respect to prorations as provided in the immediately
preceding sentence, such matter shall be submitted to the Independent Auditor
for final and binding determination in accordance with the procedures set forth
in Section 2.2(a).
3. Closing Deliveries.
3.1. Deliveries to Purchaser.
Seller agrees to deliver to Purchaser, at or before the Closing, each
of the following, each of which constitutes a condition to Purchaser's
obligation to consummate the purchase of the Assets and the assumption of the
Assumed Liabilities.
(a) Bill of Sale and Assignments. A bill of sale, assignments and
other documents of conveyance or transfer of title, all in form reasonably
satisfactory to Purchaser's counsel, executed by Seller and Parent, as
appropriate;
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(b) Service Agreement. The Service Agreement, executed by Seller
and Parent;
(c) Assignment and Assumption Agreement. The Assignment and
Assumption Agreement, executed by Seller;
(d) Escrow Agreement. The Escrow Agreement, executed by Seller and
the relevant escrow agent thereunder;
(e) Secretary's Certificate for Seller. A certificate, signed by
the secretary or an assistant secretary of Seller, certifying appropriate
authorizing resolutions of Seller's Board of Directors, the incumbency of
Seller's officers executing this Agreement and the documents delivered in
connection with the Closing, and the good standing of Seller in its state
of incorporation and the State of Washington;
(f) Secretary's Certificate for Parent. A certificate, signed by
the secretary or an assistant secretary of Parent, certifying appropriate
authorizing resolutions of Parent's Board of Directors, the incumbency of
Parent's officers executing this Agreement and the documents delivered in
connection with the Closing, and the good standing of Parent in its state
of incorporation;
(g) Closing Certificate. A certificate executed by Seller and
Parent satisfying the requirements of Sections 7.2, 7.3 and 7.4 hereof;
(h) Legal Opinion. Legal opinions of Seller's counsels, in
substantially the forms of Exhibit E attached hereto, addressed to
Purchaser and CEC;
(i) Consents. Evidence satisfactory to Purchaser's counsel that
those consents of third parties listed in Schedule 3.1(i) attached hereto,
which are required by Purchaser to be obtained by Seller and Parent prior
to the Closing, have been obtained;
(j) Files and Documents. All keys and other items necessary to
deliver possession to Purchaser of the Assets and full access to the Leased
Facilities, including all files, records, data and documents relating to
the School, the Assets and the Assumed Liabilities which are located at the
offices of Seller or the School, but excluding files, records, data and
documents relating in whole or in part to Excluded Assets (provided, that
to the extent any of the foregoing materials contain information which
relate to the Assets, copies of the portions of such materials relating to
the Assets shall be included in the deliveries pursuant to this Section
3.1(j));
(k) Consent and Estoppel Certificates. Consent and estoppel
certificates from the landlords of the Leased Facilities, certifying
certain
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factual matters relating to the Leases, including without limitation
certification that there are no defaults under the Leases and the amounts
of security deposits under the Leases, and consenting to the transfer of
the relevant Leases to the Purchaser, in form and substance reasonably
acceptable to Purchaser;
(l) Other Documents. Such other documents relating to the
transactions contemplated by this Agreement as Purchaser or its counsel may
reasonably request.
3.2. Closing Deliveries to Seller and Parent
Purchaser agrees to deliver to Seller and Parent, at or before the
Closing, each of the following, each of which constitutes a condition to
Seller's and Parent's obligation to consummate the sale of the Assets:
(a) Assignment and Assumption Documents. The Assignment and
Assumption Agreement and such other agreements and documents reasonably
required by Seller's counsel evidencing Purchaser's assumption of the
Assumed Liabilities;
(b) Closing Payment. The Closing Payment required by Section 2.5(a)
by wire transfer of immediately available funds;
(c) Service Agreement. The Service Agreement, executed by
Purchaser;
(d) Escrow Agreement. The Escrow Agreement, executed by Purchaser
and the relevant escrow agent thereunder;
(e) Secretary's Certificate for Purchaser. A certificate, signed by
the secretary or an assistant secretary of Purchaser, certifying
appropriate authorizing resolutions of Purchaser's Board of Directors, the
incumbency of Purchaser's officers executing this Agreement and the
documents delivered in connection with the Closing, and the good standing
of Purchaser in its state of incorporation and the States of Oregon and
Washington;
(f) Secretary's Certificate for CEC. A certificate, signed by the
secretary or an assistant secretary of CEC, certifying appropriate
authorizing resolutions of CEC's Board of Directors, the incumbency of
CEC's officers executing this Agreement and the documents delivered in
connection with the Closing, and the good standing of CEC in its state of
incorporation.
(g) Closing Certificate. A certificate executed by Purchaser and
CEC satisfying the requirements of Section 8.1 and 8.2 hereof;
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(h) Legal Opinion. A legal opinion of counsel for Purchaser and
CEC, in substantially the form of Exhibit F attached hereto, addressed to
Seller and Parent; and
(i) Other Documents. Such other documents relating to the
transactions contemplated by this Agreement as Seller, Parent, or their
counsel may reasonably request.
3.3. Closing Deliveries to Escrow in respect of the Indemnity Escrow
Amount and the Deferred Payment Escrow Amount.
Purchaser agrees to deposit into the Escrow (by wire transfer of
immediately available funds), at Closing, the Indemnity Escrow Amount and the
Deferred Payment Escrow Amount, which amounts shall be disbursed in accordance
with the terms, and subject to the conditions, of Section 2.5 hereof and the
Escrow Agreement. Purchaser's obligations to fund the Escrow in full at Closing
pursuant to Section 2.5(a) shall not be subject to any right of offset against
amounts Purchaser may claim it is owed under this Agreement or any other
agreements executed in connection with this Agreement; provided, that such
obligation to fund the Escrow at Closing shall in no way limit Purchaser's
rights to disbursement of proceeds from the Escrow in accordance with the terms
of this Agreement and the Escrow Agreement, nor shall it limit Purchaser's right
to bring claims for indemnification pursuant to Section 9.
3.4. Post-Closing Covenants.
(a) Further Assurances. On or after the Closing Date, and without
further consideration, Purchaser, CEC, Seller and Parent shall, from time
to time at the request of any other party hereto, execute and deliver to
such other party further instruments of conveyance, assignment and transfer
of the Assets and assumption of the Assumed Liabilities, and shall take, or
cause to be taken, such other actions as such other party may reasonably
request for the more effective conveyance, assignment and transfer to
Purchaser of the Assets or the assumption by Purchaser of any obligations
in respect of the Assumed Liabilities, as applicable. Seller and Parent
shall each lend its reasonable assistance to Purchaser in the reduction to
possession of such Assets, in the exercise of rights with respect thereto
and otherwise in the carrying out of the intentions and purposes of this
Agreement. Purchaser and CEC shall each lend its reasonable assistance to
Seller and Parent in obtaining releases for Seller and Parent in respect of
any and all obligations in respect of the Assumed Liabilities.
(b) Access to Employees. From and after the Closing Date, Purchaser
shall afford to Seller and/or Parent, its officers, counsel, accountants
and other authorized representatives access to Purchaser's employees who
formerly were employed by Seller or Parent, at Seller's sole cost and
expense and as reasonably required by Seller or Parent in connection with
any claim, action,
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litigation, program review, audit or other proceeding involving Seller,
Parent or the School (other than any such claim, action, litigation or
proceeding arising under this Agreement or in which Purchaser and Seller or
any of their Affiliates are adverse parties). Purchaser shall use its
reasonable efforts to cause such employees to cooperate with and assist
Seller or Parent in the prosecution or defense of such claims, actions,
litigations, program reviews, audits and other proceedings. Unless
Purchaser consents (which consent shall not be unreasonably withheld), all
such access shall take place only during normal business hours in a manner
designed to minimize any interference with the operation of the School.
(c) Administration of the Schools Prior to Disbursement of the
Title IV Escrow Amount; Cooperation of Parties. From and after the Closing
Date and until payment in full of the Title IV Escrow Amount, Purchaser, at
Purchaser's sole cost and expense, shall administer and operate the School
in material compliance with all federal, state and local laws, statutes,
rules and regulations and Accrediting Body requirements and in accordance
with all permits, accreditations, authorizations and agreements issued by
or entered into with any federal, state or local governmental or quasi-
governmental entity or any Accrediting Body regulating or otherwise
relating to the administration and operation of the School. Subject to the
terms and provisions of this Agreement, Purchaser and CEC shall use their
commercially reasonable efforts in order to obtain any and all approvals
from the DOE, any Accrediting Body and any other governmental or quasi-
governmental entity that may be necessary or appropriate to vest in
Purchaser the right and authority to administer and operate the School and
to release Seller from further liability or obligations in connection with
the Assumed Liabilities, including, without limitation, the issuance of the
DOE Approval Notice and resumption of Title IV funding to the School, and
Purchaser and Seller shall cooperate in order to obtain such approvals.
(d) Performance of Assumed Liabilities. From and after the Closing
Date, Purchaser shall diligently perform all of the Assumed Liabilities.
Until such time as Seller has been released or discharged with respect to
such Assumed Liabilities, Purchaser shall provide Seller or Parent, as
applicable, with prompt notice of any assertion with respect to any such
Assumed Liability of any alleged default, breach or other violation by
Purchaser of any term, condition or covenant of such obligations, and
Purchaser shall use commercially reasonably efforts to resolve, at
Purchaser's sole cost and expense, any such alleged default, breach or
other violation. Purchaser shall use good faith efforts to cause Seller or
Parent, or both, as applicable, and any guarantor of any Assumed Liability,
to be released and discharged with respect to such Assumed Liability.
Nothing herein, however, shall be deemed to require that Purchaser
terminate or renegotiate the terms of any agreement governing any of the
Assumed Liabilities on terms that would have a material adverse effect on
the School's business or operations.
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(e) Access and Maintenance of Records. From and after the Closing
Date, Purchaser shall afford to Parent and/or Seller, their officers,
counsel, accountants and other authorized representatives, DOE and other
regulatory authorities reasonable access to the School's books and records
related to periods prior to the Closing Date during normal business hours
and upon reasonable notice from Seller to Purchaser, as reasonably required
by Seller or Parent in connection with (i) performance by Seller or Parent
of any of Seller's or Parent's obligations with respect to any liabilities
related to the School other than the Assumed Liabilities with respect
thereto, (ii) any claim, action, litigation, program review, audit or other
proceeding involving Seller, Parent or the School (other than any such
claim, action, litigation, program review, audit or proceeding arising
under this Agreement or otherwise in which Purchaser and Seller or any of
their Affiliates are adverse parties) and (iii) Seller's preparation of its
financial statements and tax returns. Subject to Section 6.3 hereof, Parent
and Seller, at Parent's or Seller's expense, may make copies of any such
records as may be necessary or appropriate for Seller's use in connection
with the foregoing. From and after the Closing Date, Purchaser shall afford
to DOE, applicable Accrediting Bodies and other regulatory authorities
access to the School's books and records as required by applicable law or
regulations. For a period of seven (7) years from the Closing Date or until
the expiration of the record retention period under relevant Federal, state
or Accrediting Body requirements, if longer, Purchaser shall not destroy or
otherwise dispose of any books or records of the School related to periods
prior to the Closing Date without prior notice to Seller. Seller shall have
the option to take possession of any such books or records which Purchaser
elects to dispose of or destroy. Notwithstanding the foregoing, Purchaser
shall preserve and protect all books, documents, papers, computer programs
and records pertaining in any manner to the administration by Parent or
Seller of federal student financial assistance programs pursuant to Title
IV with respect to the School for at least the period of time specified
under applicable law and regulation.
(f) Insurance. From and after the Closing Date and until the
Deferred Payment Escrow Amount is paid in full, Purchaser shall maintain
such insurance policies as are adequate, in both scope and amount, for the
School.
(g) Substitution of Undertakings. Purchaser shall use its good
faith efforts to promptly substitute Purchaser's undertaking, guarantee,
bond or other commitment for each undertaking, guarantee, bond or
commitment, as the case may be, made by Seller, Parent or any of their
Affiliates in support of or relating to any permit, contract,
authorizations, Accreditation or license from any such entity pertaining
exclusively to the School, except to the extent such undertaking,
guarantee, bond or other commitment relates to permits, contracts,
authorizations, Accreditations or licenses which are not or cannot be
transferred to Purchaser pursuant to this Agreement.
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4. Representations and Warranties of Seller and Parent.
As a material inducement to Purchaser to enter into this Agreement and
to purchase the Assets and assume the Assumed Liabilities, Seller and Parent
hereby jointly and severally represent and warrant as of the date hereof that:
4.1. Organization and Corporate Power.
Seller is a corporation, duly organized, validly existing and in good
standing under the laws of the State of Oregon. Parent is a corporation, duly
organized, validly existing and in good standing under the laws of the State of
Mississippi. Seller is qualified to do business as a foreign corporation and is
in good standing in the State of Washington and all other states in which the
nature of Seller's operations require Seller to so qualify, except where failure
to so qualify would not have a material adverse effect on the business or
operations of the School. Each of Seller and Parent has all requisite corporate
power and authority to own and operate its properties, to carry on its business
as now conducted, and to consummate the transactions contemplated hereby. Seller
is not, and for the past five (5) years has not been, engaged in any business
other than the operation of private, post-secondary vocational schools,
including the School, and activities directly related thereto. The copies of
Seller's articles of incorporation and bylaws which have been furnished to
Purchaser reflect all amendments made thereto at any time prior to the date of
this Agreement and are correct and complete.
4.2. Ownership of Seller and School.
Seller is a wholly-owned Subsidiary of Parent. The School is owned and
operated by Seller directly, and no other Person has any ownership interest in
the School No other Person has any right, option, warrant, subscription or other
arrangement to purchase shares of capital stock of Seller or to otherwise
acquire any other equity interest in Seller or the School, other than security
interests and liens of lenders which will be cured or removed no later than the
Closing.
4.3. Capacity; Authorization; Binding Effect, Etc.
Each of Seller and Parent has the power, legal capacity and authority
to execute, deliver and perform this Agreement and each other document being
executed in connection herewith to which it is a party. This Agreement has been,
and each other document to be executed by Seller or Parent in connection
herewith, as of the Closing, will have been, duly executed and delivered by
Seller or Parent, or both, as appropriate, and (assuming the due authorization,
execution and delivery hereof and thereof by Purchaser and CEC, as applicable),
this Agreement is, and each such other document or agreement will be, a valid
and binding obligation of Seller, or Parent, or both, as the case may be,
enforceable against it in accordance with its terms, subject to applicable
bankruptcy, insolvency, reorganization, moratorium and similar laws affecting
creditors' rights and remedies generally, and subject, as to enforceability, to
general principles of equity (regardless of whether enforcement is sought in a
proceeding at law or in equity).
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4.4. No Conflicts, Etc.
Except as set forth in Schedule 4.4, the execution, delivery and
performance of this Agreement and each other document being executed by Seller
or Parent, or both, in connection herewith, and the consummation of the
transactions contemplated hereby and thereby do not and will not: (a) to the
best of Seller's knowledge, violate any provisions of law applicable to Seller
or Parent; (b) except as set forth in Schedule 4.4 attached hereto, with or
without the giving of notice or the passage of time, or both, conflict with or
result in the breach of any provision of the articles of incorporation or bylaws
of Seller or Parent, or any material instrument, license, agreement or
commitment to which Seller or Parent is a party or by which any of their assets
or properties are bound; (c) constitute a violation of any order, judgment or
decree to which Seller or Parent is a party or by which any of their assets or
properties is bound; or (d) to the best of Seller's knowledge, other than as set
forth in Schedule 4.4, require any approval of, or filing or registration with,
any governmental entity or Accrediting Body that is required to be obtained or
made by Seller or Parent.
4.5. Subsidiaries; Investments.
Seller has no Subsidiaries and has had no Subsidiaries during the five
(5) years prior to the date hereof.
4.6. Compliance with Laws; Licenses and Permits.
Except as set forth in Schedule 4.6(a) attached hereto, to the best of
Seller's knowledge, neither Seller nor Parent is in violation of any law or any
regulation or requirement which violation might reasonably be expected to have a
material adverse effect upon the financial condition, operating results,
Accreditation or business of the School, and neither Seller nor Parent has
received notice of any such violation. Except as set forth in Schedule 4.6(a)
attached hereto, neither Seller nor Parent has received any notice of any
violations of the Occupational Safety and Health Act, as amended, or any similar
state or local laws, rules or regulations, relating to the School. Seller
currently maintains all licenses, Accreditations, certificates, permits,
consents, authorizations, and other governmental or regulatory approvals (the
"Licenses and Permits") necessary for Seller to conduct the business and
operations of the School as presently being conducted, except where the failure
to maintain any such Licenses and Permits would not have a material adverse
effect on the operations or financial condition of the School. As of the date
hereof, the School has no more than eighty-five percent (85%) of its revenues
derived from Title IV funds as determined in accordance with 34 C.F.R. (S)
600.5(d) and has not had more than eighty-five percent (85%) of its revenues so
derived since July 1, 1995. Schedule 4.6(b) attached hereto is a true, correct
and complete list of all Licenses and Permits held by Seller and the
governmental authority or Accrediting Body granting such Licenses and Permits.
Except as set forth on Schedule 4.6(b), the Licenses and Permits are in full
force and effect, and no proceedings for the suspension or cancellation of any
of them is pending or, to the best of
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Seller's knowledge, threatened. Seller has delivered to Purchaser copies of all
such Licenses and Permits. Except as set forth on Schedule 4.6(b), Seller has
received no notice that any of the Licenses and Permits will not be renewed and
to the best of Seller's knowledge, there is no basis for nonrenewal. Seller is
accredited by the Accrediting Commission of Career Schools and Colleges of
Technology and the Accrediting Commission of the American Culinary Federation
Educational Institute, is certified by the DOE as an eligible institution under
Title IV and is a party to, and in compliance with, a valid program
participation agreement with the DOE with respect to the operations of the
School. Except as set forth in Schedule 4.6(c) attached hereto, Seller has not
received any notice, not previously resolved, with respect to any alleged
violation of the rules or regulations of the DOE or any applicable Accrediting
Body in respect of the School, including sales and marketing activities, or the
terms of any program participation agreement to which it is or was a party. If
any such notices have been received and not resolved, Seller has disclosed their
receipt and disposition to Purchaser in writing prior to the execution of this
Agreement. Except as set forth on Schedule 4.6(c) attached hereto, Seller and
Parent are not aware of any investigation or review of the School's student
financial aid programs or any review of Accreditation of the School by any
governmental entity or Accrediting Body.
4.7. Recruitment; Admissions Procedures; Attendance; Reports.
Schedule 4.7(a) attached hereto is a complete list of all policy
manuals and other statements of procedures or instruction relating to (a)
recruitment of students for the School, including procedures for assisting in
the application by prospective students for direct or indirect state or federal
financial assistance; (b) admissions procedures, including any descriptions of
procedures for insuring compliance with federal, state or Accrediting Body
requirements applicable to such procedures; and (c) procedures for encouraging
and verifying attendance, minimum required attendance policies, and other
relevant criteria relating to course performance requirements and completion
(collectively, the "Policy Guidelines"). Seller has delivered to Purchaser true,
correct and complete copies of all Policy Guidelines. To the best of Seller's
knowledge, and except as disclosed on Schedule 4.7(b) attached hereto or in any
other schedule to this Agreement, Seller's operations with respect to the School
have, in all material respects, been conducted in accordance with the Policy
Guidelines and all relevant standards imposed by applicable Accrediting Bodies,
and other agencies administering state or federal governmental financial
assistance programs in which Seller participates, and other applicable laws or
regulations. Seller and Parent have submitted all reports, audits, and other
information, whether periodic in nature or pursuant to specific requests, for
the School ("Compliance Reports") to all agencies or other entities with which
such filings are required relating to its compliance with (i) applicable
Accreditation standards governing its activities or (ii) laws or regulations
governing programs pursuant to which the School or its students receive student
financial assistance funding, except where failure to submit such Compliance
Reports would not have a material adverse effect on the business or operations
of the School. There are no articulation agreements pertaining to the operation
of the School. To the best of Seller's knowledge, all forms and records of
Seller and the School have been prepared, completed, maintained and filed in all
material respects in accordance with all applicable federal and state laws and
regulations, and are true and correct in all material respects. All financial
aid grants and loans, disbursements and record keeping relating thereto have
been completed in compliance with all federal and state requirements, and there
are no material deficiencies in respect thereto. To the best of Seller's
knowledge and except as previously disclosed in prior
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audits by DOE, no student at the School has been funded prior to the date for
which such student was eligible for funding, and such student's records conform
in form and substance to all relevant regulatory requirements.
4.8. Cohort Default Rate.
Schedule 4.8 attached hereto sets forth the published Federal Family
Education Loan Program cohort default rate for the School, calculated in the
manner prescribed by the DOE and issued to the School, for the federal fiscal
years 1992 through 1994. To the best of Seller's knowledge, such schedule is
materially accurate in all respects.
4.9. Title to the Assets.
(a) Seller does not presently own, nor has it ever owned any real
property, used solely in connection with the business and operations of the
School.
(b) The only real properties leased or otherwise used, operated or
occupied by Seller or the School are the School's leased facilities (the
"Leased Facilities") located at 1316 SW 13th Avenue, 1099 SW Columbia
Street, and 1201-1239 SW Jefferson Street, Portland, Oregon 97201. The
leases covering the Leased Facilities (the "Leases") are valid and in full
force and effect and are enforceable in all material respects in accordance
with their terms.
(c) All of Seller's operations with respect to the School are
conducted at the Leased Facilities, and all of the tangible Assets and
records relating to intangible Assets of the School are or as of the
Closing will be located at the Leased Facilities; provided, however, that
certain records included in the Assets are in the possession of Global
Financial Aid Services, Inc. ("Global") as agent for Seller and will remain
in the possession of Global, which will retain the records as agent for
Purchaser. Except as set forth on Schedule 4.9(c)(i), Seller is not under
any contractual or other legal obligation and has not entered into any
commitment to make capital improvements or alterations to the Leased
Facilities. Seller and, to the best of Seller's knowledge, the landlord
under the Leases, are not in default under the Leases, except for defaults
due to non-payment which are disclosed on Schedule 4.9(c)(ii) and, to the
best of Seller's knowledge, no event, act or omission has occurred which
(with or without notice, the passage of time or the happening or occurrence
of any other event) would result in a default thereunder. Seller enjoys
peaceful and undisturbed possession under the Leases, and to the best of
Seller's knowledge the Leased Facilities are not subject to any zoning,
ordinance or other restrictions which would prohibit the use and enjoyment
of the Leased Facilities in the manner in which the Leased Facilities are
currently used. Seller and Parent have no knowledge of any condemnation
proceedings relating to the Leased Facilities. To the best of Seller's
knowledge, the Leased Facilities and Seller's use thereof
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are in compliance in all material respects with all applicable laws,
including without limitation, the Americans with Disabilities Act.
(d) Except for the leased or licensed Assets set forth on Schedule
4.9(d) attached hereto, Seller has the power, legal capacity and authority
to transfer, convey and deliver the Assets and Seller owns outright, and
has good and marketable title to, all of the Assets, free and clear of all
liens, claims and encumbrances, options, rights, and restrictions, other
than Assumed Liabilities and liens for current taxes not yet due and
payable and liens which will be released effective on or prior to the
Closing Date. All leases for tangible personal property used by Seller in
connection with the operation of the School are valid and in full force and
effect and enforceable in all material respects in accordance with their
terms. Except as set forth in Schedule 4.9(d) attached hereto, neither
Seller nor, to the best of Seller's knowledge, any of the other parties
thereto, is in default under any such lease or license, and no event, act
or omission has occurred which (with or without notice, the passage of time
or the happening or occurrence of any other event) would result in a
default thereunder.
(e) The equipment and machinery at the School which is owned or
leased by Seller or Parent and used in connection with the operation of the
School is listed on Schedule 4.9(e) attached hereto, and, to the best of
Seller's knowledge, is in customary amounts maintained by Seller. Except as
set forth in Schedule 4.9(e), neither Seller nor Parent has received notice
of any violation of or default under any law, ordinance, order, regulation
or requirement relating to any of the Assets which remains uncured or has
not been resolved.
(f) The School does not operate, nor during the past five (5)
years has it operated, any Additional Location.
(g) The Curricula constitutes all of the Curricula currently used
in courses currently offered at the School.
(h) Except for the name "Phillips Colleges" and any derivatives
thereof, and any trademarks, Tradenames or servicemarks related thereto,
the Intellectual Property constitutes all the patents, trademarks,
Tradenames, servicemarks, copyrights, know-how, Curricula and trade secrets
owned by Seller and used exclusively in connection with the operation of
the School, and, except for leased or licensed Assets set forth on Schedule
4.9(d), constitutes all the patents, trademarks, servicemarks, copyrights,
know-how, Curricula and trade secrets otherwise necessary to the business
and operations of the School.
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4.10. Material Miscellaneous Contracts.
Schedule 4.10 attached hereto sets forth a true, complete and correct
list of all material contracts, agreements, and commitments relating to the
operation of the School (hereinafter collectively referred to as the "Material
Miscellaneous Contracts") other than (a) the Leases, (b) leases and licenses
listed on Schedule 4.9(d) attached hereto, and (c) Plans listed on Schedule 4.19
attached hereto. True, complete and correct copies of all Material Miscellaneous
Contracts, together with all amendments thereto, have heretofore been delivered
or otherwise made available to Purchaser. The Material Miscellaneous Contracts
constitute legal, valid and binding obligations of Seller or Parent, as
applicable, and to the best of Seller's knowledge, the other parties thereto,
and to the best of Seller's knowledge are in full force and effect. Seller is
not in material default or, to the best of Seller's knowledge, alleged to be in
material default on any term of any such Material Miscellaneous Contract. Except
as noted on Schedule 4.10 attached hereto, the consummation of the transactions
contemplated by this Agreement does not require the consent or approval of any
party to any Material Miscellaneous Contract.
4.11. Tradenames; Confidential Information.
(a) All tradenames, trademarks or service marks used or useful in
connection with the operation of the School, and all forms, derivatives and
graphic presentations thereof, including forms of the tradename "Western
Culinary Institute" (but excluding the tradenames "Phillips Colleges,"
"Western Business College" and any related trademarks or servicemarks)
(collectively, the "Tradenames"), having material value to the operation of
the School are set forth on Schedule 4.11(a) attached hereto. To the best
of Seller's knowledge, Seller has exclusive right to the use of each
Tradename as an assumed business name in the states in which such Tradename
is used, and Schedule 4.11(a) sets forth all registrations (including the
jurisdictions thereof) of each Tradename as a trademark, servicemark or
assumed name. Except as set forth on Schedule 4.11(b), Seller has not
licensed any other Person to use any Tradename. Neither Seller nor Parent
has been sued or, to the best of Seller's knowledge, threatened with suit
for infringement, violation or breach with respect to any Tradename, and to
the best of Seller's knowledge, no basis exists for any such suit. Seller
and Parent are not on notice of any infringement, violation or breach of
the Tradename by any other Person.
(b) To the best of Seller's knowledge, Seller has the right to use,
free and clear of any claims or rights of any third party, all trade
secrets, customer lists, know-how, Curricula and any other confidential
information required for or used in the operation of the School. To the
best of Seller's knowledge, neither Seller nor Parent is in any way making
any unlawful or wrongful use of any Tradename, trade secret, customer list,
know-how, Curricula or any other confidential information of any third
party including, without limitation any
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former employer of any present or past employee of Seller or Parent
employed in connection with the operation of the School.
4.12. Financial Statements.
Seller has previously furnished the Financial Statements to Purchaser.
The balance sheets included in the Financial Statements present fairly the
assets and liabilities of Seller relating to the School covered thereby as of
the respective dates thereof, and the related statements of operations present
fairly the results of operations of Seller relating to the School for the
respective periods covered thereby. The Financial Statements have been prepared
in accordance with GAAP (except that the Interim Financial Statements are not
accompanied by all footnotes required by GAAP and are subject to customary year
end adjustments), are correct and complete in all material respects and fairly
present the financial position of the School as of the dates of such Financial
Statements, and the results of operations and changes in financial position for
the periods covered by such Financial Statements. Seller has maintained the
School's books and records in accordance with applicable laws, rules and
regulations and with GAAP, and such books and records are, and during the
periods covered by the Financial Statements were, correct and complete in all
material respects, fairly reflecting the income, expenses, assets and
liabilities of the School. Except as set forth in Schedule 4.12 attached hereto,
Seller is not required to provide any letters of credit, guaranty or other
financial security arrangements in connection with any transactions, approvals
or licenses in the ordinary course of operations of the School. As of the date
hereof, Seller has no material indebtedness, liabilities or obligations of any
nature, whether absolute, accrued, contingent or otherwise, which relate to the
School other than:
(a) those set forth or reserved against in the balance sheets
included in the Financial Statements for the fiscal years then ended or
disclosed in the footnotes to such Financial Statements, to the extent set
forth, reserved against or in the case of footnote items, disclosed;
(b) those set forth or reserved for in the Interim Financial
Statements, or those which would have been disclosed in footnotes to such
Interim Financial Statements, if footnotes had been prepared and which have
been disclosed in writing to Purchaser, to the extent set forth, reserved
against or, in the case of footnote items, disclosed;
(c) except as set forth on Schedule 4.12(c) attached hereto, those
incurred since the Interim Balance Sheet Date in the ordinary course of
business and consistent in nature with past practice, or those which would
have been disclosed in footnotes if footnotes had been prepared and which
have been disclosed to Purchaser in writing, to the extent set forth,
reserved or, in the case of footnote items, disclosed; and
(d) those constituting Assumed Liabilities not required to be
disclosed in financial statements prepared in accordance with GAAP.
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There are no long-term fixed or contractual liabilities relating to the
operation of the School which are required to be assumed by Purchaser in order
to continue to operate the School in all material respects as presently operated
by Seller, the annual expense of which are not reflected in the Financial
Statements where required by GAAP or which are not otherwise disclosed or set
forth in this Agreement or any schedule hereto or in the Assignment and
Assumption Agreement. Other than obligations in respect of Prepaid Tuition, the
School has no obligations in respect of refundable deposits.
4.13. Receivables.
The student accounts receivable of Seller relating to the School,
except to the extent of the allowance for cancellations and doubtful accounts
set forth in the Financial Statements, are bona fide receivables, arose out of
arms' length transactions in the normal and usual practices of Seller relating
to the School, are recorded correctly on the applicable books and records of
Seller and the School, and, to the best of Seller's knowledge, are collectable
in accordance with prior experience in the ordinary course of business, subject
in the case of certain receivables to reserves established for such receivables
in the Financial Statements. To the best of Seller's knowledge, such receivables
are not subject to any defense, counterclaim or setoff or trade discounts or
credits not reflected in the Financial Statements (other than tuition refund
policies administered in accordance with all applicable legal requirements and
the applicable Policy Guidelines), and Seller and Parent have no knowledge of
any facts or circumstances which would cause any of such receivables to have to
be written down or written off in amounts which in the aggregate would be in
excess of reserves established for such receivables in the Financial Statements.
4.14. Inventories.
The only inventories maintained by Seller in connection with the
operation of the School consist of supplies used in the ordinary course of
business of the School. To the best of Seller's knowledge, such supplies are
usable in all material respects in the ordinary and regular course of business,
are in all material respects fit for the purpose for which they were purchased
and, at the date of this Agreement, are in amounts consistent with Seller's
customary practices.
4.15. [Intentionally omitted]
4.16. Litigation, Etc.
Except as set forth in Schedule 4.16 attached hereto, there are no
actions, suits, proceedings, orders, investigations, inquiries or claims pending
or, to the best of Seller's knowledge, threatened against or affecting the
School or Seller, at law or in equity, or before or by any governmental
department, commission, board, bureau, agency or instrumentality or Accrediting
Body; to the best of Seller's knowledge, neither Seller, Parent, nor the School
is the subject of any governmental investigations or inquiries affecting the
School (including inquiries as to the qualification to hold or receive any of
the Licenses and Permits); and, to the best of Seller's knowledge, there is no
basis for any of the foregoing. There are no other actions, suits, proceedings,
orders, investigations or claims pending, or to the best of
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Seller's knowledge, threatened in writing against or affecting Seller, Parent or
their Affiliates generally (including claims with respect to any Plans) which if
adversely decided would have a material adverse effect on the School or its
properties taken as a whole.
4.17. Insurance.
Schedule 4.17 attached hereto sets forth all insurance coverages
maintained by Seller or Parent on the Leased Facilities, the other Assets, and
the operations of the School, including a list of all policies or binders of
fire, extended coverage, general and vehicular, fidelity and fiduciary
liability, workers' compensation, key-man life and other similar insurance, and
all binders for insurance to be purchased on or before Closing in order to
replace policies expiring prior to the Closing. Copies of binders for such
policies have been previously delivered to Purchaser. Except as set forth in
Schedule 4.17 attached hereto, such policies and binders are in full force and
effect, and there is no material breach or default with respect to any provision
contained in any such policy or binder, and all premiums, to the extent due and
payable, have been paid or the liability therefor properly accrued. Except as
set forth in Schedule 4.17 attached hereto, there are no claims pending or
threatened under any of said policies pertaining to the School or disputes with
underwriters regarding coverage under such policies pertaining to the School.
Except as set forth on Schedule 4.17, the execution and delivery of this
Agreement will not result in the loss to Seller or Parent of any of the
insurance policies listed, or impair the rights of Seller or Parent with respect
to liabilities arising, in connection with the operation of the School prior to
the Closing. Within five (5) years prior to the date hereof, neither Seller nor
Parent has been denied insurance for the School, or been offered insurance for
the School only at a commercially prohibitive premium.
4.18. Environmental Matters.
In connection with the operations of the School, except as set forth
in Schedule 4.18 attached hereto, neither Seller nor Parent has generated,
transported, stored, treated or disposed of, nor has it allowed or arranged for
any third persons to generate, transport, store, treat or dispose of, any
Hazardous Substance to or at: (a) any location other than a site lawfully
permitted to receive such Hazardous Substance for such purposes or (b) any
location designated for remedial action pursuant to federal, state or local
statute and relating to the environment or waste disposal; nor, to the best of
Seller's knowledge, has Seller or Parent performed, arranged for or allowed by
any method or procedure such transportation or disposal in contravention of any
laws or regulations or in any other manner which may result in liability for
contamination or threat of contamination of the environment in violation of any
Environmental Law, except where such violation would not have a material adverse
effect on the business or operations of the School. Except as set forth in
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Schedule 4.18, attached hereto, to the best of Seller's knowledge, no
generation, use, handling, storage, treatment, release, threat of release,
discharge, spillage or disposal of any Hazardous Substance in violation of any
Environmental Law, has occurred or is occurring at the Leased Facilities or, to
the best of Seller's knowledge, any other Leased Facilities previously owned or
operated by Seller. Except as set forth in Schedule 4.18 attached hereto,
neither Seller nor Parent has received notification of, nor is it aware, of, any
past or present failure by the School to comply with any Environmental Law,
including without limitation the requirements of any permits, franchises,
licenses or orders issued pursuant to any Environmental Law, applicable to the
School or its operations. Except as set forth on Schedule 4.18, neither Seller
nor Parent has received any notification, nor is it aware of, any past or
present failure by Seller or Parent to comply in any material respect with any
Environmental Law, including without limitation the requirements of any permits,
franchises, licenses or orders issued pursuant to any Environmental Law
applicable to the Seller's or Parent's operations other than the School, which
failure may result in judicial, regulatory or other legal proceedings that would
have a material adverse impact on the operations of the School or result in the
imposition of any lien, claim, assessment or other encumbrance against the
Assets. Except as set forth on Schedule 4.18, to the best of Seller's knowledge,
the Leased Facilities do not contain asbestos or polychlorinated biphenyls or
any underground storage tanks. Neither Seller nor the School has received notice
from any governmental entity requiring any removal or other remediation with
respect to asbestos or polychlorinated biphenyls located at the Leased
Facilities.
4.19. Employee Benefit Plans.
Schedule 4.19 attached hereto lists all Plans of Seller covering
employees of the School that the Seller maintains, to which it contributes, or
to which it has an obligation to contribute with respect to any current or
former employee of the Seller, or with respect to which Seller otherwise is
reasonably expected to have any liability or potential liability (whether or not
any such Plan has terminated or whether or not any such Plan is or was
maintained for current or former employees of Seller or current or former
employees of any other member of the controlled group of companies (within the
meaning of Internal Revenue Code Sections 414 (b) and (c)) of which Seller is or
ever was a member.
(a) Except as disclosed in Schedule 4.19, the Seller and Parent do
not contribute to, or have not contributed to during the immediately
preceding five (5) year period, or do not have any obligation to contribute
to or otherwise have any liability or potential liability with respect to
(i) any multiemployer plan as defined in (S) 4001, et seq. of ERISA, or
(ii) any Plan of the type described in Sections 4063 and 4064 of ERISA or
in Section 413(c) of the Internal Revenue Code (and regulations promulgated
thereunder), or (iii) any Plan that is subject to the funding requirements
of Section 412 of the Internal Revenue Code or Section 302 of ERISA, or
(iv) any employee commission, bonus, or incentive compensation plan(s).
(b) Each Plan that covers employees of the Seller and that is
intended to be qualified under Section 401(a) of the Internal Revenue Code,
and each trust (if any) forming a part thereof, has received a favorable
determination letter, covering tax law changes up through and including the
Tax Reform Act of 1986, as amended, from the Internal Revenue Service as to
the qualification under the Internal Revenue Code of such Plan and the tax
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exempt status of such related trust, and nothing has occurred since the
date of such determination letter that could adversely affect the
qualification of such Plan or the tax exempt status of such related trust.
(c) No underfunded defined benefit plan has been, during the five
years preceding the Closing Date, transferred out of the controlled group
of companies (within the meaning of Internal Revenue Code Sections 414(b)
and (c)) of which Seller is a member or was a member during such five (5)
year period.
(d) As of the date hereof, Seller does not maintain any employee
welfare benefit plans, as defined in Section 3(1) of ERISA, which provide
post-retirement benefits to former employees of Seller or the School or to
current employees thereof after their termination of employment (including,
without limitation, medical and life insurance benefits), other than as may
be required by the Consolidated Omnibus Budget Reconciliation Act of 1985,
as amended and interpreted by regulations thereunder.
4.20. Employment Matters.
Except as set forth in Schedule 4.20(a) attached hereto, to the best
of Seller's knowledge, Seller and Parent are in compliance in all material
respects with all federal, state and local laws, rules and regulations affecting
employment and employment practices of Seller and Parent relating to the School,
including terms and conditions of employment, employment discrimination and
wages and hours, and neither Seller nor Parent is engaged in any unfair labor
practices with respect to individuals employed by or providing services to
Seller or Parent in connection with the operation of the School; neither Seller
nor Parent is aware of, nor has either of them received any written or other
notice of, any complaints against Seller or Parent with respect to individuals
employed by or providing services to Seller or Parent in connection with the
operation of the School pending before the National Labor Relations Board or any
similar state or local labor agency; there are no labor strikes, slow-downs or
stoppages or other labor troubles pending or, to the best of Seller's knowledge,
threatened with respect to any individuals employed by or providing services to
Seller or Parent in connection with operation of the School; to the best of
Seller's knowledge no labor organization activities have occurred with respect
to such employees during the past three (3) years; there are no collective
bargaining agreements binding on Seller or Parent relating to the operation of
the School; to the best of Seller's knowledge, no grievances have been asserted
by any labor organization against Seller or Parent with respect to individuals
employed by or providing services to Seller or Parent in connection with the
operation of the School; and neither Seller nor Parent has experienced any work
stoppage by such employees during the last three (3) years. Schedule 4.20(b)
attached hereto contains a list of all employees of Seller and all material
consultants to Seller or Parent (including, without limitation, sales
representatives and other recruiters), other than attorneys and accountants, who
are employed or providing services in connection with the operation of the
School including: name; length of service; job title; rate of base salary,
bonuses and other incentive compensation; and identifying all contracts,
agreements, commitments and
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arrangements, written or oral, with such employees or consultants. Sales
representatives and other recruiters for the School, whether employed directly
by or otherwise engaged by Seller or Parent, are licensed or registered in
accordance with all applicable federal, state and local laws, rules and
regulations. No such sales representative or other recruiter receives
commissions, bonuses or other contingency payments based, directly or
indirectly, on the enrollment of students by such individual. True, correct and
complete copies of all agreements between Seller or Parent and such employees or
consultants and all amendments thereto have been provided to Purchaser. Seller
and Parent have performed all of their obligations under such agreements and are
not in default or violation and, to the best of Seller's knowledge, the other
parties thereto are not in default or violation, thereunder.
4.21. Tax Matters.
Seller and Parent have completed and filed on or before the due dates
thereof or within applicable extension periods all returns for Taxes related to
the School required to be filed by either of them, and such returns are true and
correct in all material respects. Seller and Parent have paid all Taxes shown to
be due and payable on such returns to the extent that the same have become due
and payable on or before the Closing. The last taxable year with respect to
which the federal income tax returns of Seller or Parent have been examined by
the Internal Revenue Service was 1994. Neither Seller nor Parent is a party to,
nor to the best of Seller's knowledge, expected to become a party to, any
pending or threatened action or proceeding, assessment or collection of Taxes by
any governmental authority relating to the business and operations of the
School.
4.22. Brokerage.
Neither Seller nor Parent has retained any broker or finder, and
neither will be obligated to pay any brokers' or finders' fee, in connection
with the negotiation or consummation of the transactions contemplated by this
Agreement, except for the retention of the management consulting firm of Alvarez
& Marsal, Inc. ("A&M") by Parent and fees payable in connection therewith.
Parent is responsible for fees payable to A&M in respect of the transactions
contemplated by this Agreement.
4.23. Affiliate Transactions.
Except as set forth in Schedule 4.23 attached hereto or as
specifically contemplated hereby, no Affiliate of Seller or Parent is a party to
any agreement, contract, commitment or transaction with Seller or Parent
regarding the School, or has any material interest in any material property used
in connection with the operations of the School.
4.24. Absence of Certain Changes.
Except as contemplated by this Agreement or as set forth on Schedule
4.24 attached hereto, from the Interim Balance Sheet Date until the date hereof
there has not been, occurred or arisen with respect to the School:
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(a) any sale, lease, transfer, abandonment or other disposition of
any right, title or interest in or to any of the properties or assets of
Seller or Parent used in connection with the operations of the School
(tangible or intangible), except in the ordinary course of business;
(b) other than in the ordinary course of Seller's operation of the
School and consistent with Seller's past and present business practices,
(i) any approval or action to put into effect any increase in any
compensation or benefits payable to any employee, director, agent or
officer of Seller employed or providing services in connection with the
operation of the School or any payment, grant or accrual to or for the
benefit of any such employee, director, agent or officer of any bonus,
service award, percentage compensation or other benefit, (ii) any adoption
or amendment of any Plans, or any severance agreement or employment
contract to which any such employee, director, agent or officer is a party
or (iii) any entering into of any employment, deferred compensation or
other agreements with respect to bonuses, service awards, percentage
compensation or other benefits with any such employee, director, agent or
officer;
(c) any damage, destruction or loss, whether or not covered by
insurance, materially adverse to the Assets;
(d) any change in any material respect in the business policies or
practices of Seller or Parent relating to the School or a failure of Seller
or Parent to operate the School in the ordinary course with a view to
preserving such business intact, to retaining the services of the present
officers, employees and agents of Seller and Parent employed or providing
services in connection with the operation of the School and with a view to
preserving the business relationships of Seller, Parent and the School
with, and the goodwill of, students, sales representatives, suppliers,
Accrediting Bodies, governmental authorities and others; or
(e) any agreement, whether in writing or otherwise, to take any
action described in this Section 4.24.
4.25. Indebtedness.
Schedule 4.25 attached hereto contains a true, correct and complete
list of all indebtedness of Seller for borrowed money, including capitalized
leases, relating to the business or operations of the School, and the balances
owing thereunder as of the date hereof.
4.26. Delivery of Documents.
True, correct and complete copies of all Leases, Material
Miscellaneous Contracts, Plans, Policy Guidelines and other documents,
instruments, agreements and records of Seller and Parent described on schedules
to this Agreement and relating to the Assets, the
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Assumed Liabilities, the representations and warranties of Seller and Parent
contained in this Agreement or the operation of the School, have been delivered
or made available to Purchaser.
4.27. Disclosure.
Neither this Agreement, nor any of the schedules, exhibits,
attachments, written statements, documents, certificates or other items prepared
or supplied to Purchaser in writing by or on behalf of Seller or Parent with
respect to the transactions contemplated hereby, contain any untrue statement of
a material fact or omit a material fact necessary to make such statements not
misleading in light of the circumstances in which such statements were made.
5. Representations and Warranties of Purchaser and CEC.
As a material inducement to Seller and Parent to enter into this
Agreement and to sell the Assets, Purchaser and CEC hereby represent and warrant
as of the date hereof that:
5.1. Organization and Corporate Power.
Purchaser is a corporation duly organized, validly existing and in
good standing under the laws of the State of Delaware and qualified to do
business as a foreign corporation in each jurisdiction in which the character of
the properties owned or leased by it or the nature of its operations requires,
or as of the Closing will require, it so qualify, except where failure to so
qualify would not have a material adverse effect on the business or operations
of Purchaser. Purchaser has all requisite corporate power and authority to own
and operate its properties, to carry on its business as now conducted, and to
consummate the transactions contemplated hereby. The copies of Purchaser's
articles of incorporation and by-laws which have been furnished to Seller
reflect all amendments made thereto at any time prior to the date of this
Agreement and are correct and complete. CEC is a corporation duly organized,
validly existing and in good standing under the laws of the State of Delaware
and qualified to do business as a foreign corporation in each jurisdiction in
which the character of the properties owned or leased by it or the nature of its
operations requires, or as of the Closing will require, it so qualify, except
where failure to so qualify would not have a material adverse effect on the
business or operations of CEC. CEC has all requisite corporate power and
authority to own and operate its properties, to carry on its business as now
conducted, and to consummate the transactions contemplated hereby. The copies of
CEC's articles of incorporation and by-laws which have been furnished to Seller
reflect all amendments made thereto at any time prior to the date of this
Agreement and are correct and complete.
5.2. Capacity; Authorization, Binding Effect, Etc.
Each of CEC and Purchaser has the power, legal capacity and authority
to execute, deliver and perform this Agreement and each other document being
executed by it in connection herewith to which it is a party. This Agreement has
been, and each such other document and agreement to be executed in connection
herewith, as of the Closing, will have been, duly executed and delivered by CEC
and Purchaser, or both, as appropriate, and (assuming the due authorization,
execution and delivery hereof and thereof by Seller and
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Parent, as applicable), this Agreement is, and each such other document or
agreement will be, a valid and binding obligation of Purchaser or CEC, or both,
as the case may be, enforceable against it in accordance with its terms, subject
to applicable bankruptcy, insolvency, reorganization, moratorium and similar
laws affecting creditors' rights and remedies generally, and subject, as to
enforceability, to general principles of equity (regardless of whether
enforcement is sought in a proceeding at law or in equity).
5.3. No Conflicts, Etc.
The execution, delivery and performance of this Agreement by Purchaser
or CEC and each other document being executed by Purchaser or CEC, in connection
herewith, and the consummation of the transactions contemplated hereby and
thereby do not and will not (a) to the best of Purchaser's knowledge, violate
any provisions of law applicable to Purchaser or CEC; (b) except as set forth in
Schedule 5.3 attached hereto, with or without the giving of notice or passage of
time, or both, conflict with or result in the breach of any provision of the
articles of incorporation or bylaws of Purchaser or CEC, or any material
instrument, license, agreement or commitment to which Purchaser or CEC is a
party or by which any of their assets or properties are bound; (c) constitute a
violation of any order, judgment or decree to which Purchaser or CEC is a party
or by which any of their assets or properties are bound; or (d) to the best of
Purchaser's knowledge, other than as contemplated by Schedule 5.3, require any
approval of, or filing or registration with, any governmental entity or
Accrediting Body that is required to be obtained or made by Purchaser or CEC,
other than approvals, filings and registrations which have been previously
obtained or made, or which are required and will be obtained or made in the
ordinary course of Purchaser's or CEC's business and operations.
5.4. Litigation.
There are no actions, suits, proceedings, arbitrations, orders,
governmental investigations, inquiries or claims pending against or, to the best
of Purchaser's knowledge, threatened against or affecting Purchaser or CEC at
law or in equity, or before or by any governmental department, commission,
board, bureau, agency or instrumentality or Accrediting Body; seeking to enjoin,
restrain or delay the consummation of the transactions contemplated by this
Agreement and to the best of Purchaser's knowledge, there is no basis for the
foregoing.
5.5. Brokerage.
Neither Purchaser nor CEC has retained any broker or finder, and
neither will be obligated to pay any brokers' or finders' fee, in connection
with the negotiation or consummation of the transactions contemplated by this
Agreement.
5.6. Title IV Program Liabilities.
Neither Purchaser nor CEC, nor any of their Affiliates who exercises
substantial control over any other private post-secondary school or other
institution subject to Title IV, owes a liability for a violation of a Title IV
program requirement that may reasonably be anticipated to be an impairment to
certification of Purchaser under 34 C.F.R. Section 668.15(c).
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5.7. Disclosure.
Neither this Agreement, nor any of the schedules, exhibits or
attachments hereto prepared or supplied by Purchaser or CEC, or any documents,
certificates or other written agreements delivered by or on behalf of Purchaser
or CEC with respect to the transactions contemplated hereby, contain any untrue
statement of material fact or omit a statement of material fact necessary to
make such statements not misleading in light of the circumstances in which such
statements were made.
6. Noncompetition; Non-Solicitation; Confidential Information,
Exclusive Dealing.
6.1. Noncompetition Agreement.
Seller and Parent agree that for a period commencing on the date
hereof and ending four (4) years after the Closing Date (the "Noncompetition
Period"), neither Seller nor Parent shall have any interest in or engage in,
either directly or indirectly, as a manager, independent contractor, consultant,
partner, participant or stockholder, any business, whether for profit or not-
for-profit, that offers classes, courses or instruction in cooking or other
culinary arts, restaurant operation or management, or similar activities,
including without limitation any area of study or curriculum in which the School
offers courses as of the Closing Date (the "Competitive Activities"), other than
businesses engaged in such activities currently owned by Parent or one of its
Subsidiaries. Seller and Parent hereby acknowledge that Purchaser intends to
promote the School throughout the United States, and that the geographical scope
of this Agreement is intended to encompass all Competitive Activities engaged in
anywhere in the United States, its possessions and territories. Nothing herein
shall prevent Parent from (a) continuing to own, operate and/or transfer or
dispose of any of the other post-secondary vocational or career schools or
assets used therein and owned by Parent or its Subsidiaries as of the date
hereof which are not to be purchased hereunder (collectively the "Retained
Schools"), or (b) owning less than five percent (5%) of the capital stock of a
company whose stock is publicly traded and which is engaged in Competitive
Activities.
6.2. Non-Solicitation Agreement.
During the Noncompetition Period, Seller and Parent shall not,
directly or indirectly, for their own behalf or on behalf of any Person,
governmental entity or Accrediting Body, solicit, aid, or induce (a) any
employee of Purchaser or its Affiliates to leave Purchaser or its Affiliates in
order to accept employment with or render services for Seller or Parent or such
Person, governmental entity or Accrediting Body or (b) any student, customer,
client, vendor, lender, supplier or sales representative of Purchaser or its
Affiliates or similar persons engaged in business with Purchaser or its
Affiliates to discontinue the relationship or reduce the amount of business done
with Purchaser or its Affiliates; provided, however, that nothing herein shall
prohibit Seller or Parent from doing business with any vendors, lenders,
suppliers or similar persons in connection with the business and operations of
the Retained Schools or Parent's and Parent's Affiliates' other operations. For
purposes hereof, Purchaser and its Affiliates shall
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include CEC and each of its direct or indirect subsidiaries, whether now
existing or subsequently created.
6.3. Confidential Information.
Seller and Parent acknowledge and agree that they are in possession of
Confidential Information (as defined herein) relating to the School. For
purposes hereof, "Confidential Information" shall mean all proprietary or
confidential information concerning the business, Curricula, properties and
operations of the School, including, without limitation, all student and
prospective student lists, supplier lists, know-how, trade secrets, business and
marketing plans, techniques, forecasts, projections, budgets, unpublished
financial statements, price lists, costs, computer programs, source and object
codes, algorithms, data, and other original works of authorship, along with all
information received from third parties and held in confidence by the School or
Purchaser (including, without limitation, personnel files and student records).
During the Noncompetition Period and at all times thereafter, Seller and Parent
will hold the Confidential Information in the strictest confidence and will not
disclose or make use of (directly or indirectly) the Confidential Information or
any portion thereof to or on behalf of themselves or any third party, except (i)
as required in the performance of Seller's and Parent's duties and obligations
pursuant to the Service Agreement or this Agreement, (ii) as required by the
order of any court or similar tribunal or any other governmental body or agency
of appropriate jurisdiction; provided, however, that Seller and Parent shall, to
the extent practicable, give Purchaser prior written notice of any such required
disclosure and shall cooperate with Purchaser in obtaining a protective order or
such similar protection as Purchaser may deem appropriate to preserve the
confidential nature of such information. In addition, any Confidential
Information common to both the School and Retained Schools may be used or
transferred by Seller and Parent in connection with the operations and
disposition of the Retained Schools. The foregoing obligations to maintain the
Confidential Information shall not apply to any Confidential Information which
is or, without any wrongful action by Seller or Parent, becomes generally
available to the public. Upon termination of the Service Agreement, Seller and
Parent shall promptly return to Purchaser (or, at Purchaser's written request,
destroy) all physical embodiments of the Confidential Information (regardless of
form or medium) in the possession of or under the control of Seller or Parent
used exclusively in connection with the operation of the School and, to the
extent requested by Purchaser in writing, copies or originals of all physical
embodiments of the Confidential Information (regardless of form or medium)
common to both the School and the Retained Schools (provided that information
with respect solely to the Retained Schools may be excised from any such
copies). Notwithstanding the foregoing, nothing in this Section 6.3 shall be
construed to impair or restrict Seller's right to disclose to any Person,
governmental entity or Accrediting Body information regarding the Retained
Schools or Seller's or Parent's general corporate operations not specific to the
School.
6.4. Remedies.
The parties hereto each recognize that the other parties hereto will
suffer irreparable injury in the event of a breach of the terms of this Section
6 by Seller or Parent. Notwithstanding any provision to the contrary contained
herein, including without limitation
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the provisions of Section 9, in the event of a breach of the terms of this
Section 6, Purchaser shall be entitled, in addition to any other remedies and
damages available and without proof of monetary or immediate damage, to a
temporary and/or permanent injunction, without bond, to restrain the violation
of this Section 6 by Seller or Parent and any Person, governmental entity or
Accrediting Bodies acting for or in concert with Seller or Parent.
6.5. Scope of Restriction.
The parties have attempted to limit the scope of the covenants set
forth in this Section 6 to the extent necessary to provide Purchaser with the
benefit of its purchase of the School from Seller. The parties recognize,
however, that reasonable people may differ in making such determination.
Consequently, the parties hereby agree that if the scope and duration of such
covenants would, but for this provision, be deemed by a court of competent
authority to be unreasonable or otherwise unenforceable, such court may modify
such covenants to the extent that such court determines to be necessary in order
to grant enforcement thereof as so modified, consistent with the original intent
of the parties.
6.6. Termination Upon Recission.
Upon any recission of the transactions contemplated hereby pursuant to
Section 10, all provisions of this Section 6 shall be of no further force and
effect on Seller and Parent with respect to the Confidential Information.
6.7. Additional Covenants of Seller and Parent Pending Closing.
Pending the Closing, Seller and Parent shall cooperate fully with
Purchaser, its officers, employees, representatives and agents in connection
with accomplishing the satisfaction of all conditions to the Closing and with
all other matters relating to the consummation of the transactions contemplated
by this Agreement. Pending the Closing and subject to all the limitations
contained in and provisions of the Family Educational Rights and Privacy Act of
1974, 20 U.S.C. (S) 1232g, as amended, and any other relevant requirements of
federal or state law, Seller shall afford to all representatives of Purchaser
reasonable access during normal business hours to the assets, properties, books,
financial statements, work papers and records of Seller related to the School in
order that Purchaser have full opportunity to make investigations of the School
and the Assets. In addition, Seller shall use good faith efforts to assist
Purchaser in obtaining any required accreditation from any Accrediting Body
reasonably necessary for Purchaser's operation of the Schools, including
furnishing Purchaser such necessary information and reasonable assistance as
Purchaser may request in connection with its preparation of necessary filings,
submissions or applications to any such Accrediting Body in connection with the
transactions contemplated hereby. Furthermore, during the period from the date
of this Agreement to the Closing Date, Seller and Parent shall conduct no
business and incur or assume no liabilities or obligations of any kind or nature
relating to the School, the Assets or this Agreement, except for such business,
liabilities and obligations as may be conducted or incurred in the ordinary
course of business of the School or as expressly permitted or required by the
terms of this Agreement or as to which Purchaser may consent in writing.
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Seller shall promptly notify Purchaser of any occurrence or event that would or
is likely to make untrue any representation or warranty of Seller or Parent made
in Section 4 as of the Closing Date, or which would or is likely to result in an
inability to satisfy any condition set forth in Section 8. During the period
from the date of this Agreement to the Closing Date, Seller shall conduct its
operations at the School only according to its ordinary and usual course of
business and use its good faith efforts to preserve intact its business
organization, keep available the services of its employees and maintain
satisfactory relationships with Accrediting Bodies, governmental authorities,
suppliers, agents, students and others having business relationships with the
School. Seller shall notify Purchaser of any unexpected emergency or other
change in the normal course of the business of the School, and of any
Accrediting Body or governmental complaints, investigations or hearings (or
communications indicating that the same may be contemplated) or adjudicatory
proceedings involving Seller, the Assets or the School, and shall keep Purchaser
fully informed of such events and permit its representatives prompt access to
all materials prepared in connection therewith, subject to the limitations
contained in and the provisions of the Family Educational Rights and Privacy Act
of 1974 and any other relevant requirements of federal or state law.
6.8. Key Employees.
During the period from the date of this Agreement to the Closing Date,
Seller and Parent shall use their good faith efforts to retain the services of
all senior managerial employees of the School. During the period from the date
of this Agreement to the Closing Date, Seller shall not offer any employee or
sales representative of the School any other employment with Seller, any of the
Retained Schools, Parent or any of their Affiliates without the prior written
consent of Purchaser.
6.9. Exclusive Dealing.
During the period from the date of this Agreement to the earlier of
(a) the Closing Date or (b) the date of termination of this Agreement pursuant
to Section 11.1 hereof, Seller and Parent shall not, directly or indirectly,
encourage, initiate or engage in discussions or negotiations with, or (except as
contemplated by this Agreement) provide any information to, any Person, other
than Purchaser and CEC, concerning any proposed purchase of the School or the
Assets or any similar transaction involving the School or Parent's or Seller's
interest in the School.
6.10. Additional Covenants of CEC and Purchaser Pending Closing.
CEC and Purchaser covenant and agree that from and after the date of
this Agreement and until the earlier of the Closing Date or the termination of
this Agreement pursuant to Section 11.1 hereof, Purchaser (a) shall use its good
faith efforts to fulfill or satisfy, or cause to be fulfilled or satisfied, all
of the conditions precedent to Seller's obligations to consummate and complete
the transactions contemplated by this Agreement, including without limitation
the sale of the School provided herein and to take all other steps and do all
other things reasonably required to consummate this Agreement in accordance with
its terms; (b)
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shall not interfere with the performance by Seller or Parent of their
obligations under this Agreement; and (c) shall promptly coordinate with Seller
or Parent the preparation and filing of any preacquisition notification to the
FTC with respect to the School required by the Hart-Scott-Rodino Antitrust
Improvement Act of 1976, as amended, if necessary.
7. Conditions to Purchaser's Obligations.
The obligations of Purchaser to consummate the transactions
contemplated by this Agreement are subject to the satisfaction, or to the waiver
in writing by Purchaser, on or before the Closing Date, or such other date as is
set forth herein, of the conditions set forth below:
7.1. Cohort Default Rates.
Neither Seller nor Parent shall have received notification from the
DOE at any time prior to the Closing Date that the School's Federal Family
Education Loan Program cohort default rate for fiscal year 1994 is equal to or
greater than twenty-five percent (25%).
7.2. Truth of Representations and Warranties.
The representations and warranties of Seller and Parent contained in
this Agreement and in any certificate delivered by Seller or Parent in
accordance with the terms hereof shall be true and correct with respect to
Seller and Parent in all material respects on and as of the Closing Date with
the same effect as though such representations and warranties had been made on
and as of such date (except to the extent such representations and warranties
speak of a particular date and except to the extent that any failure to satisfy
this requirement does not have a material adverse effect on the Assets, or the
business or operations of the School, taken as a whole), and Seller and Parent
shall have delivered to Purchaser a certificate, dated the Closing Date, to such
effect.
7.3. Performance of Agreements.
Each and all of the agreements of Seller and Parent to be performed on
or before the Closing Date pursuant to the terms hereof shall have been fully
performed in all material respects, each of the documents, agreements and other
items to be delivered to Purchaser pursuant to Section 3.1 shall have been
delivered, and Seller shall have delivered to Purchaser a certificate, dated the
Closing Date, to such effect.
7.4. No Material Adverse Change.
Since the date of this Agreement, there shall have been no material
adverse change in the properties, business, assets, results of operations, or
condition (financial or otherwise) of the School taken as a whole, and Seller
shall have delivered to Purchaser a certificate, dated as of the Closing Date,
to such effect.
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7.5. Litigation.
No statute, law, regulation or order shall have been enacted, issued,
promulgated or entered by any governmental entity and no injunction or order of
any court or other governmental body or Accrediting Body shall have been
entered, in either case, which prohibits or restricts the transactions
contemplated hereby, and no action or proceeding shall have been instituted or
threatened by any Person, governmental entity or Accrediting Body before a court
or other governmental body or Accrediting Body, (i) seeking to restrain or
prohibit any of the transactions contemplated hereby or (ii) challenging or
questioning the right, title or interest of Seller in and to the Assets to be
transferred under this Agreement or the right of Seller to transfer validly all
of such right, title and interest in and to such Assets to Purchaser, except to
the extent such events do not have a material adverse effect on the transactions
contemplated by this Agreement.
7.6. Proceedings.
All proceedings to be taken in connection with the transactions
contemplated by this Agreement and all documents incident thereto shall be
reasonably satisfactory, in all material respects, in form and substance to
Purchaser and its counsel, and Purchaser shall have received copies of all such
documents and other evidence as Purchaser or its counsel may reasonably request
in order to establish the consummation of such transactions and the taking of
all appropriate proceedings in connection therewith.
7.7. Consents and Approvals.
Purchaser shall have obtained the consents and approvals set forth in
Section 3.1(i).
7.8. Agreement with DOE.
Parent shall have (a) entered into an agreement with DOE, which
Agreement has become effective, settling certain disputes between Parent and DOE
on terms consistent with that certain March 12, 1996 letter attached hereto as
Exhibit B hereto and resolving, without further liability to Purchaser, all
matters disclosed in Paragraph I.B of Schedule 4.6(a) and Paragraph B.1 of
Schedule 4.16, (b) delivered a copy of such agreement to Purchaser, including
the schedules and exhibits thereto (provided, that Parent may redact those
provisions (and related schedules and exhibits) of such agreement not related to
Purchaser's rights, obligations and liabilities as a successor owner of the
School), and (c) delivered to Purchaser a certificate, signed by an officer of
Parent, certifying (i) that all conditions to the effectiveness of such
agreement have been satisfied, (ii) that the redacted copy of such agreement
does not omit any provision relating to or otherwise affecting the limitations
on liability of Purchaser as buyer of the School set forth therein, and (iii)
that there are no agreements other than such agreement to which Seller and/or
Parent and DOE are parties affecting the liability of Purchaser with respect to
the School.
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8. Conditions to Seller's and Parent's Obligations.
The obligations of Seller and Parent to consummate the transactions
contemplated by this Agreement with respect to the School are subject to the
satisfaction, or to the waiver in writing by Seller, on or before the Closing
Date, of the following conditions:
8.1. Truth of Representations and Warranties.
The representations and warranties of Purchaser and CEC contained in
this Agreement and in any certificate delivered by Purchaser or CEC in
accordance with terms hereof shall be true and correct in all material respects
on and as of the Closing Date with the same effect as though such
representations and warranties had been made on and as of such date (except to
the extent such representations and warranties speak of a particular date and
except to the extent that any failure to satisfy this requirement does not have
a material adverse effect on the Assets, or the business or operations of the
School, taken as a whole), and Purchaser and CEC shall have delivered to Seller
a certificate, dated as of the Closing Date, to such effect.
8.2. Performance of Agreements.
Each and all of the agreements of Purchaser to be performed on or
before the Closing Date pursuant to the terms hereof shall have been fully
performed in all material respects, and each of the documents, agreements and
other items, to be delivered to Seller pursuant to Section 3.2 shall have been
delivered, and Purchaser shall have delivered to Seller a certificate, dated the
Closing Date, to such effect.
8.3. Litigation.
No statute, law, regulation or order shall have been enacted, issued,
promulgated or entered by any governmental entity and no injunction or order of
any court or other governmental body or Accrediting Body shall have entered, in
either case, which prohibits or restricts the transactions contemplated hereby,
and no action or proceeding shall have been instituted or threatened by any
Person, governmental entity or Accrediting Body before a court or other
governmental body or Accrediting Body, (i) seeking to restrain or prohibit any
of the transactions contemplated hereby, or (ii) unless Purchaser has agreed to
waive its right to indemnification with respect thereto, challenging or
questioning the right, title or interest of Seller to transfer validly all of
such right, title and interest in and to the Assets to be transferred to
Purchaser, except to the extent such events do not have a material adverse
effect on the transactions contemplated by this Agreement.
8.4. Proceedings.
All proceedings to be taken in connection with the transactions
contemplated by this Agreement and all documents incident thereto shall be
satisfactory in form and substance, in all material respects, to Seller, Parent
and their counsel, and Seller and Parent shall have received copies of all such
documents and other evidence as they or their counsel may
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reasonably request in order to establish the consummation of such transactions
and the taking of all appropriate proceedings in connection therewith.
8.5. Consents and Approvals.
Seller and Parent shall have obtained the consents and approvals set
forth in Schedule 3.1(i).
8.6. Agreement with DOE.
Parent shall have entered into an agreement with DOE, which has become
effective, settling certain disputes between Parent and DOE on terms consistent
with that certain March 12, 1996 letter attached as Exhibit B hereto resolving,
without further liability to Purchaser, all matters disclosed in Paragraph I.B
of Schedule 4.6(a) and Paragraph B.1 of Schedule 4.16.
9. Indemnification.
9.1. Survival of Representations, Warranties, Covenants and
Agreements.
(a) All representations and warranties, and all obligations in
respect of covenants and agreements of the parties, contained in this
Agreement, including the schedules and exhibits attached hereto, and those
contained in the Escrow Agreement, the Service Agreement, and the
Assignment and Assumption Agreement, shall survive the Closing and any
investigation at any time made by or on behalf of any party for a period of
two (2) years following the Closing; provided, however, notwithstanding the
foregoing, obligations in respect of covenants and agreements of the
parties hereto to be performed after Closing shall survive until such
covenants and agreements are fulfilled, performed or discharged in full and
for a period of two (2) years thereafter.
(b) Notwithstanding the provisions of Section 9.1(a) and except as
provided below, all representations and warranties of the parties contained
in this Agreement, including the schedules and exhibits hereto, and those
contained in the Escrow Agreement, the Service Agreement, and the
Assignment and Assumption Agreement, shall expire, terminate and be of no
force and effect (or provide the basis for any claim), and no party shall
have any obligation to indemnify under this Section 9 for any claim
resulting from breach of any such representation or warranty unless written
notice thereof is received within two (2) years after the Closing Date;
provided, that the foregoing limitation shall not apply to the breach of
any of the representations and warranties of Seller and Parent contained in
Section 4.9(d) or the bill of sale to be delivered pursuant to Section
3.1(a).
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9.2. Indemnification by Seller and Parent.
Seller and Parent hereby agree, jointly and severally, to indemnify
and hold Purchaser and its Affiliates, and any director, officer, employee,
agent, or advisor of any of them, harmless from, against and with respect to any
and all demands, claims, actions or causes of action, assessments, liabilities,
losses, costs, damages, penalties, charges or expenses, including, without
limitation interest, penalties and reasonable counsel and accountants' fees,
disbursements and expenses (collectively, "Indemnifiable Losses") arising out
of, or related to, (a) any material breach by Seller or Parent of any
representation, warranty, covenant or agreement made by Seller or Parent in this
Agreement, including the schedules and exhibits hereto, and (b) any matter
relating to the operation of the School prior to Closing other than Assumed
Liabilities (including, without limitation, any Pre-Closing Financial Aid
Irregularities); provided, that in no event shall Seller's and Parent's
aggregate liability hereunder with respect to all Indemnifiable Losses arising
under clause (a) above exceed the consideration paid to Seller and Parent under
this Agreement; provided, further, that notwithstanding the foregoing, there
shall be no limit on Seller's liability with respect to Indemnifiable Losses
arising under clause (b) of this Section 9.2.
9.3. Indemnification by Purchaser.
Purchaser hereby agrees to indemnify, defend and hold Seller, Parent
and their Affiliates, and any director, officer, employee, agent or advisor of
any of them, harmless from, against and with respect to any and all
Indemnifiable Losses arising out of, or related to, (a) any material breach by
Purchaser or CEC of any representation, warranty, covenant or agreement made by
Purchaser or CEC in this Agreement, including the schedules and exhibits hereto,
and (b) any matter relating to the operation of the School by Purchaser after
Closing, including, without limitation, Purchaser's obligations in respect of
the Assumed Liabilities.
9.4. Procedures.
(a) Any claim under Section 9.2 or Section 9.3 shall be made in a
written statement signed by the party seeking indemnification which shall
specify in reasonable detail each individual item of Indemnifiable Loss and
the estimated amount thereof, the date such item was claimed or the facts
giving rise to such claim were discovered, the basis for any alleged
liability and the nature of the breach or claim to which each such item is
related.
(b) If the indemnifying party does not pay the amount specified in any
such statement within thirty (30) days after it has been delivered by the
party seeking indemnification, the party seeking indemnification may
enforce its right in accordance with law.
(c) The party seeking indemnification shall give the indemnifying
party prompt notice (but in no event later than ten (10) business days
following receipt of written notice) of any third party claim, action or
proceeding which
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might give rise to liability of the indemnifying party for indemnification
hereunder. If the indemnifying party contests any third party claim, it
will have the option to defend, at the indemnifying party's expense, any
such matter, provided that the indemnified party shall have the right, at
its own cost and expense, to participate in the defense of such claim or,
if the indemnifying party elects not to defend the claim, to conduct the
defense on its own behalf. If the indemnifying party conducts the defense
of a claim, neither party will enter into any settlement agreement without
the other party's consent; provided, that the indemnified party shall not
object to any proposed settlement which requires only the payment of money
by the indemnifying party and does not involve any admissions or
stipulations by the indemnified party or any injunctive or similar relief
or any other contractual obligations affecting the indemnified party or its
business and operations. The indemnified party shall cooperate with the
indemnifying party in the defense, compromise or settlement of any claim
for which indemnification is sought. If the indemnifying party elects not
to conduct the defense of such claim, the indemnified party shall be
permitted to settle or compromise any such claim on such terms as it deems
appropriate and such settlement or compromise shall not prejudice its
rights to indemnification hereunder.
9.5. Prevailing Party to be Awarded Legal Fees.
In the event of any litigation, whether at law or in equity, arising
out of this Agreement, the party prevailing in such litigation shall be entitled
to receive, upon application to the court, its reasonable legal fees and
expenses incurred in connection therewith.
9.6. Limitations on Amount of Indemnification Liability.
Notwithstanding anything to the contrary contained herein, no party
shall be obligated to pay the other any amounts for indemnification under
Sections 9.2 or 9.3, until the aggregate amount which it or they would have been
obligated to pay but for this Section 9.6 equals $50,000, whereupon the
indemnifying party shall be obligated to pay all amounts for indemnification
then owing by such indemnifying party, including the amounts aggregated to reach
the $50,000 threshold; provided, that the foregoing shall not apply to
Purchaser's obligation in respect of the payment of the Purchase Price or its
obligations described in Section 2.15 or in Section 9.3(b), or to Seller's
obligations described in Section 2.9 and Section 2.15, or Seller's and Parent's
obligations described in Section 9.2(b), or to amounts deposited into the Escrow
other than amounts deposited in respect of the General Indemnity Escrow Amount.
9.7. Remedies.
Except for violations of Sections 6.1, 6.2 or 6.3 and the right to
rescind under Section 10, any claim for any breach of representation, warranty,
covenant or agreement, or any other claim, arising out of this Agreement, the
Escrow Agreement, the Service Agreement, the Assignment and Assumption
Agreement, the bill of sale to be delivered pursuant to Section
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3.1(a), or the transactions contemplated hereby or thereby, whether such claim
may be asserted as a breach of contract, tort or otherwise, shall have as its
sole remedy the indemnification provided in this Section 9, unless such breach
results from gross negligence or willful misconduct. Notwithstanding the
foregoing, nothing herein shall preclude any party from seeking injunctive or
other equitable relief as may be reasonably necessary to protect its rights
hereunder, including, without limitation, those rights and remedies specified in
Section 6.4.
9.8. Limitation on Personal Liability of Affiliates.
Notwithstanding anything in this Agreement to the contrary or anything
arising out of the transactions contemplated hereby, no shareholder, partner,
director, officer, employee, agent, manager or Affiliate of any party hereto (or
any direct or indirect shareholder, partner, director, officer, employee, agent,
manager or Affiliate of any of them) shall have any personal liability of any
nature whatsoever to any party hereto as a result of a breach of any
representation, warranty, covenant or agreement contained in this Agreement or
the other documents executed and delivered in connection with the transactions
contemplated hereby, including without limitation the Escrow Agreement, the
Service Agreement, the Assignment and Assumption Agreement, and the bill of sale
to be delivered pursuant to Section 3.1(a) or otherwise arising out of the
transactions contemplated hereby; provided, however, that nothing herein shall
limit any party's rights or remedies with respect to fraud claims arising out of
or relating to such transactions; and further provided, that the foregoing
limitations shall in no event apply to any of Parent, Seller, Purchaser or CEC.
9.9. Indemnity Escrow Amount.
The obligations of Seller and Parent in respect of Indemnifiable
Losses pursuant to this Section 9 shall be secured by and, to the extent
sufficient funds are available therein, paid from, the Indemnity Escrow Amount
portion of funds held in the Escrow established pursuant to Section 2.5.
10. Recission of Transactions.
After Closing, in the event that DOE refuses to issue a DOE Approval
Notice permitting resumption of Title IV funding to the School under Purchaser's
ownership based solely on Pre-Closing Financial Aid Irregularities or the pre-
Closing financial condition of the School or Seller (each, a "Seller
Inadequacy"), Purchaser shall have the right and option, in its sole discretion,
upon written notice delivered to Seller no later than fifteen (15) days after
receipt by Purchaser of notice from DOE that such approval is denied, to rescind
the transactions consummated under this Agreement. Upon Purchaser's election of
recission pursuant to this Section 10, each of the parties hereto shall take
such actions as may reasonably be required to restore the other parties to their
respective positions as they existed immediately prior to Closing. Purchaser
shall not have any right or option to rescind the transactions consummated under
this Agreement after Closing for any reason other than as above stated,
including, without limitation, DOE's refusal to issue a DOE Approval Notice
based in whole or in part upon any characteristic(s) or conditions(s) of
Purchaser or CEC or of any school (not
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including the School) previously or currently owned or operated by Purchaser or
CEC, including the administrative capability or financial responsibility of
Purchaser, CEC, or any school (not including the School) previously or currently
owned or operated by Purchaser or CEC (each, a "Purchaser Inadequacy") or DOE's
issuance of a DOE Approval Notice which contains conditions upon Purchaser's,
CEC's or the School's participation in Title IV. Notwithstanding the foregoing,
in the event that DOE refuses to issue a DOE Approval Notice based in part upon
one or more Seller Inadequacies and in part upon one or more Purchaser
Inadequacies, and in the event Purchaser is able to cure or otherwise resolve
such Purchaser Inadequacies to the satisfaction of DOE within thirty (30) days
after receipt by Purchaser of initial written notice from DOE that a DOE
Approval Notice will not be issued for such reasons, Purchaser shall have the
right and option, in its sole discretion, upon written notice delivered to
Seller no later than ten (10) days after receipt by Purchaser of notice from DOE
that all Purchaser Inadequacies have been cured or otherwise resolved to the
satisfaction of DOE, to rescind the transactions consummated under this
Agreement.
11. Miscellaneous.
11.1. Termination.
This Agreement may be terminated at any time prior to the Closing
Date:
(a) by mutual written consent of the Purchaser and the Seller;
(b) prior to the Closing by Seller or Parent on the one hand or
Purchaser or CEC on the other hand, if the other parties shall be in breach
of any covenant, undertaking, or restriction contained herein, the breach
of which shall have a material adverse effect on the transactions
contemplated by this Agreement taken as a whole, and such breach has not
been cured within ten (10) business days after giving written notice to the
breaching party or parties of such breach; provided, that if such breach
is, in the reasonable judgment of the non-breaching party, capable of being
cured, but cannot reasonably be cured within such ten (10) business day
period, no party shall be permitted to terminate this Agreement as a result
of such breach so long as the breaching party is diligently pursuing cure
of such breach;
(c) by the Purchaser or the Seller if the Closing shall not have
occurred on or before December 31, 1996 or if a statute, law, regulation or
order shall have been enacted, issued, promulgated or entered by any
governmental entity or an injunction or order of a court or other
governmental body or Accrediting Body has been entered, in either case,
which prohibits or restricts the transactions contemplated hereby or an
action or proceeding shall have been instituted or threatened by any
Person, governmental entity or Accrediting Body or pending before a court
or other governmental body or Accrediting Body seeking to restrain or
prohibit any of the transactions contemplated hereby;
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(d) by the Purchaser if any of the conditions specified in Section 7
have not been met or waived prior to such time as such condition can no
longer be satisfied; or
(e) by the Seller if any of the conditions specified in Section 8
have not been met or waived prior to such time as such condition can no
longer be satisfied.
In the event of termination of this Agreement, this Agreement shall forthwith
become null and void except for this Section 11.1 and Sections 9, 11.2, 11.3,
11.4, 11.5, 11.6, 11.7, 11.8, 11.9, 11.10, 11.11 and 11.12, pursuant to this
Section 11.1, which shall remain in full force and effect and which shall
survive such termination, and there shall be no liability on the part of any
party hereto resulting from the failure of the parties to consummate the
transactions contemplated herein, except that nothing herein shall relieve any
party hereto from liability for any willful or intentional breach of this
Agreement by such party occurring prior to the termination hereof.
11.2. Expenses.
Each party hereto shall be liable for the payment of the fees and
expenses incurred by such party or on such party's behalf in connection with the
negotiation and execution of this Agreement and the consummation of the
transactions contemplated by this Agreement, including, without limitation,
legal, accounting, financial and tax advice, brokers, finders and other fees,
expenses and commissions. Purchaser shall pay all transfer, sales and use taxes
in connection with the sale of the Assets to Purchaser.
11.3. Successors and Assigns.
This Agreement and the rights hereunder shall not be assignable or
transferable without the prior written consent of all the parties hereto;
provided, that notwithstanding the foregoing, this Agreement and the rights
hereunder shall be assignable by Purchaser and CEC to their Affiliates and
lenders, but no such assignment shall release Purchaser or CEC from any of their
respective duties, liabilities or obligations pursuant to this Agreement. Except
as otherwise expressly provided herein, all covenants and agreements contained
in this Agreement by or on behalf of any of the parties hereto shall bind and
inure to the benefit of the respective successors and assigns of the parties
hereto whether so expressed or not.
11.4. Severability.
Whenever possible, each provision of this Agreement shall be
interpreted in such manner as to be effective and valid under applicable law,
but if any provision of this Agreement is held to be prohibited by or invalid
under applicable law, such provision shall be ineffective only to the extent of
such prohibition or invalidity, without invalidating the remainder of this
Agreement.
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<PAGE>
11.5. Counterparts.
This Agreement may be executed simultaneously in two or more
counterparts, any one of which need not contain the signatures of more than one
party, but all such counterparts taken together shall constitute one and the
same Agreement.
11.6. Descriptive Headings; Interpretation.
The descriptive headings of this Agreement are inserted for
convenience only and do not constitute a Section of this Agreement.
11.7. Governing Laws.
This Agreement shall be construed and enforced in accordance with, and
all questions concerning the construction, validity, interpretation and
performance of this Agreement shall be governed by, the laws of the State of
Illinois without giving effect to provisions thereof regarding conflict of laws.
11.8. Consent to Jurisdiction and Service of Process.
EACH PARTY HERETO CONSENTS TO THE JURISDICTION OF ANY STATE OR FEDERAL
COURT LOCATED WITHIN THE COUNTY OF COOK, STATE OF ILLINOIS AND IRREVOCABLY
AGREES THAT SUBJECT TO PURCHASER'S ELECTION, ALL ACTIONS OR PROCEEDINGS ARISING
OUT OF OR RELATING TO THIS AGREEMENT OR THE OTHER RELATED DOCUMENTS SHALL BE
LITIGATED IN SUCH COURTS. EACH PARTY HERETO ACCEPTS FOR ITSELF AND IN CONNECTION
WITH ITS PROPERTIES, GENERALLY AND UNCONDITIONALLY, THE NONEXCLUSIVE
JURISDICTION OF THE AFORESAID COURTS AND WAIVES ANY DEFENSE OF FORUM
NONCOVENIENS, AND IRREVOCABLY AGREES TO BE BOUND BY ANY JUDGMENT RENDERED
THEREBY IN CONNECTION WITH THIS AGREEMENT. EACH PARTY HERETO DESIGNATES AND
APPOINTS CT CORPORATION SYSTEM AND SUCH OTHER PERSON AS MAY HEREINAFTER BE
SELECTED BY PURCHASER WHO IRREVOCABLY AGREE IN WRITING TO SO SERVE AS AGENT TO
RECEIVE ON SUCH PARTY'S BEHALF SERVICE OF ALL PROCESS IN ANY SUCH PROCEEDING IN
ANY SUCH COURT, SUCH SERVICE BEING HEREBY ACKNOWLEDGED BY EACH PARTY TO BE
EFFECTIVE AND BINDING SERVICE IN EVERY RESPECT. A COPY OF ANY SUCH PROCESS SO
SERVED SHALL BE MAILED BY REGISTERED MAIL TO EACH PARTY AS PROVIDED HEREIN,
EXCEPT THAT UNLESS OTHERWISE PROVIDED BY APPLICABLE LAW, ANY FAILURE TO MAIL
SUCH COPY SHALL NOT AFFECT THE VALIDITY OF SERVICE OF PROCESS. IF ANY AGENT
APPOINTED BY A PARTY REFUSES TO ACCEPT SERVICE, SUCH PARTY HEREBY AGREES THAT
SERVICE UPON IT BY REGISTERED MAIL, RETURN RECEIPT REQUESTED SHALL CONSTITUTE
SUFFICIENT NOTICE. NOTHING HEREIN SHALL AFFECT THE RIGHT TO SERVE PROCESS IN ANY
OTHER MANNER PERMITTED BY LAW OR
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<PAGE>
SHALL LIMIT THE RIGHT OF PURCHASER TO BRING PROCEEDINGS AGAINST SELLER OR PARENT
IN THE COURTS OF OREGON OR MISSISSIPPI.
11.9. Waiver of Jury Trial. Arbitration.
EACH PARTY HERETO HEREBY WAIVES ITS RESPECTIVE RIGHTS TO A JURY TRIAL
OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF THIS AGREEMENT OR
ANY DEALINGS BETWEEN THEM RELATING TO THE SUBJECT MATTER OF THIS TRANSACTION AND
THE RELATIONSHIP THAT IS BEING ESTABLISHED. EACH PARTY HERETO ALSO WAIVES ANY
BOND OR SURETY OR SECURITY UPON SUCH BOND WHICH MIGHT, BUT FOR THIS WAIVER, BE
REQUIRED OF THE OTHER PARTIES. THE SCOPE OF THIS WAIVER IS INTENDED TO BE ALL
ENCOMPASSING OF ANY AND ALL DISPUTES THAT MAY BE FILED IN ANY COURT AND THAT
RELATE TO THE SUBJECT MATTER OF THESE TRANSACTIONS, INCLUDING WITHOUT
LIMITATION, CONTRACT CLAIMS, TORT CLAIMS, BREACH OF DUTY CLAIMS, AND ALL OTHER
COMMON LAW AND STATUTORY CLAIMS. EACH PARTY HERETO ACKNOWLEDGES THAT THIS WAIVER
IS A MATERIAL INDUCEMENT TO ENTER INTO A BUSINESS RELATIONSHIP, THAT EACH HAS
ALREADY RELIED ON THE WAIVER IN ENTERING INTO THIS AGREEMENT AND THAT EACH WILL
CONTINUE TO RELY ON THE WAIVER IN THEIR RELATED FUTURE DEALINGS. EACH PARTY
HERETO FURTHER WARRANTS AND REPRESENTS THAT EACH HAS REVIEWED THIS WAIVER WITH
ITS LEGAL COUNSEL, AND THAT EACH KNOWINGLY AND VOLUNTARILY WAIVES ITS JURY TRIAL
RIGHTS FOLLOWING CONSULTATION WITH LEGAL COUNSEL. THIS WAIVER IS IRREVOCABLE,
MEANING THAT IT MAY NOT BE MODIFIED EITHER ORALLY OR IN WRITING, AND THE WAIVER
SHALL APPLY TO ANY SUBSEQUENT AMENDMENTS, RENEWALS, SUPPLEMENTS OR MODIFICATIONS
TO THIS AGREEMENT OR TO ANY OTHER DOCUMENTS OR AGREEMENTS RELATING TO THE
TRANSACTIONS CONTEMPLATED HEREBY. IN THE EVENT OF LITIGATION, THIS AGREEMENT MAY
BE FILED AS A WRITTEN CONSENT TO A TRIAL BY THE COURT.
11.10. Notices.
All notices, demands or other communications to be given or delivered
under or by reason of the provisions of this Agreement shall be in writing and
shall be deemed to have been given (a) when delivered personally or sent by
facsimile to the recipient, or (b) one (1) business day after the date such
communication is sent to the recipient by reputable express courier service
(charges prepaid). Such notices, demands and other communications shall be sent
to the parties hereto at the addresses indicated below:
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<PAGE>
If to Purchaser: WCI Acquisition, Ltd.
c/o Career Education Corporation
2800 West Higgins Road
Hoffman Estates, Illinois 60195
Attention: John M. Larson, William Klettke
Facsimile: (847) 781-3610
With copies to: D'Ancona & Pflaum
30 North LaSalle Street
Suite 2900
Chicago, Illinois 60602
Attention: Michel J. Feldman
Facsimile: (312) 580-0923
and Goldberg, Kohn, Bell, Black,
Rosenbloom & Moritz, Ltd.
55 East Monroe Street
Suite 3700
Chicago, Illinois 60603
Attention: Dennis B. Black, Esq.
Facsimile: (312) 332-2196
If to Seller or Parent: Phillips Colleges, Inc.
One Hancock Plaza - Suite 1408
Gulfport, Mississippi 39501
Attention: Joseph A. Bondi
Facsimile: (601) 864-0519
and Joseph A. Bondi
Alvarez & Marsal, Inc.
885 Third Avenue
Suite 1700
New York, New York 10022-4802
Facsimile: (212) 230-3307
With copies to: Dow, Lohnes and Albertson
1200 New Hampshire Avenue, N.W.
Suite 800
Washington, D.C. 20036-6802
Attention: Michael Goldstein
Facsimile: (202) 776-2222
or to such other address or to the attention of such other Person as the
recipient party has specified by prior written notice to the sending party.
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<PAGE>
11.11. Guaranty by CEC.
If Purchaser shall default in the due and punctual payment of its
obligations or performance of its duties and obligations hereunder or any other
agreement entered into by Purchaser in connection with the consummation of the
transactions contemplated hereby, CEC shall forthwith pay, perform or cause to
be paid or performed such duties and obligations. The obligations of CEC under
this Section 11.11 shall not be conditioned or contingent upon the pursuit of
any remedies against Purchaser or any other Person. To the maximum extent
permitted by law, CEC hereby waives any right, whether legal, equitable,
statutory or non-statutory, to require Seller or Parent to proceed or take any
action against, or pursue any remedy with respect to, Purchaser or any other
Person before Seller or Parent may enforce rights against CEC under this Section
11.11; provided, however, that the foregoing shall not be deemed a waiver of any
actions, claims or defenses available to CEC, which shall include any actions,
claims or defenses available to Purchaser with respect to any such matter for
which Seller or Parent seeks to enforce this Section 11.11. Subject to the
foregoing, the guaranty provided herein is an absolute, continuing, irrevocable
and unconditional guaranty of CEC; provided that CEC's obligations in respect of
claims made hereunder shall be subject to the same limitations as apply to
Purchaser's duties and obligations, including without limitation the limitations
set forth in Sections 9.6, 9.7 and 9.8. CEC recognizes that this guaranty is a
material inducement to Seller's and Parent's entering into this Agreement and
will not be affected, impaired or released by an extenuation, waiver or
amendment of this Agreement or Purchaser's exercise of any rights granted under
this Agreement. Notwithstanding any provision of this Agreement to the contrary,
CEC's execution and delivery of this Agreement is solely for the purpose of
evidencing its agreement to be bound by Section 5 and this Section 11.11.
11.12. Entire Agreement.
Except as otherwise expressly set forth herein, this Agreement and the
exhibits and schedules hereto embody the complete agreement and understanding
among the parties and supersede and preempt any prior understandings, agreements
or representations by or among the parties, written or oral, which may have
related to the subject matter hereof in any way, including, without limitation,
the Letter of Intent, dated July 5, 1996, as amended, between Parent and CEC.
[signature page follows]
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<PAGE>
IN WITNESS WHEREOF, the parties hereby have executed this Agreement on
the date first written above.
SELLER:
PHILLIPS EDUCATIONAL GROUP OF PORTLAND,
INC., an Oregon corporation
By /s/ JOSEPH A. BONDI
---------------------------------------
Its President and Chief Executive Officer
--------------------------------------
PARENT:
PHILLIPS COLLEGES, INC., a Mississippi
corporation
By /s/ JOSEPH A. BONDI
---------------------------------------
Its President and Chief Executive Officer
--------------------------------------
PURCHASER:
WCI ACQUISITION, LTD., a Delaware
corporation
By /s/ JOHN M. LARSON
------------------------------------
Its President/ CEO
-----------------------------------
CAREER EDUCATION CORPORATION (For
purposes of agreement to Sections 5
and 11 only):
CAREER EDUCATION CORPORATION, a
Delaware corporation
By /s/ JOHN M. LARSON
------------------------------------
Its President/ CEO
-----------------------------------
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<PAGE>
LIST OF EXHIBITS
Exhibit A - Assignment and Assumption Agreement
Exhibit B - Letter dated March 12, 1996 from DOE to Parent
Exhibit C - Form Escrow Agreement
Exhibit D - Form of Service Agreement
Exhibit E - Seller's Counsel Opinion
Exhibit F - Purchaser's Counsel Opinion
LIST OF SCHEDULES
Schedule 2.1 - Excluded Prepaid Expenses and Other Excluded Assets
Schedule 2.2 - Form of Calculation of Accounts Receivable Adjustment
and Certain Other Calculations
Schedule 2.3(a) - Assumed Liabilities
Schedule 2.9(a) - Form of Operations Statement
Schedule 2.9(b) - Form of Report of Depreciation and Amortization
Schedule 3.1(i) - Seller's Consents
Schedule 4.4 - Seller's Conflicts
Schedule 4.6(a) - Compliance with Applicable Laws
Schedule 4.6(b) - License and Permits
Schedule 4.6(c) - Notices of Noncompliances and Investigations
Schedule 4.7(a) - Policy Guidelines
Schedule 4.7(b) - Noncompliance with Policy Guidelines
Schedule 4.8 - Cohort Default Rates
Schedule 4.9(c) - Defaults under Real Property Leases
Schedule 4.9(d) - Leased or Licensed Assets Requiring Consent to
Transfer; Defaults under Leases and Licenses
Schedule 4.9(e) - List of Machinery and Equipment
Schedule 4.10 - Material Miscellaneous Contracts
Schedule 4.11(a) - Tradenames
Schedule 4.11(b) - Licensed Tradenames
Schedule 4.12 - Financial Security Arrangements
Schedule 4.12(c) - Debts Incurred Since Interim Balance Sheet Date
Schedule 4.16 - Litigation
Schedule 4.17 - Insurance
Schedule 4.18 - Environmental Matters
Schedule 4.19 - Employee Benefit Plans
Schedule 4.20(a) - Employment Issues
Schedule 4.20(b) - List of Employees, Consultants and Other Service
Providers
Schedule 4.23 - Affiliate Transactions
Schedule 4.24 - Changes Since Interim Balance Sheet Date
Schedule 4.25 - Indebtedness
Schedule 5.3 - Purchaser's Consents and Government Approvals
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Exhibit 2.2
STOCK SALE AGREEMENT
AGREEMENT OF SALE, dated April 7, 1997 (this "Agreement") by and between
K-III Prime Corporation, Inc., a corporation organized under the laws of the
State of Delaware ("Seller" or "the Seller"), and Career Education Corporation,
a corporation organized under the laws of the State of Delaware ("Purchaser" or
"the Purchaser").
WHEREAS, The Katharine Gibbs Schools, Inc. (formerly known as K-III KG
Holdings, Inc.), a Delaware corporation (the "Company"), is a wholly-owned
subsidiary of Seller and each of the corporations listed on Appendix I is a
direct wholly-owned subsidiary of the Company, which subsidiaries, with the
Company, own and operate the network of Katharine Gibbs Schools; and
WHEREAS, Purchaser desires to acquire, from Seller, the Schools by
purchasing all of the outstanding securities of the Company.
NOW, THEREFORE in consideration of the mutual covenants and agreements
hereinafter set forth and subject to the terms and conditions hereof, the
parties hereto agree as follows:
I. Definitions.
-----------
1.01 Definitions.
-----------
As used in this Agreement, the following terms shall have the respective
meanings set forth below (such meanings to be equally applicable to both
the singular and the plural forms of the terms defined):
(a) "Closing" shall mean the closing of the transactions contemplated by
this Agreement, which shall take place on such date as agreed upon by Seller and
Purchaser, which date shall not be later than May 31, 1997, provided that the
parties shall work in good faith to effectuate the Closing as soon as
practicable.
<PAGE>
(b) "Closing Date" shall mean 11:59 P.M. New York City time on the date on
which the Closing occurs.
(c) "Shares" shall mean 1000 shares of Common Stock, $.01 par value, of
the Company, all of which shares are owned by Seller on the date hereof, which
constitute all of the issued and outstanding capital stock of the Company.
(d) "HSR Act" shall mean the Hart-Scott-Rodino Antitrust Improvement Act
of 1976 and the rules and regulations thereunder, as in effect from time to
time.
(e) "School" shall mean each of the secretarial and business skills
schools listed on Appendix II and "Schools" shall mean all thereof collectively.
(f) "Subsidiary" shall mean each of the companies listed on Appendix I and
"Subsidiaries" shall mean all thereof collectively.
(g) "Best of Seller's Knowledge" or any similar term means the collective
actual knowledge of the executive officers of Seller, the Company and each
Subsidiary holding offices of vice-president or higher, following due inquiry of
legal counsel to Sellers and the Company, and the President, the admissions
director and the financial aid director of each School.
(h) "Encumbrances" means any charge, claim, community property interest,
condition, equitable interest, lien, mortgage, deed of trust, option, pledge,
security interest, right of first refusal, or restriction of any kind, including
any restriction on use, voting, transfer, receipt of income, or exercise of any
other attribute of ownership.
(i) " GAAP" means generally accepted accounting principles set forth in
the opinions and pronouncements of the Accounting Principles Board of the
American Institute of Certified Public Accountants, and statements and
pronouncements of the Financial Accounting Standards Board and the Emerging
Issues Task Force (or any successor authority) that are applicable as of
2
<PAGE>
the date of determination, all as consistently applied in the preparation of the
Financial Statements.
(j) "Legal Requirement" means any federal, state, local, municipal or
other constitution, law, statute, regulation, rule, ordinance, order, judgment,
decree, or administrative order, to which Seller, the Company, the Subsidiaries
or Purchaser are subject, as applicable.
(k) "Person" means any individual, general or limited partnership,
corporation (including any non-profit corporation), limited liability company,
joint stock company, joint venture, trust, association, unincorporated
organization, labor union, governmental entity or other similar entity.
II. Sale of Shares and Purchase Price.
---------------------------------
2.01 Acquisition. Upon the terms and subject to the satisfaction of the
conditions contained in this Agreement, Seller hereby agrees at the Closing to
sell, assign, convey, transfer and deliver to Purchaser, and Purchaser hereby
agrees at the Closing to purchase from Seller, the entire legal and equitable
right, title and interest in and to the Shares.
2.02 Purchase Price.
--------------
(a) On the terms and subject to the conditions set forth in this Agreement
and in consideration of the agreement of the Seller to make the sale,
assignment, conveyance, transfer and delivery of the Shares and the
representations of Seller, Purchaser hereby agrees to pay or cause to be paid to
Seller the sum of Twenty Million Dollars ($20,000,000) subject to adjustment
pursuant to Section 2.03 (the "Purchase Price") which shall be paid as follows:
Five Million Four Hundred Thousand Dollars ($5,400,000) (the "Closing Date
Payment") shall be payable to Seller on the Closing Date, and Fourteen Million
Six Hundred Thousand Dollars ($14,600,000) (the "Escrow Payment") shall be
placed in an escrow account (the "Escrow") on the Closing Date to
3
<PAGE>
be disbursed in accordance with the provisions of an escrow agreement (the
"Escrow Agreement") substantially in the form of Exhibit A attached hereto. All
payments shall be by wire transfer of immediately available Federal funds to an
account designated in writing by Seller for that purpose.
(b) In addition to the Purchase Price, Purchaser shall pay to Seller Seven
Million Dollars ($7,000,000) (the "Non-Competition Payment") in consideration of
Seller's execution of an agreement not to compete with Purchaser (the "Non-
Competition Agreement") substantially in the form of Exhibit B attached hereto.
In accordance with the terms of the Non-Competition Agreement, the Non-
Competition Payment shall be placed in the Escrow on the Closing Date and
distributed in accordance with the provisions of the Escrow Agreement.
2.03 Purchase Price Adjustment.
-------------------------
(a) Excess/Deficiency. As computed based on the Final Closing Date Balance
Sheet (as described below), if the total current liabilities exceed the sum of
the net book value of net accounts receivable, net cash in the bank accounts of
the Company available to Purchaser after the Closing and $665,000, the amount of
that difference shall be the "Deficiency". If, on the other hand, the sum of the
net book value of net accounts receivable, net cash in the bank accounts of the
Company available to Purchaser after the Closing and $665,000 exceed the total
current liabilities, the amount of that difference shall be the "Excess".
(b) Effect of Excess or Deficiency. Following final determination of the
Final Closing Date Balance Sheet pursuant to Section 2.03 (c), the Purchase
Price shall be decreased dollar-for-dollar by the amount of the Deficiency, if
any, or increased dollar-for-dollar by the amount of the Excess, if any.
(c) Estimated Purchase Price Adjustment. No more than three days prior to
the
4
<PAGE>
Closing Date, Purchaser and Seller, acting in good faith and consistent with
GAAP, the historical accounting practices, principles and cost accounting
methods of Seller, the Company and the Subsidiaries consistently applied, shall
agree to estimated entries for a consolidated balance sheet of the Company and
the Subsidiaries as of the close of business on the Closing Date (the "Estimated
Closing Date Balance Sheet"). Based on the Estimated Closing Date Balance Sheet,
an estimated Excess or Deficiency (as the case may be) shall be computed in
accordance with Section 2.03(a). If there is an estimated Deficiency, the Escrow
Payment which Purchaser is obligated to deposit into the Escrow on the Closing
Date shall be reduced dollar-for-dollar by the estimated Deficiency. If there is
an estimated Excess, the Escrow Payment which Purchaser is obligated to deposit
into the Escrow on the Closing Date shall be increased dollar-for-dollar by the
amount of the estimated Excess.
(d) Preliminary Closing Date Balance Sheet. As promptly as practicable
following the Closing Date, Purchaser shall cause the Company to prepare and
deliver to Seller the consolidated balance sheet of the Company and the
Subsidiaries as of the close of business on the date of Closing (the
"Preliminary Closing Date Balance Sheet"). Such Preliminary Closing Date Balance
Sheet shall be prepared using GAAP, the historical accounting practices,
principles and cost accounting methods of Seller, consistently applied in
accordance with the December Balance Sheet (as defined in Section 5.05) and
certified by Purchaser's independent certified public accountants ("Purchaser's
Accountants") as fairly presenting the consolidated financial position of the
Company and the Subsidiaries as of the Closing Date. Based on the Preliminary
Closing Date Balance Sheet, Purchaser's Accountants shall also compute the
Excess or Deficiency (as the case may be) in accordance with Section 2.03(a).
Purchaser shall have the Preliminary Closing Date Balance Sheet and the
accompanying report of Purchaser's Accountants
5
<PAGE>
delivered to the Seller within sixty days (60) after the Closing Date. Seller
and if Seller shall request, its certified public accountants ("Seller's
Accountants"), shall be informed of and consulted in connection with the
preparation and audit of the Preliminary Closing Date Balance Sheet prior to the
certification thereof by Purchaser's Accountants. Seller (and Seller's
Accountants) shall be given access to the books and records of the Company and
the Subsidiaries for the purpose of verifying the Preliminary Closing Date
Balance Sheet and the Excess or Deficiency, if any.
(e) Final Determination of Excess or Deficiency. If Seller shall disagree
with any item in the Preliminary Closing Date Balance Sheet or the computation
of the Excess or Deficiency, Seller shall, within thirty (30) days after the
date of receipt of the Preliminary Closing Date Balance Sheet, deliver to
Purchaser written notice to the effect that it disagrees therewith and a
statement of its basis for such disagreement. Absent the delivery to Purchaser
of such written notice of disagreement, the Preliminary Closing Date Balance
Sheet shall become the Final Closing Date Balance Sheet and the determination by
Purchaser's Accountants of the Excess or Deficiency shall be conclusive. If
Seller delivers a written notice of disagreement to Purchaser as described above
and within the thirty (30) day period as required hereby, Seller shall then have
the right to cause an inspection of the Preliminary Closing Date Balance Sheet
to be conducted by Seller or Seller's Accountants. If Seller and Purchaser shall
fail to reach agreement within thirty (30) days after receipt by Purchaser of
such written notice from Seller, then a determination of the Final Closing Date
Balance Sheet and a conclusive determination of the Excess or Deficiency shall
be made by a certified public accounting firm jointly selected by Seller and
Purchaser. If within five (5) days, Seller and Purchaser are unable to agree on
selection of such certified public accountant, then the selection shall be made
by the American
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<PAGE>
Arbitration Association in New York City ("AAA"). The fees and expenses of the
jointly selected accounting firm and the AAA shall be born equally by the Seller
and Purchaser.
(f) Adjustment From Estimate. Upon determination of the Final Closing Date
Balance Sheet, if the Excess or Deficiency as conclusively so determined is such
that the estimated adjustment pursuant to Section 2.03(c) resulted in an
overpayment to the Escrow by Purchaser, then the amount of such overpayment
shall be paid by Seller to Purchaser (in the event that the Escrow has already
been distributed) or shall be deducted from the deferred portion of the Purchase
Price to be disbursed to Seller from the Escrow and shall instead be disbursed
to Purchaser (in the event that the Escrow has not been distributed). If, on the
other hand, the Excess or Deficiency as conclusively so determined is such that
the estimated adjustment pursuant to Section 2.03(c) resulted in an underpayment
to the Escrow by Purchaser, then the amount of such underpayment shall be paid
by Purchaser to Seller simultaneously with the disbursement of the deferred
portion of the Purchase Price from the Escrow. Any such payment shall be made by
wire transfer of immediately available Federal funds to an account designated in
writing by the party entitled to receive the payment.
7
<PAGE>
III. Execution of Stock Sale Agreement.
---------------------------------
3.01 Stock Sale Agreement. This Agreement is being executed at the offices
of K-III Communications Corporation, 745 Fifth Avenue, New York, New York 10151.
IV. Closing.
-------
4.01 Deliveries by Seller. At the Closing, Seller shall deliver to
Purchaser (unless previously delivered) the following:
(a) Certificates as to the good standing of the Company and each
Subsidiary and the payment of all franchise taxes and filing of required reports
from the appropriate officials of the respective jurisdictions in which the
Company and each Subsidiary is incorporated, which certificates shall be dated
as of a date which is a reasonably close date to the Closing Date.
(b) Certificates representing the Shares, duly endorsed in blank or with
duly executed stock powers.
(c) The certificates and opinion required under Section 8.01 hereof.
(d) Resignation of each director and officer of the Company, each
Subsidiary and the Katharine Gibbs Scholarship Foundation, dated as of the
Closing Date.
(e) The Non-Competition Agreement in substantially the form attached as
Exhibit B.
(f) A release of claims against the Company and the Subsidiaries in the
form of Exhibit C attached hereto.
(g) Evidence of release of the Company and the Subsidiaries from
guarantees with respect to any debt of Seller or any of its affiliates (other
than the Company and the Subsidiaries).
(h) Such other documents as Purchaser may reasonably request evidencing
the consummation of the transactions contemplated by this Agreement.
(i) Guarantee of K-III Communications Corporation substantially in the form
8
<PAGE>
attached as Exhibit D.
4.02 Deliveries by Purchaser. At the Closing, Purchaser will deliver to
Seller (unless previously delivered) the following:
(a) That portion of the Purchase Price to be delivered at closing pursuant
to the provisions of Article II.
(b) The certificates and opinion required under Section 8.02 hereof.
(c) Resolutions of the Board of Directors of Purchaser authorizing the
transaction contemplated by this Agreement.
(d) Substitute letters of credit/surety bonds pursuant to Section 7.07.
(e) Such other documents as Seller may reasonably request evidencing the
consummation of the transactions contemplated hereby.
V. Representation and Warranties of Seller.
----------------------------------------
Seller hereby represents and warrants to Purchaser on the date hereof as
follows:
5.01 Organization, Standing and Qualification. Each of Seller, the Company,
and each Subsidiary is a corporation duly organized, validly existing and in
good standing under the laws of its jurisdiction of incorporation, and has all
requisite power and authority and is entitled to carry on its respective
business as now being conducted and to own and operate its assets and to
consummate the transactions contemplated by this Agreement. Each of Seller, the
Company and each Subsidiary is duly qualified to do business as a foreign
corporation in every jurisdiction listed on Schedule 5.01, which jurisdictions
constitute every jurisdiction where failure to be so qualified would have a
material adverse effect on its business or operations. Upon the execution of
this Agreement, Seller is delivering to Purchaser true and complete copies of
the Certificate of Incorporation and all amendments thereto, and the By-Laws, of
Seller, the Company, and each
9
<PAGE>
Subsidiary, as in effect on the date of this Agreement, each certified as
complete and correct by the respective secretaries of Seller, the Company and
each Subsidiary.
5.02 Stock of Company and Subsidiaries: Ownership of Schools. Schedule
5.02(a) sets forth the number of outstanding shares, the par value thereof, and
the record and beneficial owner of such shares for the Company and each
Subsidiary. Except as set forth on Schedule 5.02(b), Seller or the Company owns
all of the outstanding shares of the Company and each Subsidiary, respectively,
free and clear of all Encumbrances whatsoever. Except as set forth on Schedule
5.02(a), there are no agreements, commitments (including without limitation any
warrants, rights or similar arrangements) or employee benefits plans relating to
the issuance, sale or transfer, purchase or redemption of any equity security or
other security of the Company or any Subsidiary or providing for cash payments
based upon the value of any equity securities of the Company or any Subsidiary.
The Shares and all shares described on Schedule 5.02(a) are validly issued and
outstanding, fully-paid and non-assessable, and were issued in compliance with
all federal and state securities laws and other Legal Requirements. There are no
shares of capital stock or other securities of the Company or any Subsidiary
outstanding other than the Shares and the shares listed on Schedule 5.02(a).
Except as set forth on Schedule 5.02(c) neither the Company nor any Subsidiary
owns any stock of any other corporation other than that of the Subsidiaries. The
Company has never had any subsidiaries or other material investments in other
Persons other than the Subsidiaries. The Subsidiaries have never had any
subsidiaries or other material investments other than the Schools. Except as set
forth on Schedule 5.02(a) neither the Company nor any Subsidiary owns or has any
agreement or commitment to acquire, any equity securities of any Person or other
direct or indirect ownership interest in any other business. The Company and the
Subsidiaries are not, and for the past three
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(3) years have not been, engaged in any business other than the Schools.
5.03 Execution, Delivery and Performance of Agreement; Authority. Except as
set forth on Schedule 5.03, neither the execution, delivery nor performance by
Seller of this Agreement or the other agreements and instruments referred to in
this Agreement that Seller is executing and delivering ("Seller's Additional
Agreements") nor the consummation by Seller of the transactions contemplated
hereby or thereby (a) will violate in any material fashion any Legal
Requirement, or (b) will (with or without the giving of notice, the passage of
time or both) violate, conflict with, or constitute a default, right to
accelerate, or loss of rights under, or result in the creation of any material
Encumbrance pursuant to (i) the Certificate of Incorporation or By-Laws of
Seller, the Company or any Subsidiary or (ii) any material contract, commitment,
agreement, lease, license, permit, mortgage, deed of trust or restriction of any
kind to which Seller, the Company or any Subsidiary is a party or by which any
of them or their respective properties or businesses may be bound, (c) will
cause, or give any Person grounds to cause, the maturity of any material
liability or obligation of Seller, the Company or any Subsidiary to be
accelerated or will increase any such liability, (d) except as required as a
result of the transfer of the Shares, require any approval of, filing with, or
consent from any governmental authority or other third party that is required to
be obtained or made by Seller, the Company or any Subsidiary with respect to
which the failure to obtain such approval or consent or make such filing would
have a material adverse effect on the Company or any Subsidiary (e) cause
Purchaser, the Company or any Subsidiary, solely as a consequence of the
transactions contemplated by this Agreement, to become subject to, or liable for
payment of, any federal, state or local taxes outside of the ordinary course of
business. This Agreement constitutes, and upon execution and delivery, the
Seller's Additional Agreements will constitute, duly executed, valid and binding
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obligations of Seller enforceable in accordance with their terms (except as the
enforceability thereof may be limited by bankruptcy, insolvency, reorganization,
moratorium, receivership, conservatorship or other laws of general application
or equitable principles that affect the right of creditors generally, or by
limitations on the availability of the remedy of specific performance or
injunctive relief (collectively, the "Bankruptcy Exceptions")). All proceedings
or corporate action required to be taken by Seller to authorize, or otherwise
relating to, the execution, delivery and performance of this Agreement and
Seller's Additional Agreements and the consummation of the transactions
contemplated hereby and thereby have been taken. Concurrently with the execution
of this Agreement, Seller is delivering to Purchaser a copy of the resolutions
of Seller, certified by the secretary of Seller, authorizing the execution,
delivery and performance of this Agreement and Seller's Additional Agreements
and the consummation of the transactions contemplated and thereby. No approval
by the stockholders of Seller is required with the respect to the transactions
contemplated by this Agreement or the other agreements and instruments referred
to in this Agreement.
5.04 Books and Records Except as set forth on Schedule 5.04:
(a) The minute books, stock record books, and other records of the Company
and each Subsidiary, all of which have been made available to Purchaser, are
substantially complete and correct and have been maintained in accordance with
sound business practices, except where failure to so maintain such books and
records would not have a material adverse effect upon the Company or any
Subsidiary.
(b) Each of the Company and each Subsidiary has maintained all of its
accounting books and records in accordance with applicable Legal Requirements
and GAAP, except where failure to so maintain such books and records would not
have a material adverse effect upon the
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Company, and such books and records are true, correct and complete in all
material respects.
(c) At the Closing, all books and records described in this Section 5.04
will be in the possession of the Company and the Subsidiaries.
5.05 Financial Statements. Seller has delivered, or will deliver prior to
the fourteenth day following the date of this Agreement, to Purchaser the
unaudited consolidated balance sheets of the Company and the audited balance
sheets of the Subsidiaries as at December 31, 1996 (the "December Balance
Sheet") and as at December 31, 1995, and unaudited consolidated statements of
income of the Company and the audited statements of income of the Subsidiaries
for the years ended December 31, 1995 and December 31, 1996, (collectively, the
"Financial Statements") copies of which are attached hereto as Schedule 5.05(a).
Except as set forth on Schedule 5.05(a), Seller represents and warrants that
such balance sheets and statements of income fairly present the income,
expenses, assets, liabilities and overall financial condition and results of
operations of the Company and Subsidiaries on an unaudited consolidated basis
and on an audited Subsidiary basis as at such dates or for such periods, all in
accordance with GAAP, consistently applied. Except as set forth in Schedule
7.07(a), neither the Company nor any Subsidiary is required to provide any
letters of credit, guaranty or other financial security arrangements in
connection with any transactions, approvals or licenses in the ordinary course
of operations of the Company or the Subsidiaries. Except as set forth on
Schedule 5.05(b) attached hereto, as of the date hereof, neither the Company nor
any Subsidiary has any material indebtedness, liabilities or obligations of any
nature, whether absolute, accrued, contingent or otherwise, other than:
(a) Those set forth or reserved against in the balance sheets included in
the December Balance Sheet (and then only to the extent of such reserves);
(b) Those incurred since the date of the December Balance Sheet in the
ordinary course
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of business and consistent in nature with past practice the effect of which is
reflected in the Financial Statements or those prepared in accordance with GAAP
if such footnotes had been prepared, and which have been disclosed to Purchaser
in writing, to the extent set forth, reserved or, in the case of footnote items,
disclosed; and
(c) Those which are so immaterial as not to be required to be disclosed in
financial statements or notes thereto prepared in accordance with GAAP.
There are no long-term fixed or contractual liabilities relating to the
operation of the Company or any Subsidiary, as presently operated, the annual
expenses of which are not reflected in the December Balance Sheet or which are
not otherwise expressly disclosed or set forth in this Agreement or the
schedules hereto. Other than obligations in respect of deferred tuition revenue,
neither the Company nor any Subsidiary has any material obligations in respect
of refundable deposits.
5.06 Receivables. The accounts receivable (including, without limitation,
student accounts receivable of the Company and each Subsidiary), except to the
extent of the allowance for cancellations and doubtful accounts set forth in the
December Balance Sheet, are bona fide receivables, arose out of arms' length
transactions in the normal and usual practices of the Company and the
Subsidiaries, and are recorded correctly on the applicable books and records of
the Company and the Subsidiaries. To the best of Sellers' knowledge, the
reserves established for such receivables in the December Balance Sheet are
adequate. Seller shall not be liable for any receivable which is uncollected as
a result of the transactions contemplated in this Agreement.
5.07 Supplies. Ordinary business supplies (including without limitation
textbooks) of the Company, the Subsidiaries and the Schools, as of the date
hereof, are in customary amounts appropriate and adequate to the operations of
the Company, the Subsidiaries and the Schools.
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5.08 Bank Accounts. Schedule 5.08 attached hereto sets forth a true,
complete and correct list of the names of all banks and other financial
institutions in which the Company or any Subsidiary has an account or safe
deposit box, which list includes a description of such accounts, the account
numbers and the names of all individuals authorized to draw thereon or have
access thereto.
5.09 Absence of Undisclosed Liabilities. Except as and to the extent set
forth on Schedule 5.09 or reflected or reserved against on the December Balance
Sheet and except for liabilities and obligations that arose in the ordinary
course of business since December 31, 1996, as of the date hereof, to the
knowledge of Seller, neither the Company nor the Subsidiaries have any material
debts, liabilities or obligations of any nature whatsoever that are material to
the Company or any Subsidiary or if unpaid or unsatisfied would result in the
closing of any of the Schools.
5.10 No Material Adverse Change. Except as and to the extent set forth on
Schedule 5.10, since December 31, 1996, there has not been any material adverse
change in the business or financial condition of the Company or any Subsidiary.
5.11 Litigation. Except as set forth on Schedule 5.11, to best of Seller's
knowledge, there are no claims, legal actions, suits, arbitrations, governmental
investigations or other legal or administrative proceedings in progress, pending
or threatened against the Company or any of its Subsidiaries or the transactions
contemplated by this Agreement, which if adversely determined (a) would have a
material adverse effect on the Company or any Subsidiary or (b) would materially
challenge the validity of this Agreement or any action taken or to be taken by
Seller pursuant to this Agreement.
5.12 Compliance with Laws and Other Instruments. Except as set forth on
Schedule 5.12, to the best of Seller's knowledge, the Company and the
Subsidiaries have complied in all
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<PAGE>
material respects with all existing Legal Requirements that are material to
their respective properties or operations. Except as set forth in Schedule 5.12,
neither the ownership nor use by the Company or any of the Subsidiaries of their
respective properties nor the conduct of their respective businesses conflicts
in any material respect with the rights of any other Person or in any material
respect violates, conflicts with or results in or, will in any material respect
violate, conflict with or result in, a material default, right to accelerate or
loss of rights under, any terms or provisions of any of their certificates of
incorporation or by-laws as presently in effect, or any material Legal
Requirement, Encumbrance, license, lease or other agreement to which the Company
or any Subsidiary is a party or by which any of them or their respective
properties or businesses may be bound.
5.13 Real Property.
-------------
(a) The only real estate owned by the Company or any Subsidiary is listed
on Schedule 5.13 (the "Real Property")
(b) Schedule 5.13 sets forth a description of each lease for real property
as to which the Company or Subsidiary is a party (the "Leases"). Other than the
Real Property, during the past three (3) years, neither the Company nor and
Subsidiary has owned, leased or operated any real estate other than property
leased pursuant to the Leases.
(c) Except as set forth in Schedule 5.13, the Leases are valid, binding
and enforceable in accordance with their terms, and are in full force and
effect; there are no existing material defaults under the Leases by the Company
or any Subsidiary or, to the best of Seller's knowledge, the other party
thereto; and no event has occurred which (whether with or without notice, lapse
of time or both) would constitute a material default by the Company or any
Subsidiary thereunder.
(d) The copies of the Leases submitted to Purchaser for its review (all of
which are
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<PAGE>
listed on Schedule 5.13) are true and correct copies thereof and constitute
copies of all Leases providing for annual rental in excess of $12,000 per annum
or a remaining term of one (1) year or longer from the date hereof under which
the Company or any Subsidiary is a lessee or a lessor of real or personal
property.
5.14 Title.
-----
(a) Either the Company or the applicable Subsidiary has good title to the
Real Property and to all personal property which is not the subject of a lease
which is used in the operations of any of the Schools, and is material to the
operations of any of the Schools including, without limitation, the assets
reflected on the December Balance Sheet (except property sold after the December
Balance Sheet date in the ordinary course of business), free and clear of all
material Encumbrances except (i) as set forth in the December Balance Sheet or
as otherwise expressly permitted by the terms hereof, or (ii) Encumbrances, if
any, listed on Schedule 5.14 attached hereto.
5.15 Environmental
-------------
To the best of Seller's knowledge, except as set forth on Schedule 5.15,
neither the Company nor any Subsidiary has or is subject to any claim,
obligation, liability, loss or expense of whatever kind or nature, contingent or
otherwise, or is in material violation of any Legal Requirement pertaining to
health, safety, hazardous substances, natural resources or environmental
protection, including, but not limited to, asbestos regulations and occupational
health and safety regulations, which material violation arises out of any act or
omission of Seller, the Company or any of the Subsidiaries, their employees,
agents or representatives or arises out of the ownership, use, control or
operation by any of them of any plant, facility, site, area or property or from
their release of any substance into the environment (the term "release" meaning
any spilling, leaking,
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pumping, pouring, emitting, emptying, discharging, injecting, escaping,
leaching, dumping or disposing into the environment, and the term "environment"
meaning air, soil and water, including without limitation any surface or ground
water, drinking water supply, land, surface or subsurface strata, or the ambient
air) and neither the Company nor any Subsidiary has received notice of, nor to
the best of Seller's knowledge is there any valid basis for any of the
foregoing, provided that the representation contained in this Section 5.15 does
not include (x) any violation relating to premises leased by the Company or any
Subsidiary unless such violation results directly from the operations conducted
by the Company or any Subsidiary in such premises and (y) any matter which would
have been disclosed if Purchaser had conducted a Phase I environmental audit at
the premises in question.
5.16 Employee Benefits, Plans and Agreements.
---------------------------------------
(a) Schedule 5.16(a) contains a true and complete list of each "employee
benefit plan" (as defined in section 3(3) of the Employee Retirement Income
Security Act of 1974, as amended ("ERISA") and any other bonus, compensation,
severance, incentive, sick pay, sick leave, vacation, nonqualified deferred
compensation, termination, consulting, retainer or other plan, agreement,
policy, trust fund or arrangement: maintained by or for the benefit of or
contributed to, or with respect to which there is potential liability, by either
the Company or any Subsidiary or any trade or business, whether or not
incorporated (an "ERISA Affiliate"), that together with the Company and
Subsidiaries would be deemed a single employer" within the meaning of section
4001 of ERISA or section 414 of the Internal Revenue Code of 1986 (the "Code")
for the benefit of any employee or former employee of the Company or any
Subsidiary or any ERISA Affiliate or their beneficiaries (the "Plans"), whether
or not such Plan has terminated except for any arrangements or plans which will
be paid by Seller or its parent company following the Closing unless Purchaser
can reasonably
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<PAGE>
expect to have any liability with respect thereto.
(b) With respect to each of the Plans (each of which is listed on Schedule
5.16(a)), Seller has heretofore delivered or made available to Purchaser true
and complete copies of each of the following documents;
(i) copy of the Plans (including all amendments thereto);
(ii) a copy of all Summary Plan Descriptions (including any Summary of
Material Modifications);
(iii) a copy of the annual report together with all schedules and
attachments thereto, if required under ERISA, with respect to each such Plan for
the last year;
(iv) if the Plan is funded through a trust or any third party funding
vehicle, a copy of the trust or other funding agreement (including all
amendments thereto) and the latest financial statements thereof;
(v) the most recent determination letter received from the Internal
Revenue Service with respect to each Plan that is intended to be qualified under
Section 401 of the Code;
(vi) the most recent determination Letter received from the Internal
Revenue Service with respect to each Plan and related trust that is recognized
as exempt under Section 501(c) of the Code; and
(vii) the most recent valuation of the present and future obligations
under each Plan that provides post-retirement or post-employment health, life,
accident insurance or other "welfare type" benefits, if any;
(viii) the three most recent actuarial reports for any Plans which are
defined benefit plans; and
(ix) with respect to any non-qualified deferred compensation plans, a
copy of the
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<PAGE>
top hat or excess benefit filing with the Department of Labor, or the annual
reports for the last three years.
(c) The Pension Benefit Guaranty Corporation has not instituted proceedings
to terminate any Plan and no condition exists that presents a material risk that
such proceedings will be instituted.
(d) Neither the Company nor any Subsidiary nor any ERISA Affiliate, nor any
Plan, nor any trust created thereunder, nor any trustee, fiduciary or
administrator thereof nor, to the best of Seller's knowledge, any other
"disqualified person" (as defined in section 4975 of the Code) or "party-in-
interest" (as defined in section 3(14) of ERISA), has engaged in a transaction
in connection with which it or any Subsidiary or any ERISA Affiliate, any Plan,
any such trust, or any trustee, fiduciary or administrator thereof, or any
officer, director or employee of either the Company or any Subsidiary or an
ERISA Affiliate or any party dealing with the Plans or any such trust, including
but not limited, to any disqualified person or party-in-interest, as such terms
are defined herein, could be subject to either a civil penalty assessed pursuant
to section 409 or 502(i) of ERISA or a tax imposed pursuant to section 4975 or
4976 of the Code.
(e) Full payment has been made, or will be made in accordance with section
404(a)(6) of the Code, of all amounts which Seller, the Company or any
Subsidiary or any ERISA Affiliate is required to pay under the terms of each
Plan as of the last day of the most recent plan year thereof ended prior to the
date of this Agreement, and all such amounts properly accrued through the
Closing Date with respect to the current plan year thereof will be paid by
Seller, the Company, a Subsidiary or such ERISA Affiliate on or prior to the
Closing Date; and none of the Plans or any trust established thereunder has
incurred any "accumulated funding deficiency" (as defined in Section 302 of
ERISA and section 412 of the Code), whether or not waived, as of the last day of
the
20
<PAGE>
most recent fiscal year of each of the Plans ended prior to the date of this
Agreement and no excise taxes are due or owing because of any accumulated
funding deficiency with respect to any prior fiscal year of any Plan.
Furthermore, full payment has been made of all insurance premiums applicable to
each Plan that Seller, the Company or any Subsidiary or any ERISA Affiliate was
required to pay as of the last day of the most recent plan year thereof ended
prior to the date of this Agreement, and all such insurance premiums properly
accrued through the Closing Date with respect to the current plan year thereof
will be paid by Seller, the Company, a Subsidiary or such ERISA Affiliate on or
prior to the Closing Date.
(f) None of the Plans is a "multi-employer plan," as such term is defined
in sections 3(37)(A) and 4001(a)(3) of ERISA or section 414(f) of the Code, or a
Plan of the type described in Sections 4063 and 4064 of ERISA or in Section
413(b) of the Code (and the regulations promulgated thereunder).
(g) No plan is under audit by either the Internal Revenue Service, the
Department of Labor or any other government agency and the Company or any ERISA
Affiliate has not initiated any administrative proceeding with any of these
agencies regarding any Plan.
(h) No "reportable event" within the meaning of section 4043(b) of ERISA,
other than any such reportable event with respect to which the 30-day notice
requirement is waived pursuant to section 4043(a) of ERISA, has occurred or is
expected to occur with respect to any Plan.
(i) Nothing has occurred since the adoption of the Plans which resulted or
could result in the revocation of the determination or loss of the qualification
referred to in subsection (b)(iv) hereof.
(j) Each of the Plans has been operated and administered in all material
respects in accordance with applicable laws, including, but not limited to,
ERISA and the Code.
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(k) Except as set forth in Schedule 5.l6(k), and except for payments to be
made by Seller and not the Company or any Subsidiary the consummation of the
transactions contemplated by this Agreement will not (i) entitle any current or
former employee or officer of the Company, any Subsidiary or any ERISA Affiliate
to severance pay, unemployment compensation or any other payment, except as
expressly provided in this Agreement, or (ii) accelerate the time of payment or
vesting, or increase the amount of compensation due any such employee or
officer.
(l) There are no material pending or, to the knowledge of Seller,
threatened claims by or on behalf of any of the Plans, by any employee or
beneficiary covered under any such Plan, or otherwise involving any such Plan,
any trustee, administrator or fiduciary thereof, the Company or any Subsidiary
or any ERISA Affiliate or any officer, director or employee of the Company or
any Subsidiary or any ERISA Affiliate with respect to any such Plan (other than
routine claims for benefits).
(m) No underfunded defined benefit plan has been, during the five year
period prior to the closing date, transferred out of the controlled group of
companies (within the meaning of Section 414 of the Code) of which the Company
is a member.
5.17 Representations Regarding Tax Matters.
---- -------------------------------------
(a) The Company and the Subsidiaries (or an affiliate, including Seller)
have duly and timely filed (including extensions), with the appropriate United
States, state, local and other governmental agencies all tax returns and reports
due on or before the date hereof and will duly and timely file (including
extensions) (i) all such tax returns and reports due with respect to the Company
and each of the Subsidiaries between the date hereof and the Closing Date, and
(ii) all tax returns and reports relating to the Company and each of its
Subsidiaries with respect to all periods prior to the Closing Date regardless of
whether such tax returns and reports are due
22
<PAGE>
before or after the Closing Date; such tax returns and reports have been
prepared, or will be prepared, in accordance with all Legal Requirements and
are, or will be, accurate and complete in all material respects; each of the
Company and each of the Subsidiaries (or an affiliate) has paid, will pay in a
timely manner (including extensions), or has made appropriate provisions,
including the withholding of payroll taxes, for the payment of all taxes due and
payable as reflected by such returns (it being understood that no representation
is being made in this Section that all positions taken on all such returns and
reports will ultimately be sustained). In particular, but without limitation,
the income, deductions, gains, losses, credits and other relevant items of the
Company and each of the Subsidiaries, for any taxable period ending on or before
the Closing Date, and all taxable periods that include the Closing Date, but
only with respect to the days in such period up to and including the Closing
Date, have been, or will be, included in the Seller's consolidated federal
income tax return in accordance with all Legal Requirements. All items of income
and deduction arising on the Closing Date will be reflected in the tax returns
filed with respect to that date.
(b) The Company is, and shall continue to be through Closing Date, a
"Section 338(h)(10) Target" within the meaning of (S)1.338(h)(10) - 1(c) of the
Treasury Regulations.
(c) Seller is a member of a "consolidated group" (as defined in Section
1502 of the Internal Revenue Code) of which K-III Communications Corporation is,
and since Seller's formation has been, the Parent.
(d) To the best of Seller's knowledge, the "inside basis" of the Seller for
tax purposes is equal to the "outside basis."
(e) There are no deferred intercompany transactions, reorganizations, or
transactions involving stock and/or securities of Seller or any of its
Subsidiaries.
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5.18 Intellectual Property and Curricula.
-----------------------------------
(a) Schedule 5.18 hereto contains an accurate and complete description of
all copyrights, trademarks, service marks, trade names, assumed names and
patents, and all applications therefor which are used in connection with the
operations of, or otherwise relate to, the Schools (the "Trademarks") together
with the record owner of each such Trademark. Schedule 5.18 hereto also sets
forth all registrations (including the jurisdictions thereof) of each Trademark.
Each Trademark is owned by the Company or the Subsidiary set forth on Schedule
5.18 as its owner, free and clear of all Encumbrances. None of Seller, the
Company or any Subsidiary has been sued or, to the best of Seller's knowledge,
threatened with suit for infringement, violation or breach with respect to any
Trademark, and, to the best of Sellers' knowledge, no basis exists for any such
suit. None of Seller, the Company or any Subsidiary is on notice of any
infringement, violation or breach of any Trademark by any other Person. To the
best of Seller's knowledge, the Company or a Subsidiary has the exclusive right
to use each trade name included among the Trademarks as an assumed business name
in the states in which such tradename is used.
(b) To the best of Seller's knowledge, no curricula or course materials
(the "Curricula") or other products used, distributed, marketed or sold by the
Company or any Subsidiary, or any know-how, trade secrets, Trademarks, designs,
styles, or designations used by the Company or any Subsidiary (all of the
foregoing, excluding the Curricula, being referred to as the "Intellectual
Property") infringes on any copyrights, trademarks, patents or other rights of
any Person and neither Seller, the Company, nor any Subsidiary has received any
claims that any such infringement has occurred. Except as set forth on Schedule
5.18, neither Seller, the Company nor any Subsidiary has granted, nor to the
Seller's best knowledge are there any third parties who
24
<PAGE>
claim to have been granted, the rights to any Intellectual Property or Curricula
used, distributed, marketed or sold by the Company or any Subsidiary; and to the
Seller's best knowledge there is no basis for any such claim or claims. The
Intellectual Property constitutes all of the know-how, trade secrets,
Trademarks, designs, styles and designations necessary to the operations of the
Schools as presently conducted.
5.19 Contracts and Commitments.
-------------------------
(a) Except as set forth in Schedule 5.19, neither the Company nor any
Subsidiary is a party to or bound by any:
(i) Loan or credit agreement providing for the extension of credit for
borrowed money to employees;
(ii) Service, employment, consulting, retainer or similar agreement which
is not terminable on 90 days' notice or less without penalty or obligation to
make payments by reason of such termination or which requires the payment of
amounts in excess of $25,000 per annum or $5,000 upon severance;
(iii) Covenant not to compete or confidentiality agreement which is
material to the business, financial condition or results of operations of the
Company or any Subsidiary;
(iv) (a) Lease or similar agreement under which the Company or any
Subsidiary is a lessor of, or makes available for use by any third party, any
personal property owned by the Company or any Subsidiary, (b) continuing
contract for the future purchase of materials, supplies or equipment, (c)
management, service, printing, advertising, public relations, consulting or
other similar type of contract in any one case that has an aggregate future
liability in excess of $10,000 and that is not terminable by the Company or any
Subsidiary on 90 days' or less notice for a cost of less than $10,000;
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<PAGE>
(v) option to purchase real property;
(vi) agreement or contract under which the Company or any Subsidiary has
borrowed any money or issued any note, bond, indenture or other evidence of
indebtedness or directly or indirectly guaranteed indebtedness, liabilities or
obligations of others (other than endorsements for the purpose of collection in
the ordinary course of business) in an amount in excess of $10,000 in any one
case or $50,000 in the aggregate; which will not be satisfied or released on or
prior to the Closing Date.
(vii) distribution or sales agreement which involved the payment of fees or
commissions by the Company or any Subsidiary in excess of $5,000 in any one case
or $25,000 in the aggregate, during the year ended December 31, 1996 (provided,
that neither Seller, the Company nor any Subsidiary is party to any agreement
providing for payment of commissions to sales representatives, whether employees
or independent contractors);
(viii) mortgage, pledge, security agreement, deed of trust or other
document granting an Encumbrance (including Encumbrances upon properties
acquired under conditional sales, capital leases or other title retention or
security devices) any of which is material to the business, financial condition
or results of operations of the Company or any Subsidiary;
(ix) articulation agreement; and
(x) any other agreement, contract, lease, license, commitment or instrument
which was not made in the ordinary course of business and which involves future
payments or performance valued in excess of $10,000 in any one case or $50,000
in the aggregate.
(b) Each agreement, contract, lease, license, commitment or instrument of
the Company or any Subsidiary described on Schedule 5.19 as an exception to
subsection 5.19(a) above (the "Material Contracts") is a valid and binding
obligation of the Company or such Subsidiary,
26
<PAGE>
respectively, and, assuming that such Material Contract is a valid and binding
obligation of the other party or parties thereto, is in full force and effect,
except such Material Contracts that have been fully performed by each of the
parties thereto and under which none of the parties thereto has any further
rights or obligations, or except as disclosed on Schedule 5.19. Neither the
Company nor any Subsidiary is and, to the knowledge of Seller, the other parties
are not (in each case with or without the lapse of time or the giving of notice,
or both) in breach or default in any respect under any Material Contract, beyond
applicable grace periods, except for such breaches and defaults which,
individually or in the aggregate, do not, and, insofar as reasonably can be
foreseen, in the future will not, entitle a party to the Material Contract to
terminate the Contract or claim damages in excess of $10,000 or have a material
adverse effect upon the business or operations of the Company or any
Subsidiaries.
5.20 Labor Matters.
(a) Neither the Company nor any Subsidiary is a party to any collective
bargaining agreement or is bound to any union or other similar employee
representative. To the Seller's knowledge, with respect to the Company and the
Subsidiaries, there are not (a) matters pending before the National Labor
Relations Board or any similar state or local labor agency or (b) labor strikes,
slowdowns or stoppages pending or threatened.
(b) Schedule 5.20 lists all material written employee manuals, employment
policies, contracts, agreements and other instruments which relate to, or arise
out of, the employment of any person by the Company or any Subsidiary. Other
than those disclosed in Schedule 5.20, neither the Company nor any Subsidiary
has entered into any material employment agreements or other contracts or
arrangements with respect to the performance of personal services. To the best
of Seller's knowledge, the Company and each Subsidiary has performed all
obligations required to be
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performed by it under all contracts, agreements and other instruments described
in Schedule 5.20. There are no provisions in any such contracts, agreements or
other instruments which would in any way impact or restrict the Company or any
Subsidiary as a result of the execution, delivery or performance of this
Agreement. Neither the Company nor any Subsidiary is in default under any such
contract, agreement or instrument and, to best of Seller's knowledge, no other
party to any such contract, agreement or instrument is in default thereunder,
nor does any condition exist which, with notice or lapse of time or both, would
constitute a default thereunder by Seller or any Subsidiary or, to the best of
Seller's knowledge, by any other party thereunder. Seller's representations
herein relate to all material contracts, agreements and other instruments,
whether written or oral, expressed or implied, to which the Company or any
Subsidiary is a party or otherwise relating to or affecting any of their assets,
properties, operations or employees.
(c) Seller represents and warrants that no activity or proceeding of any
labor organization (or representative thereof) to organize any unorganized
employees of the Company or any Subsidiary, and no strike, slowdown, work
stoppage, lockout or other collective labor actions by or with respect to any
employees of the Company or any Subsidiary is in progress or has, to the
knowledge of Seller, been threatened.
(d) Except as set forth in the attached Schedule 5.11, Seller represents
and warrants that there is no litigation, action, suit, investigation, claim,
grievance, labor dispute, or other proceeding pending or, to the best of
Seller's knowledge, threatened against or affecting the Company or any
Subsidiary before any federal, state, local or other governmental or regulatory
authority, any private agency or arbitrator, or between the Company or any of
its Subsidiaries and any of the Company's or any Subsidiary's employees; and
that Seller, the Company and each Subsidiary have complied with all Legal
Requirements relating to the employment of labor, including the provisions
thereof
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relating to wages, hours, collective bargaining, and the payment of Social
Security and other payroll and/or withholding taxes, and is not liable for any
arrears of wages or any tax or penalty for failure to comply with any of the
aforesaid Legal Requirements, including, but not limited to, the National Labor
Relations Act, the Occupational Safety and Health Act of 1970, the Employee
Retirement Income Security Act of 1974, Title VII of the Civil Rights Act of
1964, the Fair Labor Standards Act, the Age Discrimination in Employment Act of
1967, the Immigration Reform and Control Act of 1986, Executive Order 11246, or
any similar Legal Requirements of the states in which the Schools operate and
neither Seller nor the Company have knowledge of, or have received or been put
on notice of any violation or alleged violation of any such Legal Requirement.
Seller represents and warrants that nothing has come to the attention of Seller
which would reasonably suggest that any present or former employee of the
Company or any Subsidiary has or is likely to make any claim against Seller by
virtue of any employment-related health defect or disease.
(e) Purchaser does not assume any obligations of any kind with respect to
any claim, demand, suit or liability with respect to any Workers' Compensation
claim or Unemployment Compensation claim, if any, in process prior to the
Closing Date, or which occur out of any accident or injury occurring prior to
the Closing Date and Seller hereby represents and warrants that none so exist or
if one arises after the Closing Date from injuries occurring prior to the
Closing Date, it will indemnify Purchaser for any amounts expended as a result
of such injury to employees of the Company or any Subsidiary.
(f) The Company and the Subsidiaries have no knowledge of, and have not
received or been put on notice of any material violation or alleged violation of
any Legal Requirement. The Company and the Subsidiaries are not in default with
respect to any material Legal Requirement or order, writ, judgment, award, or
decree of any regulatory authority or private agency or arbitrator
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applicable and material to the Company or any Subsidiary, or their respective
assets, properties, operations or employees.
(g) For the period from March 7, 1994 through the date hereof, the Company
and each Subsidiary has been in compliance with the Worker Adjustment and
Retraining Notification Act ("WARN") and any other similar applicable state
and/or local laws regarding employees, and, if applicable, it provided its
employees with such advance notice of termination of employment as required by
WARN, or other applicable state or local laws. Seller hereby covenants to
indemnify and hold Purchaser harmless from and against any and all claims,
charges, suits, demands, damages or liability, arising out of or relating to the
Company's or any Subsidiary's noncompliance with WARN or other applicable state
or local laws to the extent such claims relate to actions taken by the Company
or any Subsidiary during the period from March 7, 1994 through the date hereof.
5.21 Location of Assets. The tangible assets owned or leased by the Company
or any Subsidiary are generally suitable and adequate and are located on the
Real Estate or at one of the locations subject to the Leases.
5.22 Insurance. The policies of fire, liability, worker's compensation and
other forms of insurance described in Schedule 5.22 hereto are in effect with
respect to the Company and the Subsidiaries, shall stay in effect through the
Closing Date and provide adequate insurance coverage with respect to the Company
and each Subsidiary.
5.23 Recruitment; Admissions Procedures; Attendance; Reports; Refunds.
Schedule 5.23(a) attached hereto is a complete list of all written policy
manuals and other written statements of instruction relating to (a) recruitment
of students for the Schools, including procedures for assisting in the
application by prospective students for direct or indirect state or federal
financial assistance; (b) admissions procedures, including any descriptions of
procedures for
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insuring compliance with Legal Requirements and ACICS requirements applicable to
such procedures; and (c) procedures for encouraging and verifying attendance,
minimum required attendance policies, and other relevant criteria relating to
course performance requirements and completion (all of the foregoing,
collectively, the "Policy Guidelines"). Seller has delivered or made available
to Purchaser true, correct and complete copies of all Policy Guidelines. Except
as disclosed on Schedule 5.23(b) attached hereto or in any other schedule to
this Agreement, the operations of the Company, the Subsidiaries and each School
have, in all material respects, been conducted in accordance with the Policy
Guidelines and all relevant standards imposed by applicable accrediting bodies
(including ACICS), and other agencies administering state or federal
governmental financial assistance programs in which the Schools participate, and
other applicable Legal Requirements. The Company and/or the applicable
Subsidiary has submitted all reports, audits, and other information, whether
periodic in nature or pursuant to specific requests, for the Schools
("Compliance Reports") to all agencies or other entities with which such filings
are required relating to its compliance with (i) ACICS standards, (ii) Legal
Requirements governing programs pursuant to which the Schools or their students
receive student financial assistance funding, and (iii) all articulation
agreements between the Schools and degree granting colleges and universities in
effect as of the date hereof, except where failure to submit such Compliance
Reports would not have a material adverse effect on the business or operations
of the Company or any Subsidiary. All forms and records of each School have been
prepared, completed, maintained and filed in all material respects in accordance
with all applicable Legal Requirements, and are true and correct in all material
respects. All financial aid grants and loans, disbursements and record keeping
relating thereto have been completed in compliance with all Legal Requirements
in all material respects, and there are no material deficiencies in respect
thereto.
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5.24 Refunds. To the best of Seller's knowledge, the Company and each
Subsidiary is in compliance in all material respects with all laws, regulations,
rules and requirements of Federal, state and local government and of accrediting
organizations, with respect to student tuition and tuition refund policies that
are material to any School. To the best of Sellers' knowledge and except (i) as
previously disclosed in prior audits by DOE or (ii) to the extent that such
finding or non-conformity would not have a material adverse affect on the
Company or any Subsidiary, no student at any School has been funded prior to the
date for which such student was eligible for funding, and such student's records
conform in form and substance to all relevant regulatory requirements. Since
January 1, 1995, there have been no material amounts claimed by any government
agency or accrediting organization from the Company or any Subsidiary as a
result of any self-evaluation study or audit which is not reflected on the
December Balance Sheet or been paid.
5.25 Title IV and Accreditation Compliance. With the exception of the
School in Piscataway, New Jersey which operates as a branch of the Montclair,
New Jersey School, each School is certified by the DOE as an eligible
institution under Title IV and is a party to, and to the best of Seller's
knowledge is in compliance in all material respects, with, a valid program
participation agreement with the DOE with respect to the operations of such
School. Except as set forth in Schedule 5.25 attached hereto, none of the
Seller, the Company or any Subsidiary has received any notice, not previously
resolved without any ongoing liability, with respect to any alleged violation of
the rules or regulations of the DOE or other governmental entity, or ACICS, by
any School, including sales and marketing activities, or the terms of any
program participation agreement to which any School is or was a party. If any
such notices have been received and not resolved without any ongoing liability,
Seller has disclosed its receipt and disposition to Purchaser
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in writing prior to the execution of this Agreement. Except as set forth on
Schedule 5.25 attached hereto, Seller is not aware of any investigation or
review of the Company's or any Subsidiary's student financial aid programs or
any review of accreditation of any School by any governmental entity or ACICS.
As of the date hereof, no School has more than eighty-five percent (85%) of its
revenues pursuant to Title IV Programs or derived from Title IV funds as
determined in accordance with 34 C.F.R. (S) 600.5(d), and at no time after July
1, 1994 has more than eighty-five percent (85%) of the revenues of any School
been pursuant to Title IV programs or derived from Title IV funds.
5.26 Cohort Default Rates. Schedule 5.26 attached hereto sets forth the
published cohort default rate for each School, as stated by the DOE and issued
to such School for each year in which such data is available. To the best of
Seller's knowledge, such schedule is materially accurate in all respects. None
of the Company or any Subsidiary has received any notice as to the calculation
or amount of the cohort default rates for any School for the year ended
September 30, 1995.
5.27 Licenses. Schedule 5.27 sets forth each and every material
accreditation, license, permit and other similar regulatory approval issued by
any Federal, state or local agency or private licensing or accrediting
organization to which the Company or any Subsidiary is subject on the date
hereof and which is material to the business of the Company or any Subsidiary
(the "Licenses and Permits"). Except as set forth on Schedule 5.27, there are no
Licenses and Permits relating to any School which either lapsed or were revoked
since January 1, 1995. Each of the Company and the Subsidiaries currently
maintain all material Licenses and Permits necessary to conduct its respective
business and operations as presently being conducted, except where the failure
to do so would not have a material adverse effect on its operations or financial
condition.
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No application made by the Company or any Subsidiary for any Licenses and
Permits during the last three (3) years has been denied. Except as set forth on
Schedule 5.27, none of the Company, Seller or any Subsidiary has received notice
that any of the Licenses and Permits will not be renewed and to the best of
Seller's knowledge, there is no basis for nonrenewal.
5.28 Grants and Aid. Schedule 5.28 sets forth, to Seller's knowledge, each
and every type of student loan, grant, aid, tuition assistance, scholarship,
guarantee or similar program pursuant to which students at any of the Schools
received aid toward tuition during the period from and after January 1, 1995 and
which is material to the business or financial condition of any School.
5.29 Transaction Approvals. To the best of Seller's knowledge, there exists
no fact or circumstance attributable to Sellers, the Company or any Subsidiary
that would cause DOE, ACICS, state educational regulatory authorities or any
other governmental entity whose authorization, consent or similar approval is a
requirement for the consummation of the transactions contemplated by this
Agreement to refuse to deliver such authorization, consent or similar approval.
5.30 Delivery of Documents. True, correct and complete copies of all
Leases, Material Contracts, Policy Guidelines and other documents, instruments,
agreements and records of the Company and the Subsidiaries described on
schedules to this Agreement or relating to the assets, liabilities and the
operations of the Company and the Subsidiaries, the representations and
warranties of Sellers contained in this Agreement or the operation of the
Schools, have been delivered or made available to Purchaser.
5.31 Disclosure. Neither this Agreement, nor any of the schedules,
exhibits, attachments, written statements, documents, certificates or other
items supplied to Purchaser in writing by or on behalf of Seller with respect to
the transactions contemplated hereby, contain any
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untrue statement of a material fact or omit a material fact necessary to make
such statements not misleading in light of the circumstances in which such
statements were made.
VI. Representations and Warranties of Purchaser.
Purchaser represents and warrants to Seller on the date hereof as follows:
6.01 Execution, Delivery and Performance. This Agreement constitutes and
upon execution and delivery the other agreements and instruments referred to in
this Agreement that Purchaser is executing and delivering ("Purchaser's
Additional Agreements") will constitute, valid and binding obligations of
Purchaser enforceable in accordance with their terms (except as the
enforceability thereof may be limited by the Bankruptcy Exceptions). Neither the
execution, delivery or performance by Purchaser of this Agreement or Purchaser's
Additional Agreements nor the consummation by Purchaser of the transactions
contemplated hereby or thereby nor the consummation of the transactions herein
or therein contemplated (a) will violate in any material fashion any statute or
law or any rule, regulation, judgment, or order of any court or governmental
authority, or (b) will violate, conflict with, or constitute a default, right to
accelerate, or loss of rights under, or result in the creation of any material
lien, charge or encumbrance pursuant to (i) the Certificate of Incorporation or
By-Laws of Purchaser or (ii) any contract, commitment, agreement, lease,
license, mortgage, deed of trust, or restriction of any kind to which Purchaser
is a party or by which it or its properties or businesses may be bound or (c)
will cause, or give any person grounds to cause, the maturity of any liability
or obligation of the Purchaser to be accelerated or will increase any such
liability.
6.02 Organization, Standing and Qualification of Purchaser. Purchaser is a
corporation duly organized, validly existing and in good standing under the laws
of the State of Delaware and has all requisite power and authority and is
entitled to carry on its business as now being conducted;
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is duly qualified to do business as a foreign corporation in every jurisdiction
where failure to be so qualified would have a material adverse effect on its
business or operations.
6.03 Shareholder Approval. No approval by the stockholders of Purchaser is
required with respect to the transactions contemplated by this Agreement or the
other agreements and instruments referred to in this Agreement.
6.04 Litigation. To the knowledge of Purchaser, there is no claim, legal
action, suit, arbitration, governmental investigation, or other legal or
administrative proceeding in progress or pending or, to the knowledge of
Purchaser, threatened against Purchaser or the transactions contemplated by this
Agreement, which if adversely determined would materially challenge the validity
of this Agreement or any action taken or to be taken by Purchaser pursuant to
this Agreement.
6.05 Purchase for Investment. Purchaser is purchasing the Shares for its
own account for investment and not with a view to the distribution or resale
thereof.
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6.06 Purchaser's Examination.
(a) Purchaser is purchasing the Schools as a going concern, and is not
relying on any forecasted operating results or budgets prepared by or on behalf
of Seller, the Company or the Subsidiaries but rather upon its own plan of
operations and financial forecasts for the Schools;
(b) Nothing has come to Purchaser's attention that indicates that any of
the representations or warranties set forth in Article V are false, incorrect or
inaccurate; and
(c) No representation or warranty is being made by any of the Seller, the
Company or any Subsidiary or any of their respective representatives as to the
future operations or prospects of the businesses of the Schools.
6.07 Transaction Approvals. To the best of Purchaser's knowledge there
exists no fact or circumstance attributable to Purchaser or any of its
affiliates that would cause the DOE, ACICS, state educational regulatory
authorities or any governmental entity whose authorization, consent or similar
approval is a requirement for Purchaser to operate the schools or receive Title
IV funds or for the consummation of the transactions contemplated by this
Agreement, to refuse to deliver such consent, authorization or similar approval
such that the Schools may operate in a manner substantially similar to their
operations immediately prior to the Closing.
VII. Covenants of Purchaser and Seller.
7.01 Governmental Filings. Seller and Purchaser will cooperate in
preparing, and will each promptly file, their respective Pre-Merger Notification
and Report Forms and any other information and documents required under the HSR
Act, and each will promptly notify the other of any communication with respect
to such filings from the United States Department of Justice or the Federal
Trade Commission. Promptly following the execution of this Agreement, Seller and
Purchaser agree to cooperate to take all acts and execute all documents as may
be necessary to
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receive approval under or exception from HSR for the purchase of the Shares from
Seller as contemplated under this Agreement. All filing fees connected with such
process shall be paid by Seller with one-half of such fees to be reimbursed to
Seller by Purchaser at Closing.
7.02 Books and Records. For a period of seven years (7) after the Closing
Date, no party shall destroy (or permit the destruction of) any of the books and
records pertaining specifically to Seller, the Company, or any Subsidiary in
such party's possession that may be required by any other party in connection
with any tax audit, examination or other proceeding without first offering them
to the other party in writing at least thirty (30) days prior to the date of
their proposed destruction. Each party shall retain such records for longer than
seven (7) years if notice is given by the other party within such seven (7) year
period of any such proceeding requiring the records. After the date hereof, any
party may inspect and make copies from such books and records related in any way
to the Company, the Subsidiaries or the Schools which relates to their
operations prior to the Closing in the possession of the other party on
reasonable notice and at reasonable times.
7.03 Further Assurance. Purchaser and Seller each agrees that from and
after the Closing Date, it shall use its reasonable efforts to obtain all
consents and authorizations of third parties and to make all filings with and
give all notices to third parties and execute all documents which may be
necessary or reasonably required in order to more effectively transfer, convey
and assign to Purchaser all of the business, assets, liabilities and property of
the Company and the Subsidiaries as contemplated by this Agreement; provided,
however, that this Section 7.03 shall not apply to licenses, accreditations,
governmental approvals or third party sources for student tuition.
7.04 Operation of the Schools. Except as expressly contemplated by this
Agreement, during the period from the date of this Agreement to the Closing Date
(the "Interim Period"), Seller will cause the Company and each Subsidiary to (a)
conduct its business and
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operations according to its ordinary and usual course of business including,
without limitation, the continuation of the Company's and Subsidiaries' zero
balance cash management system, (b) use its reasonable efforts to preserve
substantially intact its business organization, (c) use its reasonable efforts
to keep available the services of its present officers and employees and to
preserve present relationships with all parties having significant business
dealings with it, (d) execute and deliver a sublease of any equipment which is
leased to Seller but used and paid for by the Company or any Subsidiary, and (e)
comply with all Legal Requirements in all material respects. Without limiting
the generality of the foregoing, and, except as otherwise expressly provided in
this Agreement, during the Interim Period, without the prior written consent of
the Purchaser, which consent shall not unreasonably be withheld or delayed,
Seller will cause the Company and each Subsidiary not to:
(i) (a) create, incur or assume any long-term debt (including obligations
in respect of capital leases in excess of $50,000 in the aggregate), or create,
incur or assume any short-term debt which shall not be released, discharged or
satisfied on or prior to the Closing; or (b) assume, guarantee, endorse or
otherwise become liable or responsible (whether directly, contingently or
otherwise) for the obligations of any other person; provided that the Company
and each Subsidiary may endorse negotiable instruments in the ordinary course of
business;
(ii) increase in any manner the compensation of any of its directors,
officers or other employees, except any such increase, granted in the ordinary
course of business in accordance with its customary practices (which shall
include normal periodic performance reviews and related compensation and benefit
increases), or materially increase the rate or terms of any bonus, insurance,
pension or other employee benefit plan, payment or arrangement made to, for or
with any such directors, officers or key employees; or
(iii) enter into any material agreement, commitment or transaction not in
the ordinary
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course of business (including, without limitation, any borrowing, capital
expenditure or capital financing in excess of $50,000).
7.05 Public Announcements. Seller and Purchaser will consult with each
other before issuing any report, statement or press releases or otherwise making
any public statements with respect to this Agreement and the transactions
contemplated hereby and neither of them shall issue any such report, statement
or press release or make any such public statement prior to such consultation
and the approval of the other party, except as in the reasonable judgment of
counsel for the party may be required by law or may be appropriate in order to
discharge its legally mandated disclosure obligations, in which case such party
shall advise and confer with the other party before issuing any such report,
statement or press release.
7.06 State Licenses. Upon execution of this Agreement, Purchaser agrees to
use its best efforts, including incurring such costs as are necessary, to obtain
all state licenses necessary for Purchaser to operate the Schools; provided,
however, that Purchaser's failure or inability to obtain or continue any such
licenses or accreditation shall not excuse Purchaser from its obligations under
this Agreement including, without limitation, its obligation to purchase the
Shares. Seller further agrees to sign, or cause the Company and each Subsidiary
to sign, all documents necessary to obtain the foregoing licenses and
accreditation, provided that neither Seller, the Company nor any Subsidiary
shall be obligated to sign any documents obligating it to pay any monies prior
to the Closing or to take any actions or refrain from taking any actions.
7.07 Guarantees, Letters of Credit, Surety Bonds. Schedule 7.07(a) sets
forth a description of all guarantees issued by Seller or Seller's parent
company as to certain obligations of the Company or the Subsidiaries to third
parties, including, without limitation, lessors and state governments (the
"Guarantees"). Purchaser agrees prior to the Closing Date to use its reasonable
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best efforts (excluding payments or delivery of collateral by Purchaser or
delivery of guarantees from parties other than Purchaser) to have Seller
released from all Guarantees. In the event Purchaser is unable to obtain any of
such releases prior to the Closing Date, Purchaser shall deliver to Seller at
Closing an indemnification agreement, together with a security bond, letter of
credit or other instrument backstopping such indemnification, indemnifying and
holding harmless Seller from and against any and all loss, liability or damage
arising out of or relating to its obligations under the Guarantees in form and
substance reasonably satisfactory to Seller. Schedule 7.07(b) sets forth letters
of credit and surety bonds issued for the benefit of the Company or any of the
Subsidiaries (together, the "LCS"). Purchaser shall provide substitute letters
of credit or surety bonds at Closing which will enable Seller to receive
delivery of the LCS undrawn by the recipients. Notwithstanding the foregoing, in
no event shall Purchaser be required to pay monies in excess of $50,000 per
annum in the aggregate in order to obtain the bonds and letters of credit
required pursuant to the preceding sentence of this Section 7.07.
7.08 Intercompany Accounts. Effective as of the close of business on the
day preceding the date on which the Closing occurs, Seller shall cause all
accounts payable or accounts receivable between Seller or any of Seller's
affiliates (other than the Company and its Subsidiaries), on the one hand, and
the Company or any Subsidiary, on the other hand (except for receivables due to
the Company or the Subsidiaries from their respective employees, which
receivables are listed on Schedule 7.08 attached hereto), to be eliminated in
such a manner as to cause neither a taxable gain nor a taxable loss to the
Company or any Subsidiary.
7.09 Election to Treat Sale of Shares as Sale of Assets.
Seller agrees, if so directed by the Purchaser, to join with Purchaser
in making an election under Section 338(h)(10) of the Code (and any
corresponding elections under state and
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local tax law) (collectively, an "Election") with respect to the purchase and
sale of the stock of the Company hereunder.
7.10 Tax Returns. Seller shall be responsible for the preparation of all
tax returns for periods ending on or before the Closing Date. Purchaser shall
cooperate in the preparation of those returns. Purchaser shall be responsible
for the preparation of all tax returns for periods ending after the Closing
Date. Each of Seller and Purchaser will give the other party access to any
records in its possession (or its affiliates possession) that the other party
may reasonably request in order to prepare its tax returns. Each of Seller and
Purchaser agrees not to destroy (or permit to be destroyed) any such records
without first giving notice to the other party hereto and granting the party
receiving such notice a reasonable opportunity to take possession of such
records.
7.11 Employees.
(a) Purchaser agrees that all employees of the Company and the Subsidiaries
will be entitled to enroll in Purchaser's Group Medical and Hospitalization Plan
and that coverage thereunder shall be effective without any pre-existing
limitation condition exclusions from and after the Closing Date.
(b) Seller agrees to be responsible for and pay to the affected persons in
accordance with the severance policies of the Company and its Subsidiaries as in
effect on the date of the Agreement (the "KGS Severance Policy") an amount equal
to severance benefits accruing for service through the Closing Date to those
employees of the Company or the Subsidiaries whose employment is terminated by
Purchaser, the Company or any Subsidiary within the later of ninety (90) days
after the Closing Date and thirty (30) days following issuance of a DOE approval
notice as defined in Section 11.01 in circumstances requiring the payment of
severance benefits to such employee as determined under the KGS Severance
Policy. In no event shall any employee who receives or is
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entitled to receive severance from Seller under this provision receive severance
under a program of Purchaser.
(c) Purchaser agrees to recognize years of service with the Company or any
Subsidiary or any of their predecessors for purposes of service and vesting as
required under any fringe benefit or other plan maintained for the benefit of
employees of the Company or any Subsidiary after the Closing except for any
grants under Purchaser's stock option programs.
7.12 Due Diligence. For a period of fourteen days from the date of this
Agreement, Purchaser shall have the right to conduct a due diligence review of
the Company with respect to the following items: accounting, corporate records,
contracts, litigation, environmental issues, student population, financial aid
records, current class starts and marketing information. This review shall be
conducted at reasonable times and under reasonable circumstances and Seller
shall cooperate fully with such review. Seller shall furnish the representatives
of Purchaser during such period with all such information and copies of such
documents concerning the matters subject to the review as such representatives
may reasonably request and cause Seller's officers, employees and agents to
cooperate fully with such representatives, and to make full disclosure to
Purchaser of all material facts affecting the matters subject to the review.
7.13 Conduct of Business Through Closing From the date hereof through and
including the Closing Date, and except as may otherwise be expressly provided
for in this Agreement:
(a) Seller shall conduct the business of the Company in a manner consistent
with past practice and shall not engage in any transaction or enter into any
material agreement or commitment outside the ordinary course of business;
(b) Seller shall not knowingly take any action, or fail to take any action,
which would
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make any representation or warranty contained in this Agreement materially
untrue or prevent any condition to closing of the transactions contemplated
hereby from being satisfied provided, however, Seller shall not be required to
take any action out of the ordinary course of business which requires the
expenditure of more than $50,000;
(c) Seller shall not (i) permit or cause any material change in the
business or financial condition of the Company and Subsidiaries; (ii) make any
commitment for capital expenditures which, individually or in the aggregate,
exceed Fifty Thousand Dollars ($50,000) without the prior written consent of
Purchaser, (iii) make any material changes in any method of marketing,
management or operation; (iv) amend any contracts, waive any rights under any
contracts or enter into any contract that is not assignable to Purchaser without
the consent of the other party thereto, (v) agree or commit (whether in writing
or otherwise) to do any of the foregoing after the Closing Date, in each
instance without the prior written consent of Purchaser.
(d) Seller shall, with respect to the Company and Subsidiaries, maintain in
full force and effect all insurance existing as of the date hereof.
(e) except upon the prior written consent of Purchaser, Seller shall not
settle, discharge, pay or otherwise satisfy any claims or causes of action
(absolute, accrued, contingent or otherwise) other than in the ordinary course
of business, nor shall Seller agree or commit to do any of the foregoing after
the Closing Date without the prior written consent of Purchaser.
(f) Seller promptly shall notify Purchaser of, and furnish Purchaser with
any information Purchaser may reasonably request with respect to, the occurrence
of any event or the existence of any fact that would result in Seller's
representations and warranties not being true in all material respects.
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7.14 Other Offers. Until May 31, 1997, Seller and/or its directors,
officers, affiliates and advisors shall not, directly or indirectly, (i) take
any action to solicit, initiate, encourage, accept or agree to any negotiations
regarding any Acquisition Proposal (as defined below); (ii) disclose any non-
public information relating to the Company, the Subsidiaries or the Schools in
connection with any Acquisition Proposal; or (iii) afford access to the assets,
books or records of the Company, the Subsidiaries, or the Schools to, any person
that, to the best of their knowledge, may be considering making, or has made, an
Acquisition Proposal. The term "Acquisition Proposal" means any offer or
proposal for, or any indication of interest in, the acquisition of the issued
and outstanding capital stock or the assets of the Company or any Subsidiary or
any material portion thereof, other than the transactions contemplated by this
Agreement. The Seller and/or its directors, officers, affiliates and advisors
shall forthwith terminate all pending negotiations with respect to any
Acquisition Proposal by any person other than the Purchaser.
7.15 Estoppel Certificates. From the date of this Agreement through the
Closing Date, with respect to the leases of real property in the name of the
Company or any of the Subsidiaries, Seller shall use reasonable commercial
efforts to obtain estoppel certificates from the lessors, provided however that
such efforts need not include the expenditure of any monies by Seller.
7.16 Transaction Approvals. Immediately following the execution of this
Agreement, Purchaser and Seller agree to work together to inform the DOE, all
relevant state governmental authorities and all relevant accrediting agencies
(the "Regulators") of the transactions contemplated by this Agreement. The
parties shall solicit input from the Regulators regarding the process of
obtaining approvals for Purchaser to operate the Company and each of the
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Subsidiaries including, without, limitation approval for a resumption of Title
IV funding. The parties shall use their best efforts to persuade the Regulators
that all necessary approvals be granted as soon as possible after the Closing
Date and to determine whether such approvals are likely to be forthcoming.
7.17 Purchaser's Licensing. Purchaser agrees that it will at all times,
prior to a recision pursuant to Section 11 of this Agreement including, without
limitation, during any Cure Period as defined in Section 11.02, use commercially
reasonable efforts to secure all state, accrediting agency and DOE Approval
Notices necessary to permit the resumption of Title IV funds and will not
knowingly take or fail to take any commercially reasonable action which could
jeopardize granting of any such approvals, provided however, Purchaser shall not
be required to take any action that would change in any material manner the way
the Schools were operated prior to the Closing Date nor shall Purchaser be
required to take any action inconsistent with the other provisions of this
Agreement including, without limitation, Section XI.
7.18 The CEC Interim Period. During the period beginning on the Closing
Date and ending on the termination of Purchaser's conditional right to rescind
pursuant to Section XI (the "CEC Interim Period"):
(a) Purchaser will provide Company with working capital (i) in amounts
consistent with ordinary practice in the twelve (12) months preceding the
closing adjusted for the fact that Title IV funds may be unavailable during this
period and (ii) to sustain the operations of the Company and each of the
Subsidiaries.
(b) Purchaser shall conduct the business of the Company in a manner
consistent with past practice and shall not engage in any transaction or enter
into any material agreement or commitment outside the ordinary course of
business;
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(c) Purchaser shall, with respect to the Company and Subsidiaries, maintain
adequate insurance equivalent in all material respects to that in place
immediately prior to the Closing Date;
(d) Except upon the prior written consent of Seller, which consent shall
not be unreasonably withheld, Purchaser shall not (i) permit or cause any
material adverse change in the business or financial condition of the Company
and Subsidiaries; (ii) make any commitment for capital expenditures, not
previously planned, which, individually or in the aggregate, exceed Fifty
Thousand Dollars ($50,000), (iii) make any material changes in any method of
marketing, management or operation; (iv) amend any material contracts, waive any
rights under any material contracts or enter into any material contract that is
not assignable to Seller without the consent of the other party thereto, (v)
agree or commit (whether in writing or otherwise) to do any of the foregoing
after the Closing Date, unless such agreement is expressly conditioned on the
termination of or Purchaser's failure to exercise Purchaser's right to rescind
pursuant to Section XI; (vi) settle, discharge, pay or otherwise satisfy any
claims or causes of action (absolute, accrued, contingent or otherwise) other
than in the ordinary course of business, nor shall Purchaser agree or commit to
do any of the foregoing after the Closing Date.
7.19 Purchaser's Financing. Purchaser shall use reasonable commercial
efforts to secure the financing necessary to consummate the transactions
contemplated by this Agreement.
VIII. Conditions to Closing.
8.01 Conditions Precedent to Purchaser's Obligations. The obligation of
Purchaser to consummate the transactions contemplated by this Agreement is
subject to the fulfillment, at the option of Purchaser, at or prior to the
Closing Date, of the following conditions:
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(a) Bring-Down of Representations and Warranties. Purchaser shall have
received a certificate of a duly authorized officer of Seller stating that the
representations and warranties of Seller made in Article V of this Agreement are
true in all material respects at and as of the Closing Date, except for
representations and warranties specifically relating to a time or times other
than the date hereof and except for changes permitted by, or necessitated by
compliance with, this Agreement, with the same force and effect as if made on
the Closing Date and all covenants and agreements required under this Agreement
to be performed and complied with by Seller on or before the Closing Date have
been performed and complied with in all material respects.
(b) Opinion. Purchaser shall have received an opinion of Seller's in-house
legal counsel in form reasonably satisfactory to Purchaser as to the matters set
forth in Sections 5.01, 5.02, and 5.03.
(c) No Material Adverse Change. Except for transactions permitted by in
Article VII of this Agreement, since the date of this Agreement, there shall
have been no material change in the business or financial condition of the
Company or any Subsidiary and there shall have been no legal actions, suits,
arbitrations, governmental investigations or other legal or administrative
proceedings in progress, pending or threatened against Seller, the Company or
any of the Subsidiaries or the transactions contemplated by this Agreement,
which if adversely determined would have a material adverse effect on the
Company or any Subsidiary, or would materially challenge the validity of this
Agreement or any action taken or to be taken by Seller pursuant to this
Agreement.
(d) Incumbency Certificate. Purchaser shall have received a certificate of
the secretary of Seller verifying the due election, authorization and incumbency
of the officers of Seller executing this Agreement or any other agreement
contemplated herein to be executed by
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Seller.
(e) Consents. Purchaser shall have received the consent to the transactions
contemplated hereby from each party to the Leases and the Material Contracts
described on Schedules 5.13 and 5.19 whose consent is required under such
agreements and where the failure to obtain such consent would have a material
adverse impact on the Company or any of the Subsidiaries.
(f) Performance of Agreements. Each and all of the agreements of Seller to
be performed on or before the Closing Date pursuant to the terms hereof shall
have been performed in all material respects (including, without limitation, the
delivery of all documents required to be delivered to Purchaser pursuant to
Section 4.01 hereof).
8.02 Conditions Precedent to Seller's Obligations. The obligation of Seller
to consummate the transactions contemplated by this Agreement is subject to the
fulfillment, at the option of Seller, at or prior to the Closing Date, of the
following conditions:
(a) Bring-Down of Representations and Warranties. Seller shall have
received a certificate from a duly authorized officer of Purchaser stating that
the representations and warranties of Purchaser made in Article VI of this
Agreement are true in all material respects at and as of the Closing Date,
except for representations and warranties specifically relating to a time or
times other than the date hereof and except for changes permitted by, or
necessitated by compliance with, this Agreement, with the same force and effect
as if made on the Closing Date and all covenants and agreements required under
this Agreement to be performed and complied with by Purchaser on or before the
Closing Date have been performed and complied with in all material respects.
(b) Seller shall have received an opinion of Purchaser's legal counsel in
form reasonably satisfactory to Seller to the matters set forth in Sections 6.01
and 6.02.
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(c) Seller shall have received a copy of the resolutions of Purchaser,
certified by the secretary of Purchaser, authorizing the execution, delivery and
performance of this Agreement and Purchaser's Additional Agreements and the
consummation of the transactions contemplated hereby and thereby.
(d) Seller shall have received adequate assurances from Purchaser that
until the termination of Purchaser's right to rescind pursuant to Section XI
Seller will provide working capital (i) in amounts consistent with ordinary
practice in the twelve (12) months preceding the Closing adjusted for the fact
that Title IV funds may be unavailable during this period and (ii) sufficient to
sustain the operations of the Company and each of the Subsidiaries.
8.03 HSR Approval. As a further condition precedent to the respective
obligations of the parties hereunder, the waiting period required after the
filing by Seller and Purchaser of their respective HSR Act Pre-Merger
Notification and Report Forms, including any extensions of such period, shall
have expired.
IX. Indemnification.
9.01 Indemnification by Seller. Seller agrees to indemnify and hold
harmless Purchaser, the Company and each of the Subsidiaries against and in
respect of:
(a) Any and all damage, loss or liability resulting from (i) any
misrepresentation or breach of warranty of Seller set forth in this Agreement or
(ii) non-fulfillment of any covenant or agreement, on the part of Seller, under
this Agreement or any other agreements or instruments delivered by Seller in
connection herewith;
(b) Any and all loss, liability or damage suffered or incurred by reason of
or in connection with any claim for finder's fee or brokerage or other
commission arising by reason of any services rendered to Seller by UBS
Securities L.L.C. or alleged to have been rendered by any
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other person to or at the instance of Seller with respect to this Agreement or
any of the transactions contemplated hereby; and
(c) All litigation pending as of the Closing Date including, without
limitation, those matters listed on Schedule 5.11.
(d) Any and all damage, loss or liability suffered or incurred by reason
of, or in connection with, any third party claim against the Company or any
Subsidiary arising out of any event or events occurring prior to the Closing
Date, regardless of whether such matters result from a breach of a
representation or warranty by Seller;
(e) Any and all actions, suits, proceedings, assessments, judgments, and
all reasonable costs and reasonable legal and other expenses incidental to the
enforcement of any of the foregoing.
9.02 Further Indemnification by Seller. Without limiting the generality of
the foregoing Section 9.01 and notwithstanding the provisions of Section 9.06
hereof, Seller agrees to indemnify and hold harmless Purchaser against and in
respect of:
(a) Indemnification for Certain Tax Liabilities.
(i) Seller shall indemnify and hold harmless Purchaser from and against
any liability, loss or damage incurred by Purchaser, the Company, or any of the
Subsidiaries, and any transferee, officer, director, stockholder or employee of
the foregoing, from and against the payment of any and all Tax Liabilities (as
that term is defined in clause (ii) below), and for all out-of-pocket costs and
expenses (including reasonable attorneys' fees) incurred by Purchaser, the
Company or any Subsidiary and any transferee, officer, director, stockholder or
employee of the foregoing, in connection with any action for enforcement of
Seller's obligations under this paragraph in which Purchaser, the Company or a
Subsidiary is the prevailing party.
(ii) For purposes of this Section 9.02(a), the term "Tax Liabilities" or
"Tax Liability"
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shall mean any and all liabilities of Seller, the Company, or the Subsidiaries
for taxes (including liabilities incurred by reason of the Company or the
Subsidiaries being a member of any affiliated group (as defined in Section
1504(a) of the Code) for any time up to and including the Closing Date), whether
federal, state, county, local or foreign, based upon or measured by income, and
all profits, franchise, gross receipts, withholding, payroll, stamp, sales, use,
employment, occupation, property, excise, recapture, value-added, unitary and
other taxes (including, without limitation, interest, additions to tax,
additional amounts, or penalties thereon or penalties for failure to file a
return or report, and taxes resulting from any election pursuant to Section 338
of the Code in connection with the sale of the Shares pursuant hereto), imposed
from time to time by any taxing authority, except liabilities reflected on the
Final Closing Date Balance Sheet for the purpose of determining the purchase
price adjustment pursuant to Section 2.03 (but only to the extent of the amount
at which such liabilities are actually reflected thereon). Such Tax Liabilities
include, without limitation, liability imposed in the capacity of transferee or
successor or with respect to any group of corporations or joint venture of which
the Company or any of the Subsidiaries have been a member at any time up to and
including the Closing Date. Such Tax Liabilities also shall include, without
limitation, any and all liabilities for taxes resulting from any transaction
pursuant to this Agreement, including, without limitation, any liability arising
from the Company, or any of the Subsidiaries ceasing to be a member of the
affiliated group including Seller, or any failure of the Company or any of the
Subsidiaries to be included in any consolidated, combined or unitary tax return
with Seller, any and all tax liabilities attributable to the Election
contemplated under Section 7.09 of this Agreement, and any and all tax
liabilities arising as a result of the distribution of appreciated real or other
property by the Company to the Seller or an affiliate of the Seller, which
liabilities shall be the sole responsibility of Seller. If Seller breaches any
of the obligations under
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Section 7.09 of this Agreement and Purchaser, the Company or any Subsidiary
incurs liability for taxes by reason of an Election, Seller will indemnify and
hold harmless Purchaser, the Company or any Subsidiary from any such tax
liability to the extent such tax liability exceeds what it would have been had
Seller not breached such obligation. Seller also will indemnify and hold
harmless Purchaser, the Company or any Subsidiary against all Tax Liabilities of
Seller and any other corporation (other than the Company or the Subsidiaries)
affiliated with Seller, as a result of S 1.1502-6 of the Treasury Regulations or
any similar provisions of Federal, state or local law.
(iii) In the event that a claim shall be made by the Internal Revenue
Service ("IRS") or any other taxing authority for Tax Liabilities which claim,
if successful, may result in an obligation on the part of Seller to indemnify
Purchaser, the Company or any Subsidiary, and any transferee, officer,
directors, stockholder or employee of the foregoing, pursuant to this Section
9.02(a), Seller shall have sole control over the conduct of a contest undertaken
by Seller under this clause (iii) or other disposition of such claim, provided,
however, that in the event that Seller receives notice of any such claim; Seller
(A) shall promptly notify Purchaser in writing of such claim (specifying in
reasonable detail the basis of such claim, action, or suit and facts pertaining
thereto) and of any action taken or proposed to be taken from time to time by
the IRS or any other taxing authority in respect thereto, (B) shall have
reasonably determined, and agreed in writing, that such claim, if determined
adversely to Purchaser, the Company or any Subsidiary, would result in a Tax
Liability for which Seller is required to indemnify Purchaser against under this
Section 9.02(a), (C) shall keep Purchaser informed of the progress of any such
contest or any such other disposition, and (D) if such claim is to be contested
by filing a claim for refund, shall provide the funds sufficient to pay any tax
attributable to such claim, together with any penalties, additions to tax,
additional amounts, or interest attributable to such tax, necessary to be paid
to proceed with such
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claim for refund. In the event that Seller receives a settlement offer which is
acceptable to Seller or decides to make any settlement offer to the IRS or any
other taxing authority with respect to contest undertaken by Seller under this
subparagraph, Seller shall notify Purchaser thereof. Purchaser shall, and shall
cause the Company and each Subsidiary to, cooperate in any contest as and to the
extent reasonably requested by Seller, and Seller shall reimburse Purchaser's
out-of-pocket costs and expenses (including reasonable attorneys' and accounting
fees) incurred by it, the Company or any Subsidiary in connection with such
cooperation or participation in the defense, or compromise of any asserted
claims or demands. Notwithstanding anything to the contrary herein, Seller shall
pay to the party being indemnified, on an after-tax basis, the amount of any Tax
Liabilities payable hereunder, no later than the date on which the obligation
for such Tax Liability is the subject of a final determination (as that term is
hereinafter defined) and the amount of all costs that the indemnified party has
incurred in connection with the preceding sentence. For purposes of this Section
9.02(a), a "final determination" shall be deemed to occur with respect to a
proposed adjustment when (A) there is a decision, judgment, decree or other
order by any court of competent jurisdiction, which decision, judgment, decree
or other order has become final, binding and is non-appealable, (B) there is a
closing agreement entered into with Seller's prior consent made under section
7121 of the Code or other administrative settlement entered into with Seller's
prior consent with the IRS or other taxing authority, or (C) if the Tax
Liability has been paid, when the time for instituting a claim for refund in
respect thereto has expired, or, if a claim was filed and Purchaser gave timely
notice thereof to Seller and the time for instituting suit with respect thereto
has expired. Upon receipt by Purchaser, the Company or any Subsidiary of a
refund or credit of any tax paid by it in respect of which Seller has provided
the funds to pay such tax, any refund received or credited with respect to such
claim and any interest which is attributable to such refund, and which is paid
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by the taxing authority, shall be paid to Seller forthwith upon receipt thereof.
Purchaser shall notify Seller forthwith of any Tax Liability claim of which
Purchaser becomes aware.
(vi) Upon receipt by Purchaser, the Company or any Subsidiary of a refund
or credit of any tax, and interest attributable thereto, with respect to a
taxable period (or part thereof) ending on or before the Closing Date, such
refund or credit shall be paid to Seller forthwith upon receipt thereof by
Purchaser, the Company or any Subsidiary, unless such tax refund or credit is
reflected on the Final Closing Date Balance Sheet. If, for any reason, there is
a claim that any such refund or credit which has been paid over to Seller, and
interest attributable thereto, is required to be repaid to any taxing authority,
Seller shall indemnify Purchaser, the Company or any Subsidiary, on an after-tax
basis, for any resultant taxes, interest, penalties, additions to tax,
additional amounts, assessments or deficiencies, which indemnity shall be in
conformity with the applicable provisions of this Section 9.02(a). Seller shall
be responsible for the preparation of all tax returns for all taxable periods
ending on or prior to the Closing Date. Purchaser, the Company and Subsidiaries
shall cooperate in the filing of such tax returns. Purchaser, the Company, and
the Subsidiaries shall be responsible for the preparation of all tax returns for
all taxable periods ending after the Closing Date. Seller shall cooperate in the
filing of such tax returns.
(b) Any and all reasonable costs and reasonable legal and other expenses
incidental to the enforcement of any of the foregoing.
9.03 Indemnification by Purchaser. Purchaser agrees to indemnify and hold
harmless Seller against and in respect of:
(a) Any and all damage, loss or liability resulting from any
misrepresentation, breach of warranty or non-fulfillment of any covenant or
agreement on the part of Purchaser under this
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Agreement or any other agreements or instruments delivered to Seller in
connection herewith;
(b) Any and all loss, liability or damage suffered or incurred by Seller by
reason of or in connection with any claim for finder's fee or brokerage or other
commission arising by reason of any services alleged to have been rendered to or
at the instance of Purchaser with respect to this Agreement or any of the
transactions contemplated hereby; and
(c) Any and all actions, suits, proceedings, assessments, judgments, and
all reasonable costs and reasonable legal and other expenses incidental to the
enforcement of any of the foregoing.
9.04 Third Party Claims.
(a) In order for Purchaser or Seller, as the case may be, to be entitled to
any indemnification provided for under this Agreement in respect of, arising out
of or involving a claim made by any person, firm, governmental authority or
corporation other than Purchaser or Seller, or their respective successors,
assigns or affiliates (a "Third Party Claim") against the indemnified party,
such indemnified party must notify the indemnifying party in writing of the
Third Party Claim promptly after receipt by such indemnified party of notice of
the Third Party Claim. Thereafter, the indemnified party shall deliver to the
indemnifying party, within ten (10) business days after receipt by such
indemnified party's receipt thereof, copies of all notices relating to the Third
Party Claim.
(b) If a Third Party Claim is made against an indemnified party, the
indemnifying party will be entitled to participate in the defense thereof and,
if it so chooses, to assume the defense thereof with counsel selected by the
indemnifying party (provided such counsel is not reasonably objected to by the
indemnified party). Should the indemnifying party elect to assume the defense of
a Third Party Claim, the indemnifying party will not be liable to the
indemnified
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party for any legal expenses subsequently incurred by the indemnified party in
connection with the defense thereof. If the indemnifying party elects to so
participate in or assume the defense of a Third Party Claim, the indemnified
party will fully cooperate with the indemnifying party in connection with such
defense.
(c) In no event will the indemnified party admit any liability with respect
to, or settle, compromise or discharge, any Third Party Claim without the
indemnifying party's prior written consent, and the indemnified party will agree
to any settlement, compromise or discharge of Third Party Claim which the
indemnifying party may recommend and which releases the indemnified party
completely in connection with such Third Party Claim; provided, that such
recommended settlement, compromise or discharge does not impose any restrictions
on future activities of the indemnified party or its affiliates or may be
reasonably anticipated to have a material adverse impact on the business or
operations of the indemnified party or its affiliates.
(d) In the event the indemnifying party shall assume the defense of any
Third Party Claim, the indemnified party shall be entitled to participate in
(but not control) such defense with its own counsel at its own expense. If the
indemnifying party does not assume the defense of any such Third Party Claim,
the indemnified party may defend the same in such manner as it may deem
appropriate, including, but not limited to, settling such claim or litigation
after giving five days' prior written notice to the indemnifying party setting
forth the terms and conditions of settlement.
9.05 Survival. All representations and warranties, covenants and agreements
made by the parties in this Agreement shall survive only through the eighteen
(18) months anniversary of the Closing Date, provided however, that (a) the
representations and warranties in Sections 5.29 and 6.07 shall survive only
through the termination of Purchaser's right to rescind this
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transaction pursuant to Section XI, and (b) the representations and warranties
in Section 5.02 with respect to title to the Shares and the obligation to
indemnify and hold harmless pursuant to Section 9.02 shall survive indefinitely.
9.06 Conditions to Indemnification. Notwithstanding any provision of this
Agreement to the contrary, Seller shall have no liability under Section 9.01 and
Purchaser shall have no liability under Section 9.03 except to the extent that
the aggregate amount of claims, losses, liabilities, damages or expenses
(collectively, the "Damages") of the party seeking indemnification based thereon
or resulting therefrom is Three Hundred Thousand Dollars ($300,000) in the
aggregate and then only to the extent Damages exceed such $300,000 threshold;
provided, that the foregoing limitations shall not apply to (i) any claim under
Section 9.01(a) based upon breach by Seller of the representations and
warranties set forth in Section 5.02, (ii) any claim under Section 9.01(b) or
9.03(b) or (iii) any claim under Section 9.01(c). Furthermore, notwithstanding
any provision of this Agreement to the contrary, in no event shall either
party's liability under this Article IX exceed in the aggregate an amount in
excess of the Purchase Price.
9.07 Exclusive Remedy. Following the Closing Date and except as required to
enforce Purchaser's rights and remedies pursuant to Section XI, the right of
indemnification pursuant to this Agreement shall constitute the sole and
exclusive remedy of each of the parties hereto in the event of a breach of
representation, warranty, covenant or agreement set forth herein by the other
party.
X. Termination and Abandonment.
10.01 Termination. This Agreement may be terminated at any time prior to
the Closing Date:
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(a) By mutual consent of Seller and Purchaser; or
(b) By either Seller or Purchaser at any time after June 30, 1997, if any
condition to the other parties' obligations set forth in Article VIII hereof is
not satisfied by such date;
(c) By Purchaser, on or before the fourteenth day after the date of this
Agreement, if, in Purchaser's reasonable judgment, the results of Purchaser's
due diligence review, conducted pursuant to Section 7.12 hereof, are not
satisfactory;
(d) By Purchaser, on or before the twenty-first day after the date of this
Agreement, if, in Purchaser's reasonable judgment, Purchaser has not obtained
satisfactory commitments from all sources of financing, debt and/or equity, for
the transactions contemplated by this Agreement;
(e) By Seller, during a period which shall run from the twenty-first day
following the date of this Agreement through the thirty-first day after the date
of this Agreement, if, in Seller's reasonable judgment, satisfactory financing
commitments from all sources of financing, debt and/or equity, for the
transactions contemplated by this Agreement, are not satisfactory.
(f) By Purchaser or Seller, on or before the twenty-first day after the
date of this Agreement, if in Purchaser or Seller's reasonable judgment, the
parties have received unfavorable indications regarding the likelihood of
obtaining necessary approvals regarding the transition of the Schools from the
Regulators.
10.02 Procedure and Effect of Termination. In the event of termination of
this Agreement and abandonment of the transactions contemplated hereby by either
or both of the parties pursuant to Section 10.01, written notice thereof shall
forthwith be given to the other party and this Agreement shall terminate and the
transactions contemplated hereby shall be abandoned, without further action by
either of the parties hereto. If this Agreement is terminated
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as provided herein:
(a) upon request therefor, Purchaser will redeliver all documents, work
papers and due diligence materials relating to Company or any Subsidiary
relating to the transactions contemplated hereby, whether obtained before or
after the execution hereof, to the party furnishing the same;
(b) no party hereto shall have any liability or further obligation to any
other party to this Agreement except (i) for any breach of a covenant or
agreement of such party contained in this Agreement and (ii) as stated
specifically in this Agreement; and
(c) all filings, applications and other submissions made pursuant to this
Agreement shall, to the extent practicable, be withdrawn from the agency or
other person to which made.
XI. Conditional Recision
--------------------
11.01 Definition. "DOE Approval Notice" shall mean a provisional program
participation agreement issued to Purchaser and executed by DOE.
11.02 Conditional Recision by Purchaser.
(a) Subject to Seller's right to cure as set forth below, and for a
period equal to six (6) months from the Closing Date, Purchaser shall have the
right and option to rescind the transactions contemplated by this Agreement
under the following conditions (the "Recision Conditions"):
(i) DOE issues to Purchaser a denial of its application for a DOE
Approval Notice and advises the Purchaser and Seller that such denial is based
wholly or in material part on any financial aid irregularities, including,
without limitation, audit or program review disallowances and improperly
disbursed student financial assistance funds, relating to the operation of any
School prior to the Closing ("Seller Pre-Closing Financial Aid Irregularities")
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or any other pre-Closing condition of any School, the Company, Seller or any of
their affiliates, the existence of which condition constitutes a breach by
Seller of its representations and warranties set forth in this Agreement (each a
"Seller Inadequacy"); or
(ii) DOE issues to Purchaser a DOE Approval Notice or DOE
Approval Notices which require the posting of a letter of credit or letters of
credit by Purchaser of more than $9,000,000 in the aggregate and DOE advises the
Purchaser and Seller that the requirement of the letter of credit or letters of
credit is based wholly or in material part on any Seller Pre-Closing Financial
Aid Irregularity or Seller Inadequacy.
(b) Purchaser shall notify Seller within five (5) days of Purchaser's
receipt of notice of the occurrence of a Recision Condition. Seller shall have
for sixty (60) days from such notice to Seller (the "Cure Period") the right,
but not the obligation, to cure any Recision Condition by (i) inducing DOE to
issue a DOE Approval Notice or DOE Approval Notices which require the posting of
a letter of credit or letters of credit by Purchaser in an amount no more than
$9,000,000 in the aggregate; or (ii) inducing DOE to issue a letter expressly
stating that no Seller Pre-Closing Financial Aid Irregularity or Seller
Inadequacy has caused DOE either (A) to fail to issue a DOE Approval Notice or
(B) to issue a DOE Approval Notice or Approval Notices which require the posting
of a letter of credit or letters of credit of more than $9,000,000 in the
aggregate. If Seller fails to cure the Recision Condition within the Cure Period
and Purchaser elects to exercise its right to rescind, Purchaser shall notify
Seller of such election within seven (7) days of the end of the Cure Period.
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<PAGE>
11.03 Recision Procedure.
(a) In the event that Purchaser exercises its right of recision,
Purchaser shall immediately turn over operating control of Company, the Schools
and the Subsidiaries to Seller. A date no later than ten (10) days following the
date on which Purchaser notifies Seller of Purchaser's election to rescind shall
be set by agreement of the parties on which to close the recision (the "Recision
Closing Date"). On the Recision Closing Date:
(i) Purchaser shall deliver to Seller certificates representing
the Shares, duly endorsed in blank or with duly executed stock powers,
resignation of each officer and director of the Company, each Subsidiary and the
Katharine Gibbs Scholarship Foundation, dated as of the Recision Closing Date
and shall take all other actions necessary to effect the recision in all
respects as soon as possible;
(ii) Seller shall wire to Purchaser in immediately available
funds an amount equal to the Closing Date Payment and shall take all other
actions necessary to effect the recision in all respects as soon as possible
including, without limitation, agreeing to the disbursement of funds in the
Escrow to Purchaser, provided that any sums in the Escrow established in
accordance with the provisions of Section 2.02(a) of this Agreement shall not be
released until the completion of the accounts resolution in subparagraph (b)
below
(b) Within thirty (30) days of the Recision Closing Date, Purchaser
shall provide Seller with an accounting of all working capital amounts used by
the Company and each of the Subsidiaries from the Closing Date through the date
of recision and the amount of cash received by the Company, each of the
Subsidiaries and the Schools during that same period (the "CEC Ownership
Accounts").
(c) If Seller disagrees with any item in the CEC Ownership
Accounts, Seller
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<PAGE>
shall, within thirty (30) days after the date of receipt of the CEC Ownership
Accounts, deliver to Purchaser written notice to the effect that it disagrees
therewith and a statement of its basis for such disagreement. Absent the
delivery to Purchaser of such written notice of disagreement, the CEC Ownership
Accounts shall become final. In the event that the working capital amounts
invested exceed the cash received, Seller shall pay to Purchaser the difference.
In the event the cash received exceeds the working capital amounts, Purchaser
shall pay to Seller the difference. If Seller delivers a written notice of
disagreement to Purchaser as described above and within the thirty (30) day
period as required hereby, Seller shall then have the right to cause an
inspection of the CEC Ownership Accounts to be conducted by Seller or Seller's
Accountants. If Seller and Purchaser fail to reach agreement within thirty (30)
days after receipt by Purchaser of such written notice from Seller, then a final
determination of the CEC Ownership Accounts shall be made by a certified public
accounting firm jointly selected by Seller and Purchaser. If within five (5)
days after such 30-day period, Seller and Purchaser are unable to agree on such
a firm, then the selection shall be made by the AAA. The fees and expenses of
the jointly selected accounting firm and the AAA shall be borne equally by the
Seller and Purchaser.
(d) Within ten (10) days of a final determination of the CEC Ownership
Accounts, Purchaser and Seller shall jointly execute instructions to the Escrow
Agent to release the escrowed funds to Purchaser less any amounts owed to Seller
pursuant to the adjustment in 11.03(c) which amounts shall be distributed to
Seller. If, pursuant to the adjustment in 11.03(c), Seller owes Purchaser
additional monies, such monies shall be paid from Seller to Purchaser by wire
transfer in immediately available funds at the time of the escrow distribution.
11.04 Termination of Right to Rescind. Purchaser's right to rescind shall
become null and void upon the earlier of:
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<PAGE>
(a) the issuance of all applicable DOE Approval Notices with a
requirement of a letter of credit or letters of credit of no more than
$9,000,000 in the aggregate.
(b) the six month anniversary of the Closing Date if neither of the
Recision Conditions in Section 11.02 have occurred.
Within five (5) days of the termination of Purchaser's right to
rescind, Purchaser and Seller shall jointly execute instructions to the escrow
agent to release all funds in the Escrow established in accordance with section
2.02(a) to Seller subject to any adjustments pursuant to Section 2.03 to the
extent that any such adjustments have been made prior to the termination of the
right to rescind but no payment has been made in respect of such adjustments. No
disbursement of funds from the Escrow shall be delayed as a result of any
pending adjustments pursuant to Section 2.03.
11.05 Exclusive Remedy. Notwithstanding anything in this Agreement to the
contrary, Purchaser's exclusive remedy to the existence of a Recision Condition
and the underlying breach of a representation or warranty giving rise to such
Recision Condition, shall be recision as set forth in Section XI, provided that
the foregoing shall not be construed to prevent Purchaser from seeking
indemnification pursuant to Section IX for any breach of representation or
warranty not known to Purchaser at the time of the termination of its right to
rescind hereunder.
XII. Miscellaneous.
12.01 Headings. All headings in this Agreement are for convenience only and
are not part of the substance of this Agreement.
12.02 Entire Agreement. This Agreement contains the entire agreement
between Purchaser and Seller with respect to the subject matter hereof and
supersedes all prior
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<PAGE>
agreements relating to the same subject matter, except for the confidentiality
agreement executed by Purchaser and relating to the transactions contemplated by
this Agreement, the provisions of which shall remain in full force and effect.
12.03 Governing Law. This Agreement shall be governed by and construed and
enforced in accordance with the laws of the State of New York without giving
effect to the conflicts of law provisions thereof.
12.04 Severability. If any one or more of the provisions of this Agreement
shall be determined to be invalid, illegal or unenforceable in any respect for
any reason, the validity, legality and enforceability of any such provision in
every other respect and of the remaining provisions of this Agreement shall not
be impaired in any way.
12.05 Notices. All notices, requests, demands, specifications and other
communications under or in connection with this Agreement shall be in writing,
shall be personally delivered or sent by registered or certified mail, or, to
the extent receipt is confirmed, by telecopy and shall be deemed to have been
given or made when received at the following offices:
If to Purchaser: Career Education Corporation
2800 West Higgins Road
Hoffman Estates, Illinois 60195
Attention: John M. Larson, William Klettke
Facsimile: (847) 781-3610
65
<PAGE>
Copies to: D'Ancona & Pflaum
30 North LaSalle Street
Suite 2900
Chicago, Illinois 60602
Attention: Michel J. Feldman
Facsimile: (312) 580-0923
and Goldberg, Kohn, Bell, Black
Rosenbloom & Moritz, Ltd.
55 East Monroe Street
Suite 3700
Chicago, Illinois 60603
Attention: Dennis B. Black, Esq.
Facsimile: (312) 332-2196
If to Seller: K-III Communications Corporation
745 Fifth Avenue
New York, NY 10151
Attn: Beverly C. Chell
Facsimile: (312) 745-0199
Copy to: K-III Communications Corporation
745 Fifth Avenue
New York, NY 10151
Attn: Christopher Fraser, Esq.
Facsimile: (212) 745-0131
12.06 Binding Effect, Amendment. This Amendment shall bind and inure to the
benefit of the parties to this Agreement and their respective successors and
assigns. This Agreement may be amended, modified or supplemented only in a
writing executed by Purchaser and Seller.
12.07 Assignment. This Agreement may not be assigned by Seller or Purchaser
without the prior written consent of the other in each instance. Any purported
assignment without the prior written consent of the other party shall be void.
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<PAGE>
12.08 Expenses. Purchaser and Seller shall each pay their own expenses with
respect to this Agreement and the transactions contemplated by this Agreement.
12.09 Third Party Beneficiaries. The covenants, agreement, representations
and warranties of Seller and Purchaser are made or given solely for the benefit
of the other party. It is not intended by the parties hereto that any third
party, including, without limitation, any employees of Seller, the Company or
any Subsidiary be or is a beneficiary of any of such covenants, agreements,
representations or warranties.
67
<PAGE>
IN WITNESS WHEREOF, this Agreement has been executed by Seller and
Purchaser by their respective officers thereunto duly authorized as of the date
appearing at the head of the first page hereof.
K-III PRIME CORPORATION, INC.
By: /s/ BEVERLY C. CHELL
--------------------------
Vice Chairman
CAREER EDUCATION
CORPORATION
By: /s/ JOHN M. LARSON
--------------------------
CEO
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<PAGE>
List of Exhibits, Appendices and Schedules
------------------------------------------
<TABLE>
<CAPTION>
<S> <C>
Exhibit A.......................................................Escrow Agreement
Exhibit B..............................................Non-Competition Agreement
Exhibit C.......................................................Seller's Release
Exhibit D..........................Guarantee of K-III Communications Corporation
Appendix I..........................................................Subsidiaries
Appendix II..............................................................Schools
Schedule 5.01......................................................Jurisdictions
Schedule 5.02(a)............................Company Shares and Subsidiary Shares
Schedule 5.02(b)..........................................Encumbrances on Shares
Schedule 5.02(c)...............................................Other Stock Owned
Schedule 5.03...........................................Conflicts with Agreement
Schedule 5.04..................................................Books and Records
Schedule 5.05(a)............................................Financial Statements
Schedule 5.05(b).....................................................Liabilities
Schedule 5.08......................................................Bank Accounts
Schedule 5.09............................................Undisclosed Liabilities
Schedule 5.10...........................................Material Adverse Changes
Schedule 5.11.........................................................Litigation
Schedule 5.12.........................................................Compliance
Schedule 5.13...........................................Real Property and Leases
Schedule 5.14..............................................Encumbrances on Title
Schedule 5.15......................................................Environmental
Schedule 5.16(a)..........................................Employee Benefit Plans
Schedule 5.16(k)....................................................Compensation
Schedule 5.18..............................................Intellectual Property
Schedule 5.19..........................................................Contracts
Schedule 5.20......................................................Labor Matters
Schedule 5.22..........................................................Insurance
Schedule 5.23(a).................................................School Policies
Schedule 5.23(b)....................................School Policy Non-Compliance
Schedule 5.25..............................Title IV and Accreditation Compliance
Schedule 5.26...............................................Cohort Default Rates
Schedule 5.27...........................................................Licenses
Schedule 5.28....................................................Grants and Aids
Schedule 7.07(a)......................................................Guarantees
Schedule 7.07(b)..................................Letters of Credit/Surety Bonds
Schedule 7.08...............................................Employee Receivables
</TABLE>
<PAGE>
EXHIBIT 2.3
STOCK PURCHASE AGREEMENT
by and among
IAMD ACQUISITION I, LTD., AS PURCHASER,
and
CLEM STEIN, JR., MARION STEIN, LEONARD RUTSTEIN,
BARBARA ANN SCOTT KING, THOMAS V. KING,
WILLIAM W. WIRTZ AND DAVID POWELL,
AS SELLERS
Dated: June 30, 1997
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<C> <S> <C>
1. Certain Definitions............................................................................. 1
2. Sale And Transfer Of Shares; Assets and Liabilities Of the Company At Closing................... 9
2.1. Purchaser and Sale of Shares.......................................................... 9
2.2. Purchase Price; Payment............................................................... 9
2.3. Company Assets and Liabilities; Purchase Price Adjustment............................. 10
2.4. Earnout............................................................................... 12
2.5. Closing............................................................................... 14
2.6. Funding of School Operations Pending DOE Approval..................................... 14
2.7. Participation of Employees in CEC Plans............................................... 14
2.8. Actions to be Taken with Respect to Company Plans..................................... 14
3. Closing Deliveries.............................................................................. 15
3.1. Deliveries to Purchaser............................................................... 15
3.2. Closing Deliveries to Sellers......................................................... 17
3.3. Post-Closing Covenants................................................................ 18
4. Representations and Warranties of Sellers....................................................... 20
4.1. Organization and Good Standing of the Company and its Subsidiaries;
Accreditation....................................................................... 20
4.2. Ownership of the Company, the Subsidiaries and the Schools............................ 21
4.3. Capacity; Authorization; Binding Effect, Etc.......................................... 21
4.4. No Conflicts, Etc..................................................................... 22
4.5. Investments........................................................................... 23
4.6. Capitalization........................................................................ 23
4.7. Book and Records...................................................................... 24
4.8. Compliance with Laws; Licenses and Permits............................................ 25
4.9. Recruitment; Admissions Procedures; Attendance; Financial Aid; Reports................ 26
4.10. Cohort Default Rate.................................................................. 27
4.11. Title to the Assets.................................................................. 27
4.12. Material Miscellaneous Contracts..................................................... 29
4.13. Tradenames; Confidential Information................................................. 29
4.14. Financial Statements................................................................. 30
4.15. Receivables.......................................................................... 31
4.16. Inventories.......................................................................... 32
4.17. Bank Accounts........................................................................ 32
4.18. Litigation, Etc...................................................................... 32
4.19. Insurance............................................................................ 33
4.20. Environmental Matters................................................................ 34
4.21. Employee Benefit Plans............................................................... 34
4.22. Employment Matters................................................................... 36
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
<S> <C>
4.23. Labor Relations; Compliance..........................................................38
4.24. Tax Matters..........................................................................39
4.25. Brokerage............................................................................40
4.26. Affiliate Transactions...............................................................40
4.27. Absence of Certain Changes...........................................................41
4.28. Indebtedness.........................................................................42
4.29. Conduct of Business Since Interim Balance Sheet Date.................................42
4.30. Approvals............................................................................42
4.31. Delivery of Documents................................................................42
4.32. Disclosure...........................................................................42
5. Representations and Warranties of Purchaser.....................................................43
5.1. Organization and Corporate Power......................................................43
5.2. Capacity; Authorization, Binding Effect, Etc..........................................43
5.3. No Conflicts, Etc.....................................................................43
5.4. Litigation............................................................................44
5.5. Brokerage.............................................................................44
5.6. Title IV Program Liabilities..........................................................44
5.7. Approvals.............................................................................44
5.8. Disclosure............................................................................44
5.9. Purchaser's Knowledge; Resources of Purchaser.........................................45
5.10. Maintenance of Insurance.............................................................45
6. Additional Covenants of the Parties.............................................................45
6.1. Confidential Information..............................................................45
6.2. Additional Covenants of Sellers Pending Closing.......................................47
6.3. Employees.............................................................................48
6.4. Exclusive Dealing.....................................................................48
6.5. Additional Covenants of Purchaser Pending Closing.....................................48
6.6. Initial Public Offering...............................................................48
7. Conditions to Purchaser's Obligations...........................................................48
7.1. Due Diligence Review..................................................................49
7.2. Audited Financial Statements, Acid Test Ratio and Cohort Default Rates................49
7.3. Financing.............................................................................49
7.4. Truth of Representations and Warranties...............................................49
7.5. Performance of Agreements.............................................................50
7.6. No Material Adverse Change............................................................50
7.7. Litigation............................................................................50
7.8. Accrediting Bodies Approval...........................................................50
7.9. Proceedings...........................................................................51
7.10. Financial Aid Compliance Audit.......................................................51
7.11. [Intentionally Omitted]..............................................................51
7.12. Consents and Approvals...............................................................51
7.13. Environmental Assessment.............................................................51
</TABLE>
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<TABLE>
<CAPTION>
<S> <C>
7.14. Acquisition of The International Academy of Merchandising and Design
(Canada), Ltd.......................................................................51
8. Conditions to Sellers' Obligations...............................................................52
8.1. Truth of Representations and Warranties................................................52
8.2. Performance of Agreements..............................................................52
8.3. Litigation.............................................................................52
8.4. Proceedings............................................................................52
8.5. Acquisition of The International Academy of Merchandising and Design
(Canada), Ltd........................................................................53
9. Indemnification; Remedies........................................................................53
9.1. Survival; Right to Indemnification Not Affected By Knowledge...........................53
9.2. Indemnification and Payment of Damages by Sellers......................................53
9.3. Indemnification and Payment of Damages by Purchaser....................................55
9.4. Limitations on Amount..................................................................55
9.5. Liability of Individual Sellers; Breaches by Individual Sellers........................56
9.6. Further Limitations on Remedies........................................................56
9.7. Procedures.............................................................................57
9.8. Prevailing Party to be Awarded Legal Fees..............................................58
9.9. Offset.................................................................................58
10. Recission of Transactions.........................................................................59
10.1. Right to Recission....................................................................59
10.2. Reasonable Efforts....................................................................60
11. Miscellaneous.....................................................................................61
11.1. Termination...........................................................................61
11.2. Expenses..............................................................................62
11.3. Successors and Assigns................................................................62
11.4. Severability..........................................................................62
11.5. Counterparts..........................................................................62
11.6. Descriptive Headings; Interpretation..................................................62
11.7. Governing Laws........................................................................63
11.8. Consent to Jurisdiction and Service of Process........................................63
11.9. Waiver of Jury Trial..................................................................63
11.10. Notices..............................................................................64
11.11. Entire Agreement; Release............................................................65
11.12. Waiver...............................................................................65
</TABLE>
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<PAGE>
STOCK PURCHASE AGREEMENT
THIS STOCK PURCHASE AGREEMENT (this "Agreement") is made as of June
30, 1997, by and between IAMD Acquisition I, Ltd., a Delaware corporation
("Purchaser"), and Clem Stein, Jr. ("C. Stein"), Marion Stein ("M. Stein"),
Leonard Rutstein ("Rutstein"), Barbara Ann Scott King ("B. King"), Thomas V.
King ("T. King"), William W. Wirtz ("Wirtz") and David Powell ("Powell"). C.
Stein, M. Stein, Rutstein, B. King, T. King, Wirtz and Powell are referred
herein collectively as "Sellers." Except as otherwise indicated, capitalized
terms used herein are defined in Section 1.
BACKGROUND
Sellers are the sole record and beneficial owners of one-hundred
percent (100%) of the issued and outstanding shares (the "Shares") of capital
stock of IAMD, Limited, an Illinois corporation (the "Company"). The Company,
through its wholly-owned subsidiaries International Academy of Merchandising and
Design, Ltd., an Illinois corporation ("IAMD-Chicago"), and International
Academy of Merchandising and Design, Inc., a Florida corporation ("IAMD-Tampa"),
owns and operates private-post secondary schools in Chicago, Illinois and Tampa,
Florida which provide degree and certificate granting programs in commercial
design and merchandising (collectively, the "Schools"). In connection with the
operation of the Schools, the Company also owns and operates student bookstores
(the "Bookstores") on each School campus through its wholly-owned subsidiary,
Academy Bookstore, Inc., an Illinois corporation ("IAMD-Bookstore"). IAMD-
Chicago, IAMD-Tampa and IAMD-Bookstore are sometimes referred to collectively as
the "Subsidiaries." Purchaser is a wholly-owned subsidiary of Career Education
Corporation, a Delaware corporation ("CEC"), which owns and operates private,
post-secondary schools throughout the United States. Sellers desire to sell,
and Purchaser desires to purchase, the Shares, for the consideration and on the
terms set forth in this Agreement.
AGREEMENT
NOW, THEREFORE, in consideration of the mutual representations,
warranties, covenants and agreements set forth herein, the parties hereto agree
as follows:
1. Certain Definitions.
-------------------
For the purposes of this Agreement, the following terms have the
meanings set forth below:
"Accrediting Bodies" means the Accrediting Council for Independent
Colleges and Schools and the Foundation for Interior Design Education
Research ("FIDER").
"Accreditation" means any license, permit, registration, authorization
or similar approval granted by any Accrediting Body.
<PAGE>
"Adjusted Balance Sheet" shall have the meaning ascribed to such term
in Section 2.3(b).
"Advertising Budget" shall have the meaning ascribed to such term in
Section 2.4(d).
"Affiliate" means, with respect to any Person, any individual related
by blood or marriage to such Person or any Person controlling, controlled
by or under common control with such Person.
"Audit Report" shall have the meaning ascribed to such term in Section
2.3(b).
"Best of Purchaser's knowledge" means the collective actual knowledge
of the executive officers of Purchaser and CEC holding offices of vice-
president or higher, following due inquiry of appropriate officers,
employees and consultants of Purchaser and CEC.
"Best of Sellers' knowledge" means the collective actual knowledge of
Sellers and the executive officers of the Company and each Subsidiary
holding offices of vice-president or higher, following due inquiry of
appropriate officers, employees and consultants of each such entity,
including without limitation, in the case of the Schools, the director, the
admissions director and the financial aid director of each of them.
"Bookstores" shall have the meaning ascribed to such term in the
background section of this Agreement.
"Canada Acquisition" shall have the meaning ascribed to such term in
Section 7.14.
"CEC" shall have the meaning ascribed to such term in the background
section to this Agreement.
"Closing" shall have the meaning ascribed to such term in Section 2.5.
"Closing Balance Sheet" shall have the meaning ascribed to such term
in Section 3.1(i).
"Closing Date" shall mean the date of the Closing.
"Closing Payment" shall have the meaning ascribed to such term in
Section 2.2(a).
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"Code" means the Internal Revenue Code of 1986, as amended, or any
successor law, and regulations issued by the IRS pursuant to that Code or
any successor code.
"Company" shall have the meaning ascribed to such term in the
background section of this Agreement.
"Compliance Reports" shall have the meaning ascribed to such term in
Section 4.9.
"Confidential Information" shall have the meaning ascribed to such
term in Section 6.1.
"Curricula" means copyrighted and proprietary uncopyrighted materials
used in any courses offered at either of the Schools.
"Damages" shall have the meaning ascribed to such term in Section 9.2.
"Deferred Payment" shall have the meaning ascribed to such term in
Section 2.2(b).
"Deferred Payment Date" shall have the meaning ascribed to such term
in Section 2.2(b).
"Deferred Payment Letter of Credit" shall have the meaning ascribed to
such term in Section 2.2.
"Deficiency" shall have the meaning ascribed to such term in Section
2.3(a).
"Designated Liabilities" shall have the meaning ascribed to such term
in Section 4.11(d).
"DOE" means the United States Department of Education and any
successor agency administering student financial assistance under Title IV.
"DOE Approval Notice" means a fully-executed Provisional Program
Participation Agreement issued and executed by DOE.
"Earnout Amount" shall have the meaning ascribed to such term in
Section 2.4(a).
"Earnout Calculation" shall have the meaning ascribed to such term in
Section 2.4(b).
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<PAGE>
"Earnout Period" shall have the meaning ascribed to such term in
Section 2.4(a).
"Employee Benefit Plan" means any (a) qualified or nonqualified
Employee Pension Benefit Plan (including any Multiemployer Plan), (b)
Employee Welfare Benefit Plan, or (c) fringe benefit plan, policy, program,
and arrangement, whether or not subject to ERISA and whether or not funded,
and includes, but is not limited to, plans described in Section 3(3) of
ERISA.
"Employee Pension Benefit Plan" means any employee pension benefit
plan as described in Section 3(2) of ERISA, that is subject to Title IV of
ERISA, that is subject to Title IV of ERISA, including a Multiemployer
Plan.
"Employee Welfare Benefit Plan" means any employee welfare plan as
described in Section 3(1) of ERISA.
"Encumbrance" means any charge, claim, community property interest,
condition, equitable interest, lien, option, pledge, security interest,
right of first refusal, or restriction of any kind, including any
restriction on use, voting, transfer, receipt of income, or exercise of any
other attribute of ownership, but in the case of leased property does not
include the rights of Lessor thereof under the lease therefor.
"Enforceable in accordance with its terms" or similar language shall
be deemed to mean enforceable in accordance with its terms, subject to
applicable bankruptcy, insolvency, reorganization, moratorium and similar
laws affecting creditors' rights and remedies generally, and subject, as to
enforceability, to general principles of equity (regardless of whether
enforcement is sought in a proceeding at law or in equity).
"Environmental Law" means any Legal Requirement pertaining to any
Hazardous Substance or otherwise pertaining to the environment or
protection of any natural resources, including, without limitation, air,
soil or water.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended, or any successor law, and regulations and rules issued pursuant to
that Act or any successor law.
"Excess" shall have the meaning ascribed to such term in Section
2.3(a).
"401(k) Plan" shall have the meaning ascribed to such term in Section
2.8.
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"Facility" means any real property now or previously owned, leased or
operated by the Company or any Subsidiary, including without limitation the
Leased Facilities.
"Final Balance Sheet" means the balance sheet which under Section
2.3(b) is deemed to be the "Final Balance Sheet."
"Financial Statements" means (i) the audited balance sheets and the
related statements of income and changes in financial position of the
Company as at and for the fiscal years ended June 30, 1994, 1995 and 1996,
and (iii) the unaudited consolidated balance sheet and the related
statement of income for the Company (the "Interim Financial Statements")
(a) prepared by the Company's accountants as at and for the six (6) month
period ended December 31, 1996 and (b) prepared by Seller as at and for the
ten (10) month period ended April 30, 1997 (the "Interim Balance Sheet
Date").
"GAAP" means generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board of the
American Institute of Certified Public Accountants, and statements and
pronouncements of the Financial Accounting Standards Board and the Emerging
Issues Task Force (or any successor authority) that are applicable as of
the date of determination, all as consistently applied in the preparation
of the Financial Statements.
"Governmental Body" means any (a) federal, state, local, municipal,
foreign, or other government; (b) governmental or quasi-governmental
authority of any nature (including any governmental agency, branch, bureau,
department, official, or entity and any court or other tribunal); and (c)
body exercising, or entitled to exercise, any administrative, executive,
judicial, legislative, police, regulatory, or taxing authority or power of
any nature.
"Guaranty" shall have the meaning ascribed to such term in Section
2.2.
"Hazardous Substance" shall include any substances included within the
definitions of "hazardous substances," "hazardous materials," "toxic
substances," "waste" or similar terms in any applicable federal, state or
local statute, ordinance, rule or regulation relating to environmental
protection, remediation or liability, including clean air, clean water,
waste disposal and hazardous substance transportation or disposal,
including, without limitation, petroleum, asbestos, polychlorinated
biphenyls, flammable explosives and radioactive materials.
"IAMD-Bookstore" shall have the meaning ascribed to such term in the
background section of this Agreement.
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<PAGE>
"IAMD-Chicago" shall have the meaning ascribed to such term in the
background section of this Agreement.
"IAMD-Tampa" shall have the meaning ascribed to such term in the
background section of this Agreement.
"Indemnification Threshold" shall have the meaning ascribed to such
term in Section 9.6.
"Independent Auditor" shall have the meaning ascribed to such term in
Section 2.3(b).
"Initial Public Offering" means an initial underwritten public
offering and sale for cash by CEC of its common stock pursuant to a "firm
commitment" underwriting agreement and a registration statement declared
effective by the Securities and Exchange Commission under the Securities
Act of 1933, as amended (the "Securities Act"); provided, that the term
Initial Public Offering shall not include the registration of an offer and
sale of the common stock of CEC (i) to the employees of CEC or its
subsidiaries or other persons providing services to CEC or its subsidiaries
pursuant to any Plan registered on Form S-8 or a successor form, or (ii)
relating to a merger, acquisition or other transaction of the type
described in Rule 145 of the Securities Act or any successor rule
registered on Form S-4 or a successor form.
"Intellectual Property" means the patents, trademarks, logos,
tradenames (including, without limitation, the Company's name, each
Subsidiary's name, each School's name and the Bookstores' name),
servicemarks, copyrights, know-how, logos and trade secrets owned by the
Company or any Subsidiary, or used in connection with the operation of the
Schools or the Bookstores.
"Investment" as applied to any Person means (i) any direct or indirect
ownership by such Person of any notes, obligations, instruments, stock,
securities or other ownership interest of any other Person, and (ii) any
capital contribution by such Person to any other Person.
"IRS" means the United States Internal Revenue Service or any
successor agency, and, to the extent relevant, the United States Department
of the Treasury.
"Leases" shall have the meaning ascribed to such term in Section
4.11(b).
"Leased Facilities" shall have the meaning ascribed to such term in
Section 4.11(b).
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"Legal Requirement" means any foreign, federal, state, local,
municipal or other constitution, law, statute, regulation, rule, ordinance,
order, administrative order, principle of common law, or treaty to which
Sellers, the Company, any Subsidiary or Purchaser are subject, as
applicable.
"Licenses and Permits" shall have the meaning ascribed to such term in
Section 4.8.
"Material Miscellaneous Contracts" shall have the meaning ascribed to
such term in Section 4.12.
"Multiemployer Plan" means any Multiemployer Plan, as defined in
Sections 3(37) and 4001(A)(3) of ERISA.
"Net Worth" shall have the meaning ascribed to such term in Section
2.3(a).
"Noncompetition Agreements" shall have the meaning ascribed to such
term in Section 3.1(c).
"Noncompetition Payments" shall have the meaning ascribed to such term
in Section 3.1(c).
"Note Letters of Credit" shall have the meaning ascribed the such term
in Section 2.2(c).
"PBGC" means the Pension Benefit Guaranty Corporation, or any
successor thereto.
"Permitted Encumbrances" shall have the meaning ascribed to such term
in Section 4.11(d).
"Person" means any individual, general or limited partnership,
corporation (including any non-profit corporation), limited liability
company, joint stock company, joint venture, trust, association,
unincorporated organization, labor union, Governmental Body, the
Accrediting Bodies or other similar entity.
"Plans" shall have the meaning ascribed to such term in Section 4.21.
"Policy Guidelines" shall have the meaning ascribed to such term in
Section 4.9.
"Pre-Closing Financial Aid Irregularities" shall have the meaning
ascribed to such term in Section 9.2(d).
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"Proceeding" means any action, claim, arbitration, audit, hearing,
investigation, inquiry, litigation, suit (whether civil, criminal,
administrative, investigative, or informal) or other proceeding commenced,
brought, conducted, or heard by or before, or otherwise involving, any
Governmental Body or arbitrator.
"Purchase Price" shall have the meaning ascribed to such term in
Section 2.2.
"Purchaser" shall have the meaning ascribed to such term in the
preamble to this Agreement.
"Purchaser's Accountant" shall have the meaning ascribed to such term
in Section 2.3(b).
"Reportable Event" means any event described in Section 4043 of ERISA,
as amended, whether or not waived.
"Revenues" shall have the meaning ascribed to such term in Section
2.4(a).
"Schools" shall have the meaning ascribed to such term in the
background section to this Agreement.
"Securities Act" means the Securities Act of 1933, as amended, or any
successor law, and regulations and rules issued pursuant to that Act or any
successor law.
"Sellers" shall have the meaning ascribed to such term in the preamble
to this Agreement.
"Seller Notes" shall have the meaning ascribed to such term in Section
2.2(c).
"Sellers' Release" shall have the meaning ascribed to such term in
Section 3.1(b).
"Shares" shall have the meaning ascribed to such term in the
background section to this Agreement.
"Show Cause Order" shall have the meaning ascribed to such term in
Section 3.3(b).
"Subsidiaries" shall have the meaning ascribed to such term in the
background section to this Agreement.
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"Taxes" means all taxes, levies or other like assessments, charges or
fees, including, without limitation income, gross receipts, excise, goods
and services, transfer, capital, property (including, without limitation,
any special assessments), sales, license, payroll and franchise or other
taxes, imposed by any Governmental Body on the Company and/or any of its
business activities; and such term shall include any interest, penalties,
fines or additions or other amounts payable in connection with any Taxes.
"Threshold Amount" shall have the meaning ascribed to such term in
Section 2.3(a).
"Title IV" means Subchapter IV of the Higher Education Act of 1965, as
amended, 20 U.S.C.A. (S) 1070a, et seq., and any amendments or successor
statutes thereto.
"Tradenames" shall have the meaning ascribed to such term in Section
4.13(a).
Immediately following the signature pages of this Agreement is an
index of the Exhibits and Schedules attached hereto.
2. Sale and Transfer of Shares; Assets and Liabilities of the Company at
Closing.
2.1. Purchaser and Sale of Shares.
Subject to the terms and conditions of this Agreement, Sellers hereby
agree to sell, transfer, assign, convey and deliver the Shares to Purchaser, and
Purchaser hereby agrees to purchase, acquire and accept the Shares from Sellers,
at the Closing.
2.2. Purchase Price; Payment.
In full consideration of the sale of the Shares by Sellers to
Purchaser, and the other agreements of the parties hereunder, and subject to
adjustment following the Closing in accordance with Section 2.3, and for the
Earnout Amount in accordance with Section 2.4 the aggregate purchase price (the
"Purchase Price") for the Shares is $3,000,000, which shall be payable as
follows:
(a) $100,000 (the "Closing Payment"), which amount shall be delivered
to Sellers in accordance with Schedule 2.2 attached hereto by wire transfer
of immediately available funds at the Closing.
(b) $1,400,000 (the "Deferred Payment"), which amount, subject to
reduction in accordance with Section 2.3, shall be delivered to Sellers in
accordance with Schedule 2.2 attached hereto on the later of (i) twenty-one
(21) days following issuance to Purchaser of a DOE Approval Notice and
resumption of Title IV funding of student financial aid programs for each
of
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the Schools and (ii) completion of the Final Balance Sheet (the "Deferred
Payment Date"). The rights of Sellers to payment of the Deferred Payment
and the Noncompetition Payments directly or pursuant to the Deferred
Payment Letter of Credit shall be subject to Purchaser's offset rights
pursuant to Section 9.9 of this Agreement; and
(c) $1,500,000, which amount shall be evidenced by, and payable in
accordance with, Purchaser's notes made in favor of Sellers (the "Seller
Notes") in substantially the form of Exhibit A attached hereto and in
accordance with Schedule 2.2 attached hereto, which Seller Notes shall bear
interest (before default) at the rate of seven percent (7.0%) per annum
payable quarterly in arrears, and after default at the rate of nine percent
(9.0%) per annum, and subject to acceleration as therein provided, shall be
due and payable in full on the fourth anniversary of the Closing Date. The
Seller Notes shall be delivered simultaneously with the Closing Payment.
The Seller Notes shall be secured by letters of credit in an aggregate
amount equal to the amount of the Seller Notes and four (4) months interest
thereunder issued by LaSalle National Bank (the "Note Letters of Credit")
in substantially the form of Exhibit B attached hereto, which Note Letters
of Credit shall be delivered to Sellers at the Closing. The rights of
Sellers to payment pursuant to the Seller Notes and/or the Note Letters of
Credit shall be subject to Purchaser's offset rights as provided in Section
9.9 (b) of this Agreement.
In addition to the Purchase Price, Purchaser shall pay to Sellers the
Noncompetition Payments in the aggregate amount of $2,000,000, as provided for
in the Noncompetition Agreements, in accordance with Schedule 3.1(c) hereto,
which Noncompetition Payments shall be made, subject to any rights to offset as
provided in Section 9.9, on the Deferred Payment Date in accordance with the
terms and conditions of the Noncompetition Agreements. The Deferred Payment and
the Noncompetition Payments shall be secured by a letter of credit in an
aggregate amount equal to $3,400,000 issued by LaSalle National Bank (the
"Deferred Payment Letter of Credit") for the benefit of Michael J. Zdeb, as
Escrow Agent, substantially in the form of Exhibit C hereto, which Deferred
Payment Letter of Credit will be delivered to Michael J. Zdeb, as Escrow Agent
at the Closing.
Furthermore, simultaneously with the delivery of the Closing Payment,
Purchaser shall deliver to Sellers a Guaranty (the "Guaranty") from CEC in the
form of Exhibit D attached hereto providing for the guaranty of performance by
Purchaser of its obligations hereunder to make the Deferred Payment and to make
the Noncompetition Payments.
2.3. Company Assets and Liabilities; Purchase Price Adjustment.
(a) Sellers agree that the consolidated net worth of the Company and
the Subsidiaries at and as of Closing as calculated in accordance with
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GAAP (the "Net Worth") shall not be less than ($650,000) (the "Threshold
Amount"). The amount of the Net Worth set forth in the Final Balance Sheet
shall be deemed to be the Net Worth for the purposes of this Section
2.3(a). If the Final Balance Sheet sets forth Net Worth of less than the
Threshold Amount, the amount of that difference shall be the "Deficiency"
and the Deferred Payment (and, as a result thereof, the Purchase Price)
shall be reduced by an amount equal to the Deficiency. If, however, the
Final Balance Sheet sets forth Net Worth of more than the Threshold Amount,
the amount of that difference shall be the "Excess". The Excess, if any,
shall be remitted to Sellers in accordance with Schedule 2.2 hereto subject
to offset as provided in Section 9.9, on the Deferred Payment Date.
(b) Purchaser shall cause Arthur Andersen, L.L.P. (the "Purchaser's
Accountant") to complete an audit of the Closing Balance Sheet delivered by
Sellers pursuant to Section 3.1(j), and to deliver to Purchaser the written
report (the "Audit Report") of Purchaser's Accountant with respect to such
audit, as soon as possible following the Closing and in any event not later
than forty-five (45) days after the Closing Date. Such Audit Report shall
state the adjustments, if any, to such Closing Balance Sheet which in the
opinion of Purchaser's Accountant would be necessary to be made so that
with such adjustments such Closing Balance Sheet would accurately set forth
the Net Worth, and, if any such adjustments are so stated, shall contain or
be accompanied by an adjusted consolidated balance sheet (the "Adjusted
Balance Sheet") of the Company and the Subsidiary reflecting such
adjustments. Purchaser shall deliver to Sellers a copy of such Audit
Report together with a copy of the Adjusted Balance Sheet, if any,
forthwith after Purchaser's receipt of same and in any event within such
forty-five (45) day period. Upon Sellers' request, Purchaser shall cause
the Purchaser's Accountant to provide to Sellers or their representative
access to the working papers of Purchaser's Accountant with respect to such
Audit Report, and the Sellers or their representative shall be entitled to
make copies thereof. If there is an Adjusted Balance Sheet, then such
Adjusted Balance Sheet shall be deemed to be the "Final Balance Sheet"
unless the Sellers object in writing to such deeming within fifteen (15)
days after their receipt of the Adjusted Balance Sheet. If there is such
an objection by Sellers and the disputes between the Sellers and the
Purchaser in that regard are not resolved to the satisfaction of the
parties within fifteen (15) days after the date upon which Purchaser
receives such written objection of the Sellers, then another nationally
recognized firm of independent accountants not otherwise engaged by Sellers
or Purchaser (or their respective Affiliates) mutually selected by Sellers
and Purchaser or appointed by a court of competent jurisdiction upon
application therefor (the "Independent Auditor") shall review the Closing
Balance Sheet delivered by Sellers pursuant to Section 3.1(j), the Adjusted
Balance Sheet, the said Audit Report of the Purchaser's Accountants and all
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related working papers of the Purchaser's Accountant, and if requested by
the Sellers to do so shall make such other examinations and investigations
as the Independent Auditor considers to be necessary in order to form an
opinion as to the Net Worth. If requested by the Sellers or the Purchaser,
on written notice to either of them, the Independent Auditor shall consider
submissions by the parties in accordance with rules and procedures
established by the Independent Auditor in that regard. The review of the
Independent Auditor shall be completed as soon as is practicable. If the
Independent Auditor shall be of the view that the Adjusted Balance Sheet
does not correctly set forth the Net Worth, then the Independent Auditor
shall prepare and deliver to the parties a fresh consolidated balance sheet
of the Company and the Subsidiary which in the view of the Independent
Auditor correctly sets forth the Net Worth and such fresh balance sheet
shall thereupon be deemed to be the "Final Balance Sheet." The Final
Balance Sheet howsoever deemed shall be final and binding upon all parties.
The costs of the engagement of the Independent Auditor shall be borne by
the Sellers unless the Independent Auditor's determination results in an
adjustment in Sellers' favor of at least $100,000, in which case the costs
of the engagement of the Independent Auditor shall be borne by Purchaser.
If an Adjusted Balance Sheet is not delivered to Sellers within forty-five
(45) days next following the Closing Date or the Audit Report of the
Purchaser's Accountant is such that no Adjusted Balance Sheet is prepared,
then the Closing Balance Sheet delivered by Sellers pursuant to Section
3.1(j) hereof shall be deemed to be the "Final Balance Sheet."
Subject to the next sentence, on the Deferred Payment Date, the
Purchaser shall pay Sellers that portion of the Deferred Payment and
Noncompetition Payments which is not subject to dispute or offset as provided in
Section 9.9, in accordance with Schedule 2.2.
Notwithstanding anything contained in this Agreement to the contrary,
Purchaser shall not be required to pay any portion of the Deferred Payment or
the Noncompetition Payment which is subject to dispute or offset, as provided in
Section 9.9 until any such dispute or offset right is resolved. Subject to
Section 2.3(b) with respect to the costs of engagement of the Independent
Auditor, each party hereto shall bear its own costs and expenses, including
attorneys' fees, incurred in connection with any dispute under this Section 2.3.
2.4. Earnout
(a) In the event that the Revenues earned by the Company and its
Subsidiaries (as hereinafter defined) for the twelve month period
commencing on July 1, 1997 and ending on June 30, 1998 (the "Earnout
Period") exceed $8,000,000, Sellers shall be entitled to an earnout (the
"Earnout Amount") as set forth on Schedule 2.4(a) attached hereto. In the
event that the Company's Revenues for the Earnout Period are between two
revenue numbers described
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on Schedule 2.4, (a) the Earnout Amount shall be calculated by
interpolating using the two corresponding Earnout Amounts described on
Schedule 2.4(a) on a linear basis. For purposes hereof, "Revenues" shall
mean gross tuition income earned minus tuition adjustments (student
refunds) plus other income (all associated fees) plus consolidated
Bookstore sales less the cost of goods sold by the Bookstores: all as
determined in accordance with GAAP. Increases in tuition rates during the
Earnout Period will count in determining the Revenues for purposes of
calculating the Earnout Amount.
(b) Purchaser shall provide Sellers with a calculation of the
Revenues for the Earnout Period and of the Earnout Amount on or before July
20, 1998 (the "Earnout Calculation"). Purchaser shall pay the Earnout
Amount set forth in the Earnout Calculation to Michael Zdeb as Escrow
Agent, within thirty (30) days after delivery of the Earnout Calculations.
If Sellers object in writing to the Earnout Amount within fifteen (15) days
after receipt of the Earnout Calculation and the disputes between the
Sellers and Purchaser in that regard are not resolved to the satisfaction
of the parties within fifteen (15) days after the date upon which Purchaser
receives such written objection of Sellers, then an Independent Auditor
shall review the Earnout Calculation, including the Revenues for the
Earnout Period and all related work papers in order to form an opinion as
to the Revenues for the Earnout Period. The review of the Independent
Auditor shall be completed as soon as practicable. If the Independent
Auditor shall be of the view that the Revenues are not correctly stated in
the Earnout Calculation, the Independent Auditor shall prepare a
calculation of the Revenues which shall be final and binding upon all
parties. The remaining part of the Earnout, if any, shall be paid within
thirty (30) days after receipt by Sellers and Purchaser of the Independent
Auditors calculation of Revenues. The costs of the engagement of the
Independent Auditor shall be borne by the Sellers unless the Independent
Auditor's determination results in an adjustment to the Earnout Amount in
Sellers' favor of at least $100,000, in which case, the costs of the
engagement of the Independent Auditor shall be borne by Purchaser.
(c) Subject to the next sentence, thirty (30) days after delivery of
the Earnout Calculation, the Purchaser shall pay Sellers that portion of
the Earnout Amount which is not subject to dispute or offset (as provided
in Section 9.9), to Michael Zdeb as Escrow Agent. Notwithstanding anything
contained in this Agreement to the contrary, Purchaser shall not be
required to pay any portion of the Earnout Amount which is subject to
dispute or offset (as provided in Section 9.9) until any such dispute or
offset right is resolved. Subject to Section 2.4(b) with respect to the
costs of engagement of the Independent Auditor, each party hereto shall
bear its own costs and expenses, including attorneys' fees, incurred in
connection with any dispute under this Section 2.4.
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By execution of the signature page hereto, CEC shall guaranty payment of the
Earnout Amount in accordance with the terms of this Section 2.4. In addition,
CEC will commit to cause the Schools to spend at least ninety-five percent (95%)
of the advertising expenditures included in the budget (the "Advertising
Budget") for the period from July 1, 1997 through June 30, 1998 attached hereto
as Schedule 2.4(d). In addition, during the Earnout Period, the Schools would
not force part-time students to enroll in full-time programs and part-time
enrollments would still be permitted, however, the Schools would begin a gradual
admissions program to encourage new enrollees to enroll on a full-time basis.
Commencing with the June, 1998 start, the Schools would no longer be required to
permit part-time students. In the event of failure of the Schools to spend at
least ninety-five percent (95%) of the Advertising Budget in the aggregate
during the Earnout Period, the Earnout Amount shall be $5,000,000.
2.5. Closing.
The parties hereto shall close the purchase and sale of the Shares and
the consummation of the other actions contemplated by this Agreement to occur in
connection therewith at the closing (the "Closing"), which shall take place at
the offices of Purchaser's counsel, Goldberg, Kohn, Bell, Black, Rosenbloom &
Moritz, Ltd., 55 East Monroe Street, Suite 3700, Chicago, Illinois 60603, on
June 30, 1997, or such other date to which the parties hereto shall mutually
agree in writing.
2.6. Funding of School Operations Pending DOE Approval.
From and after the date of the Closing and until the date the DOE
approves resumption of Title IV funding for each of the Schools as operated by
Purchaser pursuant to a DOE Approval Notice, Purchaser shall provide such
working capital to the Company as Purchaser determines to be necessary to enable
each Subsidiary to continue to operate in substantially the same manner and at
substantially the same level of operations as the Company is currently operating
such Subsidiary.
2.7. Participation of Employees in CEC Plans.
Purchaser hereby agrees, and Sellers hereby acknowledge, that
following the Closing (and subject to the requirements of applicable law),
employees of the Company and the Subsidiaries may commence participation in the
Career Education Corporation 401(k) Plan in accordance with the terms and
conditions thereof or at such earlier time as may be specifically authorized by
resolution of the Board of Directors of CEC.
2.8. Actions to be Taken with Respect to Company Plans.
Sellers will take appropriate action to freeze the International
Academy of Merchandising & Design 401(k) Savings Plan (the "401(k) Plan")
effective as of the Closing Date. Sellers will commence taking the steps
necessary to file an application for, and receive, an IRS determination letter
for the 401(k) Plan and will indemnify and hold harmless the Indemnified Persons
for, and will pay to the Indemnified Persons, any and all
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cost, liabilities, penalties, taxes or Damages arising out of, or in connection
with, receipt of the determination letter and/or the operation of the 401(k)
Plan. Sellers hereby agree to indemnify and hold harmless the Indemnified Person
for, and will pay to the Indemnified Persons, any and all cost, liabilities,
penalties, taxes or Damages related to the failure to procure an IRS
determination letter from the effective date of the 401(k) Plan.
3. Closing Deliveries.
3.1. Deliveries to Purchaser.
Sellers agree to deliver to Purchaser, at the Closing, each of the
following, each of which constitutes a condition to Purchaser's obligation to
consummate the purchase of the Shares:
(a) Certificates for Shares. Certificates representing the Shares,
duly endorsed (or accompanied by duly executed stock powers), for transfer
to Purchaser;
(b) Releases from Sellers. A release in substantially the form of
Exhibit E, executed by Sellers (the "Sellers' Release");
(c) Noncompetition Agreements. Noncompetition agreements in
substantially the form of Exhibit F, each executed by one or more of the
Sellers, as applicable (collectively, the "Noncompetition Agreements"),
providing for the payments to Sellers in the aggregate amount of $2,000,000
in accordance with Schedule 3.1(c) attached hereto (the "Noncompetition
Payments"), in consideration for the Sellers' performance of the covenants
and obligations set forth in their respective Noncompetition Agreements,
which Noncompetition Payments shall be paid to Sellers simultaneously with
disbursement of the Deferred Payment pursuant to Section 2.2(b) in
accordance with the terms and conditions of the Noncompetition Agreements;
(d) Escrow Agreement. A fully executed copy of the Escrow Agreement
pursuant to which Michael J. Zdeb is appointed as Escrow Agent for the
Deferred Payment Letter of Credit.
(e) Secretary's Certificates for the Company and each Subsidiary. A
certificate, signed by the secretary or an assistant secretary of the
Company, certifying the articles of incorporation and bylaws of the
Company, appropriate authorizing resolutions of the Company's Board of
Directors, the incumbency of the Company's directors and officers, and the
good standing of the Company in its state of incorporation and the States
of Illinois and Florida, and a certificate for each Subsidiary, signed by
the secretary or an assistant secretary of such Subsidiary, certifying the
articles of incorporation and bylaws of such Subsidiary, the incumbency of
such Subsidiary's directors and officers, and the good standing of such
Subsidiary in the state of its incorporation and each
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other state where the nature of its operations require it to qualify to do
business as a foreign corporation;
(f) Closing Certificate. A certificate executed by Sellers
satisfying the requirements of Sections 7.4, 7.5 and 7.6 hereof;
(g) Legal Opinion. A legal opinion of Seller's counsel, Childress &
Zdeb, Ltd., in substantially the form of Exhibit G attached hereto,
addressed to Purchaser and Purchaser's lender;
(h) Consents. Evidence satisfactory to Purchaser's counsel that each
consent of a third party listed in Schedule 3.1(h) attached hereto, which
consents are required by Purchaser to be obtained by Sellers prior to the
Closing, have been obtained and remain in full force and effect, unless the
obligation to obtain such consent has been specifically waived in writing
by Purchaser;
(i) Payoff Letters. Payoff letters in respect of the Designated
Liabilities, together with appropriately executed UCC termination
statements for all liens in respect thereof;
(j) Closing Financial Information. An estimated consolidated balance
sheet of the Company and the Subsidiaries (the "Closing Balance Sheet")
calculated as of 5:00 p.m. Chicago time on the business day immediately
preceding the Closing Date prepared in the same manner and using the same
procedures as the preliminary closing balance sheet attached hereto as
Schedule 3.1(j) except that the $2,000 foundation asset and the receivables
from shareholders shall be removed from the Closing Balance Sheet,
accompanied by schedules in reasonable detail showing cash balances in all
bank accounts of the Company and each Subsidiary, and all of their
respective outstanding accounts payable, together with a calculation of
estimated Net Worth;
(k) Consent and Estoppel Certificates. Except to the extent waived
in writing by Purchaser, consent and estoppel certificates from the
landlords of the Leased Facilities, certifying certain factual matters
relating to the Leases, including without limitation certification that
there are no defaults under the Leases and the amounts of security deposits
under the Leases, and consenting to the transfer of the Shares to the
Purchaser, in form and substance reasonably acceptable to Purchaser and its
lenders;
(l) Resignations. A resignation by each of the Sellers from their
positions as directors and officers of the Company and, where applicable,
the Subsidiaries, which resignations shall become effective simultaneously
with the Closing, and acknowledgment that their respective employment
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agreements, if any, have been terminated without any further obligation due
from the Company or any Subsidiary or the Purchaser or CEC;
(m) Bank Accounts. A list of all operating and other bank accounts
of the Company and each Subsidiary, together with documentation of the
removal of all directors and officers resigning pursuant to Section 3.1(l)
as signatories for such accounts; and
(n) Other Documents. Such other documents relating to the
transactions contemplated by this Agreement as Purchaser or its counsel may
reasonably request, including, without limitation, to the extent not waived
in writing by Purchaser, documents specified as Sellers' closing deliveries
on the Closing Checklist in the form of Exhibit H attached hereto.
3.2. Closing Deliveries to Sellers.
Purchaser agrees to deliver to Sellers at the Closing, each of the
following, each of which constitutes a condition to Sellers' obligations to
consummate the sale of the Shares:
(a) Closing Payment. The Closing Payment required by Section 2.2(a)
by wire transfer of immediately available funds;
(b) Seller Notes. The Seller Notes, executed by Purchaser;
(c) Guaranty. The Guaranty, executed by CEC;
(d) Noncompetition Agreements. The Noncompetition Agreements,
executed by Purchaser;
(e) Letters of Credit. The Note Letters of Credit and the Deferred
Payment Letter of Credit;
(f) Termination of Sellers' Guarantees. Evidence of the termination
or release of the guarantees of Sellers described on Schedule 3.2(f)
attached hereto, or, to the extent any such termination or release cannot
be obtained prior to Closing despite Purchaser's and CEC's best efforts,
delivery by Purchaser and CEC of an indemnification of the applicable
Seller or Sellers' obligations thereunder, in either case in form and
substance reasonably satisfactory to Sellers;
(g) Secretary's Certificate for Purchaser. A certificate, signed by
the secretary or an assistant secretary of Purchaser, certifying the
articles of incorporation and bylaws of Purchaser, appropriate authorizing
resolutions of Purchaser's Board of Directors, the incumbency of
Purchaser's officers executing this Agreement and the documents delivered
in connection with the
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Closing, and the good standing of Purchaser in its state of incorporation
and the States of Illinois and Florida;
(h) Closing Certificate. A certificate executed by Purchaser
satisfying the requirements of Sections 8.1 and 8.2 hereof;
(i) Legal Opinion. A legal opinion of counsel for Purchaser,
Goldberg, Kohn, Bell, Black, Rosenbloom & Moritz, Ltd., in substantially
the form of Exhibit I attached hereto, addressed to Sellers; and
(j) Other Documents. Such other documents relating to the
transactions contemplated by this Agreement as Sellers or their counsel may
reasonably request, including, without limitation, documents specified as
Purchaser's closing deliveries on the Closing Checklist.
3.3. Post-Closing Covenants.
(a) Further Assurances. On or after the Closing Date, and without
further consideration, Purchaser and Sellers shall, from time to time at
the request of any other party hereto, execute and deliver to such other
party further documents and instruments evidencing the consummation of the
transactions contemplated by this Agreement as such other party may
reasonably require including, without limitation, instruments of
conveyance, assignment and transfer of the Shares. The party requesting the
execution and delivery of such further documents and instruments shall pay
the reasonable out-of-pocket costs and expenses of all other parties hereto
in connection therewith.
(b) Administration of the Company Prior to Disbursement of the
Deferred Payment; Cooperation of Parties. From and after the Closing Date
and until payment in full of the Deferred Payment and the Noncompetition
Payments, or recission of the transactions contemplated hereby in
accordance with Section 10, Purchaser, at Purchaser's sole cost and
expense, shall administer and operate the Company, the Subsidiaries and the
Schools in material compliance with all Legal Requirements and Accrediting
Bodies requirements, and in accordance with all permits, Accreditations,
authorizations and agreements issued by or entered into with any
Governmental Body or Accrediting Bodies regulating or otherwise relating to
the administration and operation of the Company, the Subsidiaries or the
Schools. Subject to the terms and provisions of this Agreement, Purchaser
shall use its commercially reasonable efforts in order to obtain any and
all approvals from the DOE, the Accrediting Bodies and any other
Governmental Body that may be necessary or appropriate to vest in Purchaser
the right and authority to administer and operate the Schools and the
Bookstores, and Purchaser and Sellers shall cooperate in order to obtain
such approvals. During the period from the date of the Closing
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Date through the date on which Purchaser's right to rescind the
transactions contemplated hereby has expired or otherwise terminated (the
"Rescission Termination Date"), Purchaser shall cause the Company and the
Subsidiaries to conduct their operations only according to the Company's
and Subsidiaries' ordinary course of business, and the Purchaser shall use
its good faith efforts to preserve intact the Company's and the
Subsidiaries' business organization, maintain adequate cash reserves to pay
operating expenses in the ordinary course of business, keep available the
services of the employees and maintain satisfactory relationships with the
Accrediting Bodies, Governmental Bodies, suppliers, agents, students and
others having business relationships with the Company and the Subsidiaries;
provided, however, that the foregoing shall not prohibit Sellers from
causing the Company and its subsidiaries to implement new marketing
strategies not to exceed $300,000, reasonable personnel changes, employment
and occupational safety policies, capital expenditures not to exceed
$250,000, actions necessary to obtain the withdrawal of the show cause
order dated April 25, 1997, issued by the Accrediting Bodies (the "Show
Cause Order") and such other changes as many be reasonably anticipated to
improve the Schools. Purchaser shall promptly notify Sellers of any
material change in the normal course of business of the Company or the
Subsidiaries, and of any Accrediting Bodies or Governmental Body, and of
any investigations or hearings (or communications indicating that the same
may be contemplated) or adjudicatory proceedings involving the Company or
the Subsidiaries, and shall keep Sellers fully informed of such events and
permit Sellers representatives prompt access to all materials prepared in
connection therewith, subject to relevant Legal Requirements.
(c) Access and Maintenance of Records. From and after the Closing
Date, Purchaser shall afford to Sellers, their counsel, accountants and
other authorized representatives reasonable access to each of the
Company's, the Subsidiaries' and the Schools' books and records related to
periods prior to the Closing Date during normal business hours and upon
reasonable notice from Sellers to Purchaser, as reasonably required by
Sellers in connection with (i) performance by Sellers of any of Sellers'
obligations (whether directly or by virtue of their indemnification
obligations) pursuant to this Agreement, (ii) any claim, action,
litigation, program review, audit or other proceeding involving any one or
more of the Sellers (other than any such claim, action, litigation, program
review, audit or proceeding arising under this Agreement or in which
Purchaser and/or the Company and the Subsidiaries, on one hand, and Sellers
or any of their Affiliates, on the other hand, are adverse parties and to
which a privilege would apply) and (iii) Sellers preparation of their tax
returns. Sellers, at Sellers' expense, may make copies of any such records
as may be necessary or appropriate for Sellers' use (subject to Section 6.1
hereof) in connection with the foregoing. From and after the Closing Date,
Purchaser shall afford to DOE, the Accrediting Bodies and other regulatory
authorities access to the Company's and
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each Subsidiary's books and records as required by applicable law or
regulations. For a period of seven (7) years from the Closing Date or until
the expiration of the record retention period under relevant Legal
Requirements or Accrediting Bodies requirements, if longer, Purchaser shall
not destroy or otherwise dispose of any books or records of the Company or
any Subsidiary related to periods prior to the Closing Date.
Notwithstanding the foregoing, Purchaser shall preserve and protect all
books, documents, papers, computer programs and records pertaining in any
manner to the administration by the Company or any Subsidiary of federal
student financial assistance programs pursuant to Title IV with respect to
the Schools for at least the period of time specified under applicable
Legal Requirements.
4. Representations and Warranties of Sellers.
As a material inducement to Purchaser to enter into this Agreement and
to purchase the Shares, Sellers hereby represent and warrant as of the date
hereof (except where another particular date is specified, in which event
Sellers hereby represent as of such date) that:
4.1. Organization and Good Standing of the Company and its
Subsidiaries; Accreditation.
(a) The Company is a corporation, duly organized, validly existing
and in good standing under the laws of the State of Illinois. The Company
is qualified to do business as a foreign corporation and in good standing
in all other states in which the nature of its operations require it so
qualify, except where failure to so qualify would not have a material
adverse effect on its business or operations. IAMD-Chicago is a corporation
duly organized, validly existing and in good standing under the laws of the
State of Illinois. IAMD-Chicago is qualified to do business as a foreign
corporation and is in good standing in all other states in which the nature
of its operations require it to so qualify, except where failure to so
qualify would not have a material adverse effect on its business or
operations. IAMD-Tampa is a corporation duly organized, validly existing
and in good standing under the laws of the State of Florida. IAMD-Tampa is
qualified to do business as a foreign corporation and is in good standing
in all other states in which the nature of its operations require it to so
qualify, except where failure to so qualify would not have a material
adverse effect on its business or operations. IAMD-Bookstore is a
corporation duly organized, validly existing and in good standing under the
laws of the State of Illinois. IAMD-Bookstore is qualified to do business
as a foreign corporation and is in good standing in the State of Florida
and in all other jurisdictions in which the nature of its operations
require it to so qualify, except where failure to so qualify would not have
a material adverse effect on its business or operations. Each of the
Company and the Subsidiaries has all requisite power and authority to own,
lease and operate its properties and
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assets, to carry on its business as now conducted, and to consummate the
transactions contemplated hereby. The Company and the Subsidiaries are not,
and for the past five (5) years have not been, engaged in any business
other than the operation of the Schools and the Bookstores, and activities
directly related thereto. The copies of the Company's and the Subsidiaries'
articles of incorporation and bylaws which have been furnished by Sellers
to Purchaser reflect all amendments made thereto at any time prior to the
date of this Agreement and are correct and complete.
(b) The Accrediting Bodies represent all accrediting bodies under
which the Schools are regulated or are required to be regulated and to the
best of Sellers' knowledge, except for the DOE and state licensing
agencies, there are no other accrediting entities or bodies under which the
Schools are regulated or are required to be regulated.
4.2. Ownership of the Company, the Subsidiaries and the Schools.
----------------------------------------------------------
(a) The Subsidiaries are owned and operated by the Company directly,
and no other Person has any ownership interest in any Subsidiary. The
Schools and the Bookstores are owned directly by the applicable Subsidiary,
and no other Person has any ownership interest in the Schools or the
Bookstores. No Person other than Purchaser has any right, option, warrant,
subscription or other arrangement to purchase shares of capital stock of
the Company (or any of the Subsidiaries) or to otherwise acquire any other
equity interest in the Company (or any of the Subsidiaries) or the Schools
or the Bookstores.
(b) The Shares are is owned by each Seller directly, and no other
Person other than Sellers has any direct or indirect ownership interest in
the Company and except for agreements which will be canceled prior to
closing, no Person, other than Purchaser, has any right, option, warrant,
subscription, or other arrangement to purchase shares of capital stock of
the Company or to otherwise acquire any other equity interest in the
Company.
4.3. Capacity; Authorization; Binding Effect, Etc.
--------------------------------------------
Each Seller hereby represents and warrants that he or she has the
unrestricted and absolute power, legal capacity and authority to execute,
deliver and perform this Agreement and each other document being executed in
connection herewith to which he or she is a party. Such Seller hereby further
represents and warrants that this Agreement has been, and each other document to
be executed by such Seller in connection herewith, as of the Closing, will have
been, duly executed and delivered by such Seller and (assuming the due
authorization, execution and delivery hereof and thereof by Purchaser and any
other parties thereto), this Agreement is, and each such other document or
agreement will be, a
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valid and binding obligation of such Seller, as the case may be, enforceable
against him or her in accordance with its terms.
4.4. No Conflicts, Etc.
-----------------
(a) Except as set forth in Schedule 4.4, the execution, delivery and
performance of this Agreement and each other document being executed by
Sellers or any of them in connection herewith, and the consummation of the
transactions contemplated hereby and thereby, do not and will not: (a)
contravene, conflict with, or result in a violation of (i) any provision of
the articles of incorporation or bylaws of the Company or any of the
Subsidiaries; or (ii) any resolution adopted by the board of directors or
the stockholders of the Company or any of the Subsidiaries; (b) contravene,
conflict with or violate any Legal Requirement applicable to the Company,
any of its Subsidiaries, the Schools, the Bookstores or any of their
respective assets or properties; (c) with or without the giving of notice
or the passage of time, or both, conflict with or result in the breach or
termination, of, or default under, any provision of the articles of
incorporation or bylaws of the Company or any of the Subsidiaries, or any
material instrument, license, permit, authorization, agreement or
commitment to which the Company, any of the Subsidiaries the Schools, or
the Bookstores are a party or by which any of their assets or properties
are bound; (d) constitute a violation of any order, judgment or decree to
which the Company, the Subsidiaries, the Schools, or the Bookstores, are a
party or by which any of their assets or properties is bound; or (e)
require any approval of, filing or registration with, or consent from any
Governmental Body or Accrediting Bodies that is required to be obtained or
made by the Company, the Subsidiaries, the Schools, or the Bookstores; (f)
cause Purchaser, the Company or any Subsidiary to become subject to, or
liable for the payment of, any Taxes outside of the ordinary course of
business relating to periods prior to the Closing Date, or transfer taxes
under any state or local law attributable to the purchase and sale of the
Shares. Except as set forth on Schedule 4.4, none of the Company, any of
its Subsidiaries, the Schools, the Bookstores or any Seller is or will be
required to give any notice or obtain any consent, approval or other
authorization from any Person in connection with the execution and delivery
of this Agreement or the consummation of the transactions contemplated
hereunder.
(b) The execution, delivery and performance of this Agreement and
each other document being executed by each Seller in connection herewith,
and the consummation of the transactions contemplated hereby and thereby,
do not and will not: (a) contravene, conflict with or violate any Legal
Requirement applicable to such Seller; (b) with or without the giving of
notice or the passage of time, or both, conflict with or result in the
breach of termination, of, or default under, or any material instrument,
license, permit, authorization, agreement or commitment to which such
Seller is a party or by
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which any of his or her assets or properties are bound; (c) constitute a
violation of any order, judgment or decree to which such Seller is a party
or by which any of his or her assets or properties is bound; or (d)
required any approval of, filing or registration with, or consent from any
Governmental Body or Accrediting Bodies that is required to be obtained or
made by such Seller. Except as set forth on Schedule 4.4, such Seller is
not or will not be required to give any notice or obtain any consent,
approval or other authorization from any Person in connection with the
execution and delivery of this Agreement or the consummation of the
transactions contemplated hereunder by such Seller.
4.5. Investments.
-----------
Except as provided for on Schedule 4.5 hereto, the Company has, and
during the five (5) years prior to the date hereof has had, no Investment, in
any Person other than the Subsidiaries. None of the Subsidiaries has, and
during the five (5) years prior to the date hereof has had, any Investment in
any other Person.
4.6. Capitalization.
--------------
The capitalization of the Company and the Subsidiaries is as follows:
(a) (i) The authorized equity securities of the Company consist of
(aa) Twenty-Seven Thousand Three Hundred (27,300) shares of common stock,
par value $.00 per share, of which Twenty-Thousand Three Hundred and Sixty
(20,360) shares are issued and outstanding to the Sellers as set forth on
Schedule 4.6 and One Thousand Four Hundred and Fifty (1,450) shares of
preferred stock, $1.00 par value per share, designated as callable,
cumulative non-voting preferred shares, of which 1268 shares are issued and
outstanding as set forth in Schedule 4.6. Such issued and outstanding
securities collectively constitute the Shares. (ii) Each Seller at the
moment immediately prior to consummation of the Closing will be, the record
and beneficial owners and holders of the Shares set forth next to such
Seller's name in Schedule 4.6, free and clear of all Encumbrances, other
than those Encumbrances set forth in Schedule 4.6 which Encumbrances shall
be removed prior to or simultaneously with the Closing.
(b) The authorized equity securities of IAMD-Chicago consist of One
Hundred (100) shares of common stock, par value $.00 per share, of which
One Hundred (100) shares are issued and outstanding to the Company. The
Company is, and at the moment immediately prior to consummation of the
Closing will be, the record and beneficial owner and holder of all such
equity securities of IAMD-Chicago, free and clear of all Encumbrances.
(c) The authorized equity securities of IAMD-Tampa consist of One
Hundred (100) shares of common stock, par value $.00 per share, of which
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One Hundred (100) shares are issued and outstanding to the Company. The
Company is, and at the moment immediately prior to consummation of the
Closing will be, the record and beneficial owner and holder of all such
equity securities, free and clear of all Encumbrances.
(d) The authorized equity securities of IAMD-Bookstore consist of Ten
Thousand (10,000) shares of common stock, par value $.00 per share, of
which One Thousand (1,000) shares are issued and outstanding to the
Company. The Company is, and at the moment immediately prior to
consummation of the Closing will be, the record and beneficial owner and
holder of all such equity securities, free and clear of all Encumbrances.
Except as set forth in Schedule 4.6, no legend or other reference to any
purported Encumbrance appears upon any certificate representing equity
securities of the Company or any of its Subsidiaries. All of the outstanding
equity securities of the Company and each of its Subsidiaries have been duly
authorized and validly issued and are fully paid and nonassessable. Except as
set forth in Schedule 4.6, there are no agreements (other than shareholders'
agreements which will be terminated prior to, or in connection with, the
Closing), commitments (including without limitation any options, warrants,
rights or similar arrangements) or Plans relating to the issuance, sale, or
transfer of any equity securities or other securities of the Company or any of
its Subsidiaries or providing for cash payments based upon the value of any
equity securities of the Company or any of its Subsidiaries. None of the
outstanding equity securities or other securities of the Company or any of its
Subsidiaries was issued in violation of the Securities Act or any other Legal
Requirement. None of the Company or any of its Subsidiaries owns, or has any
agreement or commitment to acquire, any equity securities or other securities of
any Person, or any direct or indirect equity or ownership interest in any other
business or Person.
4.7. Book and Records.
----------------
Except as set forth on Schedule 4.7:
(a) The minute books, stock record books, and other records of the
Company and each of its Subsidiaries, all of which are being made available
to Purchaser, are complete and correct and have been maintained in
accordance with sound business practices, including the maintenance of an
adequate system of internal controls, except where failure to so maintain
such books and records would not have a material adverse effect upon the
Company or any of its Subsidiaries.
(b) The minute books of the Company and each of its Subsidiaries
contain accurate and complete records of all meetings held of, and
corporate action taken by, their respective stockholders, boards of
directors, and committees of their respective boards of directors, and no
meeting of any such stockholders, boards of directors, or committees has
been held for which
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minutes have not been prepared and are not contained in such minute books,
except where failure to so prepare and maintain such minutes would not have
a material adverse effect on the Company or any of its Subsidiaries.
(c) The Company and each of its Subsidiaries has maintained all of
its accounting books and records in accordance with applicable Legal
Requirements and GAAP, except where failure to so maintain such books and
records would not have a material adverse effect upon the Company or any of
its Subsidiaries, and such books and records are true, correct and complete
in all material respects.
(d) At the Closing, all books and records described in this Section
4.7 will be in the possession of the Company or one of the Subsidiaries, as
applicable.
4.8. Compliance with Laws; Licenses and Permits.
------------------------------------------
Except as set forth in Schedule 4.8(a) attached hereto, none of the
Company, the Subsidiaries, or the Sellers is in violation of any Legal
Requirement which violation might reasonably be expected to have a material
adverse effect upon the financial condition, operating results, Accreditation or
business of the Company, or any of the Subsidiaries, the Schools, or the
Bookstores, individually or in the aggregate, and none of the Company, the
Subsidiaries, or the Sellers has received notice of any such violation. None of
the Company, the Subsidiaries, or the Sellers has received any notice of any
violations of the Occupational Safety and Health Act, as amended, or any similar
state or local Legal Requirement, relating to the Company, or any of the
Subsidiaries or the Schools. The Company and each of the Subsidiaries currently
maintains all licenses, Accreditations, certificates, permits, consents,
authorizations, and other governmental or regulatory approvals (the "Licenses
and Permits") necessary to conduct the business and operations of the Company
and the Subsidiaries as presently being conducted, except where the failure to
maintain any such Licenses and Permits would not have a material adverse effect
on the operations or financial condition of the Company, or any of the
Subsidiaries. As of the date hereof, no School has more than eighty-five
percent (85%) of its revenues pursuant to Title IV Programs or derived from
Title IV funds as determined in accordance with 34 C.F.R. (S) 600.5(d), and at
no time during the past two (2) years have more than eighty-five percent (85%)
of the revenues of either School, been pursuant to Title IV programs or derived
from Title IV funds. The Company, and each Subsidiary, has duly filed all
reports and returns required to be filed by it with all Governmental Bodies and
the Accrediting Bodies , except where failure to file any such report or return
would not have a material adverse effect on the Company or any of its
Subsidiaries, the Schools or the Bookstores. No application made by the Company
or any of the Subsidiaries for any Licenses and Permits during the last five (5)
years has been denied. Schedule 4.8(b) attached hereto is a true, correct and
complete list of all Licenses and Permits held by the Company and the
Subsidiaries, and the Governmental Body or Accrediting Bodies granting each such
License and Permit. Except as set forth on Schedule 4.8(b), the Licenses and
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Permits are in full force and effect, and no proceedings for the suspension or
cancellation of any of them is pending or, to the best of Sellers' knowledge,
threatened. Sellers have delivered to Purchaser copies of all such Licenses and
Permits. Except as set forth on Schedule 4.8(b), none of the Company, the
Subsidiaries, the Schools, the Bookstores, or any Seller, has received notice
that any of the Licenses and Permits will not be renewed and to the best of
Sellers' knowledge, there is no basis for nonrenewal, except for the financial
basis, as fully described on Schedule 4.8(c) hereto. Each Subsidiary has all
Accreditations from the Accrediting Bodies required to conduct the business of
the School operated by it, as presently conducted, and such School is certified
by the DOE as an eligible institution under Title IV and is a party to, and in
compliance with, a valid, unconditional program participation agreement with the
DOE. Except as set forth in Schedule 4.8(c) attached hereto, none of the
Company, any of the Subsidiaries, or any Seller, has received any notice, not
previously resolved in full without any material liability, with respect to any
alleged violation of the rules or regulations of the DOE the Accrediting Bodies,
in respect of the Schools, including sales and marketing activities, or the
terms of any program participation agreement to which it is or was a party.
Except as set forth on Schedule 4.8(c) attached hereto, Sellers are not aware of
any investigation or review of the Schools' student financial aid programs or
any review of Accreditation of either School by any Governmental Body or
Accrediting Bodies.
4.9. Recruitment; Admissions Procedures; Attendance; Financial Aid;
--------------------------------------------------------------
Reports.
- -------
Schedule 4.9(a) attached hereto is a complete list of all current
policy manuals and other statements of procedures or instruction relating to (a)
recruitment of students for the Schools, including procedures for assisting in
the application by prospective students for direct or indirect state or federal
financial assistance; (b) admissions procedures, including any descriptions of
procedures for insuring compliance with federal, state or Accrediting Bodies
requirements applicable to such procedures; (c) procedures for encouraging and
verifying attendance, minimum required attendance policies, and other relevant
criteria relating to course performance requirements and completion; and (d)
compliance with Legal Requirements relating to financial aid programs
(collectively, the "Policy Guidelines"). Sellers have delivered to Purchaser
true, correct and complete copies of all Policy Guidelines. Except as disclosed
on Schedule 4.9(b) attached hereto or in any other schedule to this Agreement,
the operations of the Company and the Subsidiaries have, in all material
respects, been conducted substantially in accordance with the Policy Guidelines
(as then in effect) and all relevant standards imposed by the Accrediting
Bodies, and other agencies administering state or federal governmental financial
assistance programs in which the Company, the Subsidiaries or the Schools
participate, and other applicable Legal Requirements. The Company has submitted
all reports, audits, and other information, whether periodic in nature or
pursuant to specific requests, for the Company, the Subsidiaries and the Schools
("Compliance Reports") to all agencies or other entities with which such filings
are required relating to its compliance with (i) applicable Accreditation
standards, (ii) Legal Requirements governing programs pursuant to which either
of the Schools or its students receive student
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financial assistance funding, and (iii) all articulation agreements between the
Schools and degree granting colleges and universities in effect as of the date
hereof, except where failure to submit such Compliance Reports would not have a
material adverse effect on the business or operations of the Company, or any
Subsidiary. All forms and records of the Company and the Subsidiaries have been
prepared, completed, maintained and filed in all material respects in accordance
with all applicable Legal Requirements, and are true and correct in all material
respects. All financial aid grants and loans, disbursements and record keeping
relating thereto have been completed in compliance with all federal and state
requirements, and there are no material deficiencies in respect thereto. To the
best of Sellers' knowledge and except as previously disclosed in prior audits by
DOE, no student at either of the Schools has been funded prior to the date for
which such student was eligible for funding, and such student's records conform
in form and substance to all relevant regulatory requirements.
4.10. Cohort Default Rate.
Schedule 4.10 attached hereto sets forth the published cohort default
rate for each School, calculated in the manner prescribed by the DOE and issued
to such School, of all students attending such School receiving assistance
pursuant to Title IV programs for the fiscal years June 30, 1992 through June
30, 1995. To the best of Sellers' knowledge, such schedule is materially
accurate in all respects. None of the Company, the Subsidiaries, the Schools or
any Seller has received any notice as to the calculation or amount of the cohort
default rates for the Schools for the year ended June 30, 1996.
4.11. Title to the Assets.
(a) The Company does not presently own, nor has it ever owned, any
real property.
(b) Schedule 4.11(b) sets forth a list of the real properties leased
or otherwise used, operated or occupied by the Company or any of its
Subsidiaries (the "Leased Facilities"). The leases covering the Leased
Facilities (the "Leases") are also described on Schedule 4.11(b).
(c) All of the tangible assets and records relating to intangible
assets of the Company and the Subsidiaries, are or as of the Closing will
be delivered to Purchaser or located at the Leased Facilities. Neither the
Company nor any Subsidiary is under any contractual or other legal
obligation or has entered into any commitment to make capital improvements
or alterations to the Leased Facilities. To the best of Sellers' knowledge,
the Leases are in full force and effect and are enforceable in accordance
with their terms. The Company and/or the applicable Subsidiary and, to the
best of Sellers' knowledge, the landlords, are not in default under the
Leases and, to the best of Sellers' knowledge, no event, act or omission
has occurred which (with or without notice, the passage of time or the
happening or occurrence of any other event) would result in a default
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thereunder. The Company and/or the applicable Subsidiary enjoys peaceful
and undisturbed possession under the Leases, and to the best of Sellers'
knowledge the Leased Facilities are not subject to any zoning, ordinance or
other restrictions which would prohibit the use and enjoyment of the Leased
Facilities in the manner in which the Leased Facilities are currently used.
Sellers have no knowledge of any condemnation proceedings relating to the
Leased Facilities. To the best of Sellers' knowledge, the Leased
Facilities, and the use thereof by the Company, the Subsidiaries and the
Schools are in compliance in all material respects with all Legal
Requirements, including without limitation, the Americans with Disabilities
Act.
(d) Except for the leased or licensed assets and properties set forth
on Schedule 4.11(d)(i) attached hereto, the Company or one of the
Subsidiaries owns outright, and has good and marketable title to, all of
assets and properties used in connection with the operation of the Schools
and the Bookstores, free and clear of Encumbrances other than Encumbrances
set forth on Schedule 4.11(d)(ii) ("Permitted Encumbrances"), encumbrances
set forth on Schedule 4.11(d)(iii) to be released or terminated prior to or
in connection with the Closing ("Designated Liabilities"), and liens for
current taxes not yet due and payable. All leases for tangible personal
property used by the Company or any Subsidiary in connection with their
operations are valid and in full force and effect and enforceable in all
material respects in accordance with their terms. Except as set forth in
Schedule 4.11(d)(i) attached hereto, no such lease is a capital lease, and
neither the Company nor any Subsidiary, or, to the best of Sellers'
knowledge, any of the other parties thereto, is in default under any such
lease or license, and no event, act or omission has occurred which (with or
without notice, the passage of time or the happening or occurrence of any
other event) would result in a default thereunder.
(e) The tangible assets (other than the Leased facilities) which are
owned or leased by the Company or the Subsidiaries are listed on Schedule
4.11(e) attached hereto, and, to the best of Sellers' knowledge, are in
good operating condition, order and repair, useable in the ordinary course
of business consistent with past practice, subject to ordinary wear and
tear, and are sufficient and adequate for all current operations. None of
the Company, the Subsidiaries or any Seller has received notice of any
violation of or default under any Legal Requirement or requirement relating
to any of such assets which remains uncured or has not been resolved.
(f) Except as set forth on Schedule 4.11(f), other than the Leased
Facilities, the Company does not operate, nor during the past five (5)
years has it owned, leased or operated, any Facility.
(g) The Curricula constitutes all of the Curricula currently used in
courses currently offered at the Schools.
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(h) The Intellectual Property constitutes all the patents,
trademarks, Tradenames, servicemarks, copyrights, know-how and trade
secrets owned by the Company or any Subsidiary, or used in connection with
their operations, and except for leased or licensed assets and properties
set forth on Schedule 4.11(d)(i), constitutes all the patents, trademarks,
logos, tradenames, servicemarks, copyrights, know-how and trade secrets
used by the Company and the Subsidiaries.
4.12. Material Miscellaneous Contracts.
Schedule 4.12 attached hereto sets forth a true, complete and correct
list of all contracts, agreements, and commitments relating to the operations of
the Company or the Subsidiaries (hereinafter collectively referred to as the
"Material Miscellaneous Contracts") (a) requiring aggregate payments after the
date hereof in excess of $5,000 or with a term expiring one (1) year or later
after the date hereof, or (b) including confidentiality, noncompetition,
nonsolicitation option or similar provisions, other than (x) the Leases, (y)
leases and licenses listed on Schedule 4.11(d)(i) attached hereto, and (z) Plans
listed on Schedule 4.21 attached hereto. True, complete and correct copies of
all Material Miscellaneous Contracts, together with all amendments thereto, have
heretofore been delivered or otherwise made available to Purchaser. The Material
Miscellaneous Contracts constitute legal, valid and binding obligations of the
Company, or one of the Subsidiaries, as applicable, and to the best of Sellers'
knowledge, the other parties thereto, and to the best of Sellers' knowledge are
in full force and effect. None of Company or any of the Subsidiaries is in
material default or, to the best of Sellers' knowledge, alleged to be in
material default on any term of any such Material Miscellaneous Contract. Except
as noted on Schedule 4.12 attached hereto, the consummation of the transactions
contemplated by this Agreement does not require the consent or approval of any
party to any Material Miscellaneous Contract.
4.13. Tradenames; Confidential Information.
(a) All tradenames, logos, trademarks or service marks used or
useful in connection with the operations of the Company, or the
Subsidiaries, and all forms, derivatives and graphic presentations thereof,
including forms of the tradename "International Academy of Merchandising
and Design" and related trademarks and servicemarks (collectively, the
"Tradenames"), having material value to the operations of the Company or
the Subsidiaries are set forth on Schedule 4.13(a) attached hereto. To the
best of Sellers' knowledge, the Company and the Subsidiaries have the
exclusive right to the use of each Tradename as an assumed business name in
the states in which such Tradename is used, and Schedule 4.13(a) sets forth
all registrations (including the jurisdictions thereof) of each Tradename
as a trademark, servicemark or assumed name. The Company has not licensed
any other Person to use any Tradename. None of the Company, the
Subsidiaries, or any Seller, has been sued or, to the best of Sellers'
knowledge, threatened with suit for infringement, violation or
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breach with respect to any Tradename, and to the best of Sellers'
knowledge, no basis exists for any such suit. None of the Company, the
Subsidiaries or any Seller is on notice of any infringement, violation or
breach of any Tradename by any other Person.
(b) To the best of Sellers' knowledge, the Company and the
Subsidiaries have the right to use, free and clear of any claims or rights
of any third party, all Intellectual Property (subject in the case of
computer programs to the license agreements in that regard), customer
lists, Curricula and any other proprietary or confidential information
required for or used in the operations of the Subsidiaries. To the best of
Sellers' knowledge, none of the Company, the Subsidiaries, or any Seller is
in any way making any unlawful or wrongful use of any tradename, trade
secret, customer list, know-how, curricula or any other proprietary or
confidential information of any third party including, without limitation,
any former employer of any present or past employee of the Company or any
Subsidiary.
4.14. Financial Statements.
Sellers have previously furnished the Financial Statements to
Purchaser. The balance sheets included in the Financial Statements present
fairly, in accordance with GAAP, the assets and liabilities of the Company and
the Subsidiaries as of the respective dates thereof, and the related statements
of operations present fairly, in accordance with GAAP, the results of operations
of the Company and the Subsidiaries for the respective periods covered thereby.
The Financial Statements have been prepared in accordance with GAAP (except that
the Interim Financial Statements are not accompanied by all footnotes required
by GAAP and are subject to customary year end adjustments), are correct and
complete in all material respects and fairly present the financial position of
the Company and the Subsidiaries as of the dates of such Financial Statements,
and the results of operations and changes in financial position for the periods
covered by such Financial Statements. The Company and the Subsidiaries
maintained their financial books and records in accordance with applicable Legal
Requirements and (except for usual statement date adjustments) in accordance
with GAAP, and such books and records are, and during the periods covered by the
Financial Statements were, correct and complete in all material respects, fairly
reflecting the income, expenses, assets and liabilities of the Company and the
Subsidiaries. On the date of the balance sheet forming a part of the Interim
Financial Statements, the Company and the Subsidiaries had no liabilities which
were required to be set forth in a balance sheet prepared in accordance with
GAAP that were not included in such balance sheet. Except as set forth in
Schedule 4.14 attached hereto, neither the Company nor the Subsidiaries are
required to provide any letters of credit, guarantee or other financial security
arrangements in connection with any transactions approvals or licenses in the
ordinary course of operations of the Company or the Subsidiaries nor is the
Company or any Subsidiary bound by, party to or subject to any agreement,
contract, or commitment providing for the guarantee, indemnification, assumption
or endorsement or any like commitment with respect to the obligations,
liabilities (contingent or otherwise) or
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indebtedness of any Person. As of the date hereof, neither the Company nor any
Subsidiary has any material indebtedness, liabilities or obligations of any
nature, whether absolute, accrued, contingent or otherwise, whether known or
unknown, other than:
(a) those set forth or reserved against in the balance sheets
included in the Financial Statements for the fiscal years then ended or
disclosed in the footnotes to such Financial Statements, to the extent set
forth, reserved against or in the case of footnote items, disclosed;
(b) those set forth or reserved against in the Interim Financial
Statements, or those which would have been disclosed in footnotes to such
Interim Financial Statements, if footnotes had been prepared and which have
been disclosed in writing to Purchaser, to the extent set forth, reserved
against or, in the case of footnote items, disclosed;
(c) except as set forth on Schedule 4.14(c) attached hereto, those
incurred since the Interim Balance Sheet Date in the ordinary course of
business and consistent in nature with past practice, or those which would
have been disclosed in footnotes if footnotes had been prepared and which
have been disclosed to Purchaser in writing, to the extent set forth,
reserved or, in the case of footnote items, disclosed;
(d) those set forth on Schedule 4.14(c); and
(e) those not required to be disclosed in financial statements or
notes thereto prepared in accordance with GAAP.
There are no long-term fixed or contractual liabilities relating to the
operation of the Company or the Subsidiaries, as presently operated by the
Company, the annual expenses of which are not reflected in the Financial
Statements where required by GAAP or which are not otherwise disclosed or set
forth in this Agreement or one or more of the schedules hereto. Other than
obligations in respect of prepaid tuition neither the Company nor any Subsidiary
has any obligations in respect of refundable deposits.
4.15. Receivables.
The accounts receivable (including, without limitation, student
accounts receivables) of the Company and the Subsidiaries, except to the extent
of the allowance for cancellations and doubtful accounts set forth in the Final
Balance Sheet, are bona fide receivables, arose out of arms' length transactions
in the normal and usual practices of the Company or the Subsidiaries, as
applicable, are recorded correctly on the applicable books and records of the
Company and the Subsidiaries, and, to the best of Sellers' knowledge, are
collectable in full in the ordinary course of business, subject in the case of
certain receivables to reserves established for such receivables in the Final
Balance Sheet. To the best of Sellers' knowledge, such receivables are not
subject to any defense, counterclaim or setoff or trade discounts or credits not
reflected in the Final Balance Sheet (other than
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tuition refund policies administered in accordance with all applicable Legal
Requirements and the applicable Policy Guidelines), and Sellers have no
knowledge of any facts or circumstances which would cause any of such
receivables to have to be written down or written off in amounts which in the
aggregate would be in excess of reserves established for such receivables in the
Final Balance Sheet.
4.16. Inventories.
The only inventories maintained by the Company and the Subsidiaries
consist of supplies used in the ordinary course of business (and, in the case of
IAMD-Bookstore, books and school supplies) and are reflected on the Financial
Statements as "inventories." Such supplies will be reflected at cost on the
Final Balance Sheet, are usable in the ordinary and regular course of business,
are in all material respects fit and sufficient for the purpose for which they
were purchased and, at the date of this Agreement, are in customary amounts
appropriate to the Company's operation of the Schools and the Bookstores. All
excess or obsolete items have been written off.
4.17. Bank Accounts.
Schedule 4.17 attached hereto sets forth a true, complete and correct
list of the names of all banks and other financial institutions in which the
Company or any Subsidiary has an account or safe deposit box, which list
includes a description of such accounts, the account numbers and the names of
all individuals authorized to draw thereon or have access thereto.
4.18. Litigation, Etc.
(a) Except as set forth in Schedule 4.18 (a) attached hereto, there
are no (a) judgments, decrees, injunctions, rulings, awards or orders of
any Governmental Body or the Accrediting Bodies against or affecting the
Company, any Subsidiary, the Schools or the Bookstores, and (b)
Proceedings, pending or, to the best of each Sellers' knowledge, threatened
against or affecting the Company, any Subsidiary, the Schools or the
Bookstores, at law or in equity, or before or by any Governmental Body or
Accrediting Bodies; to the best of Sellers' knowledge, none of the Company,
any Subsidiary, the Schools or the Bookstores, are the subject of any
investigations or inquiries by any Governmental Body affecting the Company,
any Subsidiary, the Schools or the Bookstores, (including inquiries as to
the qualification to hold or receive any of the Licenses and Permits); and,
to the best of Sellers' knowledge, there is no basis for any of the
foregoing. There are no other Proceedings pending, or to the best of
Sellers' knowledge, threatened against or affecting the Company, the
Subsidiaries, or their Affiliates generally (including claims with respect
to any Employee Benefit Plans) which if adversely decided would have a
material adverse effect on the Company, the Subsidiaries, the Schools or
the Bookstores, or their assets taken as a whole.
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(b) Except as set forth in Schedule 4.18(b) attached hereto, there
are no (a) judgments, decrees, injunctions, rulings, awards or orders of
any Governmental Body or Accrediting Bodies against or affecting any Seller
or any such Seller's interest in the Company, and (b) Proceedings, pending
or, to the best of each Seller's knowledge, threatened against or affecting
such Seller's interest in the Company or the Schools or such Seller, at law
or in equity, or before or by any Governmental Body or Accrediting Bodies;
to the best of such Seller's knowledge, such Seller is not the subject of
any investigations or inquiries by any Governmental Body affecting the
Company or the Subsidiary (including inquiries as to the qualification to
hold or receive any of the Licenses and Permits); and, to the best of such
Seller's knowledge, there is no basis for any of the foregoing. There are
no other Proceedings pending, or to the best of Seller's knowledge,
threatened against or affecting such Seller (including claims with respect
to any Employee Benefit Plans) which if adversely decided would have a
material adverse effect on the Company, the Subsidiaries, the Schools or
their assets taken as a whole.
4.19. Insurance.
Schedule 4.19 attached hereto sets forth all insurance coverages now
or previously maintained by the Company and the Subsidiaries on the Leased
Facilities, the assets and the operations of the Company and the Subsidiaries,
including a list of all policies or binders of fire, extended coverage, general
and vehicular, fidelity and fiduciary liability, workers' compensation, key-man
life and other similar insurance, and all binders for insurance to be purchased
on or before Closing in order to replace policies expiring prior to the Closing.
Copies of such policies have been previously delivered to Purchaser. Except as
set forth in Schedule 4.19 attached hereto, such policies and binders are in
full force and effect, and there is no material breach or default with respect
to any provision contained in any such policy or binder, and all premiums, to
the extent due and payable, have been paid or the liability therefor properly
accrued. Except for amounts deductible and self-insured retainers under such
policies of insurance, the Company and the Subsidiaries have not been, prior to
the date hereof, subject to liability as a self-insurer. Except as set forth in
Schedule 4.19 attached hereto, there are no claims pending or threatened under
any of said policies pertaining to the Company or the Subsidiaries or disputes
with underwriters regarding coverage under such policies pertaining to the
Company or the Subsidiaries. Except as set forth on Schedule 4.19, neither the
execution, delivery and performance of this Agreement, nor the consummation of
the transactions contemplated hereby, will result in the loss to the Company or
the Subsidiaries of any of the insurance policies listed, or impair the rights
of the Company or the Subsidiaries with respect to liabilities arising, in
connection with the operations of the Company and Subsidiaries prior to the
Closing. Within five (5) years prior to the date hereof, neither the Company nor
any Subsidiary has been denied insurance, or been offered insurance only at a
commercially prohibitive premium.
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4.20. Environmental Matters.
Except as set forth in Schedule 4.20 attached hereto, none of the
Company or the Subsidiaries have generated, transported, stored, treated or
disposed, nor has either of them allowed or arranged for any third persons to
generate, transport, store, treat or dispose of, any Hazardous Substance to or
at: (a) any location other than a site lawfully permitted to receive such
Hazardous Substance for such purposes or (b) any location designated for
remedial action pursuant to federal, state or local statute and relating to the
environment or waste disposal; nor, to the best of Sellers' knowledge, has the
Company or the Subsidiaries performed, arranged for or allowed by any method or
procedure such transportation or disposal in contravention of any Legal
Requirements or in any other manner which may result in liability for
contamination or threat of contamination of the environment in violation of any
Environmental Law, except where such violation would not have a material adverse
effect on the business or operations of the Company or the Subsidiaries. Except
as set forth in Schedule 4.20, attached hereto, to the best of Sellers'
knowledge, no generation, use, handling, storage, treatment, release, threat of
release, discharge, spillage or disposal of any Hazardous Substance in violation
of any Environmental Law, has occurred or is occurring at the Leased Facilities
or, to the best of Sellers' knowledge, any other Facility previously owned or
operated by the Company or any Subsidiary. Except as set forth in Schedule 4.20
attached hereto, none of the Company, the Subsidiaries, or Sellers has received
notification of, nor is it aware, of, any past or present failure by the Company
or the Subsidiaries, to comply with any Environmental Law, including without
limitation the requirements of any permits, franchises, licenses or orders
issued pursuant to any Environmental Law, applicable to the Company or the
Subsidiaries, or their operations. Except as set forth on Schedule 4.20, none of
the Company, the Subsidiaries or Sellers has received any notification, nor are
any of them aware of, any past or present failure by the Company or the
Subsidiaries to comply in any material respect with any Environmental Law, which
failure may result in judicial, regulatory or other legal proceedings that would
have a material adverse impact on the operations of the Company or the
Subsidiaries or result in the imposition of any Encumbrance against the
Company's or any Subsidiaries' assets. Except as set forth on Schedule 4.20, to
the best of Sellers' knowledge, the Leased Facilities do not contain asbestos or
polychlorinated biphenyls or any underground storage tanks. None of the Company,
the Subsidiaries or Sellers has received notice from any Governmental Body
requiring any removal or other remediation with respect to asbestos or
polychlorinated biphenyls located at the Leased Facilities.
4.21. Employee Benefit Plans.
Schedule 4.21(a) lists all Employee Benefit Plans (the "Plans") that
the Company or any Subsidiary maintains to which the Company or any Subsidiary
contributes or to which the Company or any Subsidiary has an obligation to
contribute with respect to any current or former employee of the Company or any
Subsidiary, or with respect to which the Company or any Subsidiary otherwise is
reasonably expected to have any liability or potential liability (whether or not
such plan has terminated or whether or not such plan is or was maintained for
current or former employees of the Company or any
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Subsidiary or current or former employees of any other member of the controlled
group of the Company or any Subsidiary (within the meaning of Section 414 of the
Code).
(a) Except as disclosed on Schedule 4.21(b), the Company or any
Subsidiary does not contribute to, have any obligation to contribute to or
otherwise have any liability or potential liability with respect to (i) any
Multiemployer Plan, (ii) any Employee Benefit Plan of the type described in
Sections 4063 and 4064 of ERISA or in Section 413(c) of the Code (and
regulations promulgated thereunder) (iii) any voluntary employee
beneficiary as described in Section 501(c)(9) of the Code or (iv) any
employee welfare benefit plan which provides health, accident, or life
insurance benefits to current or future retirees or current or former
employees, their spouses or dependents other than in accordance with
Section 4980(B) of the Code or applicable state continuation coverage law.
(b) To the best of Sellers' knowledge and except as set forth in
Schedule 4.21(b), each Plan and all related trusts, insurance contracts and
funds, comply in form and in operation with all applicable laws and
regulations, including, but not limited to, ERISA and the Code. No person
has engaged in any transaction with respect to any Plan which could subject
the Company or any Subsidiary, any trustee, and any administrator of any
Plan, or any party dealing with any Plan, or Buyer to any tax or penalty
imposed by ERISA or the Code. No actions, suits, claims or demands with
respect to the Plans (other than routine claims for benefits) are pending
or threatened and, except as set forth in Schedule 4.21(b), Sellers have no
knowledge of any facts which could give rise, or be expected to give rise,
to any actions, suits, claims or demands. Except as set forth in Schedule
4.21(b), no Plan that is subject to the funding requirements of Section 412
of the Code or Section 302 of ERISA has incurred any "accumulated funding
deficiency" whether or not waived. Except as set forth in Schedule 4.22(b),
no liability to the PBGC (except for routine payment of premiums) has been,
or is expected to be, incurred with respect to any Plan subject to Title IV
of ERISA, no Reportable Event has occurred with respect to any such Plan
and the PBGC has not commenced or threatened the termination of any Plan.
No lien arising under Section 302(f) of ERISA or Section 412(n) of the Code
has arisen and the Company or any Subsidiary has not been required to post
any security under Section 307 of ERISA or Section 401(a)(29) of the Code,
and Sellers have no knowledge of any facts which could be expected to give
rise to any such lien or security.
(c) Except as provided on Schedule 4.21(b), each Plan, and its
related trust (if any), which is intended to be qualified under Section
401(a) of the Code has received a favorable determination letter from the
IRS as to the qualification under the Code of the Plan and the tax-exempt
status of such related trust, and, to the best of Sellers' knowledge,
nothing has occurred, including, but not limited to, the failure to make
any required amendments,
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that could adversely affect the qualification of the Plan or the tax-exempt
status of such trust.
(d) Neither the Company nor any Subsidiary is or ever has been a
party to any defined benefit plan.
(e) Except as disclosed in Schedule 4.21(b), no Plan requires the
Company or any Subsidiary to pay separation, severance, termination or
other such benefits solely as a result of any transaction contemplated by
this Agreement or solely as a result of a "Change in Control" as such term
is defined in Section 280G of the Code. The Company has complied in all
material respects with the requirements of Section 4980B of the Code and
Part VI of Subtitle B of Title I of ERISA.
(f) With respect to each Plan, all contributions which are due
(including employer contributions and employee salary reduction
contributions) have been paid to such Employee Benefit Plan, and all
contributions for prior plan years which are not yet due, and with respect
to the current plan year for the period ending on the Closing Date, have
been made or accrued, and with respect to the Employee Welfare Benefit
Plans, all premiums or other payments which are due as of the Closing Date
have been paid.
(g) Except as noted on Schedule 4.21(b), with respect to each Plan,
Sellers have provided Buyer with true, complete and correct copies, to the
extent applicable, of: (i) all documents pursuant to which the Plans are
maintained, funded and administered, (including, but not limited to,
applicable trust documents), (ii) the three most recent annual reports (IRS
Form 5500 series) (with attachments), (iii) the three most recent actuarial
reports, (iv) the three most recent financial statements, (v) all
governmental rulings, determinations, and opinions (and pending request for
governmental rulings, determinations, and opinions), if any.
4.22. Employment Matters.
(a) Except as set forth in Schedule 4.22(a) attached hereto, (i) to
the best of Sellers' knowledge, the Company and the Subsidiaries are in
compliance in all material respects with all Legal Requirements relating to
employment and employment practices, including terms and conditions of
employment, employment discrimination and wages and hours, and none of the
Company or the Subsidiaries are engaged in any unfair labor practices with
respect to individuals employed by or providing services to the Company or
the Subsidiaries; (ii) none of the Company, the Subsidiaries or Sellers are
aware of, nor has any of them received any written or other notice of, any
complaints against the Company or the Subsidiaries with respect to
individuals employed by or providing services to the Company or the
Subsidiaries pending
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before the National Labor Relations Board or any similar state or local
labor agency; (iii) there are no labor strikes, slow-downs or stoppages or
other labor troubles pending or, to the best of Sellers' knowledge,
threatened with respect to any individuals employed by or providing
services to the Company or the Subsidiaries; to the best of Sellers'
knowledge no labor organization activities have occurred with respect to
such employees during the past three (3) years; (iv) there are no
collective bargaining agreements binding on the Company or the
Subsidiaries; (v) no grievances have been asserted by any labor
organization against the Company or the Subsidiaries with respect to
individuals employed by or providing services to the Company or the
Subsidiaries; (vi) and none of the Company or the Subsidiaries has
experienced any work stoppage by such employees during the last three (3)
years. Schedule 4.22(a) attached hereto contains a list of all employees of
the Company and the Subsidiaries and all material consultants to the
Company and the Subsidiaries (including, without limitation, sales
representatives and other recruiters), other than attorneys and
accountants, who are employed or providing services in connection with the
operation of the Company or the Subsidiaries including: name; length of
service; job title; rate of base salary, bonuses and other incentive
compensation; and identifying all contracts, agreements, commitments and
arrangements, written or oral, with such employees or consultants. Sales
representatives and other recruiters for the Company and the Subsidiaries,
whether employed directly by or otherwise engaged by the Company or the
Subsidiaries, are licensed or registered in accordance with all applicable
Legal Requirements. No such sales representative or other recruiter
receives commissions, bonuses or other contingency payments based, directly
or indirectly, on the enrollment of students by such individual. True,
correct and complete copies of all agreements between the Company or any
Subsidiary and such employees or consultants and all amendments thereto
have been provided to Purchaser. The Company and the Subsidiaries have
performed all of their obligations under such agreements and are not in
default or violation and, to the best of Sellers' knowledge, the other
parties thereto are not in default or violation, thereunder.
(b) Except as set forth on Schedule 4.22(b), no employee, officer or
director of the Company or any Subsidiary is a party to, or is otherwise
bound by, any agreement or arrangement, including any confidentiality,
noncompetition, or proprietary rights agreement, that in any way adversely
affects or will affect (i) the performance of his duties as an employee,
officer or director of the Company or such Subsidiary, or (ii) the ability
of the Company or any Subsidiary to conduct its business, including without
limitation the operation of the Schools and the Bookstores. To best of
Sellers' knowledge, no employee of the Company listed on Schedule 4.22(b)
intends to terminate his or her employment with the Company.
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(c) Except as set forth on Schedule 4.22(c), there are no retired
employees or directors of the Company or the Subsidiaries, or their
dependents, receiving benefits or scheduled to receive benefits in the
future from the Company or any Subsidiary. Except as set forth on Schedule
4.22(c), none of the Company, the Subsidiaries, or any Seller is party to
any severance or other agreements with employees, former employees or
former owners of the Company.
(d) Schedule 4.22(d) lists all employee manuals and employment
policies of the Company and the Subsidiaries. Except as set forth in
Schedule 4.22(d), the Company or the applicable subsidiary has performed
all its duties and obligations through the date hereof pursuant to such
manuals and policies.
(e) The Company has no "leased employees" for purposes of Section
414(n) of the Code.
4.23. Labor Relations; Compliance
None of the Company, the Subsidiaries or the Schools has been nor is
any of them a party to any collective bargaining or other labor contract.
Except as set forth on Schedule 4.23, there has not been, there is not presently
pending or existing, and to the best of Sellers' knowledge, there is not
threatened, (a) any strike, slowdown, picketing, work stoppage, or employee
grievance process, (b) any Proceeding against or affecting the Company, the
Subsidiaries or the Schools relating to the alleged violation of any Legal
Requirement pertaining to labor relations or employment matters, including any
charge or complaint filed by an employee or union with the National Labor
Relations Board, the Equal Employment Opportunity Commission, the Occupational
Health and Safety Administration, or any comparable state or federal
Governmental Body, organizational activity, or other labor or employment dispute
against or affecting the Company, the Subsidiaries, the Schools or their
premises, or (c) any application for certification of a collective bargaining
agent. To the best of Sellers' knowledge, no event has occurred or circumstance
exists that could provide the basis for any work stoppage or other labor dispute
involving the Company or the Subsidiaries. There is no lockout of any employees
by the Company or the Subsidiaries, and no such action is contemplated. The
Company and the Subsidiaries have complied in all respects with all Legal
Requirements relating to employment, equal employment opportunity,
nondiscrimination, immigration, wages, hours, benefits, collective bargaining,
the payment of social security and similar taxes, occupational safety and
health, and plant closing, except where the failure to comply would not have a
material adverse effect upon the Company, the Subsidiaries or their assets. The
Company and the Subsidiaries are in compliance with the Worker Adjustment and
Retraining Notification Act ("WARN") and any other similar applicable state
and/or local laws regarding employees, and, where applicable, have provided its
employees with such advance notice of termination of employment as required by
WARN, or other applicable state or local laws, except where the failure to
comply or provide notice would not have a material adverse effect upon the
Company, the Subsidiaries or their respective assets.
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Except as set forth on Schedule 4.23, none of the Company or the Subsidiaries is
subject to any award, decision, injunction, judgment, ruling or verdict,
requiring the payment of any compensation, damages, taxes, fines, penalties, or
other amounts, however designated, for failure to comply with any of the
foregoing Legal Requirements.
4.24. Tax Matters.
(a) Except as disclosed on Schedule 4.24(a),
(i) Each of the Company and the Subsidiaries has filed or
caused to be filed in the prescribed manner and on or before the due
dates therefor or within applicable extension periods all Tax Returns
that are or were required to be filed by the Company or the
Subsidiaries, either separately or as a member of a group of
corporations, pursuant to applicable Legal Requirements.
(ii) Sellers have delivered or made available to Purchaser
copies of all such Tax Returns of the Company and the Subsidiaries,
filed since January 1, 1993.
(iii) Each of the Company and the Subsidiaries has paid, or made
provision for the payment of, all Taxes that have or may have become
due from the Company and the Subsidiaries, pursuant to such Tax
Returns or otherwise, or pursuant to any assessment received by the
Company or any Subsidiary, except such Taxes, if any, as are listed in
Schedule 4.24(a) and are being contested in good faith and as to which
adequate reserves (determined in accordance with GAAP) have been
provided in the Final Balance Sheet.
(b) The United States federal and state income tax returns of the
Company and the Subsidiaries have been audited by the IRS, or are closed by
the applicable statute of limitations for all taxable years through the
fiscal year ended June 30, 1992. Schedule 4.24(b) contains a complete and
accurate list of all audits of all such Tax Returns, including a reasonably
detailed description of the nature and outcome of each audit. All
deficiencies proposed as a result of such audits have been paid, reserved
against, settled, or, as described in Schedule 4.24(b), are being contested
in good faith by appropriate proceedings. Schedule 4.24(b) describes all
adjustments to the United States federal income Tax Returns filed by the
Company and the Subsidiaries or any consolidated group of corporations
including the Company for all taxable years since the fiscal year ended
June 30, 1993, and the resulting deficiencies proposed by the IRS. Except
as described in Schedule 4.24(b), none of the Company, any Subsidiary or
any Seller has given or been requested to give waivers or extensions (or is
or would be subject to a waiver or extension given by any other Person) of
any statute of limitations relating to the payment of
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Taxes of the Company and the Subsidiaries or for which the Company or the
Subsidiaries may be liable. Except as set forth and described in Schedule
4.24(b), there is no Proceeding and no assessment, reassessment or request
for information in progress, or, to the best of Sellers knowledge,
threatened, against or affecting any Subsidiary in respect of Taxes nor are
any issues under discussion with any taxing authority relating to any
matters which could result in claims for additional Taxes.
(c) The charges, accruals, and reserves with respect to Taxes on the
Interim Financial Statements are adequate (determined in accordance with
GAAP) and are at least equal to the Company's and the Subsidiaries'
liability for Taxes relating to periods through the date hereof. To the
best of Seller's knowledge, there exists no proposed tax assessment against
the Company or any Subsidiary except as disclosed in the Interim Financial
Statements or in Schedule 4.24(c). No consent to the application of Section
341(f)(2) of the Code has been filed with respect to any property or assets
held, acquired, or to be acquired by the Company or any Subsidiary. All
Taxes that the Company or the Subsidiaries are or were required by Legal
Requirements to withhold or collect have been duly withheld or collected
and, to the extent required, have been paid to the proper Governmental Body
or other Person.
(d) All Tax Returns filed by (or that include on a consolidated
basis) the Company and the Subsidiaries, or any of them, are true, correct,
and complete in all material respects. There is no tax sharing agreement
that will require any payment by the Company or any Subsidiary after the
date of this Agreement. The Company is not, nor since September 1, 1987 has
it been, an "S" corporation.
4.25. Brokerage.
Neither Sellers nor the Company (or any of their Affiliates) has
retained any broker or finder, and neither will be obligated to pay any brokers'
or finders' fee, in connection with the negotiation or consummation of the
transactions contemplated by this Agreement.
4.26. Affiliate Transactions.
Except as set forth in Schedule 4.26 attached hereto or as
specifically contemplated hereby, no Affiliate of any one or more of the Sellers
is a party to any agreement, contract, commitment or transaction with the
Company or the Subsidiaries, or has any material interest in any material
property used in connection with the operations of the Company or the
Subsidiaries.
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4.27. Absence of Certain Changes.
Except as contemplated by this Agreement or as set forth on Schedule
4.27 attached hereto, from the Interim Balance Sheet Date until the date hereof
there has not been, occurred or arisen:
(a) any sale, lease, transfer, abandonment or other disposition of
any right, title or interest in or to any of the properties or assets of
the Company or the Subsidiaries (tangible or intangible), except in the
ordinary course of business;
(b) other than in the ordinary course of the Company's and the
Subsidiaries' operations and consistent with the Company's and the
Subsidiaries' past and present business practices, (i) any approval or
action to put into effect any increase in any compensation or benefits
payable to any employee, director, agent or officer of the Company or any
Subsidiary, or any payment, grant or accrual to or for the benefit of any
such employee, director, agent or officer of any bonus, service award,
percentage compensation or other benefit, (ii) any adoption or amendment of
any Plans, or any severance agreement or employment contract to which any
such employee, director, agent or officer is a party or (iii) any entering
into of any employment, deferred compensation or other agreements with
respect to bonuses, service awards, percentage compensation or other
benefits with any such employee, director, agent or officer;
(c) any material adverse change in the financial condition, assets,
liabilities (absolute, accrued, contingent or otherwise), business
prospects, reserves or operations of the Company or the Subsidiaries which
would have a material adverse effect;
(d) any damage, destruction or loss, whether or not covered by
insurance, materially adverse to the assets, business, or operations of the
Company or the Subsidiaries;
(e) any change in any material respect in the business policies or
practices of the Company or the Subsidiaries or a failure of the
Subsidiaries to operate the Schools and the Bookstores in the ordinary
course with a view to preserving such businesses intact, to retaining the
services of the present officers, employees and agents and with a view to
preserving the business relationships of the Company and the Subsidiaries,
including without limitation business relationships of the Schools with,
and the goodwill of, students, sales representatives, suppliers, the
Accrediting Bodies, Governmental Bodies and others; or
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(f) any written agreement, or otherwise binding agreement, to take
any action described in this Section 4.27.
4.28. Indebtedness.
Schedule 4.28 attached hereto contains a true, correct and complete
list of all indebtedness of the Company and the Subsidiaries for borrowed money,
including capitalized leases, and the balances owing thereunder as of the date
hereof.
4.29. Conduct of Business Since Interim Balance Sheet Date.
From the Interim Balance Sheet Date to the date of this Agreement, the
Company and the Subsidiaries have conducted their operations only according to
their ordinary and usual course of business, and the Company and the
Subsidiaries have used their best efforts to preserve intact the Company's and
the Subsidiaries' business organizations, keep the services of its employees and
maintain satisfactory relationships with the Accrediting Bodies, suppliers,
agents, students and others having business relationships with the Company and
the Subsidiaries. Notwithstanding the foregoing, the Company shall be permitted
to redeem shares of its capital stock, make distributions to its stockholders in
respect of such redemptions, distribute to the shareholders or an escrow account
those certain subscription notes receivable reflected in the Financial
Statements and pay other compensation to its stockholders and Affiliates;
provided, that such activities shall not result in the breach of any
representation or warranty of Sellers hereunder.
4.30. Approvals.
To the best of Sellers' knowledge, there exists no fact or
circumstance attributable to Sellers, the Company, the Subsidiaries or the
Schools that would cause DOE, any other Governmental Body or Accrediting Bodies
whose authorization, consent or similar approval is a requirement for the
consummation of the transactions contemplated by this Agreement to refuse to
deliver such authorization, consent or similar approval which have not been
disclosed to Purchaser prior to Closing.
4.31. Delivery of Documents.
True, correct and complete copies of all Leases, Material
Miscellaneous Contracts, Plans, Policy Guidelines and other documents,
instruments, agreements and records of the Company and the Subsidiaries
described on schedules to this Agreement or relating to the assets, liabilities
and the operations of the Company and the Subsidiaries, or the representations
and warranties of Sellers contained in this Agreement, have been delivered or
made available to Purchaser.
4.32. Disclosure.
This Agreement, together with the schedules, exhibits, and attachments
hereto, do not contain any untrue statement of a material fact or omit to state
a material fact
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necessary to make such statements not misleading in light of the circumstances
in which such statements were made.
5. Representations and Warranties of Purchaser.
As a material inducement to Sellers to enter into this Agreement and
to sell the Shares, Purchaser hereby represents and warrants as of the date
hereof that:
5.1. Organization and Corporate Power.
Purchaser is a corporation duly organized, validly existing and in
good standing under the laws of the State of Delaware. Purchaser is qualified to
do business as a foreign corporation in each jurisdiction in which the nature of
its operations requires, or as of the Closing will require, it so qualify,
except where failure to so qualify would not have a material adverse effect on
its business or operations. Purchaser has all requisite corporate power and
authority to own and operate its properties and assets, to carry on its business
as now conducted, and to consummate the transactions contemplated hereby. The
copies of Purchaser's articles of incorporation and by-laws which have been
furnished by Purchaser to Sellers reflect all amendments made thereto at any
time prior to the date of this Agreement and are correct and complete.
5.2. Capacity; Authorization, Binding Effect, Etc.
Purchaser has the unrestricted and absolute power, legal capacity and
authority to execute, deliver and perform this Agreement and each other document
being executed by it in connection herewith to which it is a party. This
Agreement has been, and each such other document and agreement to be executed in
connection herewith, as of the Closing, will have been, duly executed and
delivered by Purchaser and (assuming the due authorization, execution and
delivery hereof and thereof by Sellers and any other parties thereto), this
Agreement is, and each such other document or agreement will be, a valid and
binding obligation of Purchaser, enforceable against it in accordance with its
terms.
5.3. No Conflicts, Etc.
Except as set forth in Schedule 5.3, the execution, delivery and
performance of this Agreement by Purchaser, and each other document being
executed by Purchaser, in connection herewith, and the consummation of the
transactions contemplated hereby and thereby do not and will not (a) contravene,
conflict with, or result in violation of (i) any provision of the articles of
incorporation or bylaws of Purchaser, or (ii) any resolution adopted by the
board of directors or stockholders of Purchaser or CEC, (b) contravene, violate
or conflict with any Legal Requirement applicable to Purchaser or CEC, (c) with
or without the giving of notice, the passage of time, or both, conflict with, or
result in the breach or termination of, or default under, any provisions of any
material instrument, license, permit, authorization, agreement or commitment to
which Purchaser or CEC is a party or by which their assets are bound, (d)
constitute a violation of any order, judgment or decree to which Purchaser or
CEC is a party or by which their assets or properties are
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bound; or (e) except as set forth in Schedule 5.3, require any approval of, or
filing or registration with, any Governmental Body or Accrediting Bodies that is
required to be obtained or made by Purchaser or CEC, other than approvals,
filings and registrations which have been previously obtained or made, or which
are required and will be obtained or made in the ordinary course of Purchaser's
and CEC's business and operations.
5.4. Litigation.
There are no Proceedings pending against or, to the best of
Purchaser's knowledge, threatened against or affecting Purchaser or CEC at law
or in equity, or before or by any Governmental Body or Accrediting Bodies
seeking to enjoin, restrain or delay the consummation of the transactions
contemplated by this Agreement and to the best of Purchaser's knowledge, there
is no basis for the foregoing.
5.5. Brokerage.
Neither Purchaser nor CEC has retained any broker or finder, and
neither will be obligated to pay any brokers' or finders' fee, in connection
with the negotiation or consummation of the transactions contemplated by this
Agreement.
5.6. Title IV Program Liabilities.
Neither Purchaser nor CEC, nor any of their Affiliates who exercises
substantial control over any other private post-secondary school or other
institution subject to Title IV, owes a liability for a violation of a Title IV
program requirement that may reasonably be anticipated to be an impairment to
certification of Purchaser under 34 C.F.R. Section 668.15(c).
5.7. Approvals.
To the best of Purchaser's knowledge, there exists no fact or
circumstances attributable to Purchaser, CEC or its subsidiaries that would
cause DOE, any other Governmental Body or Accrediting Bodies whose
authorization, consent or similar approval is a requirement for the consummation
of the transactions contemplated by this Agreement to refuse to deliver such
authorization, consent or similar approvals.
5.8. Disclosure.
Neither this Agreement, nor any of the schedules, exhibits or
attachments hereto prepared or supplied by Purchaser, or any documents,
certificates or other written agreements delivered by or on behalf of Purchaser
with respect to the transactions contemplated hereby, contain any untrue
statement of material fact or omit a statement of material fact necessary to
make such statements not misleading in light of the circumstances in which such
statements were made.
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5.9. Purchaser's Knowledge; Resources of Purchaser.
To the best of Purchaser's knowledge, there exists no fact or
circumstance that would cause any representation or warranty of Sellers to be
materially incorrect or untrue. Purchaser represents that Purchaser and its
corporate parent, CEC, have adequate resources to complete the transactions
contemplated hereby.
5.10. Maintenance of Insurance.
From and after the Closing Date and until all amounts payable to
Sellers hereunder are paid in full, Purchaser shall maintain such insurance
policies as are adequate and reasonable in the sole discretion of Purchaser, in
both scope and amount, for the Company and the Subsidiaries.
6. Additional Covenants of the Parties.
6.1. Confidential Information.
(a) Each Seller acknowledges and agrees that such Seller is in
possession of Confidential Information (as defined herein) relating to the
Company and the Subsidiaries. For purposes hereof, "Confidential
Information" shall mean all proprietary or confidential information
concerning the business, Intellectual Property, Curricula, and other
properties and operations of the Company and the Subsidiaries, including,
without limitation, all student and prospective student lists, supplier
lists, know-how, trade secrets, business and marketing plans, techniques,
forecasts, projections, budgets, unpublished financial statements, price
lists, costs, computer programs, source and object codes, algorithms, data,
and other original works of authorship, along with all information received
from third parties and held in confidence by the Company, the Subsidiaries
or such Seller (including, without limitation, personnel files and student
records). Each Seller agrees that he or she will hold the Confidential
Information in the strictest confidence and will not disclose or make use
of (directly or indirectly) the Confidential Information or any portion
thereof, except (i) as required in the performance of such Seller's duties
and obligations pursuant to the Noncompetition Agreements, this Agreement
or any employment agreement with the Purchaser, the Company, the
Subsidiaries or any Affiliate of any of them, (ii) as required by the order
of any court or similar tribunal or any other Governmental Body of
appropriate jurisdiction; provided, however, that Sellers shall, to the
extent practicable, give Purchaser prior written notice of any such
required disclosure and shall cooperate with Purchaser in obtaining a
protective order or such similar protection as Purchaser may deem
appropriate to preserve the confidential nature of such information, (iii)
disclosure to professional advisors of the Sellers, provided however such
Sellers must advise the professional advisors of the confidential nature of
such information,
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and (iv) disclosure for use in and/or the purpose of a dispute or in a
Proceeding with the Purchaser or any of the Sellers in connection with the
obligations and transactions hereunder. The foregoing obligations to
maintain the Confidential Information shall not apply to any Confidential
Information which is or, without any wrongful action by Sellers, becomes
generally available to the public. Upon consummation of the sale of the
Shares to Purchaser, each Seller shall have delivered to Purchaser
(directly or to the Company or the Subsidiaries) all physical embodiments
of the Confidential Information (regardless of form or medium) in the
possession of or under the control of such Seller. The parties hereto each
recognize that the other parties hereto will suffer irreparable injury in
the event of a breach of the terms of this Section 6.1 by a Seller.
Notwithstanding any provision to the contrary contained herein, including
without limitation the provisions of Section 9, in the event of a breach of
the terms of this Section 6.1, Purchaser shall be entitled, in addition to
any other remedies and damages available and without proof of monetary or
immediate damage, to a temporary and/or permanent injunction, without bond,
to restrain the violation of this Section 6.1 by any Seller or any Person
acting for or in concert with a Seller. Upon any rescission of the
transactions contemplated hereby pursuant to Section 10, all provisions of
this Section 6.1 shall be of no further force and effect on Sellers with
respect to the Confidential Information.
(b) In the event of recission of the transactions contemplated hereby
pursuant to Section 10, Purchaser agrees that thereafter it shall hold (and
shall cause its Affiliates to hold) the Confidential Information in the
strictest confidence and that it shall not disclose or make use of (or
permit its Affiliates to disclose or make use of) the Confidential
Information or any portion thereof, except (i) as required in the
performance of Purchaser's duties and obligations pursuant to this
Agreement, (ii) as required by the order of any court or similar tribunal
or any other Governmental Body of appropriate jurisdiction; provided,
however, that Purchaser shall, to the extent practicable, give Sellers
prior written notice of any such required disclosure and shall cooperate
with Sellers in obtaining a protective order or such similar protection as
Sellers may deem appropriate to preserve the confidential nature of such
information. The foregoing obligations to maintain the Confidential
Information shall not apply to any Confidential Information which is or,
without any wrongful action by Purchaser, becomes generally available to
the public. The parties hereto each recognize that the other parties hereto
will suffer irreparable injury in the event of a breach of the terms of
this Section 6.1(b) by Purchaser. Notwithstanding any provision to the
contrary contained herein, including without limitation the provisions of
Section 9, in the event of a breach of the terms of this Section 6.1(b),
Sellers shall be entitled, in addition to any other remedies and damages
available and without proof of monetary or immediate damage, to a temporary
and/or permanent injunction, without bond, to restrain the violation of
this
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Section 6.1(b) by Purchaser or any Person acting for or in concert with
Purchaser. Notwithstanding any provision to the contrary contained herein,
this Section 6.2(b) shall apply only in the event of a recission of the
transactions contemplated hereby pursuant to Section 10.
6.2. Additional Covenants of Sellers Pending Closing.
Pending the Closing, Sellers shall cooperate fully with Purchaser, its
officers, employees, representatives and agents in connection with accomplishing
the satisfaction of all conditions to the Closing and with all other matters
relating to the consummation of the transactions contemplated by this Agreement.
Pending the Closing and subject to all the limitations contained in and
provisions of the Family Educational Rights and Privacy Act of 1974, 20 U.S.C.
(S) 1232g, as amended, and any other relevant Legal Requirements, Sellers shall
afford to all representatives of Purchaser reasonable access during normal
business hours to the assets, properties, books, financial statements, work
papers and records of the Company and the Subsidiaries in order that Purchaser
have full opportunity to make investigations thereof. In addition, Sellers
shall, and shall cause the Company and the Subsidiaries to, use good faith
efforts to assist Purchaser in obtaining any required Accreditation from the
Accrediting Bodies reasonably necessary for Purchaser's operation of the
Schools, including furnishing Purchaser such necessary information and
reasonable assistance as Purchaser may request in connection with its
preparation of necessary filings, submissions or applications to the Accrediting
Bodies and any Governmental Bodies in connection with the transactions
contemplated hereby. In addition, Sellers shall use their best efforts to
obtain the consents and approvals set forth in Section 3.1(g). Furthermore,
during the period from the date of this Agreement to the Closing Date, neither
the Company nor the Subsidiaries shall conduct any business or incur or assume
any liabilities or obligations of any kind, except for such business,
liabilities and obligations as may be conducted or incurred in the ordinary
course of business of the Company and the Subsidiaries or as expressly permitted
or required by the terms of this Agreement or as to which Purchaser may consent
in writing. During the period from the date of this Agreement to the Closing
Date, Sellers shall use their good faith efforts to preserve intact the business
organization of the Company and the Subsidiaries, to pay operating expenses in
the ordinary course of business, to keep available the services of their
employees, and to maintain satisfactory relationships between the Company and
the Subsidiaries, and the Accrediting Bodies, Governmental Bodies, suppliers,
agents, students and others having business relationships with the Company or
the Subsidiaries. Sellers shall promptly notify Purchaser of any occurrence or
event that would or is likely to make untrue any representation or warranty of
Sellers made in Section 4 as of the Closing Date, or which would or is likely to
result in an inability to satisfy any condition set forth in Sections 7 or 8.
Notwithstanding the foregoing, the Company shall be permitted to redeem shares
of its capital stock, make distributions to its stockholders in respect of such
redemptions, and pay other compensation to its stockholders and Affiliates;
provided, that such activities shall not result in the breach of any
representation of warranty of Sellers hereunder.
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6.3. Employees.
During the period from the date of this Agreement to the Closing Date,
Sellers shall cause the Company and the Subsidiaries to use their good faith
efforts to retain the services of all senior managerial employees of the Company
and the Subsidiaries. During the period from the date of this Agreement to the
Closing Date, none of the Company, the Subsidiaries or the Sellers shall offer
any employee or sales representative of the Company or the Subsidiaries any
other employment with Sellers, the Company or the Subsidiaries, or any of their
Affiliates, without the prior written consent of Purchaser.
6.4. Exclusive Dealing.
During the period from the date of this Agreement to the earlier of
(a) the Closing Date or (b) the date of termination of this Agreement pursuant
to Section 11.1 hereof, Sellers and their Affiliates shall not and shall not
permit the Company or the Subsidiaries to, directly or indirectly, encourage,
initiate or engage in discussions or negotiations with, or (except as
contemplated by this Agreement) provide any information to, any Person, other
than Purchaser and CEC, concerning any proposed purchase of the Company, the
Subsidiaries or the Schools or the Bookstores, or any similar transaction
involving the Company, the Subsidiaries, the Schools or the Bookstores, or
Sellers' interest in any of them.
6.5. Additional Covenants of Purchaser Pending Closing.
Purchaser covenants and agrees that from and after the date of this
Agreement, and until the earlier of the Closing Date or the termination of this
Agreement pursuant to Section 11.1 hereof, Purchaser (a) shall use its good
faith efforts to fulfill or satisfy, or cause to be fulfilled or satisfied, all
of the conditions precedent to Sellers' obligations to consummate and complete
the transactions contemplated by this Agreement, including without limitation
the sale of the Shares provided herein, and to take all other steps and do all
other things reasonably required to consummate this Agreement in accordance with
its terms; and (b) shall not interfere with the performance by Sellers of their
obligations under this Agreement.
6.6. Initial Public Offering.
In the event that CEC engages in an Initial Public Offering of its
common stock at any time prior to the third anniversary of the Closing Date, CEC
shall use its best efforts (which best efforts shall not, however, include the
expenditure of more than nominal amounts of money by CEC), to reserve up to one
and one-quarter percent (1.25%) of the total shares offered in such Initial
Public Offering for purchase by Sellers.
7. Conditions to Purchaser's Obligations.
The obligations of Purchaser to consummate the transactions
contemplated by this Agreement are subject to the satisfaction, or to the waiver
in writing by Purchaser,
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on or before the Closing Date, or, where applicable, such other date as is set
forth herein, of the conditions set forth below:
7.1. Due Diligence Review.
Purchaser shall have completed and shall be satisfied with the results
of its due diligence review of the Company and the Subsidiaries, including,
without limitation, review of the Company's and the Subsidiaries' assets,
properties, business, financial condition and business prospects, legal and
accounting review of all liabilities and contingencies, Facility visits,
regulatory compliance analysis (including financial aid administration and
cohort default rates), assessment of relations with the Accrediting Bodies and
Governmental Bodies, access to lenders for student loan programs, and completion
of a satisfactory market analysis.
7.2. Audited Financial Statements, Acid Test Ratio and Cohort Default
Rates.
Purchaser shall have received audited financial statements for the
Company and the Subsidiaries for the years ended June 30, 1994, 1995 and 1996
and evidence that each of the Schools was in compliance with the "Acid Test
Ratio" as applied by the DOE pursuant to 34 C.F.R. (S) 668:15 (1994) as of such
dates, that each of the Schools has a positive tangible net worth in accordance
with the method for calculating such amount employed by DOE pursuant to 34
C.F.R. (S) 668.15 (1994) and that each of the Schools has not had operating
losses for any of such fiscal years. In addition, none of the Company, the
Subsidiaries or the Schools shall have received notification from the DOE at any
time prior to the Closing Date that either School's cohort default rate is equal
to or greater than twenty-five percent (25%).
7.3. Financing.
Purchaser shall have obtained approval for the transactions
contemplated by this Agreement and equity and/or debt financing from its present
financing sources (a) in an amount sufficient to pay the Purchase Price and to
pay the Noncompetition Payments, and (b) upon terms satisfactory to Purchaser,
CEC and CEC's stockholders, and consistent with satisfying financial
requirements of the DOE, applicable state regulators and the Accrediting Bodies.
7.4. Truth of Representations and Warranties.
The representations and warranties of Sellers contained in this
Agreement and in any certificate delivered by Sellers in accordance with the
terms hereof shall be true and correct in all material respects on and as of the
Closing Date with the same effect as though such representations and warranties
had been made on and as of such date (except to the extent such representations
and warranties speak of a particular date and except to the extent that any
failure to satisfy this requirement would not have a material adverse effect on
the business assets, or operations of the Company or any of the Subsidiaries),
and Sellers shall have delivered to Purchaser a certificate, dated the Closing
Date, to such effect.
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7.5. Performance of Agreements.
Each and all of the agreements of Sellers to be performed on or before
the Closing Date pursuant to the terms hereof shall have been fully performed in
all material respects, each of the documents, agreements and other items to be
delivered to Purchaser pursuant to Section 3.1 shall have been delivered, and
Sellers shall have delivered to Purchaser a certificate, dated the Closing Date,
to such effect.
7.6. No Material Adverse Change.
Since the date of this Agreement, there shall have been no material
adverse change in the properties, business, assets, results of operations,
condition (financial or otherwise) or business prospects of the Company or the
Subsidiaries, individually or in aggregate, there shall have been no material
deviation in the Company's or the Subsidiaries working capital position (other
than its cash position) since the Interim Balance Sheet Date, and Sellers shall
have delivered to Purchaser a certificate, dated as of the Closing Date, to such
effect.
7.7. Litigation.
No Legal Requirement shall have been enacted, issued, promulgated or
entered by any Governmental Body and no injunction or order of any court or
other Governmental Body or Accrediting Bodies shall have been entered, in either
case, which prohibits or restricts the transactions contemplated hereby, and no
Proceeding shall have been instituted or threatened by any Person before a court
or other Governmental Body or Accrediting Bodies: (i) seeking to restrain or
prohibit any of the transactions contemplated hereby or (ii) challenging or
questioning the right, title or interest of Sellers in and to the Shares to be
transferred under this Agreement or the right of Sellers to transfer validly all
of such right, title and interest in and to such Shares to Purchaser.
7.8. Accrediting Bodies Approval.
To the extent available prior to Closing, the approvals of any
applicable state regulatory agency with jurisdiction over the Schools and the
Accrediting Bodies for the consummation of the transactions contemplated by this
Agreement with respect to the Schools, including approval for issuance of
licenses to Purchaser to operate the Schools, shall have been received, shall
continue in full force and effect, and shall not contain terms and conditions
which, as a result of facts or circumstances attributable solely to Sellers, or
to the condition of the Company, the Subsidiaries or the Schools prior to
Closing, in Purchaser's reasonable judgment reduce or are reasonably likely to
reduce the economic benefit to Purchaser and its Affiliates that Purchaser
anticipated to receive from the consummation of the transactions contemplated
hereby, or would impose burdensome restrictions or limitations on the activities
of Purchaser or its Affiliates unrelated to the Schools. Obtaining DOE approval
for the resumption of Title IV funding for the Schools as operated by Purchaser
shall not be a condition to Purchaser's obligations to consummate
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the transactions contemplated by this Agreement so long as there is no
indication as of the Closing Date that DOE approval will not or cannot be
obtained.
7.9. Proceedings.
All proceedings to be taken in connection with the transactions
contemplated by this Agreement and all documents incident thereto shall be
reasonably satisfactory, in all material respects, in form and substance to
Purchaser and its counsel, and Purchaser shall have received copies of all such
documents and other evidence as Purchaser or its counsel may reasonably request
in order to establish the consummation of such transactions and the taking of
all appropriate proceedings in connection therewith.
7.10. Financial Aid Compliance Audit.
Sellers shall have delivered to Purchaser a copy of its financial aid
compliance audit report submitted to DOE for the regulatory year ended June 30,
1996, which report shall be satisfactory to Purchaser. Purchaser acknowledges
that it has received a copy of such report and that such report is satisfactory
to Purchaser.
7.11. [Intentionally Omitted]
7.12. Consents and Approvals.
Sellers shall have obtained the consents and approvals set forth in
Section 3.1(h), and such consents and approvals shall remain in full force and
effect.
7.13. Environmental Assessment.
Purchaser shall have received a Phase I environmental site assessment
for each of the Leased Facilities, which assessments shall be satisfactory to
Purchaser. Purchaser acknowledges that it has received such assessments and
that such assessments are satisfactory to Seller.
7.14. Acquisition of The International Academy of Merchandising and
Design (Canada), Ltd.
All conditions to the closing of the acquisition (the "Canada
Acquisition") of The International Academy of Merchandising and Design (Canada),
Ltd. ("IAMD-Canada") by CEC pursuant to that certain Share Purchase Agreement
(the "Canada Purchase Agreement") of event date herewith by and among CEC and
the stockholders of IAMD-Canada, shall have been satisfied or waived, and the
Canada Acquisition shall close simultaneously with the Closing hereunder.
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8. Conditions to Sellers' Obligations.
The obligations of Sellers to consummate the transactions contemplated
by this Agreement are subject to the satisfaction, or to the waiver in writing
by Sellers, on or before the Closing Date, or, where applicable, such other date
as is set forth herein, of the following conditions:
8.1. Truth of Representations and Warranties.
The representations and warranties of Purchaser contained in this
Agreement and in any certificate delivered by Purchaser in accordance with the
terms hereof shall be true and correct in all material respects on and as of the
Closing Date with the same effect as though such representations and warranties
had been made on and as of such date (except to the extent such representations
and warranties speak of a particular date and except to the extent that any
failure to satisfy this requirement would not have a material adverse effect on
the business, assets or operations of Purchaser), and Purchaser shall have
delivered to Sellers a certificate, dated as of the Closing Date, to such
effect.
8.2. Performance of Agreements.
Each and all of the agreements of Purchaser to be performed on or
before the Closing Date pursuant to the terms hereof shall have been fully
performed in all material respects, and each of the documents, agreements and
other items, to be delivered to Sellers pursuant to Section 3.2 shall have been
delivered, and Purchaser shall have delivered to Sellers a certificate, dated
the Closing Date, to such effect.
8.3. Litigation.
No Legal Requirement shall have been enacted, issued, promulgated or
entered by any Governmental Body and no injunction or order of any court or
other Governmental Body or Accrediting Bodies shall have been entered, in either
case, which prohibits or restricts the transactions contemplated hereby, and no
Proceeding shall have been instituted or threatened by any Person before a court
or other Governmental Body or Accrediting Bodies; (i) seeking to restrain or
prohibit any of the transactions contemplated hereby, or (ii) unless Purchaser
has agreed to waive its right to indemnification with respect thereto,
challenging or questioning the right, title or interest of Sellers to transfer
validly all of such right, title and interest in and to the Shares to be
transferred to Purchaser.
8.4. Proceedings.
All proceedings to be taken in connection with the transactions
contemplated by this Agreement and all documents incident thereto shall be
reasonably satisfactory in form and substance, in all material respects, to
Sellers and their counsel, and Sellers shall have received copies of all such
documents and other evidence as they or their counsel may
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reasonably request in order to establish the consummation of such transactions
and the taking of all appropriate proceedings in connection therewith.
8.5. Acquisition of The International Academy of Merchandising and
Design (Canada), Ltd.
All conditions to the closing of the Canada Acquisition shall have
been satisfied or waived, and the Canada Acquisition shall close simultaneously
with the Closing hereunder.
9. Indemnification; Remedies.
9.1. Survival; Right to Indemnification Not Affected By Knowledge.
All representations, warranties, covenants, and obligations in this
Agreement, or in any other certificate or document delivered pursuant to this
Agreement, will survive the Closing as provided herein. Subject to Section 5.9
hereof, the right to indemnification, through the payment of Damages based on a
breach of such representations, warranties, covenants and obligations, will not
be affected by any investigation conducted at any time before or after the
execution of this Agreement or the Closing Date with respect to the accuracy or
inaccuracy of, or compliance with, any such representation, warranty, covenant
or obligation except as provided in this Agreement.
9.2. Indemnification and Payment of Damages by Sellers.
Sellers, will indemnify and hold harmless Purchaser for, and will pay
to the Purchaser the amount of, any actual loss, liability, claim, damage
(excluding any and all punitive, exemplary, or consequential damages), expense
(including costs of investigation and defense and reasonable attorney's fees),
whether or not involving a third-party claim, suffered or incurred by the
Purchaser (including all Damages suffered or incurred by the Company or any
Subsidiary which would not have been suffered or incurred if there had been no
breach of any representation, warrant or covenant made by Sellers under this
Agreement or in any other document delivered by Sellers pursuant to this
Agreement (collectively, "Damages"), arising, directly or indirectly, from or in
connection with:
(a) any breach of any representation or warranty made by Sellers in
this Agreement or in any other document delivered by Sellers pursuant to
this Agreement;
(b) any breach by any Seller of any covenant in or obligation of, any
Seller in this Agreement or any other document delivered by such Seller
pursuant to his Agreement;
(c) any claim by any person for brokerage or finder's fees or
commissions or similar payments based upon any agreement or understanding
alleged to have been made by any such Person with any Seller or the Company
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or any Subsidiary (or any Person acting on their behalf) in connection with any
of the transactions contemplated by this Agreement; or
(d) (i) any debt, obligation or liability of the Company or any
Subsidiary, or any claim against any of them, of any kind, whether known or
unknown, contingent, absolute or otherwise affecting the Company or any
Subsidiary which resulted from or arose out of the operation of the Company or
the Subsidiaries prior to Closing, to the extent (A) not disclosed in this
Agreement (including any of the Schedules hereto) or reflected or disclosed in
the balance sheets forming a part of the Financial Statements (including without
limitation, any liability for Taxes (other than Taxes not yet due and payable in
the amounts reflected on the Final Closing Balance Sheet, Taxes constituting
sales taxes in connection with accounts payable reflected on the Final Closing
Balance Sheet and Taxes relating to the period after Closing not resulting from
any breach of representation or warranty of Sellers hereunder)); (B) not taken
into account in determining Net Worth (as defined in Section 2.3(a); or (C) not
arising under any non-material contract; (ii) the Designated Liabilities; (iii)
financial aid irregularities relating to operation of the Schools that occurred
or relate to activities or actions occurring prior to the Closing, including
without limitation any liabilities resulting from or arising out of any show
cause order (including the Show Cause Order), any audit review disallowances,
improperly disbursed student financial assistance program funds or similar
determinations ("Pre-Closing Financial Aid Irregularities") or the cost of
responding to any audits, program reviews or other investigations which disclose
material Pre-Closing Financial Aid Irregularities, whether such audit or
investigation is in progress as of the Closing Date or commences after the
Closing or (iv) litigation affecting the Company or any Subsidiary pending or
threatened as of Closing.
(e) notwithstanding anything contained in Section 4.21 or Schedule 4.21(a)
or 4.21(b) any Damages, penalties or taxes arising out of or in connection with
the formation, operations and termination of its Employee Benefit Plans prior to
Closing (including, but not limited to, the termination and operation of the
International Academy of Merchandising & Design, Ltd. Employees' Profit Sharing
Plan, the failure to file IRS Forms 5500 and the distribution of assets from the
International Academy of Merchandising & Design, Ltd. Employees' Profit Sharing
Plan and related to the failure to procure an IRS determination letter from the
effective date of the 401(k) Plan), to the extent not taken into account in
determining Net Worth. Sellers will prepare and file the final IRS Form 5500 for
the International Academy of Merchandising & Design, Ltd. Employees' Profit
Sharing Plan under the Department of Labor's delinquent filers program.
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9.3. Indemnification and Payment of Damages by Purchaser.
Purchaser will indemnify and hold harmless Sellers, and will pay to
Sellers the amount of any Damages arising from or in connection with:
(a) any breach of any representation or warranty made by Purchaser in
this Agreement or in any certificate delivered by Purchaser pursuant to
this Agreement;
(b) any breach by Purchaser of any covenant or obligation of
Purchaser in this Agreement; or
(c) any claim by any Person for brokerage or finder's fees or
commissions or similar payments based upon any agreement or understanding
alleged to have been made by such Person with Purchaser or CEC (or any
Person acting on their behalf) in connection with any of the transactions
contemplated by this Agreement.
9.4. Limitations on Amount.
(a) Notwithstanding any provisions of this Agreement to the contrary,
Sellers will have no liability with respect to the matters described in
clause (a), clause (b), or clause (d) of Section 9.2 other than for (i)
Damages up to the aggregate amount of fifty percent (50%) of the total
value of consideration received by Sellers for which claims are made on or
before the eighteen (18) month anniversary of the Closing, and (ii) Damages
up to the aggregate amount of $1,500,000 for which claims are made after
the eighteen (18) month anniversary and on or before the four (4) year
anniversary of the Closing; provided that in no event shall the total
liability of Sellers for indemnification pursuant to clause (a), clause (b)
and clause (d) of Section 9.2 exceed fifty percent (50%) of the total value
of consideration received by Sellers in the aggregate ("Indemnification
Cap") and further provided that in the event that there is an adjustment of
the Purchase Price pursuant to Section 2.3 hereof, the Indemnification Cap
shall be similarly adjusted by an amount equal to fifty percent (50%) of
such adjustment to the Purchase Price but in no event shall such adjustment
to the Indemnification Cap exceed $200,000.
(b) Notwithstanding Section 9.4(a), in the event of (i) any breach of
any Sellers' representations and warranties of which any Seller had actual
knowledge at any time prior to the date on which such representation and
warranty is made; or (ii) any intentional breach by Sellers of any covenant
or obligation, or (iii) any indemnification rights under Section 9.2(e),
Sellers will be liable for all Damages with respect to such breaches or
indemnification rights provided that in no event shall the total liability
of any Seller under this Agreement exceed the total value of consideration
received by such Seller.
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9.5. Liability of Individual Sellers; Breaches by Individual Sellers.
(a) Notwithstanding any provision of this Section 9 to the contrary,
in the event of any breach of the provisions of Sections 4.2(b), 4.3,
4.4(b), 4.6(a)(ii) or 4.18(b) resulting from the acts or capacity of, or
knowledge or belief of, one or more specific Sellers (in their capacity as
shareholders, as opposed to corporate directors, officers, employees or
agents), only the particular Seller or Sellers whose acts or capacity, or
knowledge or belief are the basis for such breach shall be liable pursuant
to Section 9.2 to indemnify Purchaser for Damages resulting therefrom;
provided that in no event shall the total liability of any Seller under
this Agreement exceed the total value of consideration received by such
Seller.
(b) Except as provided in Section 9.5(a), each individual Seller's
liability in respect of any claim for Damages shall be limited to an amount
equal to the product of: (1) a fraction (i) the numerator of which is the
total value of the consideration received by such Seller hereunder and (ii)
the denominator of which is the total consideration paid to all Sellers
hereunder, multiplied by (2) the total amount of such Damages, provided,
however, that the indemnification amount shall not exceed the total value
of the consideration received by such Seller hereunder.
9.6. Further Limitations on Remedies.
(a) Except in connection with the enforcement of their respective
rights pursuant to Section 10 hereof or as otherwise expressly provided
herein, any claim by any party hereto arising out of or relating in anyway
to this Agreement shall have as its sole remedy the indemnification
provided by this Section 9. Notwithstanding the foregoing, nothing herein
shall preclude any party from seeking to exercise or enforce any rights
under any other agreements executed in connection with the transactions
contemplated by this Agreement or injunctive or other equitable relief as
may be necessary or desirable to protect its rights hereunder. Sellers
hereby acknowledge and agree that no waiver or release by the Company or
any Subsidiary, or any of them, executed or issued on or prior to the
Closing shall constitute a waiver, release or limitation in any way of the
provisions of this Section 9.
(b) Except for Damages based upon or arising out of a breach of
representation or warranty subject to Section 9.5(a) hereof, Sellers shall
not be liable for indemnification for Damages until the amount of Damages
exceeds, in the aggregate, the sum of $100,000 (the "Indemnification
Threshold").
(c) All Damages shall be determined net of any tax benefit or
economic benefit to the Purchaser, Company, or any Subsidiary, arising in
respect of or as a result of the matters for which the Damages are claimed;
or
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insurance proceeds derived (or reasonably expected to be derived) by the
party or parties indemnified hereunder in respect thereof.
(d) In the event of a recission of the transactions contemplated
hereby, Purchaser's sole remedy shall be as set forth in Section 10 and
Purchaser shall have no right to indemnity hereunder.
(e) Notwithstanding anything to the contrary contained herein, in no
event shall any party be entitled to recover more than once for the same
matter.
9.7. Procedures.
(a) Any claim under Section 9.2 or Section 9.3 shall be made in a
written statement signed by the party seeking indemnification which shall
specify in reasonable detail each individual item of Damage and the
estimated amount thereof, the date such item was claimed or the facts
giving rise to such claim were discovered, the basis for any alleged
liability and the nature of the breach or claim to which each such item is
related.
(b) If the indemnifying party does not pay the amount specified in
any such statement within thirty (30) days after it has been delivered by
the party seeking indemnification, the party seeking indemnification may
enforce its right in accordance with law.
(c) The party seeking indemnification in respect of any third party
claim shall give the indemnifying party prompt notice of any Proceeding
which might give rise to liability of the indemnifying party for
indemnification hereunder; provided, that failure to give the indemnifying
party prompt notice will not relieve such indemnifying party of any
liability to the indemnified party hereunder, except to the extent the
indemnifying party demonstrates that the defense of such action is
prejudiced by the indemnified party's failure to give such notice. If the
indemnifying party contests any third party claim, it will have the option
to defend, at the indemnifying party's expense, any such matter, provided
that the indemnified party (or in the case of the Company or any
Subsidiary, that entity itself) shall have the right, at its own cost and
expense, to participate in the defense of such claim or, if the
indemnifying party elects not to defend the claim, to conduct the defense
on its own behalf. If the indemnifying party conducts the defense of a
claim, neither party (or in the case of the Company or any Subsidiary, that
entity itself) will enter into any settlement agreement without the other
party's consent; provided, that the indemnified party (or in the case of
the Company or any Subsidiary, that entity itself) shall not object to any
proposed settlement which requires only the payment of money by the
indemnifying party and does not involve any admissions or stipulations by
the indemnified party or any injunctive or similar relief or any other
contractual obligations affecting the indemnified party the Company, any
Subsidiary, the
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Schools, the Bookstores or their respective business and operations. The
indemnified party shall cooperate (and the Purchaser shall cause the
Company or the Subsidiary to cooperate) with the indemnifying party in the
defense, compromise or settlement of any claim for which indemnification is
sought. If the indemnifying party elects not to conduct the defense of such
claim, the indemnified party (or in the case of the Company or any
Subsidiary, that entity itself) shall be permitted to settle or compromise
any such claim on such terms as it deems appropriate and such settlement or
compromise shall not prejudice the rights to indemnification hereunder.
(d) Notwithstanding Section 9.7(c), if an indemnified party
determines in good faith that there is a reasonable probability that a
Proceeding may adversely affect it or its affiliates other than as a result
of monetary damages for which it would be entitled to indemnification under
this Agreement, the indemnified party may, by notice to the indemnifying
party, assume the exclusive right to defend, compromise, or settle such
Proceeding, but the indemnifying party will not be bound by any
determination of a Proceeding so defended or any compromise or settlement
effected without its consent (which may not be unreasonably withheld).
(e) A claim for indemnification for any matter not involving a third-
party claim may be asserted by notice to the party from whom
indemnification is sought.
9.8. Prevailing Party to be Awarded Legal Fees.
In the event of any litigation, whether at law or in equity, arising
out of this Agreement, the party prevailing in such litigation shall be entitled
to receive, upon application to the court, its reasonable legal fees and
expenses incurred in connection therewith.
9.9. Offset.
(a) Purchaser's obligations pursuant to the Seller Note shall be
subject to the offset rights set forth therein.
(b) Purchaser's obligations to pay the Deferred Payment, the
Noncompetition Payments and the Earnout Amount shall be subject to offset
for alleged Damages according to the following provisions:
(i) Purchaser's allegation of Damages shall be made in good
faith and shall not include any amount reflected in the Final Balance
Sheet or in the first instance of a Claim for Damages be for amounts
which in the aggregate are less than the Indemnification Threshold;
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(ii) Purchaser shall submit a notice of a claim for
indemnification in respect of such Damages to Sellers (or to the
Seller or Sellers from whom it claims indemnification if not
proportionate as to all Sellers). The manner and procedure for making
such claim and the resolution thereof shall be as provided in Sections
9.6 and 9.7 hereof.
(iii) With respect to offsets for alleged Damages against the
Deferred Payment and the Noncompetition Payment only, until the claim
for Damages is resolved by a written agreement of the parties or
final, unappealable judgment issued by a court or similar tribunal of
competent jurisdiction ("Resolution"), Purchaser shall maintain a
letter of credit for the benefit of the Seller or Sellers in respect
of whom the claim was made in an amount equal to the claim of Damages.
Such letter of credit may include the Deferred Payment Letter of
Credit if the then stated date of expiry is extended as hereinafter
provided or a fresh letter of credit. At least thirty (30) days prior
to the stated date of expiry of the Letter of Credit ("Replaced Letter
of Credit") then most recently delivered to Seller or Sellers in
respect of whom the claim exists, Purchaser shall cause there to be
delivered to such Seller or Sellers either (1) a written extension by
the issuer of the Replaced Letter of Credit of the then stated date of
expiry of the Replaced Letter of Credit whereby such then stated date
of expiry is extended by at least six (6) months, or (2) a fresh
Letter of Credit in replacement for the Replaced Letter of Credit,
which fresh Letter of Credit shall be in substantially the form of the
Replaced Letter of Credit, issued by LaSalle National Bank or a bank
of credit worthiness at least equal to LaSalle National Bank and have
a stated date of expiry which is at least six (6) months following the
then stated date of expiry of the Replaced Letter of Credit.
(c) It is understood for the sake of clarity, that the recovery of
damages, whether by offset or otherwise, is subject to the limitations of
Sections 9.4 and 9.5, and that this Section 9.9 is not intended to convey
any rights to recover sums in excess of such limits.
10. Recission of Transactions.
10.1. Right to Recission
In the event that the DOE has not issued to Purchaser a DOE Approval
Notice permitting resumption of Title IV funding to either School as operated
by Purchaser based in whole or in part upon: (i) a Pre-Closing Financial Aid
Irregularity (as Defined in Section 9.2(d)), (ii) the pre-closing financial
condition of either of the Schools,
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any Subsidiary, the Company or the Sellers, or (iii) in the event that the DOE
Approval Notice contains a condition which is not subject to curing, such as in
the case of failure to satisfy the operating loss standard at 34 C.F.R.
(S)668.15(b)(7)(i)(B), or imposes restrictions or limitations on Purchaser which
are reasonably and in good faith determined by the Purchaser to impose unduly
burdensome restrictions or limitations on the activities of Purchaser or its
Affiliates related or unrelated to the Schools ((i), (ii) and (iii)
collectively, the "Conditions"), Purchaser shall have the option, upon written
notice, which notice shall state the Conditions upon which such rescission is
based, delivered no later than ninety-five (95) days after the Closing, to
rescind the transactions otherwise consummated under this Agreement. If
Purchaser does not deliver any such notice on or before the ninety-fifth day
following the date of the Closing, such right of rescission shall terminate.
Purchaser hereby agrees that if the DOE Approval Notice is conditioned upon
Purchaser posting a letter of credit or bond for an amount not to exceed
$1,000,000, during the ninety-five (95) day approval period or during the thirty
(30) day cure period (as discussed below) such condition shall be fulfilled by
Purchaser and shall not be deemed to constitute a basis for rescission.
Upon Purchaser's election of rescission hereunder, each of the parties
hereto shall immediately take such actions as may reasonably be required to
restore the other parties to their respective positions as they existed prior to
Closing. In the event of a rescission hereunder, among other things and by way
of illustration, all amounts advanced by Purchaser or its Affiliates to fund the
operation of the Schools and Subsidiaries after the Closing (whether as debt or
equity) or as payments of consideration for the transaction shall be reimbursed
by Sellers, and all non-competition agreements executed by the parties shall be
deemed void ab initio and all further obligations of Purchaser and Sellers
pursuant to this Agreement shall be terminated.
Furthermore, and notwithstanding any provision to the contrary herein,
in the event Purchaser elects to rescind the transactions consummated under this
Agreement pursuant to this Section 10.1, Sellers shall have thirty (30) days
from the receipt of written notice of such election to cure or otherwise
resolve, at Sellers' sole cost and expense, the Condition or Conditions upon
which Purchaser's election to rescind is based and to cause the issuance of DOE
Approval Notices to the Schools without such Conditions. If Sellers elect to
attempt to cure such Conditions and obtain such issuance during such thirty (30)
day period, Purchaser's election of rescission shall be tolled for such thirty
(30) day period. If at the end of such thirty (30) day period Sellers have been
unable to cure such Conditions and obtain the DOE Approval Notices without such
Conditions, Purchaser shall have fifteen (15) days thereafter to elect to
rescind the transaction, in no event however, shall Sellers have another thirty
(30) day period in which to attempt to cure the Conditions.
10.2. Reasonable Efforts.
Purchaser agrees that during the period from the Closing Date through
the date of receipt of the DOE Approval Notices as described above or through
the date ninety-five (95) days after the Closing Date, Purchaser shall use its
reasonable efforts and in good
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faith will seek to obtain such approval, including without limitation providing
sufficient additional capital to the Company or the provision of letters of
credit as required by the DOE so that based on each School's opening balance
sheet as of the Closing the financial requirements set forth in 34 CFR 668.15
(b)(7)(i)(A) and (C) are satisfied. Except as related to the satisfaction of the
financial requirements of such regulation or as required by Section 2.6 hereof
and the last sentence of the first paragraph of Section 10.1, Purchaser shall
not be obligated to provide additional capital or provide credit support in
order to cure or otherwise satisfy any Condition. Purchaser shall provide
Sellers, upon request, with information concerning the status of the approval
process.
11. Miscellaneous.
11.1. Termination.
This Agreement may be terminated at any time prior to the Closing
Date:
(a) by mutual written consent of the Purchaser and the Sellers;
(b) prior to the Closing by Sellers or Purchaser, if the other party
shall be in breach of any covenant, undertaking, or restriction contained
herein, the breach of which shall have a material adverse effect on the
transactions contemplated by this Agreement taken as a whole, and such
breach has not been cured within ten (10) business days after giving
written notice to the breaching party or parties of such breach; provided,
that if such breach is, in the reasonable judgment of the non-breaching
party, capable of being cured, but cannot reasonably be cured within such
ten (10) business day period, no party shall be permitted to terminate this
Agreement as a result of such breach so long as the breaching party is
diligently pursuing cure of such breach;
(c) by Purchaser or Sellers if the Closing shall not have occurred on
or before June 30, 1997 or if a Legal Requirement shall have been enacted,
issued, promulgated or entered by any Governmental Body or an injunction or
order of a court or other Governmental Body or Accrediting Bodies has been
entered, in either case, which prohibits or restricts the transactions
contemplated hereby or an action or proceeding shall have been instituted
or threatened by any Person or pending before a court or other Governmental
Body or Accrediting Bodies seeking to restrain or prohibit any of the
transactions contemplated hereby;
(d) by the Purchaser if any of the conditions specified in Section 7
have not been met or waived prior to such time as such condition can no
longer be satisfied; or
(e) by the Sellers if any of the conditions specified in Section 8
have not been met or waived prior to such time as such condition can no
longer be satisfied.
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In the event of termination of this Agreement, this Agreement shall forthwith
become null and void except for this Section 11 and Section 9, which sections
shall remain in full force and effect and which shall survive such termination.
11.2. Expenses.
Each party hereto shall be liable for the payment of the fees and
expenses incurred by such party or on such party's behalf in connection with the
negotiation and execution of this Agreement and the consummation of the
transactions contemplated by this Agreement, including, without limitation,
legal, accounting, financial and tax advice, brokers, finders and other fees,
expenses and commissions. Sellers shall pay all transfer, sales and use taxes
resulting from the sale of the Shares to Purchaser.
11.3. Successors and Assigns.
This Agreement and the rights hereunder shall not be assignable or
transferable without the prior written consent of all the parties hereto
provided however, that Purchaser shall be permitted to collaterally assign this
Agreement and all rights hereunder to its lender(s). Except as otherwise
expressly provided herein, all covenants and agreements contained in this
Agreement by or on behalf of any of the parties hereto shall bind and inure to
the benefit of the respective successors and assigns of the parties hereto
whether so expressed or not. Notwithstanding the foregoing, the provisions of
this Agreement which are for Purchaser's benefit are also for the benefit of,
and enforceable by, any subsequent owner of the Company, the Subsidiaries or the
Schools, or any of them if, such subsequent owner is an Affiliate of Purchaser
or CEC. Except as otherwise expressly provided herein, there are no third party
beneficiaries of this Agreement.
11.4. Severability.
Whenever possible, each provision of this Agreement shall be
interpreted in such manner as to be effective and valid under applicable law,
but if any provision of this Agreement is held to be prohibited by or invalid
under applicable law, such provision shall be ineffective only to the extent of
such prohibition or invalidity, without invalidating the remainder of this
Agreement.
11.5. Counterparts.
This Agreement may be executed simultaneously in two or more
counterparts, any one of which need not contain the signatures of more than one
party, but all such counterparts taken together shall constitute one and the
same Agreement.
11.6. Descriptive Headings; Interpretation.
The descriptive headings of this Agreement are inserted for
convenience only and do not constitute a Section of this Agreement.
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11.7. Governing Laws.
This Agreement shall be construed and enforced in accordance with, and
all questions concerning the construction, validity, interpretation and
performance of this Agreement shall be governed by, the laws of the State of
Illinois without giving effect to provisions thereof regarding conflict of laws.
11.8. Consent to Jurisdiction and Service of Process.
EACH PARTY HERETO CONSENTS TO THE JURISDICTION OF ANY STATE OR FEDERAL
COURT LOCATED WITHIN THE COUNTY OF COOK, STATE OF ILLINOIS AND IRREVOCABLY
AGREES THAT, UPON THE MOVING PARTY'S ELECTION, ALL ACTIONS OR PROCEEDINGS
ARISING OUT OF OR RELATING TO THIS AGREEMENT OR THE OTHER RELATED DOCUMENTS
SHALL BE LITIGATED IN SUCH COURTS. EACH PARTY HERETO ACCEPTS FOR ITSELF AND IN
CONNECTION WITH ITS PROPERTIES, GENERALLY AND UNCONDITIONALLY, THE NONEXCLUSIVE
JURISDICTION OF THE AFORESAID COURTS AND WAIVES ANY DEFENSE OF FORUM
NONCOVENIENS, AND IRREVOCABLY AGREES TO BE BOUND BY ANY JUDGMENT RENDERED
THEREBY IN CONNECTION WITH THIS AGREEMENT. A PROCESS MAILED BY REGISTERED MAIL
TO EACH PARTY HEREBY ACKNOWLEDGED BY EACH PARTY TO BE EFFECTIVE AND BINDING
SERVICE IN EVERY RESPECT. NOTHING HEREIN SHALL AFFECT THE RIGHT TO SERVE
PROCESS IN ANY OTHER MANNER PERMITTED BY LAW OR SHALL LIMIT THE RIGHT OF
PURCHASER TO BRING PROCEEDINGS AGAINST SELLERS, OR ANY OF THEM, IN THE COURTS OF
ANY OTHER JURISDICTION.
11.9. Waiver of Jury Trial.
EACH PARTY HERETO HEREBY WAIVES ITS RESPECTIVE RIGHTS TO A JURY TRIAL
OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF THIS AGREEMENT OR
ANY DEALINGS BETWEEN THEM RELATING TO THE SUBJECT MATTER OF THIS TRANSACTION AND
THE RELATIONSHIP THAT IS BEING ESTABLISHED. EACH PARTY HERETO ALSO WAIVES ANY
BOND OR SURETY OR SECURITY UPON SUCH BOND WHICH MIGHT, BUT FOR THIS WAIVER, BE
REQUIRED OF THE OTHER PARTIES. THE SCOPE OF THIS WAIVER IS INTENDED TO BE ALL
ENCOMPASSING OF ANY AND ALL DISPUTES THAT MAY BE FILED IN ANY COURT AND THAT
RELATE TO THE SUBJECT MATTER OF THESE TRANSACTIONS, INCLUDING WITHOUT
LIMITATION, CONTRACT CLAIMS, TORT CLAIMS, BREACH OF DUTY CLAIMS, AND ALL OTHER
COMMON LAW AND STATUTORY CLAIMS. EACH PARTY HERETO ACKNOWLEDGES THAT THIS
WAIVER IS A MATERIAL INDUCEMENT TO ENTER INTO A BUSINESS RELATIONSHIP, THAT EACH
HAS ALREADY RELIED ON THE WAIVER IN ENTERING INTO THIS AGREEMENT AND THAT EACH
WILL CONTINUE TO RELY ON THE WAIVER IN THEIR RELATED
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FUTURE DEALINGS. EACH PARTY HERETO FURTHER WARRANTS AND REPRESENTS THAT EACH HAS
REVIEWED THIS WAIVER WITH ITS LEGAL COUNSEL, AND THAT EACH KNOWINGLY AND
VOLUNTARILY WAIVES ITS JURY TRIAL RIGHTS FOLLOWING CONSULTATION WITH LEGAL
COUNSEL. THIS WAIVER IS IRREVOCABLE, MEANING THAT IT MAY NOT BE MODIFIED EITHER
ORALLY OR IN WRITING, AND THE WAIVER SHALL APPLY TO ANY SUBSEQUENT AMENDMENTS,
RENEWALS, SUPPLEMENTS OR MODIFICATIONS TO THIS AGREEMENT OR TO ANY OTHER
DOCUMENTS OR AGREEMENTS RELATING TO THE TRANSACTIONS CONTEMPLATED HEREBY. IN THE
EVENT OF LITIGATION, THIS AGREEMENT MAY BE FILED AS A WRITTEN CONSENT TO A TRIAL
BY THE COURT.
11.10. Notices.
All notices, demands or other communications to be given or delivered
under or by reason of the provisions of this Agreement shall be in writing and
shall be deemed to have been given (a) when delivered personally or sent by
facsimile to the recipient, or (b) one (1) business day after the date such
communication is sent to the recipient by reputable express courier service
(charges prepaid). Such notices, demands and other communications shall be sent
to the parties hereto at the addresses indicated below:
If to Purchaser: Career Education Corporation
2800 West Higgins Road
Hoffman Estates, Illinois 60195
Attention: John M. Larson, William Klettke
Facsimile: (847) 781-3610
With copies to: D'Ancona & Pflaum
30 North LaSalle Street, Suite 2900
Chicago, Illinois 60602
Attention: Michel J. Feldman
Facsimile: (312) 580-0923
and Goldberg, Kohn, Bell, Black,
Rosenbloom & Moritz, Ltd.
55 East Monroe Street, Suite 3700
Chicago, Illinois 60603
Attention: Dennis B. Black, Esq.
Facsimile: (312) 332-2196
If to Sellers: As set forth on Schedule 11.10 hereto.
or to such other address or to the attention of such other Person as the
recipient party has specified by prior written notice to the sending party.
-64-
<PAGE>
11.11. Entire Agreement; Release.
(a) Except as otherwise expressly set forth herein and except for the
Canada Purchase Agreement, this Agreement and the exhibits and schedules
hereto embody the complete agreement and understanding by and among the
parties and their respective Affiliates, and supersede and preempt any
prior understandings, agreements or representations by or among the parties
and their respective Affiliates, written or oral, which may have related to
the subject matter hereof in any way, including, without limitation, that
certain letter agreement dated February 11, 1997 between CEC and IAMD, Ltd.
(as representative for Sellers).
(b) The Sellers and their respective agents, heirs, representatives,
successors and assigns, on the one hand, and the Purchaser and its
affiliates, including CEC, and their respective officers, directors,
stockholders, agents, representatives, successors and assigns, on the other
hand, hereby agree that this Agreement constitutes a settlement of all
disputes among the parties with respect to the subject matter hereof and
hereby release and hold harmless the other from any and all claims,
liabilities, damages, costs and expenses arising out of or pertaining to
any prior understanding, agreement or negotiation related to the subject
matter hereof.
11.12. Waiver.
Notwithstanding anything to the contrary contained herein, no waiver
by any party hereto of any right or remedy hereunder shall be deemed to
constitute a waiver by such party of any other right or remedy hereunder or to
create a course of conduct.
-65-
<PAGE>
IN WITNESS WHEREOF, the parties hereby have executed this Agreement on
the date first written above.
SELLERS:
/s/ CLEM STEIN, JR.
-------------------------------------------
Clem Stein, Jr.
/s/ MARION STEIN
-------------------------------------------
Marion Stein
/s/ LEONARD RUTSTEIN
-------------------------------------------
Leonard Rutstein
/s/ BARBARA ANN SCOTT KING
-------------------------------------------
Barbara Ann Scott King
/s/ THOMAS V. KING
-------------------------------------------
Thomas V. King
/s/ WILLIAM W. WIRTZ
-------------------------------------------
William W. Wirtz
/s/ DAVID POWELL
-------------------------------------------
David Powell
PURCHASER:
IAMD ACQUISITION I, LTD., a Delaware
corporation
By: /s/ WILLIAM A. KLETTKE
---------------------------------------
Its: Senior Vice President
---------------------------------------
-66-
<PAGE>
UNDERTAKING
Career Education Corporation hereby executes this Agreement for the
limited purpose of acknowledging and agreeing to be bound by the provisions of
the Agreement directly applicable to Career Education Corporation, including
without limitation Section 6.6 and of guaranteeing the Purchaser's obligations
with respect to the Earnout Amount pursuant to Section 2.4 and of abiding by the
covenants with respect to the Advertising Budget set forth in Schedule 2.4(d).
CAREER EDUCATION CORPORATION
By /s/ WILLIAM A. KLETTKE
--------------------------------
Its Senior Vice President
--------------------------------
-67-
<PAGE>
LIST OF EXHIBITS AND SCHEDULES
<TABLE>
<S> <C> <C>
Exhibit A - Form of Seller Note
Exhibit B - Form of Note Letter of Credit
Exhibit C _ Form of Deferred Payments Letter of Credit
Exhibit D - Form of Guaranty
Exhibit E - Form of Sellers' Release
Exhibit F - Form of Noncompetition Agreement
Exhibit G - Form of Sellers' Counsel Opinion
Exhibit H - Form of Closing Checklist
Exhibit I - Form of Purchaser's Counsel Opinion
LIST OF SCHEDULES
<S> <C> <C>
Schedule 2.2 - Payment of Purchase Price, Allocations among Sellers
Schedule 2.4(a) Earnout Targets
Schedule 2.4(d) Advertising Budget
Schedule 3.1(c) - Noncompetition Payments, Allocations among Sellers
Schedule 3.1(h) - Seller's Required Consents
Schedule 3.1(j) - Preliminary Closing Balance Sheet
Schedule 3.2(f) - List of Guarantees to be Terminated
Schedule 4.4 - Seller's Conflicts
Schedule 4.5 - Investments
Schedule 4.6 - Capitalization
Schedule 4.7 - Books & Records
Schedule 4.8(a) - Compliance with Laws
Schedule 4.8(b) - License and Permits
Schedule 4.8(c) - Investigations
Schedule 4.9(a) - List of Policy Guideline Documentation
Schedule 4.9(b) - Material Deviations from Policy Guidelines
Schedule 4.10 - Cohort Default Rate
Schedule 4.11(b) - Leased Real Property
Schedule 4.11(d)(i) - Leased and Licensed Assets
Schedule 4.11(d)(ii) - Permitted Encumbrances
Schedule 4.11(d)(iii)- Designated Liabilities
Schedule 4.11(e) - List of Tangible Assets
Schedule 4.11(f) - Other Facilities
Schedule 4.12 - Material Miscellaneous Contracts
Schedule 4.13(a) - Tradenames
Schedule 4.14 - Financial Security Arrangements
Schedule 4.14(c) - Debts Incurred Since Interim Balance Sheet Date
Schedule 4.17 - List of Bank Accounts
Schedule 4.18(a) - Litigation
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C>
Schedule 4.18(b) - Judgments
Schedule 4.19 - Insurance
Schedule 4.20 - Environmental Matters
Schedule 4.21(a) - Employee Benefit Plans
Schedule 4.21(b) - Benefit Obligations
Schedule 4.22(a) - List of Employees, Consultants and Other Service Providers;
Compliance with Legal Requirements
Schedule 4.22(b) - Confidentiality, Noncompetition and Proprietary Rights
Agreements
Schedule 4.22(c) - Retired Employees and Directors; Severance Agreements
Schedule 4.22(d) - Employee Manuals and Employment Policies
Schedule 4.23 - Labor Relations; Compliance
Schedule 4.24(a) - Tax Matters
Schedule 4.24(b) - Tax Audits and Filing Extension Requests
Schedule 4.24(c) - Interim Financial Statements
Schedule 4.26 - Affiliate Transactions
Schedule 4.27 - Absence of Certain Changes
Schedule 4.28 - Indebtedness
Schedule 5.3 - Purchaser's Consents and Governmental Approvals
Schedule 11.10 _ Addresses for Notices to Sellers
</TABLE>
-69-
<PAGE>
EXHIBIT 2.4
SHARE PURCHASE AGREEMENT
BY AND AMONG
CAREER EDUCATION CORPORATION, AS PURCHASER,
AND
CLEM STEIN, JR., LEONARD RUTSTEIN,
BARBARA ANN SCOTT KING, AND LAWRENCE N. GROSS,
AS SELLERS
DATED: JUNE 30, 1997
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
1. Certain Definitions..................................................................... 1
2. Sale and Transfer of Shares; Assets and Liabilities of the Company at Closing........... 9
2.1. Purchase and Sale of Shares................................................... 9
2.2. Purchase Price; Payment....................................................... 9
2.3. Company Assets and Liabilities; Purchase Price Adjustment..................... 10
2.4. Closing. 12
2.5. Section 116 Certificates...................................................... 12
3. Closing Deliveries...................................................................... 13
3.1. Deliveries to Purchaser....................................................... 13
3.2. Closing Deliveries to Sellers................................................. 16
3.3. Other Closing Deliveries...................................................... 17
3.4. Post-Closing Covenants........................................................ 17
4. Representations and Warranties of Sellers............................................... 18
4.1. Incorporation and Organization of the Company and the Subsidiary.............. 19
4.2. Ownership of the Company, the Subsidiary and the Schools...................... 19
4.3. Capacity; Authorization; Binding Effect, Etc.................................. 20
4.4. No Conflicts, Etc............................................................. 20
4.5. Investments................................................................... 21
4.6. Capitalization................................................................ 21
4.7. Book and Records.............................................................. 22
4.8. Compliance with Laws; Licenses and Permits.................................... 23
4.9. Recruitment; Admissions Procedures; Attendance; Financial Aid; Reports........ 24
4.10. Regulatory Requirements...................................................... 25
4.11. Title to the Assets.......................................................... 25
4.12. Material Miscellaneous Contracts............................................. 26
4.13. Tradenames; Confidential Information......................................... 27
4.14. Financial Statements......................................................... 28
4.15. Receivables.................................................................. 29
4.16. Inventories.................................................................. 30
4.17. Bank Accounts................................................................ 30
4.18. Litigation, Etc.............................................................. 30
4.19. Insurance.................................................................... 31
4.20. Environmental Matters........................................................ 31
4.21. Employee Benefit Plans....................................................... 32
4.22. Employment Matters........................................................... 33
4.23. Labor Relations; Compliance.................................................. 35
4.24. Tax Matters.................................................................. 36
4.25. Brokerage.................................................................... 38
</TABLE>
-i-
<PAGE>
<TABLE>
<S> <C>
4.26. Affiliate Transactions........................................................ 38
4.27. Absence of Certain Changes.................................................... 38
4.28. Indebtedness.................................................................. 39
4.29. Conduct of Business Since Interim Balance Sheet Date.......................... 39
4.30. Accrediting Body Approvals.................................................... 40
4.31. Delivery of Documents......................................................... 40
4.32. Disclosure.................................................................... 40
4.33. Residence of Sellers.......................................................... 40
5. Representations and Warranties of Purchaser.............................................. 40
5.1. Organization and Corporate Power.............................................. 40
5.2. Capacity; Authorization, Binding Effect, Etc.................................. 41
5.3. No Conflicts, Etc............................................................. 41
5.4. Litigation.................................................................... 41
5.5. Brokerage..................................................................... 42
5.6. Accrediting Body Approvals.................................................... 42
5.7. Disclosure.................................................................... 42
5.8. Purchaser's Knowledge; Resources of Purchaser................................. 42
5.9. Maintenance of Insurance...................................................... 42
6. Additional Covenants of the Parties...................................................... 42
6.1. Confidential Information...................................................... 42
6.2. Additional Covenants of Sellers Pending Closing............................... 44
6.3. Employees..................................................................... 45
6.4. Exclusive Dealing............................................................. 45
6.5. Additional Covenants of Purchaser Pending Closing............................. 45
6.6. Initial Public Offering....................................................... 45
7. Conditions to Purchaser's Obligations.................................................... 46
7.1. Due Diligence Review.......................................................... 46
7.2. Financing..................................................................... 46
7.3. Truth of Representations and Warranties....................................... 46
7.4. Performance of Agreements..................................................... 46
7.5. No Material Adverse Change.................................................... 47
7.6. Litigation.................................................................... 47
7.7. Accrediting Body Approval..................................................... 47
7.8. Proceedings................................................................... 48
7.9. Financial Aid Compliance Audit................................................ 48
7.10. Consents and Approvals........................................................ 48
7.11. Environmental Assessment...................................................... 48
7.12. Investment Canada Act......................................................... 48
7.13. Corporate Matters Pertaining to Company....................................... 49
7.14. Subsidiary Corporate Matters.................................................. 49
7.15. Lease on 31 Wellesley Property................................................ 49
</TABLE>
-ii-
<PAGE>
<TABLE>
<S> <C>
8. Conditions to Sellers' Obligations...................................................... 49
8.1. Truth of Representations and Warranties....................................... 49
8.2. Performance of Agreements..................................................... 50
8.3. Litigation.................................................................... 50
8.4. Proceedings................................................................... 50
8.5. Lease on 31 Wellesley Property................................................ 50
9. Indemnification Remedies................................................................ 50
9.1. Survival; Right to Indemnification Not Affected By Knowledge.................. 50
9.2. Indemnification and Payment of Damages by Sellers............................. 51
9.3. Indemnification and Payment of Damages by Purchaser........................... 52
9.4. Limitations on Amount......................................................... 52
9.5. Liability of Individual Sellers; Breaches by Individual Sellers............... 53
9.6. Further Limitations on Remedies............................................... 53
9.7. Procedures.................................................................... 54
9.8. Prevailing Party to be Awarded Legal Fees..................................... 55
9.9. Offset........................................................................ 56
9.10. Agreements Concerning Pending Litigation.................................... 56
10. Fraud Claim............................................................................ 59
11. Miscellaneous.......................................................................... 60
11.1. Termination.................................................................. 60
11.2. Expenses..................................................................... 61
11.3. Successors and Assigns....................................................... 61
11.4. Severability................................................................. 61
11.5. Counterparts................................................................. 61
11.6. Descriptive Headings; Interpretation......................................... 62
11.7. Governing Laws............................................................... 62
11.8. Consent to Jurisdiction and Service of Process............................... 62
11.9. Waiver of Jury Trial......................................................... 62
11.10. Notices..................................................................... 63
11.11. Sellers' Representative..................................................... 64
11.12. Entire Agreement............................................................ 64
11.13. Currency.................................................................... 65
11.14. English Language............................................................ 65
11.15. Announcements............................................................... 65
11.16. Time of the Essence......................................................... 65
11.17. Waiver...................................................................... 65
</TABLE>
-iii-
<PAGE>
SHARE PURCHASE AGREEMENT
THIS SHARE PURCHASE AGREEMENT (this "AGREEMENT") is made as of June
30, 1997, by and between Career Education Corporation, a Delaware corporation
("PURCHASER"), and Clem Stein, Jr. ("STEIN"), Leonard Rutstein ("RUTSTEIN"),
Barbara Ann Scott King ("KING"), and Lawrence N. Gross ("GROSS"). C. Stein,
Rutstein, B. King, and Gross are referred herein collectively as "SELLERS."
Except as otherwise indicated, capitalized terms used herein are defined in
Section 1.
- ---------
BACKGROUND
Sellers are the registered and beneficial owners of one-hundred
percent (100%) of the issued and outstanding shares (the "SHARES") in the
capital of International Academy of Merchandising & Design (Canada) Ltd., an
Ontario corporation (the "COMPANY"). The Company owns and operates a private-
vocational school in Toronto, Ontario, and through its wholly-owned subsidiary,
Academie Internationale du Design Inc. (a/k/a International Academy of Design
Inc.) a Quebec corporation ("IAMD-MONTREAL") owns and operates a private
vocational school in Montreal, Quebec, both of which provide certificate
granting programs in commercial design and merchandising (collectively, the
"SCHOOLS"). IAMD-Montreal is sometimes referred to as the "SUBSIDIARY."
Sellers desire to sell, and Purchaser desires to purchase, the Shares, for the
consideration and on the terms set forth in this Agreement.
AGREEMENT
NOW, THEREFORE, in consideration of the mutual representations,
warranties, covenants and agreements set forth herein, the parties hereto agree
as follows:
1. CERTAIN DEFINITIONS.
-------------------
For the purposes of this Agreement, the following terms have the
meanings set forth below:
"ACCREDITING BODY" means any Person, entity or organization, whether
governmental, government chartered, private or quasi-private, which engages
in granting or withholding Accreditation for the Schools, in accordance
with standards relating to the performance, operation, financial condition
and/or academic standards relating to the Schools, including, without
limitation, the Superintendent and the Private Vocational School Review
Board under the Private Vocational Schools Act (Ontario) and the
regulations thereunder, and the Minister of Education (Quebec) under an Act
respecting private education (Quebec) and the regulations thereunder.
<PAGE>
"ACCREDITATION" means any license, permit, registration, authorization
or similar approval granted to or in respect of the Schools by an
Accrediting Body.
"ADJUSTED BALANCE SHEET" shall have the meaning ascribed to such term
in Section 2.3(b).
"AFFILIATE" means, with respect to any Person, any individual related
by blood or marriage to such Person or any Person controlling, controlled
by or under common control with such Person.
"AGREEMENT" shall have the meaning ascribed to such term in the
Preamble.
"AUDIT REPORT" shall have the meaning ascribed to such term in Section
2.3(b).
"BEST OF PURCHASER'S KNOWLEDGE" means the collective actual knowledge
of the executive officers of Purchaser holding offices of vice-president or
higher, following due inquiry of appropriate officers, employees and
consultants of Purchaser.
"BEST OF SELLERS' KNOWLEDGE" means the collective actual knowledge of
Sellers and the executive officers of the Company and the Subsidiary
holding offices of vice-president or higher, following due inquiry of
appropriate officers, employees and consultants of each such entity,
including without limitation, in the case of the Schools, Larry Gross, the
president, the director of admissions (Montreal), the director of
admissions (Toronto) and the financial aid director (Toronto) and Financial
Aid Officer (Montreal).
"CERTIFICATE DEADLINE DATE" shall have the meaning ascribed to such
term in Section 2.5(b).
-------------
"CLOSING" shall have the meaning ascribed to such term in Section 2.4.
-----------
"CLOSING BALANCE SHEET" shall have the meaning ascribed to such term
in Section 3.1(j).
--------------
"CLOSING DATE" shall mean the date of the Closing.
"CLOSING PAYMENT" shall have the meaning ascribed to such term in
Section 2.2(a).
--------------
"COMPANY" shall have the meaning ascribed to such term in the
background section of this Agreement.
-2-
<PAGE>
"COMPLIANCE REPORTS" shall have the meaning ascribed to such term in
Section 4.9.
-----------
"CONFIDENTIAL INFORMATION" shall have the meaning ascribed to such
term in Section 6.1(a).
-------------
"CURRICULA" means copyrighted and proprietary uncopyrighted materials
used in any courses offered at either of the Schools.
"DAMAGES" shall have the meaning ascribed to such term in Section 9.2.
-----------
"DEFICIENCY" shall have the meaning ascribed to such term in Section
-------
2.3(a).
------
"EMPLOYEE BENEFIT PLAN" means any: (a) stock option plan, stock
purchase plan, incentive plan, deferred compensation plan, profit-sharing
plan and other similar benefit, plan or arrangement; and (b) insurance
plan, health plan, welfare plan, disability plan, pension plan, retirement
plan, travel plan, hospitalization plan, medical plan, dental plan, legal
plan, counseling plan, eye care plan and other similar benefit, plan or
arrangement.
"ENCUMBRANCE" means any charge, claim, community property interest,
condition, equitable interest, hypothecation, lien, mortgage, option,
pledge, security interest, servitude, right of first refusal, or
restriction of any kind, including any restriction on use, voting,
transfer, receipt of income, or exercise of any other attribute of
ownership, but in the case of leased property does not include the rights
of the lessors thereof under the respective leases therefor.
"ENFORCEABLE IN ACCORDANCE WITH ITS TERMS" or similar language shall
be deemed to mean enforceable in accordance with its terms, subject to
applicable bankruptcy, insolvency, reorganization, moratorium and similar
laws affecting creditors' rights and remedies generally, and subject, as to
enforceability, to general principles of equity (regardless of whether
enforcement is sought in a proceeding at law or in equity).
"ENVIRONMENTAL LAW" means any Legal Requirement pertaining to any
Hazardous Substance or otherwise pertaining to the environment or
protection of any natural resources, including, without limitation, air,
soil or water.
"ESCROW" shall have the meaning ascribed to such term in Section
-------
2.2(b).
-----
"ESCROW AGREEMENT" shall have the meaning ascribed to such term in
Section 2.2(b).
-------------
-3-
<PAGE>
"EXCESS" shall have the meaning ascribed to such term in Section
-------
2.3(a).
------
"FACILITY" means any real property now or previously owned, leased or
operated by the Company or the Subsidiary, including without limitation the
Leased Facilities.
"FINAL BALANCE SHEET" means the balance sheet which under Section
-------
2.3(B) is deemed to be the "FINAL BALANCE SHEET."
------
"FINANCIAL STATEMENTS" means (i) the audited balance sheets and the
related statements of income and changes in financial position of the
Company as at and for the fiscal years ended August 31, 1994, 1995 and
1996, and (ii) the unaudited consolidated balance sheet and the related
statement of income of the Company (the "INTERIM FINANCIAL STATEMENTS")
prepared by the Company on behalf of the Sellers as at and for the nine (9)
month period ended May 31, 1997 (the "INTERIM BALANCE SHEET DATE").
"GAAP" means generally accepted accounting principles from time to
time approved by the Canadian Institute of Chartered Accountants (or any
successor authority) that are applicable as of the date of determination,
all as consistently applied in the preparation of the Financial Statements.
"GOVERNMENTAL BODY" means any (a) federal, state, provincial, local,
municipal, foreign, or other government; (b) governmental or quasi-
governmental authority of any nature (including any governmental agency,
branch, bureau, department, official, or entity and any court or other
tribunal); and (c) body exercising, or entitled to exercise, any
administrative, executive, judicial, legislative, police, regulatory, or
taxing authority or power of any nature.
"GROSS INDEBTEDNESS" shall have the meaning ascribed to such term in
Section 3.1(i).
--------------
"HAZARDOUS SUBSTANCE" shall include any substance included within the
definitions of "hazardous substances," "hazardous materials," "toxic
substances," "waste" or similar terms in any applicable federal, state,
provincial, or local statute, ordinance, rule or regulation relating to
environmental protection, remediation or liability, including clean air,
clean water, waste disposal and hazardous substance transportation or
disposal, including, without limitation, petroleum, asbestos,
polychlorinated biphenyls, flammable explosives and radioactive materials.
"HOLDBACK" shall have the meaning ascribed to such term in Section
-------
2.2(b).
------
-4-
<PAGE>
"IAMD" shall have the meaning ascribed to such term in Section 7.13.
------------
"IAMD-MONTREAL" shall have the meaning ascribed to such term in the
background section of this Agreement.
"INCOME TAX ACT (CANADA)" means, collectively, the Income Tax Act,
R.S.C. 1985 (5th Supp.), the Income Tax Application Rules, 1971, S.C. 1970-
71-72 c.63 and the Income Tax Regulations, as amended to date, and where a
reference is made to a provision of the Income Tax Act (Canada), it shall
be deemed to include where applicable, the Income Tax Application Rules,
the Income Tax Regulations, any Notice of Ways and Means Motion or Bill
tabled to date in the House of Commons to the extent that it results in a
subsequent amendment to the Income Tax Act (Canada), the Income Tax
Application Rules or the Income Tax Regulations, or any press release or
publicly disseminated statement made to date by the Minster of Finance,
pertaining to an intended amendment to the Income Tax Act, the Income Tax
Application Rules or the Income Tax Regulations", to the extent that such
amendment is subsequently enacted.
"INDEMNIFICATION THRESHOLD" shall have the meaning ascribed to such
term in Section 9.6(a).
--------------
"INDEPENDENT AUDITOR" shall have the meaning ascribed to such term in
Section 2.3(b).
--------------
"INITIAL PUBLIC OFFERING" means an initial public offering and sale
for cash by Purchaser of its common stock pursuant to a "firm commitment"
underwriting agreement and a registration statement declared effective by
the Securities and Exchange Commission under the United States Securities
Act of 1933, as amended (the "SECURITIES ACT"); provided, that the term
--------
Initial Public Offering shall not include the registration of an offer and
sale of the common stock of Purchaser (i) to the employees of Purchaser or
its subsidiaries or other persons providing services to Purchaser or its
subsidiaries pursuant to any Plan registered on Form S-8 or a successor
form, or (ii) relating to a merger, acquisition or other transaction of the
type described in Rule 145 of the Securities Act or any successor rule
registered on Form S-4 or a successor form.
"INTELLECTUAL PROPERTY" means the patents, trademarks, logos,
tradenames (including, without limitation, the Company's name, the
Subsidiary's name, and each Schools' name), servicemarks, copyrights, know-
how, and trade secrets owned by the Company or the Subsidiary or any other
Person and used in connection with the operation of the Schools.
-5-
<PAGE>
"INVESTMENT" as applied to any Person means (i) any direct or indirect
ownership by such Person of any notes, obligations, instruments, stock,
securities or other ownership interest of any other Person, and (ii) any
capital contribution by such Person to any other Person.
"LEASES" shall have the meaning ascribed to such term in Section
-------
4.11(b).
-------
"LEASED FACILITIES" shall have the meaning ascribed to such term in
Section 4.11(b).
---------------
"LEGAL REQUIREMENT" means any foreign, federal, state, provincial,
local, municipal or other constitution, law, statute, regulation, rule,
ordinance, order, administrative order, principle of common law, or treaty
to which Sellers, the Company, the Subsidiary or Purchaser are subject, as
applicable.
"LETTERS OF CREDIT" shall have the meaning ascribed to such term in
Section 2.2(c).
--------------
"LICENSES AND PERMITS" shall have the meaning ascribed to such term in
Section 4.8.
-----------
"MATERIAL MISCELLANEOUS CONTRACTS" shall have the meaning ascribed to
such term in Section 4.12.
------------
"ME" means the Quebec Minister of Education and any successor
administering student financial assistance under An Act Respecting
Financial Assistance for Students (Quebec) and regulations thereunder, as
amended.
"MET" means the Ontario Ministry of Education and Training and any
successor administering student financial assistance under (a) the Ministry
of Colleges and Universities Act (Ontario), Regulation 774, as amended; and
(b) the Canada Student Financial Assistance Act and the regulations
thereunder and the Canada Students Loans Act and the regulations
thereunder.
"NET WORTH" shall have the meaning ascribed to such term in Section
-------
2.3(a).
------
"NONCOMPETITION AGREEMENTS" shall have the meaning ascribed to such
term in Section 3.1(c).
--------------
"NONCOMPETITION PAYMENTS" shall have the meaning ascribed to such term
in Section 3.1(c).
--------------
"NON-RESIDENT SELLERS" shall have the meaning ascribed to such term in
Section 2.5.
-----------
-6-
<PAGE>
"PERMITTED ENCUMBRANCES" shall have the meaning ascribed to such term
in Section 4.11(d).
---------------
"PERSON" means any individual, general or limited partnership,
corporation (including any non-profit corporation), limited liability
company, joint stock company, joint venture, trust, association,
unincorporated organization, labor union, Governmental Body, Accrediting
Body or other similar entity.
"PLANS" shall have the meaning ascribed to such term in Section 4.21.
------------
"POLICY GUIDELINES" shall have the meaning ascribed to such term in
Section 4.9.
-----------
"PRE-CLOSING FINANCIAL AID IRREGULARITIES" shall have the meaning
ascribed to such term in Section 9.2(d).
--------------
"PROCEEDING" means any action, claim, arbitration, audit, hearing,
investigation, inquiry, litigation, suit (whether civil, criminal,
administrative, investigative, or informal) or other proceeding commenced,
brought, conducted, or heard by or before, or otherwise involving, any
Governmental Body or arbitrator.
"PURCHASE PRICE" shall have the meaning ascribed to such term in
Section 2.2.
-----------
"PURCHASER" shall have the meaning ascribed to such term in the
preamble to this Agreement.
"PURCHASER'S ACCOUNTANT" shall have the meaning ascribed to such term
in Section 2.3(b).
--------------
"SCHOOLS" shall have the meaning ascribed to such term in the
background section to this Agreement.
"SECURITIES ACT" means the United States Securities Act of 1933, as
amended, or any successor law, and regulations and rules issued pursuant to
that Act or any successor law.
"SELLERS" shall have the meaning ascribed to such term in the preamble
to this Agreement.
"SELLER NOTES" shall have the meaning ascribed to such term in Section
-------
2.2(c).
------
-7-
<PAGE>
"SELLERS' RELEASE" shall have the meaning ascribed to such term in
Section 3.1(b).
--------------
"SHARES" shall have the meaning ascribed to such term in the
background section to this Agreement.
"STOCK PURCHASE AGREEMENT" means the stock purchase agreement of even
date herewith by and among IAMD Acquisition I, Ltd., a Delaware corporation
and the stockholders of IAMD Limited, an Illinois corporation, executed
substantially contemporaneously with the execution of this Agreement.
"SUBSIDIARY" shall have the meaning ascribed to such term in the
background section to this Agreement.
"TAX RETURNS" means all reports, elections, tax returns and tax forms
required to be filed by the Company, the Subsidiary and/or any of their
business activities under the provisions of any applicable Legal
Requirement and any tax forms required to be filed by the Company, the
Subsidiary and/or any of their business activities, whether in connection
with a tax return or not, under the provisions of any applicable Legal
Requirement.
"TAXES" means all taxes payable by the Company, the Subsidiary and/or
any of their business activities under the Income Tax Act (Canada) and all
taxes, levies or other like assessments, charges or fees, including,
without limitation income, gross receipts, excise, goods and services,
value added, transfer, capital, property (including, without limitation,
any special assessments), sales, license, payroll and franchise or other
taxes and import and customs duties, imposed by any Governmental Body on
the Company and/or the Subsidiary and/or any of their business activities;
and such term shall include any interest, penalties, fines or additions or
other amounts payable in connection with any Taxes.
"THRESHOLD AMOUNT" shall have the meaning ascribed to such term in
Section 2.3(a).
--------------
"TRADENAMES" shall have the meaning ascribed to such term in Section
-------
4.13(a).
-------
Immediately following the signature pages of this Agreement is an
index of the Exhibits and Schedules attached hereto.
-8-
<PAGE>
2. SALE AND TRANSFER OF SHARES; ASSETS AND LIABILITIES OF THE COMPANY AT
---------------------------------------------------------------------
CLOSING.
-------
2.1. PURCHASE AND SALE OF SHARES.
---------------------------
Subject to the terms and conditions of this Agreement, Sellers hereby
agree to sell, transfer, assign, convey and deliver the Shares to Purchaser, and
Purchaser hereby agrees to purchase, acquire and accept the Shares from Sellers,
at the Closing.
2.2. PURCHASE PRICE; PAYMENT.
-----------------------
In full consideration of the sale of the Shares by Sellers to
Purchaser, and the other agreements of the parties hereunder, and subject to
adjustment following the Closing in accordance with Section 2.3, the aggregate
-----------
purchase price (the "PURCHASE PRICE") for the Shares is $6,500,000, which,
subject to Section 2.5, plus the sum of $2,000,000 hereinafter in this section
-----------
provided for shall be payable as follows:
(a) $3,826,625 (the "CLOSING PAYMENT"), $22,000 of which shall be
delivered by Purchaser to the Company on behalf of Sellers as payment
on account of the $30,000 (Cdn) owed by them for the purchase of the
LaPierre Claim (as defined in Section 10) and $3,804,625 of which
----------
shall be delivered to Sellers in accordance with Schedule 2.2 by wire
------------
transfer of immediately available funds at the Closing;
(b) $2,123,375 (the "HOLDBACK") which amount shall be deposited
in immediately available funds into an escrow account with Chicago
Title & Trust Co. (the "ESCROW") established pursuant and subject to
the terms of the escrow agreement (the "ESCROW AGREEMENT") in
substantially the form of Exhibit A attached hereto, and which amount,
---------
subject to reduction in accordance with Sections 2.3 and 2.5, and the
------------ ---
offset pursuant to Section 9.9 of this Agreement, shall be disbursed
-----------
to Sellers in accordance with the Escrow Agreement; and
(c) $2,550,000, which amount shall be evidenced by, and payable
in accordance with, Purchaser's notes made in favor of Sellers (the
"SELLER NOTES") in substantially the form of Exhibit B attached hereto
---------
and in accordance with Schedule 2.2 attached hereto, which Seller
------------
Notes shall bear interest (before default) at the rate of seven
percent (7.0%) per annum payable quarterly in arrears, and after
default at the rate of nine percent (9.0%) per annum and subject to
the accelerations therein provided, shall be due and payable in full
on the fourth anniversary of the Closing Date. The Seller Notes shall
be delivered simultaneously with the Closing Payment. The Seller Notes
shall be secured by letters of credit, in an aggregate amount equal to
the amount of the Seller Notes and four (4) months interest
thereunder, issued by LaSalle National Bank (collectively the "LETTERS
OF CREDIT") in substantially the form of Exhibit C attached hereto,
---------
which Letters of Credit shall be
-9-
<PAGE>
delivered to Sellers at the Closing. The rights of Sellers to payment
pursuant to the Seller Notes shall be subject to Purchaser's offset
rights as provided in Section 9.9 of this Agreement.
-----------
In addition to the Purchase Price, Purchaser shall pay to Sellers the
Noncompetition Payments in the aggregate amount of $2,000,000, as provided for
in the Noncompetition Agreements, in accordance with Schedule 3.1(c) hereto,
---------------
which Noncompetition Payments shall be made simultaneously with the Closing
Payment.
2.3. COMPANY ASSETS AND LIABILITIES; PURCHASE PRICE ADJUSTMENT.
---------------------------------------------------------
(a) Sellers agree that the consolidated net worth of the Company
and the Subsidiary at and as of Closing as calculated in accordance
with GAAP (the "NET WORTH") shall not be less than $400,000 (the
"THRESHOLD AMOUNT"). The amount of the Net Worth set forth in the
Final Balance Sheet shall be deemed to be the Net Worth for the
purposes of this Section 2.3(a). If the Final Balance Sheet sets forth
--------------
Net Worth of less than the Threshold Amount, the amount of that
difference shall be the "DEFICIENCY" and the Holdback (and, as a
result thereof, the Purchase Price) shall be reduced by an amount
equal to the Deficiency. If, however, the Final Balance Sheet sets
forth Net Worth of more than the Threshold Amount, the amount of that
difference shall be the "EXCESS". The Excess, if any, shall, subject
to any rights of offset, be promptly remitted to Sellers in accordance
with Schedule 3.1(c).
---------------
(b) Purchaser shall cause Arthur Andersen, L.L.P. (the
"PURCHASER'S ACCOUNTANT") to complete an audit of the Closing Balance
Sheet delivered by Sellers pursuant to Section 3.1(j), and to deliver
--------------
to Purchaser the written report (the "AUDIT REPORT") of Purchaser's
Accountant with respect to such audit, as soon as possible following
the Closing and in any event not later than forty-five (45) days after
the Closing Date. Such Audit Report shall state the adjustments, if
any, to such Closing Balance Sheet which in the opinion of Purchaser's
Accountant would be necessary to be made so that with such adjustments
such Closing Balance Sheet would accurately set forth the Net Worth,
and if any such adjustments are so stated shall contain or be
accompanied by an adjusted consolidated balance sheet (the "ADJUSTED
BALANCE SHEET") of the Company and the Subsidiary reflecting such
adjustments. Purchaser shall deliver to Sellers a copy of such Audit
Report together with a copy of the Adjusted Balance Sheet, if any,
forthwith after Purchaser's receipt of same and in any event within
such forty-five (45) day period. Upon Sellers' request, Purchaser
shall cause the Purchaser's Accountant to provide to Sellers or their
representative access to the working papers of Purchaser's Accountant
with respect to such Audit Report, and the Sellers or their
representative shall be entitled to make copies thereof. If there is
an Adjusted Balance Sheet, then such Adjusted Balance Sheet shall be
-10-
<PAGE>
deemed to be the "FINAL BALANCE SHEET" unless the Sellers object in
writing to such deeming within fifteen (15) days after their receipt
of the Adjusted Balance Sheet. If there is such an objection by
Sellers and the disputes between the Sellers and the Purchaser in that
regard are not resolved to the satisfaction of the Sellers within
fifteen (15) days after the date upon which Purchaser receives such
written objection of the Sellers, then another nationally recognized
firm of chartered accountants not otherwise engaged by Sellers or
Purchaser (or their respective Affiliates) mutually selected by
Sellers and Purchaser or appointed by a court of competent
jurisdiction upon application therefor (the "INDEPENDENT AUDITOR")
shall review the Closing Balance Sheet delivered by Sellers pursuant
to Section 3.1(j), the Adjusted Balance Sheet, the said Audit Report
--------------
of the Purchaser's Accountants and all related working papers of the
Purchaser's Accountant, and if requested by the Sellers to do so shall
make such other examinations and investigations as the Independent
Auditor considers to be necessary in order to form an opinion as to
the Net Worth. If requested by the Sellers or the Purchaser on written
notice to the other of them, the Independent Auditor shall consider
submissions by the parties in accordance with rules and procedures
established by the Independent Auditor in that regard. The review of
the Independent Auditor shall be completed as soon as is practicable.
If the Independent Auditor shall be of the view that the Adjusted
Balance Sheet does not correctly set forth the Net Worth, then the
Independent Auditor shall prepare and deliver to the parties a fresh
consolidated balance sheet of the Company and the Subsidiary which in
the view of the Independent Auditor correctly sets forth the Net Worth
and such fresh balance sheet shall thereupon be deemed to be the
"FINAL BALANCE SHEET." The Final Balance Sheet howsoever deemed shall
be final and binding upon all parties. The costs of the engagement of
the Independent Auditor shall be borne by the Sellers unless the
Independent Auditor's determination results in an adjustment in
Sellers' favor of at least $100,000, in which event the costs of the
engagement of the Independent Auditor shall be borne by the Purchaser.
If an Adjusted Balance Sheet is not delivered to the Sellers within
forty-five (45) days next following the Closing Date or the Audit
Report of the Purchaser's Accountant is such that no Adjusted Balance
Sheet is prepared, then the Closing Balance Sheet delivered by Sellers
pursuant to Section 3.1(j) hereof shall be deemed to be the "FINAL
--------------
BALANCE SHEET." Forthwith after a balance sheet is deemed to be the
Final Balance Sheet, the parties shall in writing direct the Escrow
Agent under the Escrow Agreement to disburse the $500,000 plus accrued
interest thereon in accordance with their respective entitlements
thereto (which entitlements shall be set forth in such direction);
provided, however, if the Purchaser claims an offset against such
amount pursuant to Section 9.9(b) such direction shall set forth the
--------------
amount claimed as such offset.
-11-
<PAGE>
Notwithstanding anything contained in this Agreement to the contrary,
Purchaser shall not be required to pay any portion of the Holdback (excluding
however that portion of the Holdback relating to the tax withholding pursuant to
Section 116 of the Income Act (Canada)) until any and all disputes pursuant to
- -----------
this Section 2.3 are resolved. Subject to Section 2.3 with respect to the costs
----------- -----------
of engagement of the Independent Auditor, each party hereto shall bear its own
costs and expenses, including attorneys' fees, incurred in connection with any
dispute under this Section 2.3.
-----------
2.4. CLOSING.
-------
The parties hereto shall close the purchase and sale of the Shares and
the consummation of the other actions contemplated by this Agreement to occur in
connection therewith at the closing (the "CLOSING"), which shall take place at
the offices of Purchaser's counsel, Goldberg, Kohn, Bell, Black, Rosenbloom &
Moritz, Ltd., 55 East Monroe Street, Suite 3700, Chicago, Illinois 60603, on
June 30, 1997, or such other date to which the parties hereto shall mutually
agree in writing.
2.5. SECTION 116 CERTIFICATES.
------------------------
With the exception of Gross, each of the other Sellers (the "NON-
RESIDENT SELLERS") shall use all reasonable efforts to deliver to Purchaser, on
the day prior to the Closing Date, the certificates required pursuant to (S) 116
of the Income Tax Act (Canada) to permit Purchaser to pay the Purchase Price
without any obligations pursuant to the Income Tax Act (Canada) to withhold or
remit any portion thereof or any liability for failing to do so, failing which:
(a) each of the Non-Resident Sellers shall continue to use all
reasonable efforts to obtain the certificates required pursuant to (S)
116 of the Income Tax Act (Canada);
(b) if certificates required pursuant to (S) 116 of the Income
Tax Act (Canada), in form and substance satisfactory to Purchaser,
acting reasonably, are not received by Purchaser at or before 5:00
p.m. (Toronto time) on the 28th day after the last day of the calendar
month in which the Closing occurs (the "CERTIFICATE DEADLINE DATE")
and if there is no Final Balance Sheet determined in accordance with
Section 2.3 by such time and date, Purchaser shall following the
-----------
Certificate Deadline Date remit to Revenue Canada the amount required
pursuant to (S) 116 of the Income Tax Act (Canada) in respect of the
Shares and the payment to Revenue Canada of such amount shall be
credited towards, and shall be deemed to have been paid to each of the
Non-Resident Sellers in partial satisfaction of, the Holdback;
provided that if the certificates required pursuant to (S) 116 of the
Income Tax Act (Canada) are received by Purchaser after Closing but
before the Certificate Deadline Date, Purchaser shall pay the Holdback
to each of the Non-Resident Sellers in
-12-
<PAGE>
accordance with Section 2.2(b) without any deduction for withholding tax
--------------
under (S) 116 of the Income Tax Act (Canada); and
(c) if the Final Balance Sheet has been determined in accordance
with Section 2.3 at or before 5:00 p.m. (Toronto time) on the
-----------
Certificate Deadline Date and certificates required pursuant to (S)
116 of the Income Tax Act (Canada), in form and substance satisfactory
to Purchaser, acting reasonably, are not received by Purchaser by such
time and date, Purchaser shall pay each of the Non-Resident Sellers
the amount of the Holdback less the amount required pursuant to (S)
116 of the Income Tax Act (Canada) to be remitted to Revenue Canada in
respect of the Shares, and Purchaser shall, following the Certificate
Deadline Date, remit to Revenue Canada the amount required pursuant to
(S) 116 of the Income Tax Act (Canada) in respect of the Shares and
the payment to Revenue Canada of such amount shall be credited
towards, and shall be deemed to have been paid to each of the Non-
Resident Sellers in partial satisfaction of, the Holdback provided
that Purchaser shall have no further responsibilities to the Non-
Resident Sellers in connection with such payment to Revenue Canada;
provided further that if the certificates required pursuant to (S) 116
of the Income Tax Act (Canada) are received by Purchaser after the
determination of the Final Closing Balance Sheet but before the
Certificate Deadline Date, Purchaser shall pay the balance of the
Holdback to each of the Non-Resident Sellers without any deduction for
withholding tax under (S) 116 of the Income Tax Act (Canada).
(d) if Revenue Canada should assess or threaten to assess
Purchaser for a liability pursuant to subsection 116(5) of the Income
-----------------
Tax Act (Canada) because the cost of the Shares to the Purchaser
exceeds the "certificate limit" (as defined in the Income Tax Act
(Canada)), such liability shall be considered a third party claim
against Purchaser subject to Section 9 hereof. However, for purposes
---------
of Section 9, the claim pursuant to this subparagraph shall be
---------
considered a breach of a covenant under Section 9.2(b) only in respect
--------------
of the Non-Resident Seller whose payment is the subject of the
liability assessed against Purchaser; such claim shall not be subject
to the limitation of Section 9.6(b).
--------------
3. CLOSING DELIVERIES.
------------------
3.1. DELIVERIES TO PURCHASER.
-----------------------
Sellers agree to deliver to Purchaser, at the Closing, each of the
following, each of which constitutes a condition to Purchaser's obligation to
consummate the purchase of the Shares:
-13-
<PAGE>
(a) Certificates for Shares. Certificates representing the
-----------------------
Shares, duly endorsed (or accompanied by duly executed stock powers),
for transfer to Purchaser;
(b) Releases from Sellers. A release in substantially the form
---------------------
of Exhibit D, executed by Sellers (the "SELLERS' RELEASE");
---------
(c) Noncompetition Agreements. Noncompetition agreements in
-------------------------
substantially the form of Exhibit E, each executed by one or more of
---------
the Sellers, a applicable (collectively, the "NONCOMPETITION
AGREEMENTS"), providing for the payments to Sellers in the aggregate
amount of $2,000,000 in accordance with Schedule 3.1(c) attached
---------------
hereto (the "NONCOMPETITION PAYMENTS"), in consideration for the
Sellers' performance of the covenants and obligations set forth in
their respective Noncompetition Agreements, which Noncompetition
Payments shall be paid to Sellers; subject to Section 2.5 and the
-----------
Escrow Agreement, simultaneously with disbursement of the Closing
Payment pursuant to Section 2.2(a) in accordance with the terms and
--------------
conditions of the Noncompetition Agreements;
(d) Escrow Agreement. The Escrow Agreement, executed by the
----------------
Purchaser, Sellers and the relevant escrow agent thereunder;
(e) Secretary's Certificates for the Company and the Subsidiary.
-----------------------------------------------------------
A certificate, signed by the secretary or an assistant secretary of
the Company, certifying the articles of incorporation and bylaws of
the Company, appropriate authorizing resolutions of the Company's
Board of Directors, the incumbency of the Company's directors and
officers, and the status or compliance of the Company in the Provinces
of Ontario and Quebec, and, as necessary, wherever else qualified to
conduct its business, and a certificate for the Subsidiary, signed by
the secretary or an assistant secretary of the Subsidiary, certifying
the articles of incorporation and bylaws of the Subsidiary, the
incumbency of the Subsidiary's directors and officers, and the status
or compliance of the Subsidiary in the Province of Quebec, and as
necessary, wherever else qualified to conduct its business;
(f) Closing Certificate. A certificate executed by Sellers
-------------------
satisfying the requirements of Sections 7.4, 7.5 and 7.6 hereof;
------------ --- ---
(g) Legal Opinion. Legal opinion of Goodman, Phillips &
-------------
Vineberg and Lapointe, Rosenstein in form satisfactory to Purchaser,
addressed to Purchaser and Purchaser's lenders;
(h) Consents. Evidence satisfactory to Purchaser's counsel that
--------
each consent of a third party listed in Schedule 3.1(h) attached
---------------
hereto, which consents are required by Purchaser to be obtained by
Sellers prior to the
-14-
<PAGE>
Closing, have been obtained and remain in full force and effect,
unless the obligation to obtain such consent has been specifically
waived in writing by Purchaser;
(i) Evidence of Gross Indebtedness. Evidence of the amount of
------------------------------
the Company's indebtedness to Gross satisfactory to Purchaser (the
"GROSS INDEBTEDNESS")
(j) Closing Financial Information. An estimated consolidated
-----------------------------
balance sheet of the Company and the Subsidiary calculated as of 5:00
p.m. Toronto time on the business day immediately preceding the
Closing Date prepared as described in Section 2.3(a), a copy of which
--------------
shall be attached hereto as Schedule 3.1(j) (the "CLOSING BALANCE
---------------
SHEET"), accompanied by schedules in reasonable detail showing cash
balances in all bank accounts of the Company and each Subsidiary, and
all of their respective outstanding accounts payable, together with a
calculation of estimated Net Worth;
(k) Consent and Estoppel Certificates. Except to the extent
---------------------------------
waived in writing by Purchaser, Consent and estoppel certificates from
the landlords of the Leased Facilities, certifying certain factual
matters relating to the Leases, including without limitation
certification that there are no defaults under the Leases and the
amounts of security deposits under the Leases, consenting to the grant
of security interests in the Leases to Purchaser's senior secured
creditor, and consenting to the transfer of the Shares to the
Purchaser, in form and substance reasonably acceptable to Purchaser
and its lenders;
(l) Resignations. A resignation by each of the Sellers from
------------
their positions as directors and officers of the Company and, where
applicable, the Subsidiary, which resignations shall become effective
simultaneously with the Closing, and acknowledgment that their
respective employment agreements, if any, have been terminated without
any further obligation due from the Company or the Subsidiary or the
Purchaser;
(m) Bank Accounts. A list of all operating and other bank
-------------
accounts of the Company and the Subsidiary, together with
documentation of the removal of all directors and officers resigning
pursuant to Section 3.1(l) as signatories for such accounts;
--------------
(n) Certificates. Such tax certificates as required pursuant to
------------
Section 2.5, hereof; and
-----------
(o) Payment for Lapierre Claim. Payment of the $30,000 (Cdn) for
--------------------------
the Lapierre Claim described in Section 10 hereof; and
----------
(p) Other Documents. Such other documents relating to the
---------------
transactions contemplated by this Agreement as Purchaser or its
counsel may
-15-
<PAGE>
reasonably request, including, without limitation, to the extent not
waived in writing by the Purchaser, documents specified as Sellers'
closing deliveries on the Closing Checklist in the form of Exhibit F
---------
attached hereto.
3.2. CLOSING DELIVERIES TO SELLERS.
-----------------------------
Purchaser agrees to deliver to Sellers at the Closing, each of the
following, each of which constitutes a condition to Sellers' obligations to
consummate the sale of the Shares:
(a) Closing Payment. The Closing Payment required by Section
--------------- -------
2.2(a) by wire transfer of immediately available funds;
------
(b) Seller Notes. The Seller Notes, executed by Purchaser;
------------
(c) Letters of Credit. The Letters of Credit, executed by the
-----------------
issuer thereof;
(d) Noncompetition Agreements. The Noncompetition Agreements,
-------------------------
executed by Purchaser;
(e) Escrow Agreement. The Escrow Agreement, executed by
----------------
Purchaser and the relevant escrow agent thereunder;
(f) Termination of Guarantees. Evidence of the termination or
-------------------------
release of the guarantees of Sellers described on Schedule 3.2(f)
---------------
attached hereto, or, to the extent any such termination or release
cannot be obtained prior to the Closing, delivery by Purchaser of an
indemnification of the applicable Seller or Sellers' obligations
thereunder, in either case in form and substance reasonably
satisfactory to Sellers;
(g) Secretary's Certificate for Purchaser. A certificate, signed
-------------------------------------
by the secretary or an assistant secretary of Purchaser, certifying
the articles of incorporation and bylaws of Purchaser, appropriate
authorizing resolutions of Purchaser's Board of Directors, the
incumbency of Purchaser's officers executing this Agreement and the
documents delivered in connection with the Closing, and the good
standing of Purchaser in its state of incorporation and the State of
Illinois;
(h) Closing Certificate. A certificate executed by Purchaser
-------------------
satisfying the requirements of Sections 8.1 and 8.2 hereof;
------------ ---
(i) Legal Opinion. A legal opinion of counsel for Purchaser,
-------------
Goldberg, Kohn, Bell, Black, Rosenbloom & Moritz, Ltd., in
substantially the form of Exhibit G attached hereto, addressed to
---------
Sellers; and
-16-
<PAGE>
(j) Other Documents. Such other documents relating to the
---------------
transactions contemplated by this Agreement as Sellers or their
counsel may reasonably request, including, without limitation,
documents specified as Purchaser's closing deliveries on the Closing
Checklist.
3.3. OTHER CLOSING DELIVERIES.
------------------------
(a) Delivery into Escrow. Purchaser agrees to deposit into the
--------------------
Escrow (by wire transfer of immediately available funds), at Closing,
$3,123,375 which amounts shall be disbursed in accordance with Section
-------
2.2(b).
------
(b) Payment to Gross. Purchaser agrees to repay in full on
----------------
behalf of the Company to Gross (by wire transfer of immediately
available funds), at Closing the Gross Indebtedness.
(c) Indemnification for 56 Wellesley Street Guaranty. Purchaser
------------------------------------------------
hereby agrees to indemnify and hold Sellers harmless from and against
any and all out-of-pocket costs incurred by them arising under
Sellers' Guaranty contained in one of the various leases of the 56
Wellesley Street West property.
3.4. POST-CLOSING COVENANTS.
----------------------
(a) Further Assurances. On or after the Closing Date, and
------------------
without further consideration, Purchaser and Sellers shall, from time
to time at the request of any other party hereto, execute and deliver
to such other party further documents and instruments evidencing the
consummation of the transactions contemplated by this Agreement and/or
any of the obligations created hereby or pursuant hereto, as such
other party may reasonably require including, without limitation,
instruments of conveyance, assignment and transfer of the Shares. The
party requesting the execution and delivery of such further documents
and instruments shall pay the reasonable out of pocket costs and
expenses of all other parties hereto in connection therewith.
(b) Administration of the Company Prior to Disbursement of the
----------------------------------------------------------
Holdback; Cooperation of Parties. From and after the Closing Date and
--------------------------------
until payment in full of the Holdbacks, Purchaser, at Purchaser's sole
cost and expense, shall administer and operate the Company, the
Subsidiary and the Schools in material compliance with all Legal
Requirements and Accrediting Body requirements, and in accordance with
all permits, Accreditations, authorizations and agreements issued by
or entered into with any Governmental Body or any Accrediting Body
regulating or otherwise relating to the administration and operation
of the Company, the Subsidiary or the Schools. Subject to the terms
and provisions of this Agreement, Purchaser shall use its
-17-
<PAGE>
commercially reasonable efforts in order to obtain any and all
approvals from the MET and the ME, any Accrediting Body and any other
Governmental Body that may be necessary or appropriate to vest in
Purchaser the right and authority to administer and operate the
Schools, and Purchaser and Sellers shall cooperate in order to obtain
such approvals.
(c) Access and Maintenance of Records. From and after the
---------------------------------
Closing Date, Purchaser shall afford to Sellers, their counsel,
accountants and other authorized representatives reasonable access to
each of the Company's, the Subsidiary's and the Schools' books and
records related to periods prior to the Closing Date during normal
business hours and upon reasonable notice from Sellers to Purchaser,
as reasonably required by Sellers in connection with (i) performance
by Sellers of any of Sellers' obligations (whether directly or by
virtue of their indemnification obligations) pursuant to this
Agreement, (ii) any claim, action, litigation, program review, audit
or other proceeding involving any one or more of the Sellers (other
than any such claim, action, litigation, program review, audit or
proceeding arising under this Agreement or in which Purchaser and/or
the Company and the Subsidiary, on one hand, and Sellers or any of
their Affiliates, on the other hand, are adverse parties and to which
a privilege would apply) and (iii) Sellers preparation of their tax
returns. Sellers, at Sellers' expense, may make copies of any such
records as may be necessary or appropriate for Sellers' use (subject
to Section 6.1 hereof) in connection with the foregoing. For a period
-----------
of seven (7) years from the Closing Date or until the expiration of
the record retention period under relevant Legal Requirements or
Accrediting Body requirements, if longer, Purchaser shall not destroy
or otherwise dispose of any books or records of the Company or the
Subsidiary related to periods prior to the Closing Date.
Notwithstanding the foregoing, Purchaser shall preserve and protect
all books, documents, papers, computer programs and records pertaining
in any manner to the administration by the Company or the Subsidiary
of student financial assistance programs with respect to the Schools
for at least the period of time specified under applicable Legal
Requirements.
4. REPRESENTATIONS AND WARRANTIES OF SELLERS.
-----------------------------------------
As a material inducement to Purchaser to enter into this Agreement and
to purchase the Shares, Sellers hereby represent and warrant as of the date
hereof (except where another particular date is specified, in which event
Sellers hereby represent as of such date) that:
4.1. INCORPORATION AND ORGANIZATION OF THE COMPANY AND THE SUBSIDIARY.
----------------------------------------------------------------
The Company is a corporation, duly incorporated, organized and
subsisting under the laws of the Province of Ontario. The Company is qualified
to do business as a corporation in the Province of Quebec, and all other
jurisdictions in which the nature of its
-18-
<PAGE>
operations require it to register or otherwise qualify as an extra-provincial
corporation, except where failure to register or so qualify would not have a
material adverse effect on its business or operations. IAMD-Montreal is a
corporation duly incorporated, organized and subsisting under the laws of the
Province of Quebec. IAMD-Montreal is qualified to do business as an extra-
provincial corporation and in good standing in all other jurisdictions in which
the nature of its operations require it to so qualify, except where failure to
so qualify would not have a material adverse effect on its business or
operations. Each of the Company and the Subsidiary has all requisite power and
authority to own and operate its properties and assets, to carry on its business
as now conducted, and to consummate the transactions contemplated hereby. The
Company and the Subsidiary are not, and for the past five (5) years have not
been, engaged in any business other than the operation of the Schools, and
activities directly related thereto. The copies of the Company's and the
Subsidiary's articles of incorporation and bylaws which have been furnished by
Sellers to Purchaser reflect all amendments made thereto at any time prior to
the date of this Agreement and are correct and complete. The failure of the
Company to be registered in Quebec did not and will not have a material adverse
effect on the Company, the subsequently organized Quebec Subsidiary, or the
Schools.
4.2. OWNERSHIP OF THE COMPANY, THE SUBSIDIARY AND THE SCHOOLS.
--------------------------------------------------------
(a) The Subsidiary is owned and operated by the Company directly,
and no other Person has any ownership interest in the Subsidiary. The
School in Toronto is owned directly by the Company and the School in
Montreal is owned directly by the Subsidiary, and no other Person has
any ownership interest in the Schools. No Person other than Purchaser
has any right, option, warrant, subscription or other arrangement to
purchase shares in the capital of the Company (or the Subsidiary) or
to otherwise acquire any other equity interest in the Company (or the
Subsidiary) or the Schools. The transfer by the Company of assets to
the Subsidiary was sufficient to transfer good and valid title to such
assets to the Subsidiary, free and clear of any Encumbrances.
(b) The Shares are owned by each Seller directly, and no other
Person has direct or indirect ownership interest in the Company and no
Person, other than the Purchaser, has any right, option, warrant,
subscription or other arrangement to purchase shares of capital stock
of the Company or to otherwise acquire any other equity interest in
the Company.
4.3. CAPACITY; AUTHORIZATION; BINDING EFFECT, ETC.
--------------------------------------------
Each Seller hereby represents and warrants that he or she individually
has the unrestricted and absolute power, legal capacity and authority to
execute, deliver and perform this Agreement and each other document being
executed in connection herewith to which he or she is a party. Such Seller
hereby further individually represents and warrants that this Agreement has
been, and each other document to be executed by such Seller in connection
herewith, as of the Closing, will have been, duly executed and delivered by
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<PAGE>
Sellers or such Seller, and (assuming the due authorization, execution and
delivery hereof and thereof by Purchaser and any other parties thereto), this
Agreement is, and each such other document or agreement will be, a valid and
binding obligation of such Seller, as the case may be, enforceable against him
or her in accordance with its terms.
4.4. NO CONFLICTS, ETC.
-----------------
(a) Except as set forth in Schedule 4.4, the execution, delivery
------------
and performance of this Agreement and each other document being
executed by Sellers or any of them in connection herewith, and the
consummation of the transactions contemplated hereby and thereby, do
not and will not: (a) contravene, conflict with, or result in a
violation of (i) any provision of the articles of incorporation or
bylaws of the Company or the Subsidiary; or (ii) any resolution
adopted by the board of directors or the shareholders of the Company
or the Subsidiary; (b) contravene, conflict with or violate any Legal
Requirement applicable to the Company, the Subsidiary or the Schools
or any of their respective assets or properties; (c) with or without
the giving of notice or the passage of time, or both, conflict with or
result in the breach or termination, of, or default under, any
provision of the articles of incorporation or bylaws of the Company or
the Subsidiary, or any material instrument, license, permit,
authorization, agreement or commitment to which the Company, the
Subsidiary or the Schools, are a party or by which any of their assets
or properties are bound; (d) constitute a violation of any order,
judgment or decree to which the Company, the Subsidiary, or the
Schools, are a party or by which any of their assets or properties is
bound; or (e) require any approval of, filing or registration with, or
consent from any Governmental Body or Accrediting Body that is
required to be obtained or made by the Company, the Subsidiary or the
Schools; (f) cause the Company or the Subsidiary to become subject to,
or liable for the payment of, any Taxes outside of the ordinary course
of business relating to periods prior to the Closing Date, or transfer
taxes under any state, province or local law attributable to purchase
of the Shares by Purchaser, except as result of the current taxation
year of the Company and the Subsidiary ending by virtue of the Closing
of the transactions contemplated hereby. Except as set forth on
Schedule 4.4, none of the Company, the Subsidiary, the Schools or any
------------
Seller is or will be required to give any notice or obtain any
consent, approval or other authorization from any Person in connection
with the execution and delivery of this Agreement or the consummation
of the transactions contemplated hereunder.
(b) The execution, delivery and performance of this Agreement and
each other document being executed by each Seller in connection
herewith, and the consummation of the transactions contemplated hereby
and thereby, do not and will not: (a) contravene, conflict with or
violate any Legal Requirement applicable to such Seller; (b) with or
without the giving of notice or the passage of time, or both, conflict
with or result in the breach or
-20-
<PAGE>
termination, of, or default under, or any material instrument,
license, permit, authorization, agreement or commitment to which such
Seller is a party or by which any of his or her assets or properties
are bound; (c) constitute a violation of any order, judgment or decree
to which such Seller is a party or by which any of his or her assets
or properties is bound; or (d) require any approval of, filing or
registration with, or consent from any Governmental Body or
Accrediting Body that is required to be obtained or made by such
Seller. Except as set forth on Schedule 4.4, such Seller is not or
------------
will not be required to give any notice or obtain any consent,
approval or other authorization from any Person in connection with the
execution and delivery of this Agreement or the consummation of the
transactions contemplated hereunder by such Seller.
4.5. INVESTMENTS.
-----------
The Company has, and during the five (5) years prior to the date
hereof has had, no Investment, in any Person other than the Subsidiary. The
Subsidiary does not have, and during the five (5) years prior to the date hereof
has not had, any Investment in any other Person.
4.6. CAPITALIZATION.
--------------
The capitalization of the Company and the Subsidiary is as
follows:
(a) (i) The authorized equity securities of the Company consist
of an unlimited number of common shares, of which forty-three thousand
six hundred sixty seven (43,667) shares are issued and outstanding to
the Sellers as set forth on Schedule 4.6. Such issued and outstanding
------------
securities constitute the "SHARES". (ii) Sellers are, and at the
moment immediately prior to consummation of the Closing will be, the
record and beneficial owners and holders of the Shares, free and clear
of all Encumbrances.
(b) The authorized equity securities of IAMD-Montreal consist of
an unlimited number of Class A, Class B, Class C, Class D, Class E,
and Class F shares, of which one hundred (100) Class A shares and
Seven Thousand Two Hundred Forty One (7,241) Class E shares are issued
and outstanding to the Company. The Company is, and at the moment
immediately prior to consummation of the Closing will be, the record
and beneficial owner and holder of all such equity securities of IAMD-
Montreal, free and clear of all Encumbrances.
Except as set forth in Schedule 4.6, no legend or other reference to any
------------
purported Encumbrance appears upon any certificate representing equity
securities of the Company or the Subsidiary. All of the outstanding equity
securities of the Company and the Subsidiary have been duly authorized and
validly issued and are fully paid and nonassessable. Except as set forth in
Schedule 4.6, there are no agreements, (other
- ------------
-21-
<PAGE>
than shareholders' agreements which will be terminated prior to, or in
connection with, the Closing), commitments (including without limitation any
options, warrants, rights or similar arrangements) or Plans relating to the
issuance, sale, or transfer of any equity securities or other securities of the
Company or the Subsidiary or providing for cash payments based upon the value of
any equity securities of the Company or the Subsidiary. None of the outstanding
equity securities or other securities of the Company or the Subsidiary was
issued in violation of the Securities Act, any Canadian securities legislation
or any other Legal Requirement. Neither the Company (except for its ownership of
the outstanding shares of the Subsidiary) nor any of the Subsidiary owns, or has
any agreement or commitment to acquire, any equity securities or other
securities of any Person, or any direct or indirect equity or ownership interest
in any other business.
4.7. BOOK AND RECORDS.
----------------
Except as set forth on Schedule 4.7:
------------
(a) The minute books, share record books, and other records of
the Company and the Subsidiary, all of which are being made available
to Purchaser, are complete and correct and have been maintained in
accordance with sound business practices, including the maintenance of
an adequate system of internal controls, except where failure to so
maintain such books and records would not have a material adverse
effect upon the Company or the Subsidiary.
(b) The minute books of the Company and the Subsidiary contain
accurate and complete records of all meetings held of, and corporate
action taken by, their respective shareholders, boards of directors,
and committees of their respective boards of directors, and no meeting
of any such shareholders, boards of directors, or committees has been
held for which minutes have not been prepared and are not contained in
such minute books, except where failure to so prepare and maintain
such minutes would not have a material adverse effect on the Company
or any of its Subsidiaries.
(c) The Company and the Subsidiary have maintained all of its
accounting books and records in accordance with applicable Legal
Requirements and GAAP, except where failure to so maintain such books
and records would not have a material adverse effect upon the Company
or the Subsidiary, and such books and records are true, correct and
complete in all material respects.
(d) At the Closing, all books and records described in this
Section 4.7 will be in the possession of the Company or the
-----------
Subsidiary, as applicable.
-22-
<PAGE>
4.8. COMPLIANCE WITH LAWS; LICENSES AND PERMITS.
------------------------------------------
Except as set forth in Schedule 4.8(a) attached hereto, none of the
---------------
Company, the Subsidiary, or the Sellers is in violation of any Legal Requirement
which violation might reasonably be expected to have a material adverse effect
upon the financial condition, operating results, Accreditation or business of
the Company, or the Subsidiary or the Schools, and none of the Company, the
Subsidiary, or the Sellers has received notice of any such violation. None of
the Company, the Subsidiary, or the Sellers has received any notice of any
violations of the Occupational Health and Safety Act, as amended, or any other
occupational health or safety act or any similar Legal Requirement, relating to
the Company or the Subsidiary. The Company and the Subsidiary currently
maintain all licenses, Accreditations, certificates, permits, consents,
authorizations, and other governmental or regulatory approvals (the "LICENSES
AND PERMITS") necessary to conduct the business and operations of the Company
and the Subsidiary as presently being conducted, except where the failure to
maintain any such Licenses and Permits would not have a material adverse effect
on the operations or financial condition of the Company or the Subsidiary or the
Schools. Each of the Company and the Subsidiary has duly filed all reports and
returns required to be filed by it with all Governmental Bodies and the
Accrediting Body except where failure to file any such report or return would
not have a material adverse effect on the Company or its Subsidiary. No
application made by the Company or the Subsidiary for any Licenses and Permits
during the last five (5) years has been denied except for requests made to the
ME to introduce a new program, which requests were not granted, as listed on
Schedule 4.8(d) hereto. Schedule 4.8(b) attached hereto is a true, correct and
- --------------- ---------------
complete list of all Licenses and Permits held by the Company and the
Subsidiary, and the Governmental Body or Accrediting Body granting each such
License and Permit. Except as set forth on Schedule 4.8(b), the Licenses and
---------------
Permits are in full force and effect, and no proceedings for the suspension or
cancellation of any of them is pending or, to the best of Sellers' knowledge,
threatened. Sellers have delivered to Purchaser copies of all such Licenses and
Permits. Except as set forth on Schedule 4.8(b), none of the Company or the
---------------
Subsidiary, or any Seller, has received notice that any of the Licenses and
Permits will not be renewed and to the best of Sellers' knowledge, there is no
basis for nonrenewal. Each of the Company and the Subsidiary has all
Accreditations from Accrediting Bodies and all surety bonds sufficient and in
effect which are required to conduct the business of the School operated by it,
as presently conducted. Except as set forth in Schedule 4.8(c) attached hereto,
---------------
none of the Company, or the Subsidiary, or any Seller, has received any notice,
not previously resolved in full without any material liability, with respect to
any alleged violation of the rules or regulations of the MET or ME or any
applicable Accrediting Body, in respect of the Schools, including sales and
marketing activities, or the terms of any program participation agreement to
which it is or was a party. Except as set forth on Schedule 4.8(c) attached
---------------
hereto, Sellers are not aware of any investigation, and/or review of the
Schools' student financial aid programs or any review of Accreditation of either
School by any Governmental Body or Accrediting Body.
-23-
<PAGE>
4.9. RECRUITMENT; ADMISSIONS PROCEDURES; ATTENDANCE; FINANCIAL AID;
--------------------------------------------------------------
REPORTS.
- -------
Schedule 4.9(a) attached hereto is a complete list of all policy
---------------
manuals and other statements of procedures or instruction of the Company or the
Subsidiary or of ME and MET in the possession of the Company or the Subsidiary
relating to (a) recruitment of students for the Schools, including procedures
for assisting in the application by prospective students for direct or indirect
provincial or federal financial assistance; (b) admissions procedures, including
any descriptions of procedures for insuring compliance with federal, provincial
or Accrediting Body requirements applicable to such procedures; (c) procedures
for encouraging and verifying attendance, minimum required attendance policies,
and other relevant criteria relating to course performance requirements and
completion; and (d) compliance with Legal Requirements relating to financial aid
programs (collectively, the "POLICY GUIDELINES"). Sellers have delivered to
Purchaser true, correct and complete copies of all Policy Guidelines. Except as
disclosed on Schedule 4.9(b) attached hereto or in any other schedule to this
---------------
Agreement, the operations of the Company and the Subsidiary have, in all
material respects, been conducted substantially in accordance with the Policy
Guidelines (as then in effect) and all relevant standards imposed by applicable
Accrediting Bodies, and other agencies administering provincial or federal
governmental financial assistance programs in which the Company or the
Subsidiary participate, and other applicable Legal Requirements. The Company
has submitted all reports, audits, and other information, whether periodic in
nature or pursuant to specific requests, for the Company, the Subsidiary and the
Schools ("COMPLIANCE REPORTS") to all agencies or other entities with which such
filings are required relating to its compliance with (i) applicable
Accreditation standards, and (ii) Legal Requirements governing programs pursuant
to which either of the Schools or its students receive student financial
assistance funding except where failure to submit such Compliance Reports would
not have a material adverse effect on the business or operations of the Company,
or the Subsidiary or the Schools. There are no articulation agreements between
the Schools and degree granting colleges and universities in effect and no such
agreements are necessary for the business or operations of the Company or the
Subsidiary. All forms and records of the Company and the Subsidiary have been
prepared, completed, maintained and filed in all material respects in accordance
with all applicable Legal Requirements, and are true and correct in all material
respects. All financial aid grants and loans, disbursements and record keeping
relating thereto have been completed in compliance with all federal and
provincial requirements, and there are no material deficiencies in respect
thereto. To the best of Sellers' knowledge and except as previously disclosed
in prior audits by MET or ME, no student at either of the Schools has been
funded prior to the date for which such student was eligible for funding, and
such student's records conform in form and substance to all relevant regulatory
requirements.
4.10. REGULATORY REQUIREMENTS.
-----------------------
The ME and the MET represent all Accrediting Bodies under which the
Schools are regulated or required to be regulated and there are no other
governmental,
-24-
<PAGE>
regulatory or accrediting entities under which the Schools are regulated or
required to be regulated.
4.11. TITLE TO THE ASSETS.
-------------------
(a) Neither the Company nor the Subsidiary presently owns, or has
ever owned, any real property.
(b) Schedule 4.11(b) sets forth a list of the real properties
----------------
leased or otherwise used, operated or occupied by the Company or the
Subsidiary (the "LEASED FACILITIES"). The leases covering the Leased
Facilities (the "LEASES"), which are also described on Schedule
--------
4.11(b) are valid and in full force and effect and are enforceable in
-------
all material respects in accordance with their terms.
(c) All of the tangible assets and records relating to intangible
assets of the Company and the Subsidiary are or as of the Closing will
be delivered to Purchaser or located at the Leased Facilities. Except
as disclosed or summarized in Schedule 4.11(c), neither the Company
----------------
nor the Subsidiary is under any contractual or other legal obligation
or has entered into any commitment to make capital improvements or
alterations to the Leased Facilities. The Company and/or the
applicable Subsidiary and, to the best of Sellers' knowledge, the
landlords, are not in default under the Leases and, to the best of
Sellers' knowledge, no event, act or omission has occurred which (with
or without notice, the passage of time or the happening or occurrence
of any other event) would result in a default thereunder. The Company
and/or the applicable Subsidiary enjoys peaceful and undisturbed
possession under the Leases, and to the best of Sellers' knowledge the
Leased Facilities are not subject to any zoning, ordinance or other
restrictions which would prohibit the use and enjoyment of the Leased
Facilities in the manner in which the Leased Facilities are currently
used. Sellers have no knowledge of any condemnation proceedings
relating to the Leased Facilities. To the best of Sellers' knowledge,
the Leased Facilities, and the use thereof by the Company, the
Subsidiary and the Schools are in compliance in all material respects
with all Legal Requirements.
(d) Except for the leased or licensed assets and properties set
forth on Schedule 4.11(d)(i) attached hereto, the Company or the
-------------------
Subsidiary owns outright, and has good and marketable title to, all of
assets and properties used in connection with the operation of the
Schools, free and clear of Encumbrances other than Encumbrances set
forth on Schedule 4.11(d)(ii) ("PERMITTED ENCUMBRANCES"), and liens
--------------------
for current taxes not yet due and payable. All leases for tangible
personal property used by the Company or any Subsidiary in connection
with their operations are valid and in full force and effect and
enforceable in all material respects in accordance with their terms.
Except as set forth in Schedule 4.11(d)(i) attached hereto, no such
-------------------
lease is a capital lease, and neither the Company nor any Subsidiary,
or, to the best of Sellers' knowledge,
-25-
<PAGE>
any of the other parties thereto, is in default under any such lease
or license, and no event, act or omission has occurred which (with or
without notice, the passage of time or the happening or occurrence of
any other event) would result in a default thereunder.
(e) The tangible assets (other than the Leased Property) which
are owned or leased by the Company or the Subsidiary and with
individual values of $5,000 or more are listed or reflected on
Schedule 4.11(e) attached hereto, and, to the best of Sellers'
----------------
knowledge, are in good operating condition, order and repair, useable
in the ordinary course of business consistent with past practice,
subject to ordinary wear and tear, and with the additional equipment
already ordered, are sufficient and adequate for all current
operations. None of the Company, the Subsidiary or any Seller has
received notice of any violation of or default under any Legal
Requirement or requirement relating to any of such assets which
remains uncured or has not been resolved.
(f) Other than as listed on Schedule 4.11(f) hereto and the
----------------
Leased Facilities, the Company does not operate, nor during the past
five (5) years has it owned, leased or operated, any Facility.
(g) The Curricula constitutes all of the Curricula currently used
in courses currently offered at the Schools.
(h) The Intellectual Property constitutes all the patents,
trademarks, logos, Tradenames (as defined in Section 4.13(a) herein),
---------------
servicemarks, copyrights, know-how, logos and trade secrets owned by
the Company or the Subsidiary, or used in connection with their
operations, and except for leased or licensed assets and properties
set forth on Schedule 4.11(d)(i), constitutes all the patents,
-------------------
trademarks, logos, Tradenames, servicemarks, copyrights, know-how and
trade secrets otherwise necessary to the business and operations of
the Company and the Subsidiary.
4.12. MATERIAL MISCELLANEOUS CONTRACTS.
--------------------------------
Schedule 4.12 attached hereto sets forth a true, complete and correct
-------------
list of all material contracts, agreements, and commitments relating to the
operations of the Company or the Subsidiary (hereinafter collectively referred
to as the "MATERIAL MISCELLANEOUS CONTRACTS") (a) requiring aggregate payments
after the date hereof in excess of $5,000 or with a term expiring one (1) year
or later after the date hereof, or (b) including confidentiality,
noncompetition, nonsolicitation option or similar provisions, other than (w) the
Leases, (x) leases and licenses listed on Schedule 4.11(d)(i) attached hereto,
-------------------
(y) Plans listed on Schedule 4.21 attached hereto and (z) teachers' contracts
-------------
entered into in the ordinary course of business on standard terms and
conditions. True complete and correct copies of all Material Miscellaneous
Contracts, together with all amendments thereto, have heretofore been delivered
or otherwise made available to Purchaser. The
-26-
<PAGE>
Material Miscellaneous Contracts constitute legal, valid and binding obligations
of the Company, or the Subsidiary, as applicable, and to the best of Sellers'
knowledge, the other parties thereto, and to the best of Sellers' knowledge are
in full force and effect. None of Company or any of the Subsidiaries is in
material default or, to the best of Sellers' knowledge, alleged to be in
material default on any term of any such Material Miscellaneous Contract. Except
as noted on Schedule 4.12 attached hereto, the consummation of the transactions
-------------
contemplated by this Agreement does not require the consent or approval of any
party to any Material Miscellaneous Contract.
4.13. TRADENAMES; CONFIDENTIAL INFORMATION.
------------------------------------
(a) All tradenames, logos, trademarks or service marks used in
connection with the operations of the Company, the Subsidiary or the
Schools, and all forms, derivatives and graphic presentations thereof,
including forms of the tradename "International Academy of
Merchandising and Design" and related trademarks, logos and
servicemarks (collectively, the "TRADENAMES"), having material value
to the operations of the Company or the Subsidiary are set forth on
Schedule 4.13(a) attached hereto. To the best of Sellers' knowledge,
----------------
the Company and the Subsidiary have the exclusive right to the use of
each Tradename as an assumed business name in the province in which
such Tradename is used, and Schedule 4.13(a) sets forth all
----------------
registrations (including the jurisdictions thereof) of each Tradename
as a trademark, servicemark or assumed name. The Company has not
licensed any other Person to use any Tradename. None of the Company,
the Subsidiary, or any Seller, has been sued or, to the best of
Sellers' knowledge, threatened with suit for infringement, violation
or breach with respect to any Tradename, and to the best of Sellers'
knowledge, no basis exists for any such suit. None of the Company, the
Subsidiary or any Seller is on notice of any infringement, violation
or breach of any Tradename by any other Person.
(b) To the best of Sellers' knowledge, the Company and the
Subsidiary have the right to use, free and clear of any claims or
rights of any third party, all Intellectual Property (subject in the
case of computer programs to the license agreements in that regard),
customer lists, Curricula and any other proprietary or confidential
information required for or used in the operations of the Schools. To
the best of Sellers' knowledge, none of the Company, the Subsidiary,
or any Seller is in any way making any unlawful or wrongful use of any
tradename, trade secret, customer list, know-how, curricula or any
other proprietary or confidential information of any third party
including, without limitation, any former employer of any present or
past employee of the Company or the Subsidiary.
-27-
<PAGE>
4.14. FINANCIAL STATEMENTS.
--------------------
Sellers have previously furnished the Financial Statements to
Purchaser. The balance sheets included in the Financial Statements present
fairly, in accordance with GAAP, the assets and liabilities of the Company and
the Subsidiary as of the respective dates thereof, and the related statements of
operations present fairly, in accordance with GAAP, the results of operations of
the Company and the Subsidiary for the respective periods covered thereby
(subject to the proviso that the Quebec subsidiary was formed in 1996). The
Financial Statements have been prepared in accordance with GAAP (except that the
Interim Financial Statements are not accompanied by all footnotes required by
GAAP and are subject to customary year end adjustments), are correct and
complete in all material respects and fairly present the financial position of
the Company and the Subsidiary as of the dates of such Financial Statements, and
the results of operations and changes in financial position for the periods
covered by such Financial Statements. The Company and the Subsidiary maintained
their financial books and records in accordance with applicable Legal
Requirements and (except for usual statement date adjustments) in accordance
with GAAP, and such books and records are, and during the periods covered by the
Financial Statements were, correct and complete in all material respects, fairly
reflecting the income, expenses, assets and liabilities of the Company and the
Subsidiary. On the date of the balance sheet forming a part of the Interim
Financial Statements, the Company and the Subsidiary had no liabilities which
were required to be set forth in a balance sheet prepared in accordance with
GAAP but that were not included in such balance sheet. Except as set forth in
Schedule 4.14 attached hereto, neither the Company nor the Subsidiary are
- -------------
required to provide any letters of credit, guarantees or other financial
security arrangements in connection with any transactions, approvals or licenses
in the ordinary course of operations of the Company or the Subsidiary nor is the
Company or the Subsidiary bound by, party to or subject to any agreement,
contract or commitment providing for the guarantee, indemnification, assumption
or endorsement or any like commitment with respect to the obligations,
liabilities (contingent or otherwise) or indebtedness of any Person. As of the
date hereof, neither the Company nor the Subsidiary has any material
indebtedness, liabilities or obligations of any nature, whether absolute,
accrued, contingent or otherwise, whether known or unknown, other than:
(a) those set forth or reserved against in the balance sheets
included in the Financial Statements for the fiscal years then ended
or disclosed in the footnotes to such Financial Statements, to the
extent so disclosed;
(b) those set forth or reserved against in the Interim Financial
Statements, or those which would have been disclosed in footnotes to
such Interim Financial Statements, if footnotes had been prepared and
which have been disclosed in writing to Purchaser, to the extent set
forth, reserved against or, in the case of footnote items, disclosed;
(c) except as set forth on Schedule 4.14(c) attached hereto,
----------------
those incurred since the Interim Balance Sheet Date in the ordinary
course of
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<PAGE>
business and consistent in nature with past practice, or those which
would have been disclosed in footnotes if footnotes had been prepared
and which have been disclosed to Purchaser in writing, to the extent
set forth, reserved or, in the case of footnote items, disclosed;
(d) those set forth on Schedule 4.14(c); and
----------------
(e) those not required to be disclosed in financial statements or
notes thereto prepared in accordance with GAAP.
There are no long-term fixed or contractual liabilities relating to the
operation of the Company or the Subsidiary, as presently operated by the
Company, the annual expenses of which are not reflected in the Financial
Statements where required by GAAP or which are not otherwise disclosed or set
forth in this Agreement or one or more of the schedules hereto. Other than
obligations in respect of prepaid tuition neither the Company nor the Subsidiary
has any obligations in respect of refundable deposits.
4.15. RECEIVABLES.
-----------
The accounts receivable (including, without limitation, student
accounts receivables) of the Company and the Subsidiary, except to the extent of
the allowance for cancellations and doubtful accounts set forth in the Final
Balance Sheet, are bona fide Receivables, arose out of arms' length transactions
in the normal and usual practices of the Company or the Subsidiary, as
applicable, are recorded correctly on the applicable books and records of the
Company and the Subsidiary, and, to the best of Sellers' knowledge, are
collectable in full in the ordinary course of business, subject in the case of
certain Receivables to reserves established for such Receivables in the Final
Balance Sheet. To the best of Sellers' knowledge, such Receivables are not
subject to any defense, counterclaim or setoff or trade discounts or credits not
reflected in the Final Balance Sheet (other than tuition refund policies
administered in accordance with all applicable Legal Requirements and the
applicable Policy Guidelines), and Sellers have no knowledge of any facts or
circumstances which would cause any of such Receivables to have to be written
down or written off in amounts which in the aggregate would be in excess of
reserves established for such Receivables in the Final Balance Sheet.
4.16. INVENTORIES.
-----------
The only inventories maintained by the Company and the Subsidiary
consists of supplies used in the ordinary course of business and are reflected
on the Financial Statements as "inventories." Such supplies will be reflected
at the lesser of the cost or realizable value to the extent thereof on the Final
Balance Sheet and to that extent are usable in the ordinary and regular course
of business, are in all material respects fit and sufficient for the purpose for
which they were purchased and, at the date of this Agreement, are in customary
amounts appropriate to the Company's operation of the Schools. All excess or
obsolete items have been written off.
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<PAGE>
4.17. BANK ACCOUNTS.
-------------
Schedule 4.17 attached hereto sets forth a true, complete and correct
-------------
list of the names of all banks and other financial institutions in which the
Company or the Subsidiary has an account or safe deposit box, which list
includes a description of such accounts, the account numbers and the names of
all individuals authorized to draw thereon or have access thereto.
4.18. LITIGATION, ETC.
----------------
(a) Except as set forth in Schedule 4.18(a) attached hereto,
----------------
there are no (a) judgments, decrees, injunctions, rulings, awards or
orders of any Governmental Body or Accrediting Body against or
affecting the Company, or the Subsidiary or the Schools and (b)
Proceedings, pending or, to the best of Sellers' knowledge, threatened
against or affecting the Company, the Subsidiary, or the Schools, at
law or in equity, or before or by any Governmental Body or Accrediting
Body; to the best of Sellers' knowledge, none of the Company, the
Subsidiary or the Schools are the subject of any investigations or
inquiries by any Governmental Body affecting the Company or the
Subsidiary (including inquiries as to the qualification to hold or
receive any of the Licenses and Permits); and, to the best of Sellers'
knowledge, there is no basis for any of the foregoing. There are no
other Proceedings pending, or to the best of Sellers' knowledge,
threatened against or affecting the Company, the Subsidiary, or their
Affiliates generally (including claims with respect to any Employee
Benefit Plans) which if adversely decided would have a material
adverse effect on the Company, the Subsidiary, the Schools, or their
assets taken as a whole.
(b) Except as set forth in Schedule 4.18(b) attached hereto,
----------------
there are no (a) judgments, decrees, injunctions, rulings, awards or
orders of any Governmental Body or Accrediting Body against or
affecting any Seller or such Seller's interest in the Company, or (b)
Proceedings, pending or, to the best of Sellers' knowledge, threatened
against or affecting any Seller's interest in the Company or the
Schools or any Seller, at law or in equity, or before or by any
Governmental Body or Accrediting Body; to the best of Seller's
knowledge, such Seller is not the subject of any investigations or
inquiries by any Governmental Body affecting such Seller (including
claims with respect to any Employee Benefit Plans) which if adversely
decided would have a material adverse effect on the Company, the
Subsidiary or their assets taken as a whole.
4.19. INSURANCE.
---------
Schedule 4.19 attached hereto sets forth all insurance coverages now
-------------
maintained by the Company and the Subsidiary on the Leased Facilities, the
assets and the operations of the Company and the Subsidiary, including a list of
all policies or binders of
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<PAGE>
fire, extended coverage, general and vehicular, fidelity and fiduciary
liability, workers' compensation, key-man life and other similar insurance, and
all binders for insurance to be purchased on or before Closing in order to
replace policies expiring prior to the Closing. Copies of such policies have
been previously delivered to Purchaser. Except as set forth in Schedule 4.19
-------------
attached hereto, such policies and binders are in full force and effect, and
there is no material breach or default with respect to any provision contained
in any such policy or binder, and all premiums, to the extent due and payable,
have been paid or the liability therefor properly accrued. Except for amounts
deductible and self-insured retainers under such policies of insurance, the
Company and the Subsidiary have not been, prior to the date hereof, subject to
liability as a self-insurer. Except as set forth in Schedule 4.19 attached
-------------
hereto, there are no claims pending or threatened under any of said policies
pertaining to the Company or the Subsidiary or disputes with underwriters
regarding coverage under such policies pertaining to the Company, the Subsidiary
or the Schools. Except as set forth on Schedule 4.19, neither the execution,
-------------
delivery and performance of this Agreement, nor the consummation of the
transactions contemplated hereby, will result in the loss to the Company or the
Subsidiary of any of the insurance policies listed, or impair the rights of the
Company or the Subsidiary with respect to liabilities arising, in connection
with the operations of the Company and Subsidiary prior to the Closing. Within
five (5) years prior to the date hereof, neither the Company nor the Subsidiary
has been denied insurance, or been offered insurance only at a commercially
prohibitive premium.
4.20. ENVIRONMENTAL MATTERS.
---------------------
Except as set forth in Schedule 4.20 attached hereto, neither the
-------------
Company nor the Subsidiary has generated, transported, stored, treated or
disposed, nor has either of them allowed or arranged for any third persons to
generate, transport, store, treat or dispose of, any Hazardous Substance to or
at: (a) any location other than a site lawfully permitted to receive such
Hazardous Substance for such purposes or (b) any location designated for
remedial action pursuant to federal, state, provincial or local statute and
relating to the environment or waste disposal; nor, to the best of Sellers'
knowledge, has the Company or the Subsidiary performed, arranged for or allowed
by any method or procedure such transportation or disposal in contravention of
any Legal Requirements or in any other manner which may result in liability for
contamination or threat of contamination of the environment in violation of any
Environmental Law, except where such violation would not have a material adverse
effect on the business or operations of the Company or the Subsidiary. Except
as set forth in Schedule 4.20, attached hereto, to the best of Sellers'
-------------
knowledge, no generation, use, handling, storage, treatment, release, threat of
release, discharge, spillage or disposal of any Hazardous Substance in violation
of any Environmental Law, has occurred or is occurring at the Leased Facilities
or, to the best of Sellers' knowledge, any other Facility previously owned or
operated by the Company or the Subsidiary. Except as set forth in Schedule 4.20
-------------
attached hereto, neither the Company, the Subsidiary, nor any Sellers has
received notification of, nor is it aware, of, any past or present failure by
the Company or the Subsidiary to comply with any Environmental Law, including
without limitation the requirements of any permits, franchises, licenses or
orders
-31-
<PAGE>
issued pursuant to any Environmental Law, applicable to the Company or the
Subsidiary or their operations. Except as set forth on Schedule 4.20, none of
-------------
the Company or the Subsidiary or Sellers has received any notification, nor is
it aware of, any past or present failure by the Company or the Subsidiary to
comply in any material respect with any Environmental Law, which failure may
result in judicial, regulatory or other legal proceedings that would have a
material adverse impact on the operations of the Company or the Subsidiary or
result in the imposition of any Encumbrance against the Company's or the
Subsidiary's assets. Except as set forth on Schedule 4.20, to the best of
-------------
Sellers' knowledge, the Leased Facilities do not contain asbestos or
polychlorinated biphenyls or any underground storage tanks. None of the Company,
the Subsidiary, or Sellers has received notice from any Governmental Body
requiring any removal or other remediation with respect to asbestos or
polychlorinated biphenyls located at the Leased Facilities.
4.21. EMPLOYEE BENEFIT PLANS.
----------------------
(a) Schedule 4.21(a) lists all Employee Benefit Plans (the
----------------
"PLANS") that the Company or any Subsidiary maintains to which the
Company or any Subsidiary contributes or to which the Company or any
Subsidiary has an obligation to contribute with respect to any current
or former employee of the Company or any Subsidiary, or with respect
to which the Company or any Subsidiary otherwise is reasonably
expected to have any liability or potential liability, whether or not
such plan has terminated or whether or not such plan is or was
maintained for current or former employees of the Company or any
Subsidiary or current or former employees of any other member of the
controlled group of the Company or any Subsidiary.
(b) Except as disclosed on Schedule 4.21(b), neither the Company
----------------
nor the Subsidiary contributes to, has any obligation to contribute to
or otherwise has any liability or potential liability with respect to
any Employee Benefit Plan.
(c) No Plan requires Sellers, the Company or the Subsidiary to
pay separation, severance, termination or other such benefits solely
as a result of any transaction contemplated by this Agreement or
solely as a result of a "change in control" of the Company or such
Subsidiary.
(d) With respect to each Plan, all premiums which are due
(including employer contributions and employee salary deduction
contributions) have been paid to such Plan, and all premiums with
respect to the current plan year for the period ending on the Closing
Date, have been made or accrued. No Plan has any material unfunded
liabilities.
(e) With respect to each Plan, Seller has provided Purchaser with
true, complete and correct copies, to the extent applicable, of: (i)
all
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<PAGE>
documents pursuant to which the Plans are maintained, funded and
administered.
(f) The Company does not have nor has it at any time had any
obligations or liabilities with respect to any pension, retirement
arrangement or deferred profit sharing plan for the benefit of its
employees or former employees.
4.22. EMPLOYMENT MATTERS.
------------------
(a) Except as set forth in Schedule 4.22(a) attached hereto, (i)
----------------
to the best of Sellers' knowledge, the Company and the Subsidiary are
in compliance in all material respects with all Legal Requirements
relating to employment and employment practices, including terms and
conditions of employment, employment discrimination and wages and
hours, and none of the Company or the Subsidiary are engaged in any
unfair labor practices with respect to individuals employed by or
providing services to the Company or the Subsidiary; (ii) none of the
Company, the Subsidiary or Sellers are aware of, nor has any of them
received any written or other notice of, any complaints against the
Company or the Subsidiary with respect to individuals employed by or
providing services to the Company or the Subsidiary pending before the
Ontario Labour Relations Board, the Quebec Labour Court, a Quebec
labour commissioner or the Quebec Commission des relations du travail
or any similar provincial or local labor agency or otherwise; (iii)
there are no labor strikes, slow-downs or stoppages or other labor
troubles pending or, to the best of Sellers' knowledge, threatened
with respect to any individuals employed by or providing services to
the Company or the Subsidiary; to the best of Sellers' knowledge no
labor organization activities have occurred with respect to such
employees during the past three (3) years; (iv) there are no
collective bargaining agreements binding on the Company or the
Subsidiary; (v) no labor organization or employee association
represents employees of the Company or the Subsidiary and there have
been no attempts made by any labour organization or employee
association to organize such employees; nor, to the best of Seller's
knowledge, are any such attempts being made, (vi) no grievances have
been asserted by any labor organization against the Company or the
Subsidiary with respect to individuals employed by or providing
services to the Company or the Subsidiary; and (vii) neither the
Company nor the Subsidiary has experienced any work stoppage by such
employees during the last three (3) years. Schedule 4.22(a) attached
----------------
hereto contains a list of all employees of the Company and the
Subsidiary and all material consultants to the Company and the
Subsidiary (including, without limitation, sales representatives and
other recruiters), other than attorneys and accountants, who are
employed or providing services in connection with the operation of the
Company or the Subsidiary including: name; length of service; job
title and job description; rate of base salary, bonus, vacation
entitlements, commissions,
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<PAGE>
fees and other incentive compensation; and identifying all contracts,
agreements, commitments and arrangements, written or oral, with such
employees or consultants. None of the contracts, agreements,
commitments and arrangements, written or oral, with such employees or
consultants requires the Company or the Subsidiary to pay separation,
severance, termination or other such benefits solely as a result of a
"change in control" in the Company or the Subsidiary. Sales
representatives and other recruiters for the Company and the
Subsidiary, whether employed directly by or otherwise engaged by the
Company or the Subsidiary, are licensed or registered in accordance
with all applicable Legal Requirements. Except as provided for on
Schedule 4.22(a) hereto, no such sales representative or other
----------------
recruiter receives commissions, bonuses or other contingency payments
based, directly or indirectly, on the enrollment of students by such
individual. True, correct and complete copies of all written
agreements or descriptions of oral agreements, if any between the
Company or the Subsidiary and such employees or consultants and all
amendments thereto have been provided to Purchaser. The Company and
the Subsidiary has performed all of their obligations under such
agreements and are not in default or violation and, to the best of
Sellers' knowledge, the other parties thereto are not in default or
violation, thereunder.
(b) Except as set forth on Schedule 4.22(b), no employee, officer
----------------
or director of the Company or the Subsidiary is a party to, or is
otherwise bound by, any agreement or arrangement, including any
confidentiality, noncompetition, or proprietary rights agreement, that
in any way adversely affects or will affect (i) the performance of his
or her duties as an employee, officer or director of the Company or
the Subsidiary, or (ii) the ability of the Company or the Subsidiary
to conduct its business, including without limitation the operation of
the Schools. To best of Sellers' knowledge, no employee of the Company
listed on Schedule 4.22(b) intends to terminate his or her employment
----------------
with the Company.
(c) Except as set forth on Schedule 4.22(c), there are no retired
----------------
employees or directors of the Company or the Subsidiary, or their
dependents, receiving benefits or scheduled to receive benefits in the
future from the Company or the Subsidiary. Except as set forth on
Schedule 4.22(c), neither the Company, the Subsidiary, nor any Seller
----------------
is party to any severance or other agreements with employees, former
employees or former owners of the Company.
(d) Schedule 4.22(d) lists all employee manuals and employment
----------------
policies of the Company and the Subsidiary. Except as set forth in
Schedule 4.22(d), the Company or the applicable subsidiary has
----------------
performed all its duties and obligations through the date hereof
pursuant to such manuals and policies.
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<PAGE>
(e) The Company and the Subsidiary have paid or accrued all
required payroll-related contributions, remittances, assessments and
taxes including QPP/CPP, EIC, ITA, EHT, CSST, CNT and WCB payments and
none of the Company or the Subsidiary are subject to any complaints,
investigations, penalties, interest charges or assessments in
connection with such payroll-related payments.
4.23. LABOR RELATIONS; COMPLIANCE
---------------------------
None of the Company, the Subsidiary or the Schools has been nor is any
of them a party to any collective bargaining or other labor contract. Except as
set forth on Schedule 4.23(a), there has not been, there is not presently
----------------
pending or existing, and to the best of Sellers' knowledge, there is not
threatened, (a) any strike, slowdown, picketing, work stoppage, or employee
grievance process, (b) any Proceeding against or affecting the Company, the
Subsidiary or the Schools relating to the alleged violation of any Legal
Requirement pertaining to labor relations or employment matters, including any
charge or complaint or appeal filed by an employee or union with or under the
Ontario Labour Relations Board, the Quebec Labour Court, a Quebec labour
commissioner, the Quebec Commission des relations du travail, the Ontario Human
Rights Commission, the Quebec Human Rights Commission, the Ontario Pay Equity
Commission, the Ontario Occupational Health and Safety Act, the Quebec
Occupational Health and Safety Act, the Ontario Employment Standards Act, the
Quebec Labour Standards Act, the Ontario Workers' Compensation Appeals Tribunal,
the Commission de la sante et de la securite du travail du Quebec and the Quebec
Manpower Vocational Training and Qualification Act or any comparable provincial
or federal Governmental Body, organizational activity, or other labor or
employment dispute against or affecting the Company, the Subsidiary, the Schools
or their premises, or (c) any application for certification of a collective
bargaining agent. To the best of Sellers' knowledge, no event has occurred or
circumstance exists that could provide the basis for any work stoppage or other
labor dispute involving the Company or the Subsidiary. There is no lockout of
any employees by the Company or the Subsidiary, and no such action is
contemplated. The Company and the Subsidiary have complied in all respects with
all Legal Requirements relating to employment, equal employment opportunity,
nondiscrimination, immigration, wages, hours, benefits, collective bargaining,
the payment of social security and similar taxes, occupational safety and
health, and plant closing, except where the failure to comply would not have a
material adverse effect upon the Company, the Subsidiary or their assets.
Except as set forth on Schedule 4.23(b), none of the Company or the Subsidiary
----------------
is subject to any award, decision, injunction, judgment, ruling or verdict,
requiring the payment of any compensation, damages, taxes, fines, penalties, or
other amounts, however designated, for failure to comply with any of the
foregoing Legal Requirements. Except as set forth on Schedule 4.18(a), 4.18(b)
-------------------------
or 4.23(c), there are no wrongful employee dismissal disputes or statutory
- ----------
complaints against the Company or the Subsidiary against dismissals made for
good and sufficient cause.
-35-
<PAGE>
4.24. TAX MATTERS.
-----------
(a) Except as disclosed on Schedule 4.24(a),
----------------
(i) Each of the Company and the Subsidiary has filed or
caused to be filed in the prescribed manner and on or before the
due dates therefor or within applicable extension periods all Tax
Returns that are or were required to be filed by the Company or
the Subsidiary, pursuant to applicable Legal Requirements.
(ii) Sellers have delivered or made available to Purchaser
copies of all such Tax Returns of the Company and the Subsidiary,
filed since January 1, 1993.
(iii) Each of the Company and Subsidiary has paid, or made
provision for the payment of, all Taxes that have or may have
become due from the Company and the Subsidiary, pursuant to such
Tax Returns or otherwise, or pursuant to any assessment received
by the Company or any Subsidiary, except such Taxes, if any, as
are listed in Schedule 4.24(a) and are being contested in good
----------------
faith and as to which adequate reserves (determined in accordance
with GAAP) will be provided in the Final Balance Sheet. The
accrual for Taxes on the Final Balance Sheet will be sufficient
to pay the Taxes payable as a result of the taxation year of the
Company and the Subsidiary ending as a result of the transactions
contemplated hereby.
(iv) The Company and the Subsidiary have complied with all
registration, reporting, collection and remittance requirements
in respect of all federal and provincial sales tax legislation,
including, but not limited to, the Excise Tax Act (Canada), An
Act respecting the Quebec sales tax and the Retail Sales Tax Act
(Ontario). The Company and the Subsidiary have on hand all
invoices, purchase orders and all such other documents as are
necessary to report any claims for input tax credits or refunds
claimed or to be claimed pursuant to the Excise Tax Act (Canada)
or an Act respecting Quebec sales tax.
(b) The Canadian federal and provincial income Tax Returns of the
Company and the Subsidiary have been assessed by the applicable taxing
authorities, or are closed by the applicable statute of limitations,
for all taxation years through the most recently completed taxation
years. The federal tax assessments are statute barred from
reassessment for all years ending prior to April 15, 1993. Schedule
--------
4.24(b) contains a complete and accurate list of all audits of all
-------
such Tax Returns, including a reasonably detailed description of the
nature and outcome of each audit. All deficiencies proposed as a
result of such audits have been paid, reserved against, settled, or,
as described in
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<PAGE>
Schedule 4.24(b), are being contested in good faith by appropriate
----------------
proceedings. Schedule 4.24(b) describes all adjustments to date to the
----------------
income Tax Returns filed by the Company and the Subsidiary for all
taxation years since 1993, and the resulting deficiencies proposed by
the applicable taxing authorities. Except as described in Schedule
--------
4.24(b), there are no agreements, waivers or other arrangements
-------
providing for, and none of the Company, the Subsidiary or any Seller
has given or been requested to give, waivers or extensions of any
statute of limitations relating to any assessment or reassessment of
Taxes, the filing of any Tax Return or the payment of Taxes of the
Company or the Subsidiary or for which the Company or the Subsidiary
may be liable. Except as set forth and described in Schedule 4.24(b),
----------------
there is no Proceeding and no assessment, reassessment or request for
information in progress, pending or, to the best of Sellers'
knowledge, threatened against or affecting the Company or the
Subsidiary in respect of Taxes nor are any issues under discussion
with any taxing authority relating to any matters which could result
in claims for additional Taxes.
(c) The charges, accruals, and reserves with respect to Taxes on
the Interim Financial Statements are adequate (determined in
accordance with GAAP) as at the respective dates of the balance sheets
forming a part thereof and are at least equal to the Company's and the
Subsidiary's liability for Taxes accrued through those dates. The
charges, accruals and reserves with respect to Taxes on the Final
Balance Sheet will be adequate and at least equal to the Company's and
the Subsidiary's liability for Taxes through the Closing or arising as
a result of the Closing. To the best of Sellers' knowledge, there
exists no proposed tax assessment or reassessment against the Company
or any Subsidiary except as disclosed in the Interim Financial
Statements or in Schedule 4.24(c). All Taxes that the Company or the
----------------
Subsidiary are or were required by Legal Requirements to withhold or
collect have been duly withheld or collected and, to the extent
required, have been paid to the proper Governmental Body or other
Person.
(d) All Tax Returns respectively filed by the Company and the
Subsidiary are true, correct, and complete in all material respects
and each of the Company and the Subsidiary has made complete and
accurate disclosure in such Tax Returns and in all materials
accompanying such Tax Returns.
4.25. BROKERAGE.
---------
Neither Sellers nor the Company (or any of their Affiliates) has
retained any broker or finder, and neither will be obligated to pay any brokers'
or finders' fee, in connection with the negotiation or consummation of the
transactions contemplated by this Agreement.
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<PAGE>
4.26. AFFILIATE TRANSACTIONS.
----------------------
Except as set forth in Schedule 4.26 attached hereto or as
-------------
specifically contemplated hereby, no Affiliate of any one or more of the Sellers
is a party to any agreement, contract, commitment or transaction with the
Company or the Subsidiary, or has any material interest in any material property
used in connection with the operations of the Company or the Subsidiary which
will survive the Closing.
4.27. ABSENCE OF CERTAIN CHANGES.
--------------------------
Except as contemplated by this Agreement or as set forth on Schedule
--------
4.27 attached hereto, from the Interim Balance Sheet Date until the date hereof
- ----
there has not been, occurred or arisen:
(a) any sale, lease, transfer, abandonment or other disposition
of any right, title or interest in or to any of the properties or
assets of the Company or the Subsidiary (tangible or intangible),
except in the ordinary course of business;
(b) other than in the ordinary course of the Company's and the
Subsidiary's operations and consistent with the Company's and the
Subsidiary' past and present business practices, (i) any approval or
action to put into effect any increase in any compensation or benefits
payable to any employee, director, agent or officer of the Company or
the Subsidiary, or any payment, grant or accrual to or for the benefit
of any such employee, director, agent or officer of any bonus, service
award, percentage compensation or other benefit, (ii) any adoption or
amendment of any Plans, or any severance agreement or employment
contract to which any such employee, director, agent or officer is a
party or (iii) any entering into of any employment, deferred
compensation or other agreements with respect to bonuses, service
awards, percentage compensation or other benefits with any such
employee, director, agent or officer;
(c) any material adverse change in the financial condition,
assets, liabilities (absolute, accrued, contingent or otherwise),
business prospects, reserves or operations of the Company or the
Subsidiary which would have a material adverse effect;
(d) any capital expenditure by the Company or the Subsidiary;
(e) any damage, destruction or loss, whether or not covered by
insurance, materially adverse to the assets, business, or operations
of the Company or the Subsidiary;
(f) any change in any material respect in the business policies
or practices of the Company or the Subsidiary or a failure of the
Company or the
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<PAGE>
Subsidiary to operate the Schools in the ordinary course with a view
to preserving such businesses intact, to retaining the services of the
present officers, employees and agents, except for Sellers other than
Gross, and with a view to preserving the business relationships of the
Company and the Subsidiary, including without limitation business
relationships of the Schools with, and the goodwill of, students,
sales representatives, suppliers, Accrediting Bodies, Governmental
Bodies and others; or
(g) any written agreement, or otherwise binding agreement, to
take any action described in this Section 4.27.
------------
4.28. INDEBTEDNESS.
------------
Schedule 4.28 attached hereto contains a true, correct and complete
-------------
list of all indebtedness of the Company and the Subsidiary for borrowed money,
including capital leases, and the balances owing thereunder as of the date
hereof.
4.29. CONDUCT OF BUSINESS SINCE INTERIM BALANCE SHEET DATE.
----------------------------------------------------
Except as set forth in Schedule 4.29 hereto, from the Interim Balance
-------------
Sheet Date to the date of this Agreement, the Company and the Subsidiary have
conducted their operations only according to their ordinary and usual course of
business, and the Company and the Subsidiary have used their best efforts to
preserve intact the Company's and the Subsidiary's business organizations, keep
the services of its employees and maintain satisfactory relationships with
Accrediting Bodies, suppliers, agents, students and others having business
relationships with the Company and the Subsidiary.
4.30. ACCREDITING BODY APPROVALS.
--------------------------
To the best of Sellers' knowledge, there exists no fact or
circumstance attributable to Sellers, the Company, the Subsidiary or the Schools
that would cause MET or ME or any other Governmental Body or the Accrediting
Body whose authorization, consent or similar approval is a requirement for the
consummation of the transactions contemplated by this Agreement or the
continuation for the Schools to be fully eligible for governmental programs of
student financial assistance at levels not materially less than the levels for
which the Schools have been eligible in the most recent academic year to refuse
to deliver such authorization, consent or similar approval.
4.31. DELIVERY OF DOCUMENTS.
---------------------
True, correct and complete copies of all Leases, Material
Miscellaneous Contracts, Plans, Policy Guidelines and other documents,
instruments, agreements and records of the Company and the Subsidiary described
on schedules to this Agreement or relating to the assets, liabilities and the
operations of the Company and the Subsidiary, or the representations and
warranties of Sellers contained in this Agreement, have been delivered or made
available to Purchaser.
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<PAGE>
4.32. DISCLOSURE.
----------
This Agreement, together with the schedules, exhibits and attachments
hereto, do not contain any untrue statement of a material fact or omit to state
a material fact necessary to make such statements not misleading in light of the
circumstances in which such statements were made.
4.33. RESIDENCE OF SELLERS.
--------------------
Each of the Sellers, with the exception of Gross, is a "non-resident"
of Canada within the meaning of the Income Tax Act (Canada). Lawrence N. Gross
is a resident of Canada within the meaning of the Income Tax Act (Canada).
5. REPRESENTATIONS AND WARRANTIES OF PURCHASER.
-------------------------------------------
As a material inducement to Sellers to enter into this Agreement and
to sell the Shares, Purchaser hereby represents and warrants as of the date
hereof that:
5.1. ORGANIZATION AND CORPORATE POWER.
--------------------------------
Purchaser is a corporation duly organized, validly existing and in
good standing under the laws of the State of Delaware. Purchaser is qualified to
do business as a foreign corporation in each jurisdiction in which the nature of
its operations requires, or as of the Closing will require, it to so qualify,
except where failure to so qualify would not have a material adverse effect on
its business or operations. Purchaser has all requisite corporate power and
authority to own and operate its properties and assets, to carry on its business
as now conducted, and to consummate the transactions contemplated hereby. The
copies of Purchaser's articles of incorporation and by-laws which have been
furnished by Purchaser to Sellers reflect all amendments made thereto at any
time prior to the date of this Agreement and are correct and complete.
5.2. CAPACITY; AUTHORIZATION, BINDING EFFECT, ETC.
---------------------------------------------
Purchaser has the unrestricted and absolute power, legal capacity and
authority to execute, deliver and perform this Agreement and each other document
being executed by it in connection herewith to which it is a party. This
Agreement has been, and each such other document and agreement to be executed in
connection herewith, as of the Closing, will have been, duly executed and
delivered by Purchaser and (assuming the due authorization, execution and
delivery hereof and thereof by Sellers and any other parties thereto), this
Agreement is, and each such other document or agreement will be, a valid and
binding obligation of Purchaser, enforceable against it in accordance with its
terms.
5.3. NO CONFLICTS, ETC.
------------------
Except as set forth in Schedule 5.3, the execution, delivery and
------------
performance of this Agreement by Purchaser, and each other document being
executed by Purchaser, in
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<PAGE>
connection herewith, and the consummation of the transactions contemplated
hereby and thereby do not and will not (a) contravene, conflict with, or result
in violation of (i) any provision of the articles of incorporation or bylaws of
Purchaser, or (ii) any resolution adopted by the board of directors or
stockholders of Purchaser, (b) contravene, violate or conflict with any Legal
Requirement applicable to Purchaser, (c) with or without the giving of notice,
the passage of time, or both, conflict with, or result in the breach or
termination of, or default under, any provisions of any material instrument,
license, permit, authorization, agreement or commitment to which Purchaser is a
party or by which their assets are bound, (d) constitute a violation of any
order, judgment or decree to which Purchaser is a party or by which their assets
or properties are bound; or (e) except as set forth in Schedule 5.3, require any
------------
approval of, or filing or registration with, any Governmental Body or
Accrediting Body that is required to be obtained or made by Purchaser, other
than approvals, filings and registrations which have been previously obtained or
made, or which are required and will be obtained or made in the ordinary course
of Purchaser's and Purchaser's business and operations.
5.4. LITIGATION.
----------
There are no Proceedings pending against or, to the best of
Purchaser's knowledge, threatened against or affecting Purchaser at law or in
equity, or before or by any Governmental Body or Accrediting Body seeking to
enjoin, restrain or delay the consummation of the transactions contemplated by
this Agreement and to the best of Purchaser's knowledge, there is no basis for
the foregoing.
5.5. BROKERAGE.
---------
Purchaser has not retained any broker or finder, and neither will be
obligated to pay any brokers' or finders' fee, in connection with the
negotiation or consummation of the transactions contemplated by this Agreement.
5.6. ACCREDITING BODY APPROVALS.
--------------------------
To the best of Purchaser's knowledge, there exists no fact or
circumstances attributable to Purchaser, or its subsidiaries that would cause
MET, or the ME, any other Governmental Body or the Accrediting Body whose
authorization, consent or similar approval is a requirement for the consummation
of the transactions contemplated by this Agreement or the continuation of the
Schools to be fully eligible for governmental programs of student financial
assistance at levels not materially less than the levels for which the Schools
have been eligible in the most recent academic year, to refuse to deliver such
authorization, consent or similar approval.
5.7. DISCLOSURE.
----------
Neither this Agreement, nor any of the schedules, exhibits or
attachments hereto prepared or supplied by Purchaser, or any documents,
certificates or other written agreements delivered by or on behalf of Purchaser
with respect to the transactions
-41-
<PAGE>
contemplated hereby, contain any untrue statement of material fact or omit a
statement of material fact necessary to make such statements not misleading in
light of the circumstances in which such statements were made.
5.8. PURCHASER'S KNOWLEDGE; RESOURCES OF PURCHASER.
---------------------------------------------
To the best of Purchaser's knowledge, there exists no fact or
circumstance that would cause any representation or warranty of Sellers to be
materially incorrect or untrue. Purchaser represents that Purchaser has
adequate resources to complete the transactions contemplated hereby.
5.9. MAINTENANCE OF INSURANCE.
------------------------
From and after the Closing Date and until all amounts payable to
Sellers hereunder are paid in full, Purchaser shall maintain such insurance
policies as are adequate and reasonable in the sole discretion of Purchaser in
both scope and amount for the Company and the Subsidiary.
6. ADDITIONAL COVENANTS OF THE PARTIES.
-----------------------------------
6.1. CONFIDENTIAL INFORMATION.
------------------------
(a) Each Seller acknowledges and agrees that such Seller is in
possession of Confidential Information (as defined herein) relating to
the Company and the Subsidiary. For purposes hereof, "CONFIDENTIAL
INFORMATION" shall mean all proprietary or confidential information
concerning the business, Intellectual Property, Curricula, and other
properties and operations of the Company and the Subsidiary,
including, without limitation, all student and prospective student
lists, supplier lists, know-how, trade secrets, business and marketing
plans, techniques, forecasts, projections, budgets, unpublished
financial statements, price lists, costs, computer programs, source
and object codes, algorithms, data, and other original works of
authorship, along with all information received from third parties and
held in confidence by the Company, the Subsidiary or such Seller
(including, without limitation, personnel files and student records).
Each Seller agrees that such Seller will hold the Confidential
Information in the strictest confidence and will not disclose or make
use of (directly or indirectly) the Confidential Information or any
portion thereof to or on behalf of themselves or any third party,
except (i) as required in the performance of such Seller's duties and
obligations pursuant to the Noncompetition Agreements, this Agreement
or any employment agreement with Purchaser, the Company, the
Subsidiary or any Affiliate of any of them, (ii) as required by the
order of any court or similar tribunal or any other Governmental Body
of appropriate jurisdiction; provided, however, that Sellers shall, to
the extent practicable, give Purchaser prior written notice of any
such required disclosure and shall cooperate with
-42-
<PAGE>
Purchaser in obtaining a protective order or such similar protection
as Purchaser may deem appropriate to preserve the confidential nature
of such information, (iii) disclosure to professional advisors of the
Seller, provided, however such Seller must advise the professional
--------
advisors of the confidential nature of such information, and (iv)
disclosure for use in or the purposes of a dispute or in a Proceeding
with the Purchaser or any of the other Sellers in connection with the
obligations and transactions hereunder . The foregoing obligations to
maintain the Confidential Information shall not apply to any
Confidential Information which is or, without any wrongful action by
Sellers, becomes generally available to the public. Upon consummation
of the sale of the Shares to Purchaser, each Seller shall have
delivered to Purchaser (directly or to the Company or the Subsidiary)
all physical embodiments of the Confidential Information (regardless
of form or medium) in the possession of or under the control of that
Seller. The parties hereto each recognize that the other parties
hereto will suffer irreparable injury in the event of a breach of the
terms of this Section 6.1(a) by a Seller. Notwithstanding any
--------------
provision to the contrary contained herein, including without
limitation the provisions of Section 9, in the event of a breach of
---------
the terms of this Section 6.1(a), Purchaser shall be entitled, in
--------------
addition to any other remedies and damages available and without proof
of monetary or immediate damage, to a temporary and/or permanent
injunction, without bond, to restrain the violation of this Section
-------
6.1(a) by any Seller or any Person acting for or in concert with any
------
Seller.
6.2. ADDITIONAL COVENANTS OF SELLERS PENDING CLOSING.
-----------------------------------------------
Pending the Closing, Sellers shall cooperate fully with Purchaser, its
officers, employees, representatives and agents in connection with accomplishing
the satisfaction of all conditions to the Closing and with all other matters
relating to the consummation of the transactions contemplated by this Agreement.
Pending the Closing and subject to all the limitations contained in any relevant
Legal Requirements, Sellers shall afford to all representatives of Purchaser
reasonable access during normal business hours to the assets, properties, books,
financial statements, work papers and records of the Company and the Subsidiary
in order that Purchaser have full opportunity to make investigations thereof.
In addition, Sellers shall, and shall cause the Company and the Subsidiary to,
use good faith efforts to assist Purchaser in obtaining any required
Accreditation from any Accrediting Body reasonably necessary for Purchaser's
operation of the Schools, including furnishing Purchaser such necessary
information and reasonable assistance as Purchaser may request in connection
with its preparation of necessary filings, submissions or applications to any
such Accrediting Body and any Governmental Bodies in connection with the
transactions contemplated hereby. In addition, Sellers shall use their best
efforts to obtain the consents and approvals set forth in Section 3.1(h).
--------------
Furthermore, during the period from the date of this Agreement to the Closing
Date, neither the Company nor the Subsidiary shall conduct any business or incur
or assume any liabilities or obligations of any kind, except for such business,
liabilities and obligations as may be conducted or incurred in the ordinary
course of business of the Company and the Subsidiary or as expressly permitted
or required by the
-43-
<PAGE>
terms of this Agreement or as to which Purchaser may consent in writing.
Purchaser hereby consents to the Company continuing with its improvements at 56
Wellesley Street West, Toronto, Canada, leasing additional equipment (as
referenced to in one or more of the Schedules hereto) and receiving cash
advances from Gross. During the period from the date of this Agreement to the
Closing Date, Sellers shall use their good faith efforts to preserve intact the
business organization of the Company and the Subsidiaries, to pay operating
expenses in the ordinary course of business, to keep available the services of
their employees, and to maintain satisfactory relationships between the Company
and the Subsidiary, and the Accrediting Body, Governmental Bodies, suppliers,
agents, students and others having business relationships with the Company or
the Subsidiary. Sellers shall promptly notify Purchaser of any occurrence or
event that would or is likely to make untrue any representation or warranty of
Sellers made in Section 4 as of the Closing Date, or which would or is likely to
---------
result in an inability to satisfy any condition set forth in Sections 7 or 8.
---------- -
Notwithstanding the foregoing, the Company shall be permitted to redeem shares
of its capital stock, make distributions to its shareholders in respect of such
redemptions, and pay other compensation to its shareholders and Affiliates;
provided, that such activities shall not result in the breach of any
- --------
representation or warranty of Sellers hereunder.
6.3. EMPLOYEES.
---------
During the period from the date of this Agreement to the Closing Date,
Sellers shall cause the Company and the Subsidiary to use their good faith
efforts to retain the services of all senior managerial employees of the Company
and the Subsidiary. During the period from the date of this Agreement to the
Closing Date, none of the Company, the Subsidiary or the Sellers shall offer any
employee or sales representative of the Company or the Subsidiary any other
employment with Sellers, the Company or the Subsidiary, or any of their
Affiliates, without the prior written consent of Purchaser.
6.4. EXCLUSIVE DEALING.
-----------------
During the period from the date of this Agreement to the earlier of
(a) the Closing Date or (b) the date of termination of this Agreement pursuant
to Section 11.1 hereof, Sellers and their Affiliates shall not and shall not
------------
permit the Company or the Subsidiary to, directly or indirectly, encourage,
initiate or engage in discussions or negotiations with, or (except as
contemplated by this Agreement) provide any information to, any Person, other
than Purchaser, concerning any proposed purchase of the Company, the Subsidiary
or the Schools, or any similar transaction involving the Company, the Subsidiary
or the Schools, or Sellers' interest in any of them.
6.5. ADDITIONAL COVENANTS OF PURCHASER PENDING CLOSING.
-------------------------------------------------
Purchaser covenants and agrees that from and after the date of this
Agreement, and until the earlier of the Closing Date or the termination of this
Agreement pursuant to Section 11.1 hereof, Purchaser (a) shall use its good
------------
faith efforts to fulfill or
-44-
<PAGE>
satisfy, or cause to be fulfilled or satisfied, all of the conditions precedent
to Sellers' obligations to consummate and complete the transactions contemplated
by this Agreement, including without limitation the sale of the Shares provided
herein, and to take all other steps and do all other things reasonably required
to consummate this Agreement in accordance with its terms; and (b) shall not
interfere with the performance by Sellers of their obligations under this
Agreement.
6.6. INITIAL PUBLIC OFFERING.
-----------------------
In the event that Purchaser engages in an Initial Public Offering of
its common stock at any time prior to the third anniversary of the Closing Date,
Purchaser shall use its best efforts (which best efforts shall not, however,
include the expenditure of more than nominal amounts of money by Purchaser), to
reserve up to one and one-quarter percent (1.25% in the aggregate) of the total
shares offered in such Initial Public Offering for purchase by Sellers. Each
Seller shall be eligible to purchase up to its pro rata twenty-five (25%)
portion of the one and one quarter percent (1.25%) whether or not any other
Seller elects to purchase such stock.
7. CONDITIONS TO PURCHASER'S OBLIGATIONS.
-------------------------------------
The obligations of Purchaser to consummate the transactions
contemplated by this Agreement are subject to the satisfaction, or to the waiver
in writing by Purchaser, on or before the Closing Date, or, where applicable,
such other date as is set forth herein, of the conditions set forth below:
7.1. DUE DILIGENCE REVIEW.
--------------------
Purchaser shall have completed and shall be satisfied with the results
of its due diligence review of the Company the Subsidiary and the Schools,
including, without limitation, review of the Company's and the Subsidiary'
assets, properties, business, financial condition and business prospects, legal
and accounting review of all liabilities and contingencies, Facility visits,
regulatory compliance analysis (including financial aid administration and
cohort default rates), assessment of relations with Accrediting Bodies and
Governmental Bodies, access to lenders for student loan programs, and completion
of a satisfactory market analysis.
7.2. FINANCING.
---------
Purchaser shall have obtained approval for the transactions
contemplated by this Agreement and equity and/or debt financing from its present
financing sources (a) in an amount sufficient to pay the Purchase Price and to
pay the Noncompetition Payments, and (b) upon terms satisfactory to Purchaser,
and its stockholders, and consistent with satisfying financial requirements of
the MET or, the ME, other applicable federal and provincial regulators and the
applicable Accrediting Bodies.
-45-
<PAGE>
7.3. TRUTH OF REPRESENTATIONS AND WARRANTIES.
---------------------------------------
The representations and warranties of Sellers contained in this
Agreement and in any certificate delivered by Sellers in accordance with the
terms hereof shall be true and correct in all material respects on and as of the
Closing Date with the same effect as though such representations and warranties
had been made on and as of such date (except to the extent such representations
and warranties speak of a particular date and except to the extent that any
failure to satisfy this requirement would not have a material adverse effect on
the business assets, or operations of the Company or any of the Subsidiary), and
Sellers shall have delivered to Purchaser a certificate, dated the Closing Date,
to such effect.
7.4. PERFORMANCE OF AGREEMENTS.
-------------------------
Each and all of the agreements of Sellers to be performed on or before
the Closing Date pursuant to the terms hereof shall have been fully performed in
all material respects, each of the documents, agreements and other items to be
delivered to Purchaser pursuant to Section 3.1 shall have been delivered, and
-----------
Sellers shall have delivered to Purchaser a certificate, dated the Closing Date,
to such effect.
7.5. NO MATERIAL ADVERSE CHANGE.
--------------------------
Since the date of this Agreement, there shall have been no material
adverse change in the properties, business, assets, results of operations,
condition (financial or otherwise) or business prospects of the Company or the
Subsidiary, there shall have been no material deviation in the Company's or the
Subsidiary's working capital position (other than its cash position) since the
Interim Balance Sheet Date, and Sellers shall have delivered to Purchaser a
certificate, dated as of the Closing Date, to such effect.
7.6. LITIGATION.
----------
No Legal Requirement shall have been enacted, issued, promulgated or
entered by any Governmental Body and no injunction or order of any court or
other Governmental Body or Accrediting Body shall have been entered, in either
case, which prohibits or restricts the transactions contemplated hereby, and no
Proceeding shall have been instituted or threatened by any Person before a court
or other Governmental Body or Accrediting Body: (i) seeking to restrain or
prohibit any of the transactions contemplated hereby or (ii) challenging or
questioning the right, title or interest of Sellers in and to the Shares to be
transferred under this Agreement or the right of Sellers to transfer validly all
of such right, title and interest in and to such Shares to Purchaser.
7.7. ACCREDITING BODY APPROVAL.
-------------------------
To the extent available prior to Closing, the approvals of any
applicable provincial regulatory agency with jurisdiction over the Schools and
the applicable Accrediting Bodies for
-46-
<PAGE>
(a) the consummation of the transactions contemplated by this
Agreement with respect to the Schools, including approval for issuance
of licenses or registrations to Purchaser to operate the Schools; and
(b) the continuation of the Schools to be fully eligible for
governmental programs of student financial assistance at levels not
materially less than the levels for which the Schools have been
eligible in the most recent academic year, shall have been received,
shall continue in full force and effect, and shall not contain terms
and conditions which, as a result of facts or circumstances
attributable solely to Sellers, or to the condition of the Company,
the Subsidiary or the Schools prior to Closing, in Purchaser's
reasonable judgment reduce or are reasonably likely to reduce the
economic benefit to Purchaser and its Affiliates that Purchaser
anticipated to receive from the consummation of the transactions
contemplated hereby, or would impose burdensome restrictions or
limitations on the activities of Purchaser or its Affiliates unrelated
to the Schools.
7.8. PROCEEDINGS.
-----------
All proceedings to be taken in connection with the transactions
contemplated by this Agreement and all documents incident thereto shall be
reasonably satisfactory, in all material respects, in form and substance to
Purchaser and its counsel, and Purchaser shall have received copies of all such
documents and other evidence as Purchaser or its counsel may reasonably request
in order to establish the consummation of such transactions and the taking of
all appropriate proceedings in connection therewith.
7.9. FINANCIAL AID COMPLIANCE AUDIT.
------------------------------
Sellers shall have delivered to Purchaser a copy of its financial aid
compliance audit report submitted to MET and the ME for the regulatory year
ended June 30, 1996, which report shall be satisfactory to Purchaser acting
reasonably.
7.10. CONSENTS AND APPROVALS.
----------------------
Sellers shall have obtained the consents and approvals set forth in
Section 3.1(g), and such consents and approvals shall remain in full force and
- --------------
effect.
7.11. ENVIRONMENTAL ASSESSMENT.
------------------------
Purchaser shall have received a Phase I environmental site assessment
for each of the Leased Facilities, which assessments shall be satisfactory to
Purchaser. Purchaser acknowledges it has received the assessments and such
assessments are satisfactory to Purchaser.
-47-
<PAGE>
7.12. INVESTMENT CANADA ACT.
---------------------
Purchaser shall have:
(a) within thirty (30) days of the Closing Date, filed a notice
with Investment Canada of the transaction contemplated hereunder; and
(b) received a receipt issued under the Investment Canada Act
(Canada) certifying that a notice in prescribed form in respect of
the acquisition of the Shares by Purchaser as herein contemplated
has been duly filed under the said Act and that such acquisition is
not reviewable.
7.13. CORPORATE MATTERS PERTAINING TO COMPANY.
---------------------------------------
(a) Sellers shall have delivered to Purchaser true, complete and
--------
accurate copies of the corporate record books of the Company, in form
and substance satisfactory to Purchaser.
(b) Unless waived in writing by Purchaser, Sellers shall have
delivered to Purchaser evidence that all necessary and appropriate
actions have been taken to reinstate the Company in Quebec retroactive
back to the date of non-compliance and that all taxes, penalties,
interest, and other charges and fees related thereto have been paid.
7.14. SUBSIDIARY CORPORATE MATTERS.
----------------------------
(a) Sellers shall have delivered to Purchaser true, complete and
--------
accurate corporate record books for the Subsidiary, in form and
substance satisfactory to Purchaser.
(b) Sellers shall have delivered to Purchaser evidence of the
transfer of assets from the Company to the Subsidiary in form and
substance satisfactory to Purchaser.
7.15. LEASE ON 31 WELLESLEY PROPERTY.
------------------------------
Sellers and Purchasers shall have entered into a lease for the real
property located at 31 Wellesley Street West, Toronto, Ontario.
If the Closing occurs, notwithstanding that not all of the foregoing
conditions have been satisfied or so waived, Purchaser shall not be entitled to
rescind its purchase by virtue thereof.
8. CONDITIONS TO SELLERS' OBLIGATIONS.
----------------------------------
The obligations of Sellers to consummate the transactions contemplated
by this Agreement are subject to the satisfaction, or to the waiver in writing
by Sellers, on or
-48-
<PAGE>
before the Closing Date, or, where applicable, such other date as is set forth
herein, of the following conditions:
8.1. TRUTH OF REPRESENTATIONS AND WARRANTIES.
---------------------------------------
The representations and warranties of Purchaser contained in this
Agreement and in any certificate delivered by Purchaser in accordance with the
terms hereof shall be true and correct in all material respects on and as of the
Closing Date with the same effect as though such representations and warranties
had been made on and as of such date (except to the extent such representations
and warranties speak of a particular date and except to the extent that any
failure to satisfy this requirement would not have a material adverse effect on
the business, assets or operations of Purchaser), and Purchaser shall have
delivered to Sellers a certificate, dated as of the Closing Date, to such
effect.
8.2. PERFORMANCE OF AGREEMENTS.
-------------------------
Each and all of the agreements of Purchaser to be performed on or
before the Closing Date pursuant to the terms hereof shall have been fully
performed in all material respects, and each of the documents, agreements and
other items, to be delivered to Sellers pursuant to Section 3.2 shall have been
-----------
delivered, and Purchaser shall have delivered to Sellers a certificate, dated
the Closing Date, to such effect.
8.3. LITIGATION.
----------
No Legal Requirement shall have been enacted, issued, promulgated or
entered by any Governmental Body and no injunction or order of any court or
other Governmental Body or Accrediting Body shall have been entered, in either
case, which prohibits or restricts the transactions contemplated hereby, and no
Proceeding shall have been instituted or threatened by any Person before a court
or other Governmental Body or Accrediting Body; (i) seeking to restrain or
prohibit any of the transactions contemplated hereby, or (ii) unless Purchaser
has agreed to waive its right to indemnification with respect thereto,
challenging or questioning the right, title or interest of Sellers to transfer
validly all of such right, title and interest in and to the Shares to be
transferred to Purchaser.
8.4. PROCEEDINGS.
-----------
All proceedings to be taken in connection with the transactions
contemplated by this Agreement and all documents incident thereto shall be
reasonably satisfactory in form and substance, in all material respects, to
Sellers and their counsel, and Sellers shall have received copies of all such
documents and other evidence as they or their counsel may reasonably request in
order to establish the consummation of such transactions and the taking of all
appropriate proceedings in connection therewith.
-49-
<PAGE>
LEASE ON 31 WELLESLEY PROPERTY.
------------------------------
Sellers and Purchasers shall have entered into a lease for the real
property located at 31 Wellesley Street East, Toronto, Ontario.
9. INDEMNIFICATION REMEDIES
------------------------
9.1. SURVIVAL; RIGHT TO INDEMNIFICATION NOT AFFECTED BY KNOWLEDGE
------------------------------------------------------------
All representations, warranties, covenants, and obligations in this
Agreement, or in any other certificate or document delivered pursuant to this
Agreement, will survive the Closing as provided herein. Subject to Section 5.8
-----------
hereof, the right to indemnification, through the payment of Damages based on a
breach of such representations, warranties, covenants and obligations, will not
be affected by any investigation conducted at any time before or after the
execution of this Agreement or the Closing Date with respect to the accuracy or
inaccuracy of, or compliance with, any such representation, warranty, covenant
or obligation except as provided in this Agreement.
9.2. INDEMNIFICATION AND PAYMENT OF DAMAGES BY SELLERS
-------------------------------------------------
Sellers will indemnify and hold harmless Purchaser for, and will pay
to the Purchaser the amount of, any actual loss, liability, claim, damage
(excluding any and all punitive, exemplary, or consequential damages), expense
(including costs of investigation and defense and reasonable attorney's fees),
whether or not involving a third-party claim, suffered or incurred by the
Purchaser (including, all Damages suffered or incurred by the Company or the
Subsidiary which would not have been suffered or incurred if there had been no
breach of any representation, warranty or covenant made by Sellers under this
Agreement or in any other document delivered by Sellers pursuant to this
Agreement) (collectively, "DAMAGES"), arising, directly or indirectly, from or
in connection with:
(a) any breach of any representation or warranty made by Sellers
in this Agreement or in any other document delivered by Sellers
pursuant to this Agreement;
(b) any breach by any Seller of any covenant in or obligation
of, any Seller in this Agreement or any other document delivered by
such Seller pursuant to his Agreement;
(c) any claim by any person for brokerage or finder's fees or
commissions or similar payments based upon any agreement or
understanding alleged to have been made by any such Person with any
Seller or the Company or any Subsidiary (or any Person acting on their
behalf) in connection with any of the transactions contemplated by
this Agreement; or
(d) (i) any debt, obligation or liability of the Company or the
Subsidiary, or any claim against any of them, of any kind, whether
known or
-50-
<PAGE>
unknown, contingent, absolute or otherwise, affecting the Company or
any Subsidiary which resulted from or arose out of the operation of
the Company or the Subsidiary prior to Closing, to the extent (A) not
disclosed in this Agreement (including any of the Schedules hereto) or
reflected or disclosed in the balance sheets forming a part of the
Financial Statements (including without limitation, any liability for
Taxes (other than Taxes not yet due and payable in the amounts
reflected on the Final Balance Sheet, Taxes constituting sales taxes
in connection with accounts payable reflected on the Final Balance
Sheet and Taxes relating to the period after Closing not resulting
from any breach of representation or warranty of Sellers hereunder));
(B) not taken into account in determining the Net Worth (as defined in
Section 2.3(a)), or (C) not arising under nonmaterial contracts
---------------
entered into in the ordinary course of business; (ii) financial aid
irregularities relating to operation of the Schools that occurred or
relate to activities or actions occurring prior to the Closing,
including without limitation any liabilities resulting from or arising
out of any show cause order, any audit review disallowances,
improperly disbursed student financial assistance program funds or
similar determinations ("PRE-CLOSING FINANCIAL AID IRREGULARITIES") or
the cost of responding to any audits, program reviews or other
investigations which disclose material Pre-Closing Financial Aid
Irregularities, whether such audit or investigation is in progress as
of the Closing Date or commences after the Closing or (iii) litigation
affecting the Company or any Subsidiary pending or threatened as of
Closing, other than litigation which is disclosed on Schedules hereto
which is covered by Section 9.10 hereof.
------------
9.3. INDEMNIFICATION AND PAYMENT OF DAMAGES BY PURCHASER.
---------------------------------------------------
Purchaser will indemnify and hold harmless Sellers, and will pay to
Sellers the amount of any Damages arising from or in connection with:
(a) any breach of any representation or warranty made by
Purchaser in this Agreement or in any certificate delivered by
Purchaser pursuant to this Agreement;
(b) any breach by Purchaser of any covenant or obligation of
Purchaser in this Agreement; or
(c) any claim by any Person for brokerage or finder's fees or
commissions or similar payments based upon any agreement or
understanding alleged to have been made by such Person with Purchaser
or Purchaser (or any Person acting on their behalf) in connection with
any of the transactions contemplated by this Agreement.
-51-
<PAGE>
9.4. LIMITATIONS ON AMOUNT
---------------------
(a) Notwithstanding any provisions of this Agreement to the contrary,
Sellers will have no liability with respect to the matters described in
clause (a), clause (b), or clause (d) of Section 9.2 other than for (i)
-----------
Damages up to the aggregate amount of $4,250,000 for which claims are made
on or before the eighteen (18) month anniversary of the Closing, and (ii)
Damages up to the aggregate amount of $2,550,000 for which claims are made
after the eighteen (18) month anniversary and on or before the four (4)
year anniversary of the Closing; provided that in no event shall the total
liability of Sellers for indemnification pursuant to clause (a), clause (b)
and clause (d) of Section 9.2 exceed $4,250,000 in the aggregate
-----------
("INDEMNIFICATION CAP") and further provided that in the event that there
is an adjustment of the Purchase Price pursuant to Section 2.3 hereof, the
-----------
Indemnification Cap shall be similarly adjusted by an amount equal to fifty
percent (50%) of such adjustment to the Purchase Price but in no event
shall such adjustment to the indemnification cap exceed $200,000.
(b) Notwithstanding Section 9.4(a), in the event of any breach of (i)
--------------
any Sellers' representations and warranties of which any Seller had actual
knowledge at any time prior to the date on which such representation and
warranty is made; or (ii) any intentional breach by Sellers of any covenant
or obligation, Sellers will be liable for all Damages with respect to such
breaches provided that in no event shall the total liability of any Seller
hereunder exceed the total value of consideration received by such Seller.
9.5. LIABILITY OF INDIVIDUAL SELLERS; BREACHES BY INDIVIDUAL SELLERS
---------------------------------------------------------------
(a) Notwithstanding any provision of this Section 9 to the contrary,
---------
in the event of any breach of the provisions of Sections 2.5(d), 4.2(b),
------------------------
4.3, 4.4(b), 4.6(a)(ii) or 4.18(b) resulting from the acts or capacity of,
----------------------------------
or knowledge or belief of, one or more specific Sellers (in their capacity
as shareholders, as opposed to corporate directors, officers, employees or
agents), only the particular Seller or Sellers whose acts or capacity, or
knowledge or belief, are the basis for such breach shall be liable pursuant
to Section 9.2 to indemnify Purchaser for Damages resulting therefrom
-----------
provided that in no event shall the total liability of any Seller hereunder
exceed the total value of consideration received by such Seller.
(b) Except as provided in Section 9.5(a), each individual Seller's
--------------
liability in respect of any claim for Damages shall be limited to an amount
equal to the product of: (1) a fraction (i) the numerator of which is the
total value of the consideration received by such Seller hereunder and (ii)
the denominator of which is the total consideration paid to all Sellers
hereunder, multiplied by (2) the total amount of such Damages provided,
however, that
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<PAGE>
the indemnification amount shall not exceed the total value of the
consideration received by such Seller hereunder.
9.6. FURTHER LIMITATIONS ON REMEDIES.
-------------------------------
(a) Except in connection with the enforcement of their respective
rights pursuant to Section 10 hereof or as otherwise expressly provided
----------
herein, any claim by any party hereto arising out of or relating in anyway
to this Agreement shall have as its sole remedy the indemnification
provided by this Section 9. Notwithstanding the foregoing, nothing herein
---------
shall preclude any party from seeking to exercise or enforce any rights
under any other agreements executed in connection with the transactions
contemplated by this Agreement or injunctive or other equitable relief as
may be necessary or desirable to protect its rights hereunder, Sellers
hereby acknowledge and agree that no waiver or release by the Company or
the Subsidiary or the Schools of the Sellers, or any of them, executed or
issued prior to the Closing shall constitute a waiver, release or
limitation in any way of the provisions of this Section 9.
---------
(b) Except for Damages based upon or arising out of a breach of
representation or warranty subject to Section 9.5(a) hereof, Sellers shall
--------------
not be liable for indemnification for Damages until the amount of Damages
exceeds, in the aggregate, the sum of $100,000 (the "INDEMNIFICATION
THRESHOLD")
(c) All Damages shall be determined net of any tax benefit or
economic benefit to the Purchaser, Company, or Subsidiary, arising in
respect of or as a result of the matters for which the Damages are claimed
or insurance proceeds derived (or reasonably expected to be derived) by any
of the foregoing.
(d) Notwithstanding anything to the contrary contained herein, in no
event shall any party be entitled to recover more than once for the same
matter.
9.7. PROCEDURES.
----------
(a) Any claim under Section 9.2 or Section 9.3 shall be made in a
----------- -----------
written statement signed by the party seeking indemnification which shall
specify in reasonable detail each individual item of Damage and the
estimated amount thereof, the date such item was claimed or the facts
giving rise to such claim were discovered, the basis for any alleged
liability and the nature of the breach or claim to which each such item is
related.
(b) If the indemnifying party does not pay the amount specified in
any such statement within thirty (30) days after it has been delivered by
the party seeking indemnification, the party seeking indemnification may
enforce its right in accordance with law.
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<PAGE>
(c) The party seeking indemnification in respect of any third party
claim shall give the indemnifying party prompt notice of any Proceeding
which might give rise to liability of the indemnifying party for
indemnification hereunder; provided, that failure to give the indemnifying
party prompt notice will not relieve such indemnifying party of any
liability to the indemnified party hereunder, except to the extent the
indemnifying party demonstrates that the defense of such action is
prejudiced by the indemnified party's failure to give such notice. If the
indemnifying party wishes to contest any third party claim, it will have
the option to defend, at the indemnifying party's expense, any such matter,
provided that the indemnified party (or in the case of the Company or the
Subsidiary, that entity itself) shall have the right, at its own cost and
expense, to participate in the defense of such claim or, if the
indemnifying party elects not to defend the claim, to conduct the defense
on its own behalf. If the indemnifying party conducts the defense of a
claim, neither party (or in the case of the Company or the Subsidiary, that
entity itself) will enter into any settlement agreement without the other
party's consent; provided, that the indemnified party (or in the case of
the Company or the Subsidiary, that entity itself) shall not object to any
proposed settlement which requires only the payment of money by the
indemnifying party and does not involve any admissions or stipulations by
the indemnified party, the Company, the Subsidiary, or the Schools or any
injunctive or similar relief or any other contractual obligations affecting
the indemnified party (or in the case of the Company or the Subsidiary,
that entity itself) or their respective business and operations. The
indemnified party shall cooperate (and the Purchaser shall cause the
Company and the Subsidiary to cooperate) with the indemnifying party in the
defense, compromise or settlement of any claim for which indemnification is
sought. If the indemnifying party elects not to conduct the defense of such
claim, the indemnified party (or in the case of the Company or the
Subsidiary, that entity itself) shall be permitted to settle or compromise
any such claim on such terms as it deems appropriate and such settlement or
compromise shall not prejudice the rights to indemnification hereunder.
(d) Notwithstanding Section 9.7(c), if an indemnified party
---------------
determines in good faith that there is a reasonable probability that a
Proceeding may adversely affect it or its affiliates other than as a result
of monetary damages for which it would be entitled to indemnification under
this Agreement, the indemnified party may, by notice to the indemnifying
party, assume the exclusive right to defend, compromise, or settle such
Proceeding, but the indemnifying party will not be bound by any
determination of a Proceeding so defended or any compromise or settlement
effected without its consent (which may not be unreasonably withheld).
(e) A claim for indemnification for any matter not involving a third-
party claim may be asserted by notice to the party from whom
indemnification is sought.
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<PAGE>
9.8. PREVAILING PARTY TO BE AWARDED LEGAL FEES.
-----------------------------------------
In the event of any litigation, whether at law or in equity,
arising out of this Agreement, the party prevailing in such litigation
shall be entitled to receive, upon application to the court, its
reasonable legal fees and expenses incurred in connection therewith.
9.9. OFFSET.
------
(a) Purchaser's obligations pursuant to the Seller Note shall be
subject to the offset rights set forth therein.
(b) Purchaser's obligations to pay the $500,000 portion of the
Holdback shall be subject to offset for alleged Damages according to
the following provisions:
(i) Purchaser's allegation of Damage shall be made in good
faith and shall not include any amount reflected the Final
Balance Sheet or in the first instance of a Claim for Damages be
for amounts which in the aggregate are less than the
Indemnification Threshold;
(ii) Purchaser shall submit a notice of a claim for
indemnification in respect of such Damages to Sellers (or to the
Seller or Sellers from whom it claims indemnification if not
proportionate as to all Sellers). The manner and procedure for
making such claim and the resolution thereof shall be as provided
in Sections 9.6 and 9.7 hereof.
------------ ---
(iii) Until the claim for Damages is resolved by a written
agreement of the parties or final, unappealable judgment issued
by a court or similar tribunal of competent jurisdiction
("RESOLUTION"), the amount claimed shall remain in escrow
pursuant to the terms of the Escrow Agreement.
(c) It is understood, for the sake of clarity, that the recovery
of Damages, whether by offset or otherwise, is subject to the
limitations of Sections 9.4 and 9.5, and that this Section 9.9 is not
------------ --- -----------
intended to convey any rights to recover sums in excess of such
limits.
9.10. Agreements Concerning Pending Litigation.
-----------------------------------------
The parties agree to the following with respect to the undernoted
litigation, all of which is pending or threatened as at the Closing Date and
disclosed on Schedule 4.18(a):
----------------
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<PAGE>
(a) with respect to the action against the Company by Barnes Security
Services Ltd. (the "BARNES SECURITY MATTER"), the action threatened by
Christopher Lotoski (the "LOTOSKI MATTER") and the action threatened by
Emily Zarb (the "ZARB MATTER"), Purchaser shall cause the Company to defend
the Barnes Security Matter, to defend any action brought against the
Company or the Subsidiary (and/or any of the officers, directors or
employees of the Company or the Subsidiary) by Christopher Lotoski in
furtherance of the Lotoski Matter or by Emily Zarb in furtherance of the
Zarb Matter, and also to commence and prosecute counterclaims in those
actions, as and to the extent from time to time directed to do so by or on
behalf of the Sellers as hereinafter in this Section 9.10 is provided; and
------------
as regards any such action brought by Christopher Lotoski or Emily Zarb, to
claim indemnity or contribution from the Company's and/or the Subsidiary's
insurers as and to the extent directed to do so by or on behalf of the
Sellers as hereinafter provided. The Barnes Security Matter, the Lotoski
Matter and the Zarb Matter, and all related proceedings defended or taken
by or on behalf of the Company, are herein collectively referred to as the
"INDEMNIFIED LITIGATION." The provisions of Section 9.7(c) hereof shall
--------------
apply mutatis mutandis to the conduct of the Indemnified Litigation and the
conduct of any negotiations regarding a settlement thereof. Each Seller
agrees to indemnify Purchaser against 25% of all out-of-pocket costs
(including without limitation attorneys' and filing fees), out-of-pocket
expenses, adverse awards and other adverse judgments, incurred or paid
after the Final Balance Sheet Date (but only to the extent not taken into
account in determining the Net Worth) by the Company arising out of or in
connection with the Indemnified Litigation, determined net of any tax
benefit to the Company or the Subsidiary in that regard and after deduction
therefrom of the net after-tax benefits to the Company or the Subsidiary of
all favorable awards (including all favorable awards of costs and the net
proceeds to the Company or the Subsidiary of any settlements), if any,
obtained in or in respect of the Indemnified Litigation and all payments or
indemnities provided in that regard by any of the Company's or the
Subsidiary's insurers. In addition, each Seller agrees to advance to the
Purchaser, upon written request of the Purchaser, an amount equal to 25% of
the amount of out-of-pocket expenses of the Company or the Subsidiary from
time to time accrued and paid by the Company or the Subsidiary after the
Final Balance Sheet Date with respect to the Indemnified Litigation,
calculated net of the tax benefits to the Company or the Subsidiary of such
expenses.
(b) with respect to the action against the Institute Superieur de
Design de Mode as well as the related counterclaims which have been made in
that action against the Company and/or the Subsidiary and all further
counterclaims, if any, which may be made in such action, and all related
proceedings (such action, counterclaims and related proceedings are
collectively referred to as the "ISDM CLAIMS;" and the Company and the
-56-
<PAGE>
Subsidiary, to the extent that they are parties to the action(s) or
proceeding(s) falling within the definition of the "ISDM Claims," is/are
referred to as the "CORPORATE ENTITY"), Purchaser shall cause the Corporate
Entity to diligently prosecute and defend the same as and to the extent
from time to time directed to do so by or on behalf of the Sellers as
hereinafter in this Section 9.10 is provided. The provisions of Section
------------ -------
9.7(c) hereof shall apply mutatis mutandis to the conduct of the
------
Indemnified Litigation and the conduct of any negotiations regarding
settlements thereof. Forthwith after the time at which all of the ISDM
Claims have been resolved (whether such resolution is by settlement or non-
appealable judgment), Purchaser shall calculate the amount of all out-of-
pocket costs (including without limitation attorneys' and filing fees),
out-of-pocket expenses, adverse awards and other adverse judgments,
incurred or paid after the Final Balance Sheet Date (but only to the extent
not taken into account in determining the Net Worth) by the Corporate
Entity arising out of or in connection with the ISDM Claims (the "PRE-TAX
COSTS"), and also net of all tax benefits to the Corporate Entity in that
regard (the amount of the Pre-Tax Costs less the amount of such tax
benefits is hereinafter referred to as the "COSTS"), as well as the amount
of the net after-tax benefit to the Corporate Entity of all favorable
awards (including favorable awards of costs) obtained in the ISDM Claims
and/or as a result of all settlements thereof (the "RECEIPTS"). If the
amount of the Receipts exceeds the Costs, Purchaser shall pay to each
Seller an amount equal to 25% of the amount of such excess (the "EXCESS").
If there is no Excess, each Seller shall pay to the Purchaser an amount
equal to 25% of the amount remaining after deducting the amount of the
Receipts from the Costs and deducting from that remainder the amount
remaining after deducting from the amount of the Pre-Tax Costs, to a limit
of $50,000 (Cdn) of the Pre-Tax Costs, the amount of all tax benefits to
the Corporate Entity by virtue of its having incurred the Pre-Tax Costs to
a limit of $50,000 (Cdn) of the Pre-Tax Costs.
(c) With respect to the complaints of 15 students of the Toronto
School enrolled in the full-time accelerated Year 1 class of Computer
Animation and made by their letters of February 14, 1997 and June 10, 1997
of which copies have been provided to the Purchaser, as well as related
complaints, claims and proceedings, Purchaser shall cause the Company to
make all reasonable efforts to resolve the same by offering to those
students free make-up courses, other courses, extra instruction and the
like and to the extent that such offers are accepted, performing them, all
without charge to or liability of the Sellers in that regard; and as
regards such efforts shall cause the Company to follow the reasonable
instructions of Larry Gross and keep him informed of all material
developments. If notwithstanding such reasonable efforts by the Company any
one or more of such students or related group of students shall commence
any action against the Company in respect of any one or more of the subject
matters of such complaints (all such action or actions
-57-
<PAGE>
and all related proceedings is/are hereinafter collectively referred
to as the "ANIMATION CLAIMS"), Purchaser shall cause the Company to
defend the Amimation Claims as and to the extent from time to time
directed to do so by or on behalf of the Sellers as hereinafter in
this Section 9.10 is provided. The provisions of Section 9.7(c) hereof
------------ --------------
shall apply mutatis mutandis to the conduct of the Animation Claims
and the conduct of any negotiations regarding a settlement thereof.
Each Seller shall indemnify Purchaser against 25% of all out-of-pocket
costs (including without limitation attorneys' and filing fees), out-
of-pocket expenses, adverse awards and other adverse judgments,
incurred or paid by the Company (but only to the extent not taken into
account in determining the Net Worth) arising out of or in connection
with the Animation Claims, determined net of any tax benefit to the
Company in that regard, but excluding from the subject matter of this
indemnity (for certainty) all costs and expenses, if any, which the
Company incurs or will incur pursuant to any agreement to finally and
fully resolve any of the Animation Claims by providing make-up
courses, other courses, extra instruction or the like (collectively,
the "EXCLUDED ITEMS"). In addition, each Seller agrees to advance to
the Purchaser, upon written request of the Purchaser, an amount equal
to 25% of the amount of out-of-pocket expenses of the Company from
time to time accrued and paid by the Company, other than on account of
the Excluded Items, with respect to the Animation Claims, calculated
net of the tax benefits to the Company of such expenses.
Any direction by or on behalf of Sellers pursuant to this Section 9.10 may be
------------
oral or may be in writing, and (i) if given in writing by a majority of the
Sellers shall be binding upon all Sellers and (ii) if given either orally or in
writing by any one of Leonard D. Rutstein or Michael Zdeb shall be binding upon
all Sellers. If in the course of the defense or prosecution by the Company or
the Subsidiary of any action which forms part of the subject matter of this
Section 9.10 it is necessary for counsel to the Company, the Subsidiary or the
- ------------
Sellers having carriage of that matter to obtain the immediate instructions of
the Sellers and none of Leonard D. Rutstein or Michael Zdeb is then available to
provide such instructions either in person or by telephone at his telephone
number as then known to the Purchaser or such counsel, the instructions to such
counsel in that regard given by the Purchaser, formulated by the Purchaser in
good faith believing them to be in the best interests of the Company or the
Subsidiary (as the case may be) without consideration of the financial
arrangements provided for in clauses (a), (b) or (c) of this Section 9.10, shall
------------
be binding upon all Sellers.
10. FRAUD CLAIM.
-----------
At or prior to the Closing, Sellers shall purchase from the Company
for the sum of $30,000 (Cdn), but without any warranties of enforceability or
collectibility either express or implied, all rights of the Company to recover
from Helene Lapierre all sums which she has alleged to have stolen from the
Company and all rights of the Company to receive from its insurers reimbursement
therefor (the "LAPIERRE CLAIM"). From and after
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<PAGE>
the Closing, the Purchaser shall permit and shall cause the Company to permit
the Sellers to prosecute in the name of the Company or in their own names as the
Company's assignee, but at their sole cost and expense, such actions against the
said Helene Lapierre, her heirs, executors, administrators and other legal
representatives, and against the said insurers, as the Sellers in their
discretion from time to time consider to be appropriate in order to recover such
sums and receive such reimbursement and shall cause the Company to cooperate
fully with the Sellers in that regard. Sellers shall indemnify the Company
against all costs and expenses of such prosecution, including any award of costs
which may be made against the Company in any action or proceedings commenced or
prosecuted by the Sellers in that regard. Sellers represent and warrant that
nothing related to the aforesaid claim was included in the Financial Statements
and that nothing related to said claim in excess of $30,000 (Cdn) will be
included on the Final Balance Sheet.
11. MISCELLANEOUS.
-------------
11.1. TERMINATION.
-----------
This Agreement may be terminated at any time prior to the Closing
Date:
(a) by mutual written consent of the Purchaser and the Sellers;
(b) prior to the Closing by Sellers or Purchaser, if the other
party shall be in breach of any covenant, undertaking, or restriction
contained herein, the breach of which shall have a material adverse
effect on the transactions contemplated by this Agreement taken as a
whole, and such breach has not been cured within ten (10) business
days after giving written notice to the breaching party or parties of
such breach; provided, that if such breach is, in the reasonable
judgment of the non-breaching party, capable of being cured, but
cannot reasonably be cured within such ten (10) business day period,
no party shall be permitted to terminate this Agreement as a result of
such breach so long as the breaching party is diligently pursuing cure
of such breach;
(c) by Purchaser or Sellers if the Closing shall not have
occurred on or before June 30, 1997 or if a Legal Requirement shall
have been enacted, issued, promulgated or entered by any Governmental
Body or an injunction or order of a court or other Governmental Body
or Accrediting Body has been entered, in either case, which prohibits
or restricts the transactions contemplated hereby or an action or
proceeding shall have been instituted or threatened by any Person or
pending before a court or other Governmental Body or Accrediting Body
seeking to restrain or prohibit any of the transactions contemplated
hereby;
(d) by the Purchaser if any of the conditions specified in
Section 7 have not been met or waived prior to such time as such
---------
condition can no longer be satisfied; or
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(e) by the Sellers if any of the conditions specified in Section
-------
8 have not been met or waived prior to such time as such condition can
-
no longer be satisfied.
In the event of termination of this Agreement, this Agreement shall forthwith
become null and void except for this Section 11 and Section 9, which sections
---------- ---------
shall remain in full force and effect and which shall survive such termination.
11.2. EXPENSES.
--------
Each party hereto shall be liable for the payment of the fees and
expenses incurred by such party or on such party's behalf in connection with the
negotiation and execution of this Agreement and the consummation of the
transactions contemplated by this Agreement, including, without limitation,
legal, accounting, financial and tax advice, brokers, finders and other fees,
expenses and commissions. No sales or transfer taxes under the laws of Ontario
or Quebec will be payable by Sellers as a result of the sale of the Shares to
Purchaser.
11.3. SUCCESSORS AND ASSIGNS.
----------------------
This Agreement and the rights hereunder shall not be assignable or
transferable without the prior written consent of all the parties hereto
provided however, that Purchaser shall be permitted to collaterally assign this
- -------- -------
Agreement and all rights hereunder to its lender(s). Except as otherwise
expressly provided herein, all covenants and agreements contained in this
Agreement by or on behalf of any of the parties hereto shall bind and inure to
the benefit of the respective successors and assigns of the parties hereto
whether so expressed or not. Notwithstanding the foregoing, the provisions of
this Agreement which are for Purchaser's benefit are also for the benefit of,
and enforceable by, any subsequent owner of the Company, the Subsidiary or the
Schools, or any of them if, such subsequent owner is an Affiliate of Purchaser
or Purchaser. The only parties to this Agreement are the Purchaser and the
Sellers and their successors, assigns, heirs, executors and administrators.
11.4. SEVERABILITY.
------------
Whenever possible, each provision of this Agreement shall be
interpreted in such manner as to be effective and valid under applicable law,
but if any provision of this Agreement is held to be prohibited by or invalid
under applicable law, such provision shall be ineffective only to the extent of
such prohibition or invalidity, without invalidating the remainder of this
Agreement.
11.5. COUNTERPARTS.
------------
This Agreement may be executed simultaneously in two or more
counterparts, any one of which need not contain the signatures of more than one
party, but all such counterparts taken together shall constitute one and the
same Agreement.
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<PAGE>
DESCRIPTIVE HEADINGS; INTERPRETATION.
------------------------------------
The descriptive headings of this Agreement are inserted for
convenience only and do not constitute a Section of this Agreement.
11.7. GOVERNING LAWS.
--------------
This Agreement shall be construed and enforced in accordance with, and
all questions concerning the construction, validity, interpretation and
performance of this Agreement shall be governed by, the laws of the State of
Illinois without giving effect to provisions thereof regarding conflict of laws.
11.8. CONSENT TO JURISDICTION AND SERVICE OF PROCESS.
----------------------------------------------
EACH PARTY HERETO CONSENTS TO THE JURISDICTION OF ANY STATE OR FEDERAL
COURT LOCATED WITHIN THE COUNTY OF COOK, STATE OF ILLINOIS AND IRREVOCABLY
AGREES THAT, UPON THE MOVING PARTY'S ELECTION, ALL ACTIONS OR PROCEEDINGS
ARISING OUT OF OR RELATING TO THIS AGREEMENT OR THE OTHER RELATED DOCUMENTS
SHALL BE LITIGATED IN SUCH COURTS. EACH PARTY HERETO ACCEPTS FOR ITSELF AND IN
CONNECTION WITH ITS PROPERTIES, GENERALLY AND UNCONDITIONALLY, THE NONEXCLUSIVE
JURISDICTION OF THE AFORESAID COURTS AND WAIVES ANY DEFENSE OF FORUM
NONCOVENIENS, AND IRREVOCABLY AGREES TO BE BOUND BY ANY JUDGMENT RENDERED
THEREBY IN CONNECTION WITH THIS AGREEMENT. ANY PROCESS SERVED BY REGISTERED MAIL
TO A PARTY IS HEREBY ACKNOWLEDGED BY SUCH PARTY TO BE EFFECTIVE AND BINDING
SERVICE IN EVERY RESPECT. NOTHING HEREIN SHALL AFFECT THE RIGHT TO SERVE
PROCESS IN ANY OTHER MANNER PERMITTED BY LAW OR SHALL LIMIT THE RIGHT OF
PURCHASER TO BRING PROCEEDINGS AGAINST SELLERS, OR ANY OF THEM, IN THE COURTS OF
ANY OTHER JURISDICTION.
11.9. WAIVER OF JURY TRIAL.
--------------------
EACH PARTY HERETO HEREBY WAIVES ITS RESPECTIVE RIGHTS TO A JURY TRIAL
OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF THIS AGREEMENT OR
ANY DEALINGS BETWEEN THEM RELATING TO THE SUBJECT MATTER OF THIS TRANSACTION AND
THE RELATIONSHIP THAT IS BEING ESTABLISHED. EACH PARTY HERETO ALSO WAIVES ANY
BOND OR SURETY OR SECURITY UPON SUCH BOND WHICH MIGHT, BUT FOR THIS WAIVER, BE
REQUIRED OF THE OTHER PARTIES. THE SCOPE OF THIS WAIVER IS INTENDED TO BE ALL
ENCOMPASSING OF ANY AND ALL DISPUTES THAT MAY BE FILED IN ANY COURT AND THAT
RELATE TO THE SUBJECT MATTER OF THESE TRANSACTIONS, INCLUDING WITHOUT
LIMITATION, CONTRACT CLAIMS, TORT CLAIMS, BREACH OF DUTY CLAIMS,
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<PAGE>
AND ALL OTHER COMMON LAW AND STATUTORY CLAIMS. EACH PARTY HERETO ACKNOWLEDGES
THAT THIS WAIVER IS A MATERIAL INDUCEMENT TO ENTER INTO A BUSINESS RELATIONSHIP,
THAT EACH HAS ALREADY RELIED ON THE WAIVER IN ENTERING INTO THIS AGREEMENT AND
THAT EACH WILL CONTINUE TO RELY ON THE WAIVER IN THEIR RELATED FUTURE DEALINGS.
EACH PARTY HERETO FURTHER WARRANTS AND REPRESENTS THAT EACH HAS REVIEWED THIS
WAIVER WITH ITS LEGAL COUNSEL, AND THAT EACH KNOWINGLY AND VOLUNTARILY WAIVES
ITS JURY TRIAL RIGHTS FOLLOWING CONSULTATION WITH LEGAL COUNSEL. THIS WAIVER IS
IRREVOCABLE, MEANING THAT IT MAY NOT BE MODIFIED EITHER ORALLY OR IN WRITING,
AND THE WAIVER SHALL APPLY TO ANY SUBSEQUENT AMENDMENTS, RENEWALS, SUPPLEMENTS
OR MODIFICATIONS TO THIS AGREEMENT OR TO ANY OTHER DOCUMENTS OR AGREEMENTS
RELATING TO THE TRANSACTIONS CONTEMPLATED HEREBY. IN THE EVENT OF LITIGATION,
THIS AGREEMENT MAY BE FILED AS A WRITTEN CONSENT TO A TRIAL BY THE COURT.
11.10. NOTICES.
-------
All notices, demands or other communications to be given or delivered
under or by reason of the provisions of this Agreement shall be in writing and
shall be deemed to have been given (a) when delivered personally or sent by
facsimile to the recipient, or (b) one (1) business day after the date such
communication is sent to the recipient by reputable express courier service
(charges prepaid). Such notices, demands and other communications shall be sent
to the parties hereto at the addresses indicated below:
If to Purchaser: Career Education Corporation
2800 West Higgins Road
Hoffman Estates, Illinois 60195
Attention: John M. Larson, William Klettke
Facsimile: (847) 781-3610
With copies to: D'Ancona & Pflaum
30 North LaSalle Street
Suite 2900
Chicago, Illinois 60602
Attention: Michel J. Feldman
Facsimile: (312) 580-0923
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<PAGE>
and Goldberg, Kohn, Bell, Black,
Rosenbloom & Moritz, Ltd.
55 East Monroe Street
Suite 3700
Chicago, Illinois 60603
Attention: Dennis B. Black, Esq.
Facsimile: (312) 332-2196
If to Non-Resident
Sellers, as set forth
hereto on Schedule
--------
11.10:
-----
If to Gross: Lawrence N. Gross
175 Cumberland Street
Suite 2204
Toronto, Ontario
CANADA M5R 3M9
With copies to: Richard Bain
Robins, Appleby & Taub
130 W. Adelaide Street
Toronto, Ontario
CANADA M5H 2M2
Facsimile: (416) 868-0306
or to such other address or to the attention of such other Person as the
recipient party has specified by prior written notice to the sending party.
11.11. SELLERS' REPRESENTATIVE.
-----------------------
Intentionally deleted.
11.12. ENTIRE AGREEMENT.
----------------
Except as otherwise expressly set forth herein and except for the
Stock Purchase Agreement, this Agreement and the exhibits and schedules hereto
embody the complete agreement and understanding by and among the parties and
their respective Affiliates, and supersede and preempt any prior understandings,
agreements or representations by or among the parties and their respective
Affiliates, written or oral, which may have related to the subject matter hereof
in any way, including, without limitation, that certain letter agreement dated
February 11, 1997 between Purchaser and the Company (as representative for
Sellers).
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<PAGE>
11.13. CURRENCY.
--------
Unless otherwise indicated all dollar amounts referred to in this
Agreement, including the symbol "$", refer to lawful money of the United States
of America.
11.14. ENGLISH LANGUAGE.
----------------
The parties confirm that it is their wish that this Agreement and any
other documents delivered or given pursuant to this Agreement, including
notices, have been and shall be in the English language only. Les parties aux
presents confirment leur volonte que cette convention de meme tous les
documents, y compris tous avis, s'y rattachant, soient rediges en anglais
seulement.
11.15. ANNOUNCEMENTS.
-------------
Except to the extent required by law or by any Governmental Body each
of the parties hereto agrees that no disclosure or public announcement with
respect to this Agreement or the transactions herein contemplated shall be made
by any party hereto without the prior written consent of each of the other
parties hereto, which consent shall not be unreasonably withheld.
11.16. TIME OF THE ESSENCE.
-------------------
Time shall be of the essence of this Agreement.
11.17. WAIVER.
------
Notwithstanding anything to the contrary contained herein, no waiver
by any party of any right or remedy hereunder shall be deemed to constitute a
waiver by such party of any other right or remedy hereunder or to create a
course of conduct.
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<PAGE>
IN WITNESS WHEREOF, the parties hereby have executed this Share
Purchase Agreement on the date first written above.
SELLERS:
/s/ CLEM STEIN, JR.
----------------------------------------
Clem Stein, Jr.
/s/ LEONARD RUTSTEIN
----------------------------------------
Leonard Rutstein
/s/ BARBARA ANN SCOTT KING
----------------------------------------
Barbara Ann Scott King
/s/ LAWRENCE N. GROSS
----------------------------------------
Lawrence N. Gross
PURCHASER:
CAREER EDUCATION CORPORATION, a
Delaware corporation
By: /s/ WILLIAM A. KLETTKE
--------------------------------------
Its: Senior Vice President
-------------------------------------
-65-
<PAGE>
LIST OF EXHIBITS AND SCHEDULES
Exhibit A - Form of Escrow Agreement
Exhibit B - Form of Seller Note
Exhibit C - Form of Letter of Credit
Exhibit D - Form of Sellers' Release
Exhibit E - Form of Noncompetition Agreement
Exhibit F - Form of Closing Checklist
Exhibit G - Form of Purchaser's Counsel Opinion
LIST OF SCHEDULES
Schedule 2.2 - Payment of Purchase Price
Schedule 3.1(c) - Allocation of Non-Competition Payments
Schedule 3.1(h) - Sellers' Required Consents
Schedule 3.1(j) - Preliminary Closing Balance Sheet
Schedule 3.2(f) - Termination of Guarantees
Schedule 4.4 - Sellers' Conflicts
Schedule 4.6 - Capitalization
Schedule 4.7 - Books & Records
Schedule 4.8(a) - Compliance with Laws
Schedule 4.8(b) - License and Permits
Schedule 4.8(c) - Investigations
Schedule 4.8(d) - New Programs Denied by ME
Schedule 4.9(a) - List of Policy Guideline Documentation
Schedule 4.9(b) - Material Deviations from Policy Guidelines
Schedule 4.11(b) - Leased Real Property
Schedule 4.11(c) - Capital Improvements to Leased Facilities Other
Facilities
Schedule 4.11(d)(i) - Leased and Licensed Assets
Schedule 4.11(d)(ii) - Permitted Encumbrances
Schedule 4.11(e) - List of Tangible Assets
Schedule 4.11(f) - Other Facilities
Schedule 4.12 - Material Miscellaneous Contracts
Schedule 4.13(a) - Tradenames
Schedule 4.14 - Financial Security Arrangements
Schedule 4.14(c) - Debts Incurred Since Interim Balance Sheet Date
Schedule 4.17 - List of Bank Accounts
Schedule 4.18(a) - Litigation
Schedule 4.18(b) - Judgments
Schedule 4.19 - Insurance
Schedule 4.20 - Environmental Matters
Schedule 4.21(a) - Employee Benefit Plans
Schedule 4.21(b) - Company Contributions to Employee Benefit Plans
-66-
<PAGE>
Schedule 4.22(a) - List of Employees, Consultants and Other Service
Providers; Compliance with Legal Requirements
Schedule 4.22(b) - Confidentiality, Noncompetition and Proprietary
Rights Agreements
Schedule 4.22(c) - Retired Employees and Directors; Severance
Agreements
Schedule 4.23(a) - Labor Relations; Compliance
Schedule 4.23(b) - Judgments
Schedule 4.23(c) - Wrongful dismissals
Schedule 4.24(a) - Tax Matters
Schedule 4.24(b) - Tax Audits
Schedule 4.24(c) - Interim Financial Statements
Schedule 4.26 - Affiliate Transactions
Schedule 4.27 - Absence of Certain Changes
Schedule 4.28 - Indebtedness
Schedule 4.29 - Conducted Business Since Interim Balance sheet
Schedule 5.3 - Purchaser's Consents and Governmental Approvals
Schedule 11.10 - Addresses for Notice to Non-Resident Sellers
-67-
<PAGE>
EXHIBIT 4.2
================================================================================
CREDIT AGREEMENT
dated as of May 30, 1997
among
CAREER EDUCATION CORPORATION,
as Borrower,
THE LENDERS NAMED HEREIN,
and
LASALLE NATIONAL BANK,
as Agent
================================================================================
<PAGE>
The following Table of Contents has been inserted for convenience only and does
not constitute a part of this Agreement.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
SECTION 1. DEFINITIONS AND ACCOUNTING TERMS.................. 2
1.1 Certain Defined Terms.............................. 2
---------------------
1.2 Other Definitional Provisions...................... 23
-----------------------------
1.3 Accounting and Financial Determinations............ 23
---------------------------------------
SECTION 2. THE COMMITMENTS................................... 24
2.1 Term Loan Commitment............................... 24
--------------------
2.2 Revolving Loan Commitment.......................... 24
-------------------------
2.3 Increase of Commitments............................ 24
-----------------------
2.4 Automatic Reduction of Revolving Loan Commitments.. 26
-------------------------------------------------
2.5 LC Commitment...................................... 26
-------------
2.6 Commitments and Other Terms........................ 27
---------------------------
SECTION 3. THE LOANS......................................... 27
3.1 Various Types of Loans............................. 27
----------------------
3.2 Notice of Borrowing................................ 27
-------------------
3.3 Funding............................................ 28
-------
3.4 Funding Reliance................................... 28
----------------
3.5 Conversion and Continuation of Loans............... 28
------------------------------------
3.6 Repayment of Term Loans; Notes..................... 30
------------------------------
3.7 Repayment of Revolving Loans; Notes................ 30
-----------------------------------
3.8 Recordkeeping...................................... 30
-------------
SECTION 4. THE LETTERS OF CREDIT............................. 30
4.1 Request for Issuance of Letters of Credit.......... 30
-----------------------------------------
4.2 Expiration and other Terms......................... 31
--------------------------
4.3 Participation...................................... 31
-------------
4.4 Notification of Demand for Payment................. 31
----------------------------------
4.5 Funding by Agent................................... 31
----------------
4.6 Funding By Lenders................................. 31
------------------
4.7 Non-Conforming Demand For Payment.................. 32
---------------------------------
4.8 Return of Funds Related to Non-Conforming Demand... 32
------------------------------------------------
4.9 Return of Letter of Credit......................... 32
--------------------------
4.10 Reimbursement Agreement of the Borrower............ 32
---------------------------------------
4.11 Obligation to Reimburse for or Participate in
---------------------------------------------
Letter of Credit Payments......................... 33
-------------------------
4.12 Mandatory Payment to Agent of LC Obligations....... 34
--------------------------------------------
SECTION 5. INTEREST AND FEES, ETC............................ 34
5.1 Interest Rates..................................... 34
--------------
</TABLE>
-i-
<PAGE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
5.2 Default Interest Rate.............................. 35
---------------------
5.3 Interest Payment Dates............................. 35
----------------------
5.4 Interest Periods................................... 35
----------------
5.5 Setting and Notice of Rates........................ 36
---------------------------
5.6 Computation of Interest............................ 36
-----------------------
5.7 Fees............................................... 36
----
SECTION 6. REDUCTION OR TERMINATION OF THE COMMITMENTS;
PAYMENTS AND PREPAYMENTS......................... 38
6.1 Voluntary Reduction or Termination of the Revolving
Loan Commitments.................................. 38
6.2 Voluntary Reduction of the LC Commitments.......... 38
-----------------------------------------
6.3 Voluntary Prepayments.............................. 38
---------------------
6.4 Mandatory Prepayments.............................. 39
---------------------
6.5 Making of Payments................................. 40
------------------
6.6 Due Date Extension................................. 41
------------------
6.7 Sharing of Payments................................ 41
-------------------
6.8 Setoff............................................. 42
------
6.9 Net Payments....................................... 42
------------
SECTION 7. CHANGES IN CIRCUMSTANCES.......................... 43
7.1 Increased Costs.................................... 43
---------------
7.2 Change in Rate of Return........................... 44
------------------------
7.3 Basis for Determining Interest Rate Inadequate or
-------------------------------------------------
Unfair............................................. 45
------
7.4 Changes in Law Rendering Certain Loans Unlawful.... 45
-----------------------------------------------
7.5 Funding Losses..................................... 46
--------------
7.6 Right of Lenders to Fund Through Other Offices..... 46
----------------------------------------------
7.7 Discretion of Lenders as to Manner of Funding...... 46
---------------------------------------------
7.8 Conclusiveness of Statements; Survival of
-----------------------------------------
Provisions........................................ 47
----------
SECTION 8. COLLATERAL AND OTHER SECURITY..................... 47
8.1 Security Documents................................. 47
------------------
8.2 Further Assurances................................. 47
------------------
SECTION 9. REPRESENTATIONS AND WARRANTIES.................... 48
9.1 Organization, etc.................................. 48
-----------------
9.2 Authorization...................................... 48
-------------
9.3 No Conflict........................................ 48
-----------
9.4 Governmental Consents.............................. 49
---------------------
9.5 Validity........................................... 49
--------
9.6 Financial Statements............................... 49
--------------------
9.7 Material Adverse Change............................ 49
-----------------------
9.8 Litigation and Contingent Obligations.............. 49
-------------------------------------
9.9 Liens.............................................. 50
-----
9.10 Subsidiaries....................................... 50
------------
</TABLE>
-ii-
<PAGE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
9.11 Pension and Welfare Plans.......................... 50
-------------------------
9.12 Investment Company Act............................. 51
----------------------
9.13 Public Utility Holding Company Act................. 51
----------------------------------
9.14 Margin Regulation.................................. 51
-----------------
9.15 Collateral......................................... 51
----------
9.16 Taxes.............................................. 51
-----
9.17 Accuracy of Information............................ 52
-----------------------
9.18 Environmental Warranties........................... 52
------------------------
9.19 Proceeds........................................... 53
--------
9.20 Insurance.......................................... 54
---------
9.21 Securities Laws.................................... 54
---------------
9.22 Governmental Authorizations........................ 54
---------------------------
9.23 Stock Purchase Transaction......................... 54
--------------------------
9.24 Representations in Other Agreements True and
--------------------------------------------
Correct............................................ 55
-------
9.25 Business Locations; Trade Names.................... 55
-------------------------------
9.26 Solvency........................................... 55
--------
9.27 Title IV Compliance................................ 55
-------------------
9.28 No Burdensome Restrictions......................... 57
--------------------------
9.29 Copyrights, Patents, Trademarks and Licenses, etc.. 57
-------------------------------------------------
9.30 Title to Assets; Leases............................ 58
-----------------------
9.31 Labor Disputes..................................... 58
--------------
SECTION 10. AFFIRMATIVE COVENANTS............................ 58
10.1 Reports, Certificates and Other Information........ 58
-------------------------------------------
10.2 Corporate Existence; Foreign Qualification......... 63
------------------------------------------
10.3 Books, Records and Inspections..................... 63
------------------------------
10.4 Insurance.......................................... 64
---------
10.5 Taxes and Liabilities.............................. 64
---------------------
10.6 Pension Plans and Welfare Plans.................... 64
-------------------------------
10.7 Compliance with Laws............................... 64
--------------------
10.8 Title IV Compliance................................ 64
-------------------
10.9 Maintenance of Permits............................. 67
----------------------
10.10 Environmental Compliance........................... 67
------------------------
SECTION 11. NEGATIVE COVENANTS............................... 67
11.1 Limitation on Indebtedness......................... 67
--------------------------
11.2 Liens.............................................. 69
-----
11.3 Consolidation, Merger, etc......................... 69
--------------------------
11.4 Asset Disposition, etc............................. 70
----------------------
11.5 Dividends, etc..................................... 70
--------------
11.6 Investments........................................ 71
-----------
11.7 Rental Obligations................................. 71
------------------
11.8 Subordinated Debt.................................. 71
-----------------
11.9 Take or Pay Contracts.............................. 72
---------------------
11.10 Regulations G and U................................ 72
-------------------
11.11 Subsidiaries....................................... 72
------------
11.12 Other Agreements................................... 73
----------------
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
11.13 Business Activities................................ 73
-------------------
11.14 Change of Location or Name......................... 73
--------------------------
11.15 Transactions with Affiliates....................... 74
----------------------------
11.16 Bank Accounts...................................... 74
-------------
11.17 Limitation on Sales and Leasebacks................. 74
----------------------------------
11.18 Modification of Certain Documents.................. 74
---------------------------------
SECTION 12. FINANCIAL COVENANTS.............................. 75
12.1 Minimum Fixed Charge Coverage Ratio................ 75
-----------------------------------
12.2 Minimum Interest Coverage.......................... 75
-------------------------
12.3 Maximum Leverage Ratio............................. 75
----------------------
12.4 Maximum Capital Expenditures....................... 75
----------------------------
12.5 Minimum Tangible Net Worth......................... 75
--------------------------
SECTION 13. CONDITIONS....................................... 76
13.1 Initial Borrowing.................................. 76
-----------------
13.2 Conditions of each Letter of Credit................ 78
-----------------------------------
13.3 All Loans and Letters of Credit.................... 78
-------------------------------
13.4 Loans for Stock Purchase Transactions.............. 79
-------------------------------------
13.5 Loans for Permitted Acquisitions................... 79
--------------------------------
SECTION 14. EVENTS OF DEFAULT AND THEIR EFFECT............... 80
14.1 Events of Default.................................. 80
-----------------
14.2 Effect of Event of Default......................... 83
--------------------------
SECTION 15. THE AGENT........................................ 83
15.1 Authorization and Action........................... 83
------------------------
15.2 Liability of the Agent............................. 83
----------------------
15.3 LaSalle and Affiliates............................. 84
----------------------
15.4 Lender Credit Decision............................. 84
----------------------
15.5 Indemnification.................................... 85
---------------
15.6 Successor Agent.................................... 85
---------------
15.7 Collateral Matters................................. 86
------------------
SECTION 16. ASSIGNMENTS AND PARTICIPATIONS................... 86
16.1 Assignments........................................ 86
-----------
16.2 Participations..................................... 88
--------------
16.3 Disclosure of Information.......................... 88
-------------------------
16.4 Foreign Transferees................................ 89
-------------------
SECTION 17. MISCELLANEOUS.................................... 89
17.1 Waivers and Amendments............................. 89
----------------------
17.2 Notices............................................ 90
-------
17.3 Regulation U....................................... 91
------------
</TABLE>
-iv-
<PAGE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
17.4 Payment of Costs and Expenses...................... 91
-----------------------------
17.5 Indemnity.......................................... 92
---------
17.6 Subsidiary References.............................. 92
---------------------
17.7 Captions........................................... 92
--------
17.8 Governing Law...................................... 92
-------------
17.9 Counterparts....................................... 92
------------
17.10 SUBMISSION TO JURISDICTION; WAIVER OF VENUE....... 93
-------------------------------------------
17.11 Service of Process................................ 93
------------------
17.12 WAIVER OF JURY TRIAL.............................. 94
--------------------
17.13 Successors and Assigns............................ 94
----------------------
</TABLE>
-v-
<PAGE>
SCHEDULES AND EXHIBITS
SCHEDULES
- ---------
SCHEDULE 2.1 Schedule of Lenders and Percentages
SCHEDULE 9.1 Stockholders
SCHEDULE 9.8 Material Litigation
SCHEDULE 9.10 Subsidiaries
SCHEDULE 9.11 ERISA
SCHEDULE 9.15 Collateral
SCHEDULE 9.18 Environmental Warranties
SCHEDULE 9.20 Insurance
SCHEDULE 9.25 Business Locations; Trade Names
SCHEDULE 9.27(c) Title IV Compliance Information
SCHEDULE 9.27(f) Title IV Compliance Disclosure
SCHEDULE 9.27(g) Cohort Default Rate
SCHEDULE 9.28 Intellectual Property
SCHEDULE 9.30 Material Leases
SCHEDULE 11.1 Indebtedness
SCHEDULE 11.2 Liens
SCHEDULE 11.6 Investments
SCHEDULE 11.12 Subsidiaries
SCHEDULE 11.16 Bank Accounts
EXHIBITS
- --------
EXHIBIT A Form of Term Note
EXHIBIT B Form of Revolving Note
EXHIBIT C Form of Borrowing Request
EXHIBIT D Form of Continuation/Conversion Notice
EXHIBIT E Form of LC Application
EXHIBIT F Form of Security Agreement
EXHIBIT G Form of Borrower Pledge Agreement
EXHIBIT H Form of Gibbs Pledge Agreement
EXHIBIT I Form of Collateral Assignment of Lease(s)
EXHIBIT J Form of Subsidiary Guaranty
EXHIBIT K-1 Form of Borrower Officer's Certificate
EXHIBIT K-2 Form of Subsidiary Officer's Certificate
EXHIBIT L Form of Borrower Trademark Security Agreement
EXHIBIT M Form of Subordination Agreement
EXHIBIT N Form of Borrower Solvency Certificate
EXHIBIT O Form of Compliance Certificate
EXHIBIT P Form of Landlord Waiver and Estoppel Certificate
EXHIBIT Q Form of Excess Cash Flow Certificate
EXHIBIT R Form of Gibbs Acquisition Agreement
EXHIBIT S-1 [RESERVED]
EXHIBIT S-2 [RESERVED]
EXHIBIT T Form of Opinion of D'Ancona & Pflaum, counsel to the Borrower and
its Subsidiaries
-vi-
<PAGE>
EXHIBIT U Form of Assignment Agreement
EXHIBIT V Form of Financing Request
EXHIBIT W-1 Form of Step-up Lender Confirmation
EXHIBIT W-2 Form of New Lender Confirmation
EXHIBIT X [RESERVED]
EXHIBIT Y Form of Post-Closing Agreement
-vii-
<PAGE>
CREDIT AGREEMENT
THIS CREDIT AGREEMENT, dated as of May 30, 1997, is made by and among
CAREER EDUCATION CORPORATION, a Delaware corporation (the "Borrower"), the
lenders party hereto (herein, together with any Eligible Assignees thereof,
collectively called the "Lenders", and each individually called a "Lender"), and
LASALLE NATIONAL BANK ("LaSalle"), as agent for the Lenders (herein, in such
capacity, together with any successor thereto in such capacity, called the
"Agent").
Background
----------
1. The Borrower and K-III Prime Corporation, Inc., a Delaware
corporation, entered into a Stock Sale Agreement, dated as of April 7, 1997 (as
the same may be amended or modified in accordance with the Agreement, the "Gibbs
Acquisition Agreement"), a copy of which is attached hereto as Exhibit R,
---------
pursuant to which the Borrower will acquire all of the outstanding capital stock
of The Katharine Gibbs Schools, Inc., a Delaware corporation ("Gibbs").
2. IAMD Acquisition I, Ltd., a Delaware corporation and a wholly owned
Subsidiary (as hereinafter defined) of the Borrower ("IAMD Acquisition") and the
shareholders of IAMD Limited, an Illinois Corporation ("IAMD (U.S.)"), are
currently negotiating a Stock Purchase Agreement (the "IAMD (U.S.) Acquisition
Agreement"), pursuant to which IAMD Acquisition will acquire all of the
outstanding capital stock of IAMD (U.S.). The Borrower and the shareholders of
International Academy of Merchandising and Design (Canada), Ltd., an Ontario
corporation ("IAMD (Canada)") are currently negotiating a Stock Purchase
Agreement (the "IAMD (Canada) Acquisition Agreement"), pursuant to which the
Borrower will acquire all of the outstanding capital stock of IAMD (Canada).
The IAMD (U.S.) Acquisition Agreement and the IAMD (Canada) Acquisition
Agreement are collectively referred to herein as the "IAMD Acquisition
Agreements."
3. In connection with the transactions contemplated by the Gibbs
Acquisition Agreement and the IAMD Acquisition Agreements (collectively, the
"Stock Purchase Transactions"), the Borrower desires to obtain Commitments (as
hereinafter defined) from the Lenders pursuant to which Loans (as hereinafter
defined) will be made and/or Letters of Credit (as hereinafter defined) issued
for the account of the Borrower.
4. (a) simultaneously with the closing under this Agreement, the Borrower
will issue at least $15,000,000 of equity securities to Heller, Electra (each as
hereinafter defined) and certain other stockholders of the Borrower in the form
of
<PAGE>
preferred stock and common stock purchase warrants, and (b) upon the closing of
the transactions contemplated by the IAMD Acquisition Agreements, the Borrower
will issue at least an additional $5,500,000 (a portion of which may have
previously been issued under clause (a)) of equity securities to Heller, Electra
and certain other stockholders of the Borrower in the form of preferred stock
and common stock purchase warrants, the proceeds referred to in the foregoing
clauses (a) and (b) of which, together with the proceeds of the Loans, shall be
- -------------------
used to (i) finance the Stock Purchase Transactions (including the payment of
expenses incident thereto); provided that the purchase price of Gibbs shall not
exceed $27,000,000 and the aggregate purchase price of IAMD (U.S) and IAMD
(Canada) shall not exceed $18,000,000, (ii) to finance Permitted Acquisitions
(as hereinafter defined) in addition to the Stock Purchase Transactions in an
amount not to exceed $20,000,000, (iii) to pay (or in the case of letters of
credit issued under the Provident Bank Credit Agreement (as hereinafter
defined), to back up such letters of credit with Letters of Credit (as
hereinafter defined) issued under this Agreement) the Indebtedness to be
Refinanced (as hereinafter defined) and (iv) to provide general working capital.
5. The Lenders are willing to make the Loans and issue, or participate in
the issuance of, the Letters of Credit, all subject to the terms and conditions
hereinafter set forth.
NOW, THEREFORE, in consideration of the mutual promises herein contained
and for other good and valuable consideration, the receipt and sufficiency of
which is hereby acknowledged, the parties hereto agree as follows:
SECTION 1. DEFINITIONS AND ACCOUNTING TERMS
SECTION 1.1 Certain Defined Terms. As used in this Agreement, the
---------------------
following terms shall have the following meanings (such meanings to be equally
applicable to both the singular and plural forms of the terms defined):
"ABN AMRO" ABN AMRO a banking holding company organized under the laws of
the Netherlands.
"Acquired Person" shall mean any Person acquired or the Person holding the
assets acquired upon the consummation of an Acquisition permitted by the terms
of this Agreement.
"Accrediting Body" shall mean, with respect to any Educational Institution,
any entity or organization, whether governmental, government-chartered, inter-
governmental, private or quasi-private, which engages in granting or withholding
licensing, accreditation or similar approval for such Educational
-2-
<PAGE>
Institution, in accordance with standards relating to the performance,
operation, financial condition and/or academic standing of private post-
secondary schools, including, without limitation, as applicable, the Accrediting
Commission of Career Schools and Colleges of Technology and the Accrediting
Council for Independent Colleges and Schools and the Western Association of
Schools and Colleges.
"Acquisition" shall mean any transaction or series of transactions for the
purpose of or resulting, directly or indirectly, in (a) the acquisition (in one
or a series of related transactions) of all or substantially all of the assets
of a Person, or of any business or division of a Person, (b) the acquisition (in
one or a series of related transactions) of in excess of 50% of the capital
stock, partnership interests, membership interests or other equity securities of
any Person, or otherwise causing any Person to become a Subsidiary of the
Borrower, or (c) a merger or consolidation or any other combination of the
Borrower or one of its Subsidiaries with another Person (other than a Person
that is a Subsidiary of the Borrower immediately prior to such merger or
consolidation); provided that the Borrower or such Subsidiary, as the case may
-------- ----
be, is the surviving entity (unless otherwise consented to by the Agent), in
each case subject to and to the extent permitted by the terms of this Agreement.
"Affected Lender" - see Section 7.4.
-----------
"Affiliate" of any Person shall mean any other Person which, directly or
indirectly, controls, is controlled by or is under common control with such
Person (excluding any trustee under, or any commitment with responsibility for
administering, any Pension Plan). A Person shall be deemed to be "controlled
by" any other Person if such other Person possesses, directly or indirectly,
power (a) to vote 5% or more of the securities (on a fully diluted basis) having
ordinary voting power for the election of directors or managing general
partners; or (b) to direct or cause the direction of the management and policies
of such Person whether through the ownership of voting securities, membership
interests, by contract, or otherwise.
"Agent" shall mean LaSalle in its capacity as agent for the Lenders
hereunder, and any successor agent in accordance with the terms of Section 15.6.
------------
"Agreement" shall mean this Credit Agreement, as hereafter amended,
modified, restated, refinanced, refunded or renewed from time to time in whole
or in part.
"Applicable Base Rate Margin" - see Section 5.1.
-----------
-3-
<PAGE>
"Applicable LIBOR Rate Margin" - see Section 5.1.
-----------
"Assignment Agreement" - see Section 16.1.
------------
"Base Rate" shall mean, for any day, a fluctuating rate of interest per
annum equal to the greater of (a) the rate of interest in effect for such day as
publicly announced from time to time by LaSalle in Chicago, Illinois, as its
"prime rate", or (b) a rate of interest per annum (rounded upward to the next
higher 1/16th of 1% if not already an integral multiple of 1/16th of 1%) equal
to the Federal Funds Rate in effect at the commencement of business on such day
plus 1/2% per annum. The "prime rate" is a rate of interest set by LaSalle
based upon various factors including LaSalle's costs and desired return, general
economic conditions and other factors, and is used as a reference point for
pricing some loans, which may be priced at, above, or below such announced rate.
If for any reason the Agent shall have determined (which determination shall be
conclusive in the absence of manifest error) that it is unable to ascertain the
Federal Funds Rate for any reason (including, without limitation, the inability
or failure of the Agent to obtain sufficient bids or publications in accordance
with the terms hereof), the Base Rate shall be determined in accordance with
clause (a) of this definition until the circumstances giving rise to such
- ----------
inability no longer exist.
"Base Rate Loan" shall mean any Loan which bears interest at or by
reference to the Base Rate.
"Beneficiary" shall mean the beneficiary under any Letter of Credit.
"Borrower" - see Preamble.
"Borrower Pledge Agreement" - see Section 8.1.
-----------
"Borrower Trademark Security Agreement" shall mean that certain Borrower
Trademark Security Agreement, dated as of the date hereof, among the Borrower
and the Agent, substantially in the form of Exhibit L, as the same may be
---------
amended or modified from time to time in whole or in part.
"Borrowing" shall mean a borrowing hereunder consisting of Loans made to
the Borrower at the same time by the Lenders pursuant to Section 2, and with
---------
respect to LIBOR Rate Loans, having the same Interest Period. A Borrowing may
be a Base Rate Borrowing or a LIBOR Rate Borrowing.
"Borrowing Request" - see Section 3.2.
-----------
"Business Day" shall mean: (a) in the case of a Business Day
-4-
<PAGE>
which relates to a LIBOR Rate Loan, any day of the year on which banks are open
for business in Chicago, Illinois and on which dealings are carried on in the
London eurodollar market; and (b) in the case of a Business Day which relates to
a Base Rate Loan, any day of the year on which banks are open for business in
Chicago, Illinois.
"Capitalized Lease Liabilities" shall mean, with respect to any Person, all
monetary obligations of such Person under any leasing or similar arrangement
which, in accordance with GAAP, would be classified as a capitalized lease, and,
for purposes of this Agreement, the amount of such obligations shall be the
capitalized amount thereof, determined in accordance with GAAP, and the stated
maturity thereof shall be the date of the last payment of rent or any other
amount due under such lease prior to the first date upon which such lease may be
terminated by the lessee without payment of a penalty.
"Cash Equivalents" shall mean (a) securities with maturities of three (3)
months or less from the date of acquisition issued and fully guaranteed or
insured by the United States Government or any agency thereof, (b) certificates
of deposit, eurodollar time deposits, overnight bank deposits, bankers'
acceptances and repurchase agreements of any Lender or any other commercial bank
organized under the laws of the United States or any state thereof having
capital and surplus and undivided profits aggregating at least $250,000,000 and
whose unsecured long-term debt obligations are rated at least A-1 by S&P or A3
by Moody's having maturities of three (3) months or less from the date of
acquisition, and (c) commercial paper rated at least A-1 by S&P or P-1 by
Moody's.
"CEC Management" shall mean CEC Management, Inc., an Illinois corporation.
"CERCLA" shall mean the Comprehensive Environmental Response Compensation
and Liability Act of 1980, as amended.
"CERCLIS" shall mean the Comprehensive Environmental Response Compensation
Liability Information System List.
"C.F.R." shall mean the Code of Federal Regulations.
"Change in Control" shall mean the time at which (a) any Person (including
a Person's Affiliates and associates) or group (as that term is understood under
Section 13(d) of the Securities Exchange Act of 1934, as amended, and the rules
and regulations thereunder), other than the Control Group, has become the
beneficial owner of a percentage (based on voting power, in the event different
classes of stock shall have different voting powers) of the voting stock of the
Borrower greater than twenty-five percent (25%), (b) the Control Group no longer
has the
-5-
<PAGE>
ability to control the appointment or election of a majority of the directors of
the Borrower, (c) there shall occur a sale by Heller of more than fifty percent
(50%) of its capital stock of the Borrower held on the Closing Date (after
giving effect to the Equity Purchase Transaction), (d) there shall be
consummated any consolidation or merger of the Borrower or any of its
Subsidiaries pursuant to which the Borrower's or such Subsidiary's common stock
(or other capital stock) would be converted into cash, securities or other
property, other than a merger or consolidation of the Borrower or such
Subsidiary in which the holders of such common stock (or such other capital
stock) immediately prior to the merger have the same proportionate ownership,
directly or indirectly, of common stock of the surviving corporation immediately
after the merger as they had of the Borrower's or such Subsidiary's common stock
immediately prior to such merger, (e) all or substantially all of the Borrower's
or any of its Subsidiary's assets shall be sold, leased, conveyed or otherwise
disposed of as an entirety or substantially as an entirety to any Person
(including an Affiliate or associate of the Borrower or its Subsidiaries) in one
or a series of transactions, (f) Jack M. Larson shall cease to perform his
duties as President and CEO of the Borrower, unless within one hundred and
twenty (120) days thereafter, a replacement for him acceptable to the Agent (in
its reasonable judgment) is found, unless the Borrower is diligently pursuing
appointment of a replacement chief executive officer, but in any event such
replacement is appointed within 150 days, or (g) the Borrower ceases to own free
and clear of all Liens (other than Permitted Liens), at least 100% of the
outstanding shares of voting stock of any of its Subsidiaries existing on the
Closing Date on a fully diluted basis and, with respect to any Subsidiary
created or acquired after the Closing Date, at least 66-2/3% of the outstanding
shares of voting stock of such Subsidiary on a fully diluted basis, except in
connection with a disposition permitted by Section 11.3.
------------
"Charges" - see Section 6.9.
-----------
"Closing Date" shall mean the date that the initial Loans are made under
this Agreement after satisfaction of the conditions precedent set forth in
Section 13.
- ----------
"Code" shall mean the Internal Revenue Code of 1986, as amended.
"Collateral" shall mean all of the collateral security described or
provided for in Section 8 together with all property and/or rights on or in
---------
which a Lien is now or hereafter granted by any Person to the Agent (or to any
agent, trustee or other party acting on behalf of the Agent), for the benefit of
the Lenders, pursuant to the Security Agreement, the Borrower Trademark Security
Agreement, the Borrower Pledge Agreement, the Gibbs
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Pledge Agreement, the Fee Mortgages, the Collateral Assignment of Lease(s) or
any other instruments or documents provided for herein or delivered hereunder or
in connection herewith or therewith.
"Collateral Assignment of Lease(s)" shall mean the Collateral Assignment of
Leases, substantially in the form of Exhibit I, as the same may be amended or
---------
modified from time to time.
"Commitment Fee" - see Section 5.7(a).
--------------
"Commitment Increase" - see Section 2.3.
-----------
"Commitment Increase Closing Items" - see Section 2.3.
-----------
"Commitment Increase Date" - see Section 2.3.
-----------
"Commitments" - see Section 2.6.
-----------
"Compliance Certificate" - see Section 10.1.4.
--------------
"Compliance Reports" - see Section 9.27(f).
---------------
"Consolidated Capital Expenditures" shall mean, for any period, the capital
expenditures of the Borrower and its Subsidiaries for such period, as the same
are (or would in accordance with GAAP be) set forth in the consolidated
statement of changes in financial position of the Borrower and its Subsidiaries
for such period, and including in any event the amount of any Investment during
such period pursuant to Sections 11.6(d) and 11.6(e).
---------------- -------
"Consolidated EBITDA" shall mean, for any period, Consolidated Net Income
for such period, plus (a) Consolidated Interest Expense for such period, plus
(b) the aggregate amounts deducted in determining Consolidated Net Income in
respect of (i) cash Income Taxes paid, (ii) depreciation and amortization, and
(iii) interest income, less (c) any Non-Recurring Items.
"Consolidated Interest Expense" shall mean, for any period, the aggregate
interest expense (net of interest income) of the Borrower and its Subsidiaries
for such period including, without limitation, (a) the portion of any obligation
under Capital Leases allocable to interest expense in accordance with GAAP, and
(b) the portion of any debt discount that shall be amortized in such period.
"Consolidated Net Income" shall mean, for any period, the consolidated net
income (or loss) of the Borrower and its Subsidiaries for such period.
"Consolidated Tangible Net Worth" shall mean the consolidated
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<PAGE>
net worth of the Borrower and its Subsidiaries after subtracting therefrom the
aggregate amount of any assets of the Borrower and its Subsidiaries,
constituting goodwill, franchises, licenses, patents, trademarks, trade names,
copyrights, service marks, brand names and any other general intangibles as
defined in GAAP.
"Contingent Obligation" shall mean any agreement, undertaking or
arrangement by which any Person guarantees, endorses or otherwise becomes or is
contingently liable upon (by direct or indirect agreement, contingent or
otherwise, to provide funds for payment, to supply funds to, or otherwise to
invest in, a debtor, or otherwise to assure a creditor against loss) the debt,
obligation or other liability of any other Person (other than by endorsements of
instruments in the course of collection), or guarantees the payment of dividends
or other distributions upon the shares of any other Person. The amount of any
Person's obligation under any Contingent Obligation shall (subject to any
limitation set forth therein) be deemed to be the outstanding principal amount
(or maximum outstanding principal amount, if larger) of the debt, obligation or
other liability guaranteed thereby.
"Continuation/Conversion Notice" - see Section 3.5.
-----------
"Control Group" shall mean, the Borrower, the Management Stockholders,
Heller, Electra and Affiliates thereof.
"Controlled Group" shall mean all members of a controlled group of
corporations and all members of a controlled group of trades or businesses
(whether or not incorporated) under common control which, together with the
Borrower, are treated as a single employer under section 414(b) or section
414(c) of the Code or section 4001 of ERISA. For purposes of this definition,
the term Borrower shall be deemed to include any and all Subsidiaries of the
Borrower.
"Default" shall mean any condition or event which constitutes an Event of
Default or which with the giving of notice or lapse of time or both would,
unless cured or waived, become an Event of Default.
"Disposition" - see Section 6.4(b).
--------------
"DOE" shall mean the United States Department of Education and any
successor agency administering federal student financial assistance under Title
IV.
"Dollars" and the sign "$" shall mean lawful money of the United States of
America.
"EAI" shall mean Electra Associates, Inc., a Delaware
-8-
<PAGE>
corporation.
"Educational Institution" shall mean each of the Subsidiaries of the
Borrower (other than CEC Management, IAMD Acquisition and Market Direct) and any
other Acquired Person acquired after the Effective Date pursuant to a Permitted
Acquisition, in each case, which constitutes an Eligible Facility and satisfies
clauses (c)-(e) of the definition of Permitted Acquisition.
- ---------------
"Effective Date" shall mean the date of this Agreement as set forth in the
Preamble.
"EIT" shall mean Electra Investment Trust P.L.C., a corporation formed
under the laws of England and Wales.
"Electra" shall mean, collectively, EIT and EAI.
"Electra Permitted Cash Dividends" shall mean scheduled cash dividends
required to be paid by the Borrower to Electra with respect to the Borrower's
Series C Preferred Stock in an amount not to exceed $500,000 per year or such
lesser proportionate amount reflecting any reduction in the number of shares of
the Borrower's Series C Preferred Stock owned by Electra after the Closing Date.
"Eligible Assignee" shall mean any bank (including, without limitation, any
Federal Reserve Bank), insurance company, pension fund, mutual fund, investment
fund, other financial institution.
"Eligible Facility" shall mean a vocational or similar educational
institution.
"Environmental Laws" shall mean all federal, state or local laws, statutes,
common law duties, rules, regulations, ordinances and codes, together with all
administrative orders, directed duties, requests, licenses, authorizations and
permits of, and agreements with, any Governmental Authorities, in each case
relating to environmental, health, safety and land use matters.
"Equity Purchase Documents" shall mean, the stock purchase agreements, the
subscription agreements, the stockholders' agreement(s), the registration rights
agreements, the applicable certificate of designations, the stock certificates,
the warrants, and the other agreements and instruments executed and delivered in
connection with any Equity Purchase Transaction, as in effect on the Closing
Date, or as the same may be amended or modified in accordance with the
Agreement.
"Equity Purchase Transaction" shall mean, collectively, (a) the purchase by
certain stockholders of the Borrower of Series A Preferred Stock of the Borrower
on January 31, 1994, (b) the
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<PAGE>
purchase by Heller of Series A Preferred Stock on June 20, 1994, (c) the
purchase by Electra of shares of Series C Preferred Stock of the Borrower and
the issuance of the warrants on July 31, 1995 pursuant to the applicable Equity
Purchase Documents, (d) the purchase by Electra, Heller and certain other
stockholders of the Borrower of shares of Series D Preferred Stock of the
Borrower and the issuance of warrants on February 28, 1997 and (e) the purchase
by Electra, Heller and certain other stockholders of the Borrower of shares of
Series D Preferred Stock of the Borrower and the issuance of warrants on and/or
after the Closing Date.
"ERISA" shall mean the Employee Retirement Income Security Act of 1974, as
amended.
"Eurocurrency Reserve Percentage" shall mean, with respect to any LIBOR
Rate Loan for any Interest Period, a percentage (expressed as a decimal) equal
to the daily average during such Interest Period, as prescribed by the Federal
Reserve Board, for determining the aggregate maximum reserve requirements
(including all basic, supplemental, marginal and other reserves) applicable to
"Eurocurrency liabilities" pursuant to Regulation D or any other then-applicable
regulation of the Federal Reserve Board which prescribes reserve requirements
applicable to "Eurocurrency liabilities," as defined in Regulation D, as
applicable to the class of banks of which the Agent is a member. Without
limiting the effect of the foregoing, the Eurocurrency Reserve Percentage shall
reflect any other reserves required to be maintained by the Agent against (a)
any category of liabilities that includes deposits by reference to which the
LIBOR Rate (Reserve Adjusted) is to be determined, or (b) any category of
extensions of credit or other assets that includes LIBOR Rate Loans. For
purposes of this Agreement, any LIBOR Rate Loan hereunder shall be deemed to be
"Eurocurrency liabilities," as defined in Regulation D, and, as such, shall be
deemed to be subject to such reserve requirements without the benefit of, or
credit for, proration, exceptions or offsets which may be available to the Agent
from time to time under Regulation D.
"Event of Default" shall mean any of the events described in Section 14.1.
------------
"Excess Cash Flow" shall mean, with respect to any period, (a) Consolidated
EBITDA for such period, less (b) the sum of (i) Consolidated Interest Expense,
(ii) the current portion of any principal or interest paid under this Agreement
during such period, (iii) cash Taxes paid during such period, (iv) Consolidated
Capital Expenditures made during such period and (v) Electra Permitted Cash
Dividends.
"Federal Funds Rate" shall mean, for any day, the rate set forth in the
weekly statistical release designated as H.15(519),
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<PAGE>
or any successor publication, published by the Federal Reserve Bank of New York
(including any such successor, "H.15(519)") on the preceding Business Day
opposite the caption "Federal Funds (Effective)"; or, if for any relevant day
such rate is not so published on any such preceding Business Day, the rate for
such day will be the arithmetic mean as determined by the Agent of the rates for
the last transaction in overnight Federal funds arranged prior to 9:00 a.m. (New
York City time) on that day by each of three leading brokers of Federal funds
transactions in New York City selected by the Agent.
"Fee Letter" - see Section 5.7(d).
--------------
"Fee Mortgages" shall mean the Fee Mortgages granted from time to time by
the Borrower or its Subsidiaries to the Agent to secure the Loans in form and
substance reasonably satisfactory to the Agent in its sole discretion, as the
same may be amended or supplemented from time to time in whole or in part.
"Fiscal Quarter" or "FQ" shall mean any fiscal quarter of a Fiscal Year.
"Fiscal Year" or "FY" shall mean any period of twelve consecutive calendar
months ending on December 31; references to a Fiscal Year with a number
corresponding to any calendar year (e.g., the "1996 Fiscal Year") refer to the
Fiscal Year ending on the December 31 occurring during such calendar year.
"Fixed Charge Coverage Ratio" shall mean, with respect to any period, the
ratio of (a) the sum of (i) Consolidated EBITDA for such period, plus (ii)
expenses paid by the Borrower and its Subsidiaries with respect to operating
leases during such period, plus (iii) Electra Permitted Cash Dividends paid
during such period, minus (iv) to the extent permitted by this Agreement,
Capital Expenditures made during such period, to (b) the sum of (i) scheduled
principal and interest payments on the Senior Funded Debt during such Period,
plus (ii) Consolidated Interest Expense during such period, plus (iii) expenses
paid by the Borrower and its Subsidiaries with respect to operating leases
during such period.
"Funded Debt to Consolidated EBITDA Ratio" shall mean the ratio of Senior
Funded Debt to Consolidated EBITDA.
"GAAP" - see Section 1.3.
-----------
"Gibbs" - see the first recital.
"Gibbs Acquisition Agreement" - see the first recital.
"Gibbs Pledge Agreement" - see Section 8.1.
-----------
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<PAGE>
"Guarantor" shall mean collectively, (or individually each a "Guarantor")
Al Collins Graphic Design School, Ltd., Brooks College, Ltd., Allentown Business
School, Ltd., Brown Institute, Ltd., Western Culinary Institute, Ltd., School of
Computer Technology, Inc., IAMD Acquisition, Gibbs, each a Delaware corporation,
Market Direct, CEC Management and any other Subsidiary of the Borrower that
becomes a guarantor pursuant to Section 11.11.
-------------
"Hazardous Material" shall mean: (a) any "hazardous substance," as defined
by CERCLA; (b) any "hazardous waste," as defined by the Resource Conservation
and Recovery Act, as amended; (c) any petroleum product; or (d) any pollutant or
contaminant or hazardous, dangerous or toxic chemical, material or substance
within the meaning of any other applicable federal, state or local law,
regulation, ordinance or requirement (including consent decrees and
administrative orders) relating to or imposing liability or standards of conduct
concerning any hazardous, toxic or dangerous waste, substance or material, all
as amended or hereafter amended.
"Hedging Obligations" shall mean, with respect to any Person, all
liabilities of such Person under interest rate swap agreements, interest rate
cap agreements and interest rate collar agreements or agreements designed to
protect such Person against fluctuations in interest rates or currency exchange
rates.
"Heller" shall mean Heller Equity Capital Corporation, a Delaware
corporation and its Affiliates.
"IAMD Acquisition" - see the second recital.
"IAMD Acquisition Agreements" - see the second recital.
"IAMD (Canada)" - see the second recital.
"IAMD (Canada) Acquisition Agreement" - see the second recital.
"IAMD (U.S.)" - see the second recital.
"IAMD (U.S.) Acquisition Agreement" - see the second recital.
"Income Taxes" shall mean, with respect to any Person, any Taxes in which
the base is measured by net income of such Person.
"Indebtedness" shall mean, with respect to any Person at any date, without
duplication: (a) all obligations of such Person for borrowed money or in
respect of loans or advances; (b) all obligations of such Person evidenced by
bonds, debentures, notes
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<PAGE>
or other similar instruments including, without limitation, all obligations
comprising Subordinated Debt of such Person; (c) all obligations in respect of
letters of credit, whether or not drawn, and bankers' acceptances issued for the
account of such Person; (d) all Capitalized Lease Liabilities of such Person;
(e) all Hedging Obligations of such Person; (f) all obligations of such Person
secured by a contractual lien; (g) all trade payables of such Person; (h) all
obligations of such Person with respect to operating leases; (i) all other items
(exclusive of negative goodwill) which, in accordance with GAAP, would be
included as liabilities on the liability side of the balance sheet of such
Person; (j) whether or not so included as liabilities in accordance with GAAP,
all obligations of such Person to pay the deferred purchase price of property or
services and Indebtedness secured by a Lien on property owned or being purchased
by such Person (including Indebtedness arising under conditional sales or other
title retention agreements) whether or not such Indebtedness shall have been
assumed by such Person or is limited in recourse; and (k) and all Contingent
Obligations of such Person whether or not in connection with the foregoing.
"Indebtedness to be Refinanced" shall mean, collectively, (a) all
Indebtedness of the Borrower under the Provident Bank Credit Agreement in an
aggregate amount of $17,305,506.81, and (b) upon consummation of the IAMD (U.S.)
and IAMD (Canada) acquisition, Indebtedness in an aggregate amount of $2,000,000
with the approval of the Agent.
"Interest Coverage Ratio" shall mean, for any period, the ratio of
Consolidated EBITDA for such period, to Consolidated Interest Expense for such
period.
"Interest Payment Date" shall mean, as to any LIBOR Rate Loan, the last day
of each Interest Period applicable to such Loan and each date such Loan is
converted into another Type of Loan and, as to any Base Rate Loan, the last
Business Day of each Quarterly Payment Date; provided, however, that if any
-------- -------
Interest Period for a LIBOR Rate Loan exceeds three (3) months, the date that
falls three (3) months after the beginning of such Interest Period and after
each Interest Payment Date thereafter is also an Interest Payment Date.
"Interest Period" - see Section 5.4.
-----------
"Investment" shall mean any investment in any Person, whether by means of
share purchase, capital contribution, loan, time deposit or otherwise.
"LaSalle" shall mean LaSalle National Bank, a national banking association
having its principal place of business at 135 South LaSalle Street, Chicago,
Illinois 60603, in its individual
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capacity.
"LC Administrative Fees" - see Section 5.7(c).
--------------
"LC Application" - see Section 4.1.
-----------
"LC Commitment Fee" - see Section 5.7(b).
--------------
"LC Commitments" - see Section 2.5.
-----------
"LC Obligations" shall mean any and all obligations of every description of
the Borrower in connection with the Letters of Credit issued pursuant to this
Agreement, including without limitation all reimbursement obligations (whether
absolute or contingent) under any LC Application, and all obligations in respect
of related fees or expenses.
"Lenders" or "Lender" - see Preamble.
"Lending Office" shall mean, with respect to any Lender, any office
designated by such Lender in its sole discretion beneath its signature hereto
(or in an Assignment Agreement) or otherwise from time to time by written notice
to the Borrower and the Agent, as a Lending Office for purposes hereunder. A
Lender may designate separate Lending Offices for the purposes of making,
maintaining or continuing Base Rate Loans or LIBOR Rate Loans and, with respect
to LIBOR Rate Loans, such Lending Office may be a foreign branch or an Affiliate
of such Lender or such Lender's holding company.
"Letters of Credit" - see Section 2.5.
-----------
"Leverage Ratio" shall mean, with respect to any period, the ratio of (a)
the aggregate of all Senior Funded Debt of the Borrower and its Subsidiaries for
such period, to (b) Consolidated EBITDA for such period.
"Liabilities" shall mean all obligations of the Borrower and/or any of its
Subsidiaries to the Lenders and the Agent howsoever created, arising or
evidenced, whether direct or indirect, joint or several, absolute or contingent,
or now or hereafter existing, or due or to become due, which arise out of or in
connection with (a) this Agreement, the Notes, the Letters of Credit or the
other Related Documents, or (b) any agreement entered into by the Borrower or
any of its Subsidiaries with respect to any Hedging Obligation.
"LIBOR Rate" shall mean, with respect to any LIBOR Rate Loan for any
Interest Period, the rate per annum equal to the average (rounded upward, if
necessary, to the next higher 1/16th of 1%) of the respective rates notified to
the Agent by ABN AMRO as the rate
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<PAGE>
per annum at which Dollar deposits in immediately available funds are offered to
the Lending Office of ABN AMRO used for quoting such LIBOR Rates two Business
Days prior to the beginning of such Interest Period by prime banks in the London
eurodollar market at their request at approximately 11:00 A.M. (London time),
for delivery on the first day of such Interest Period, for the number of days
comprised therein and in an amount equal or comparable to the amount of the
LIBOR Rate Loan of the Agent for such Interest Period.
"LIBOR Rate Loan" shall mean any Loan which bears interest at a rate
determined by reference to the LIBOR Rate (Reserve Adjusted).
"LIBOR Rate (Reserve Adjusted)" shall mean, with respect to any LIBOR Rate
Loan for any Interest Period, a rate per annum (rounded upward, if necessary, to
the nearest 1/16th of 1%) determined pursuant to the following formula:
LIBOR Rate = LIBOR Rate
----------
(Reserve Adjusted) 1-Eurocurrency
Reserve Percentage
"Lien" shall mean any security interest, mortgage, pledge, hypothecation,
assignment, deposit arrangement, encumbrance, lien (statutory or other), claim
or other priority or preferential arrangement of any kind or nature whatsoever.
"Litigation" shall mean any litigation, proceeding (including without
limitation any governmental proceeding or arbitration proceeding), claim,
lawsuit, and/or investigation pending or threatened against or involving the
Borrower or any of its Subsidiaries or any of its or their businesses or
operations, or the Stock Purchase Transactions.
"Loans" - see Section 2.6.
-----------
"Management Stockholders" shall mean those stockholders of the Borrower or
any of its Subsidiaries who are management employees of the Borrower.
"Market Direct" shall mean Market Direct, Inc., an Illinois corporation.
"Material Adverse Change" or "Material Adverse Effect" shall mean any
change, event, action, condition or effect which individually or in the
aggregate (a) impairs the validity or enforceability of this Agreement, or any
Related Document, or (b) subjects any officer of the Borrower or any of its
Subsidiaries to criminal liability, or (c) materially and adversely affects the
consolidated business, operations, prospects or financial
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<PAGE>
condition of the Borrower or any of its Subsidiaries, taken as a whole, or (d)
impairs the ability of the Borrower or any of its Subsidiaries to perform its
respective obligations under this Agreement and the Related Documents, or (e)
materially adversely affects the perfection or priority of any Lien granted
under any Related Document.
"Material Litigation" or "Material Litigation Development" shall mean any
Litigation, or development in any Litigation, as the case may be (a) which
involves the Stock Purchase Transactions (other than post-closing purchase price
adjustments which could not have a Material Adverse Effect), this Agreement, any
Related Document or other transactions contemplated hereby or thereby, or (b)
which reasonably could have a Material Adverse Effect.
"Moody's" shall mean Moody's Investors Service, Inc.
"Net Proceeds" shall mean, with respect to the disposition of any asset by
any Person, the aggregate amount of cash and readily marketable Cash Equivalents
received by such Person in respect of such disposition minus the sum of (a)
reasonable costs and expenses (including costs of discontinuance and Taxes other
than Income Taxes) incurred in connection with such disposition and required to
be paid in cash, (b) the estimated Income Tax to be paid by such Person in
connection with such disposition. For purposes of this definition, and (c) any
reserves required in accordance with GAAP relating to any liabilities assumed or
incurred by the Borrower in connection with any transaction resulting in Net
Proceeds under Section 6.4(b) or 6.4(c), the Net Proceeds received by any Person
-------------- ------
in respect of any disposition shall include such Cash Equivalents as may be
received ("subsequent cash proceeds") by such Person at any time or from time to
time in connection with the sale, transfer, lease or other disposition, or
otherwise in respect of, any consideration other than cash or readily marketable
Cash Equivalents received by such Person in respect of such disposition, less
the estimated Taxes and Income Tax to be paid in connection with the receipt of
such subsequent cash proceeds that were not theretofore deducted in computing
Net Proceeds.
"Non-Recurring Items" shall mean any of the following items of gain or loss
to the extent reflected in the determination of Consolidated Net Income for any
period: (a) extraordinary gains and losses under GAAP, and/or amortization of
fees and expenses incurred in connection with the Transaction in an aggregate
amount and (b) write-downs or write-offs of assets.
"Notes" shall mean, collectively, the Term Notes and the Revolving Notes,
together with any promissory note issued and accepted by any Lender in
replacement of or substitution for any Term Note or Revolving Note.
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<PAGE>
"New Lender" - see Section 2.3.
-----------
"Pension Plan" shall mean a "pension plan," as such term is defined in
section 3(2) of ERISA (including a multiemployer plan as defined in section
4001(a)(3) of ERISA), to which the Borrower or any corporation, trade or
business that is, along with the Borrower, a member of a Controlled Group, may
have liability, including any liability by reason of having been a substantial
employer within the meaning of section 4063 of ERISA at any time during the
preceding six years, or by reason of being deemed to be a contributing sponsor
under section 4069 of ERISA. For purposes of this definition, the term Borrower
shall be deemed to include any and all Subsidiaries of the Borrower.
"Percentage" shall mean, relative to any Lender, the percentage set forth
opposite such Lender's name on Schedule 2.1 (or set forth in an Assignment
------------
Agreement), as such Percentage may be adjusted from time to time pursuant
Section 2.3 or pursuant to Assignment Agreement(s) executed by such Lender and
- -----------
its Eligible Assignee and delivered pursuant to Section 16.1.
------------
"Permitted Acquisition" shall mean an Acquisition on or after the Effective
Date which meets all of the following requirements:
(a) neither the Person being acquired nor its board of directors shall
have (i) announced that it will oppose such Acquisition or (ii) commenced
any litigation which alleges that such Acquisition or any other acquisition
involving the Borrower or any of its Subsidiaries violates, or will
violate, any applicable law;
(b) the Person being acquired is an Eligible Facility or a holding
company therefor and must demonstrate positive Consolidated EBITDA for the
12 month period immediately prior to the Acquisition;
(c) prior to its Acquisition by the Borrower or any of its
Subsidiaries, the Eligible Facility is and, subject to receipt of approval
of the Acquisition by the DOE and/or each other applicable Accrediting
Body, will be accredited by each applicable Accrediting Body, if any, and
offers primarily associate and/or bachelor degree programs or certificate
programs;
(d) prior to its Acquisition by the Borrower or any of its
Subsidiaries, the Eligible Facility, if applicable, is eligible, and after
DOE review and approval of the change of control pursuant to the
Acquisition, if applicable, will be eligible, for participation in Title IV
Programs;
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<PAGE>
(e) the Acquisition of the Eligible Facility meets all conditions to
change of ownership under Title IV, if applicable;
(f) the Borrower shall have given the Agent and the Lenders at least
45 days prior notice of such Acquisition (it being understood that the
Borrower and/or such Subsidiary making such Acquisition shall promptly
provide such information as the Agent or any Lender may reasonably request
regarding such Acquisition);
(g) immediately prior to and after giving effect to such Acquisition
(and the incurrence or assumption of any Indebtedness in connection
therewith), the Borrower will be in pro forma compliance with each of the
financial covenants set forth in Section 12, assuming for purposes of
----------
calculating Consolidated Net Income and related items, that such
Acquisition had occurred one year prior to the last day of the most
recently-ended Fiscal Quarter for which the Borrower has delivered
financial statements pursuant to Section 10.1.1 or 10.1.2;
------ ------
(h) if the total consideration (including without limitation
consideration in the form of cash, stock, assumed liabilities, non-compete
payments or other payments), to be paid to acquire such Acquired Person is
greater than or equal to $2,500,000, the Borrower shall have received the
prior written consent of the Required Lenders; and
(i) the Agent shall have received (and the Borrower or the applicable
Subsidiary of the Borrower shall cause the duly authorized officers of such
Acquired Person to duly execute and deliver to the Agent on behalf of such
Acquired Person, to the extent applicable): (i) a guaranty agreement
guaranteeing payment of the Liabilities; (ii) a security agreement granting
to the Agent, for the benefit of the Lenders, a first priority perfected
security interest in all presently owned and hereafter acquired tangible
and intangible personal property (including, without limitation, all
inventory, accounts, equipment, and general intangibles), fixtures and
real estate (whether owned or leased) of such Acquired Person to secure
payment of the Liabilities; (iii) a pledge agreement granting to the Agent,
for the benefit of the Lenders, a first priority perfected pledge of all
outstanding capital stock of such Acquired Person and all currently
existing and hereafter created, acquired or organized Subsidiaries of such
Acquired Person to secure payment of the Liabilities; (iv) mortgages (fee
and/or leasehold), deeds of trust and any other documents necessary to
grant in favor of the Agent, for the benefit of the Lenders, a first
priority lien on any real estate (whether
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<PAGE>
owned or, if material and necessary to the business of such Acquired Person
in the sole reasonable discretion of the Agent, leased) of such Acquired
Person to secure payment of the Liabilities; and (v) any and all other
agreements, financing statements, mortgages, deeds of trust and other
documents necessary to create a first priority perfected security interest
in favor of the Agent, for the benefit of the Lenders, in all presently
owned and thereafter acquired tangible and intangible personal property
(including without limitation all inventory, accounts, equipment and
general intangibles), fixtures and real estate (whether owned or leased) of
such Acquired Person. All guaranty agreements, security agreements, pledge
agreements and such other documents shall be in the form prescribed by the
Agent and acceptable to the Required Lenders.
"Permitted Liens" - see Section 11.2.
------------
"Person" shall mean an individual, a corporation, a partnership, a sole
proprietorship, a limited liability company or partnership, a joint venture, an
association, a trust or any other entity or organization, including a government
(whether federal, state, county, city, municipal or otherwise, including without
limitation, any political subdivision or an agency or instrumentality thereof).
"Post-Closing Agreement" shall mean the Post-Closing Agreement in the form
of Exhibit Y attached hereto, as the same may be amended or modified.
---------
"Process Agent" - see Section 17.11.
-------------
"Qualification" shall mean, with respect to any certificate covering
financial statements, a qualification to such certificate (such as a "subject
to" or "except for" statement therein) (a) resulting from a limitation on the
scope of examination of such financial statements or the underlying data, (b) as
to the capability of the Person whose financial statements are certified to
continue operations as a going concern, or (c) which could be eliminated by
changes in financial statements or notes thereto covered by such certificate
(such as by the creation of or increase in a reserve or a decrease in the
carrying value of assets) and which if so eliminated by the making of any such
change and after giving effect thereto would occasion a Default; provided that
-------- ----
neither of the following shall constitute a Qualification: (i) a consistency
exception relating to a change in accounting principles with which the
independent public accountants for the Person whose financial statements are
being certified have concurred, or (ii) a qualification relating to the outcome
or disposition of threatened Litigation, pending Litigation being contested in
good faith, pending or threatened
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<PAGE>
claims or contingencies which cannot be determined with sufficient certainty to
permit such financial statements to be qualified.
"Provident Bank Credit Agreement" shall mean that certain Credit Agreement
dated as of July 31, 1995, as amended, waived or modified, by and among the
Borrower, as the borrower, Al Collins Graphic Design, Ltd., Brooks College,
Ltd., BI Acquisition, Ltd., CEC Management as subsidiaries, The Provident Bank,
as agent, and the various lenders party thereto, as amended or modified as of
the date hereof.
"Quarterly Payment Date" shall mean the last day of each March, June,
September and December or, if any such day is not a Business Day, the next
succeeding Business Day.
"Related Documents" shall mean the Notes, the LC Applications, the Letters
of Credit, the Security Agreement, the Borrower Trademark Security Agreement,
the Subsidiary Guaranty, the Fee Mortgages, the Collateral Assignment of
Lease(s), the Borrower Pledge Agreement, the Gibbs Pledge Agreement, the
Subordination Agreement and any and all other documents or instruments furnished
or required to be furnished pursuant to Section 8 or Section 13, as the same may
--------- ----------
be amended or modified from time to time in whole or in part.
"Release" shall mean a "release," as such term is defined in CERCLA.
"Reportable Event" shall have the meaning assigned to such term in ERISA.
"Required Lenders" shall mean Lenders having at least 66-2/3% or more of
the Commitments, or if the Commitments have terminated or expired, 66-2/3% of
the aggregate Loans and LC Obligations outstanding at such time.
"Responsible Officer" shall mean, in the case of the Borrower or any of its
Subsidiaries, any of the following officers of such Person: the president, the
chief financial officer, the secretary, the treasurer or any vice president.
If any of the titles of the preceding officers are changed after the date
hereof, the term "Responsible Officer" shall thereafter mean any officer
performing substantially the same functions as are presently performed by one or
more of the officers listed in the first sentence of this definition.
"Revolving Loan(s)" - see Section 2.2.
-----------
"Revolving Loan Commitment(s)" - see Section 2.2.
-----------
"Revolving Note" shall mean a promissory note, substantially
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<PAGE>
in the form of Exhibit B with blanks appropriately completed in conformity
---------
herewith, evidencing the Revolving Loans of any Lender.
"Revolving Loan Termination Date" shall mean the earlier of (a) May 30,
2002, or (b) the date of termination in whole of the Revolving Loan Commitments
pursuant to Sections 6.1, 6.2 and/or 14.2.
------------ --- ----
"S&P" shall mean Standard & Poor's, a Division of the McGraw Hill
Companies.
"Security Agreement" - see Section 8.1.
-----------
"Senior Funded Debt" shall mean Indebtedness as set forth in clauses (a)-
-----------
(e) of the definition of Indebtedness.
- ---
"Solvent", as to any Person on a particular date, shall mean that on such
date (a) the fair value of the property of such Person is greater than the total
amount of liabilities, including, without limitation, contingent liabilities, of
such Person, (b) the present fair salable value of the assets of such Person is
not less than the amount that will be required to pay the probable liabilities
of such Person on its debts as they become absolute and matured, (c) such Person
is able to realize upon its assets and pay its debts and other liabilities,
contingent obligations and other commitments as they mature in the normal course
of business, (d) such Person does not intend to, and does not believe that it
will, incur debts or liabilities beyond such Person's ability to pay as such
debts and liabilities mature, and (e) such Person is not engaged in business or
a transaction, and is not about to engage in business or a transaction, for
which such Person's property would constitute unreasonably small capital after
giving due consideration to the prevailing practice in the industry in which
such Person is engaged. In computing the amount of any contingent liability at
any time, it is intended that such liability will be computed at the amount
which, in light of all the facts and circumstances existing at such time,
represents the amount that can reasonably be expected to become an actual or
matured liability.
"Step-up Lender" - see Section 2.3.
-----------
"Stock Purchase Transactions" - see third recital.
"Subordinated Debt" shall mean Indebtedness having payment terms and other
terms, and subordinated in form and substance, satisfactory to the Required
Lenders.
"Subordination Agreement" shall mean a subordination agreement among the
Agent, Heller and Electra substantially the form of Exhibit M.
---------
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<PAGE>
"Subsidiary" shall mean, as to any Person, any corporation, partnership,
limited liability company, limited liability partnership, joint venture, trust,
association or other unincorporated organization (other than a limited
partnership in which such Person acts solely as a limited partner) of which or
in which such Person and such Person's Subsidiaries own directly or indirectly
an aggregate of more than 50% of (a) the combined voting power of all classes of
stock having general voting power under ordinary circumstances to elect a
majority of the board of directors, if it is a corporation, (b) the capital
interest or partnership interest, if it is a partnership, joint venture or
similar entity, or (c) the beneficial interest, if it is a trust, association or
other unincorporated organization.
"Subsidiary Guaranty" - see Section 8.1
-----------
"Taxes" shall mean all taxes of any nature whatsoever and however
denominated, including, without limitation, excise, import, governmental fees,
duties and all other charges, as well as additions to tax, penalties and
interest thereon, imposed by any government or instrumentality, whether federal,
state, local, foreign or other.
"Term Loan Commitments" - see Section 2.1.
-----------
"Term Loan Termination Date" shall mean the earlier of (a) May 30, 2002, or
(b) the date of termination in whole of the Term Loan Commitments pursuant to
Sections 6.1, 6.2, 6.4 and/or 14.2.
- ------------ --- --- ----
"Term Loans" - see Section 2.1.
-----------
"Term Note" shall mean a promissory note, substantially in the form of
Exhibit A with blanks appropriately completed in conformity herewith, evidencing
- ---------
the Term Loans of any Lender.
"Title IV" shall mean Chapter 28, Subchapter IV of the Higher Education Act
of 1965, as amended, 20 U.S.C.A. (S)1070, and any amendments or successor
statutes thereto.
"Title IV Programs" shall mean the Title IV Programs as defined in Section
668.1(c) of 34 C.F.R.
"Transferee" - see Section 16.3.
------------
"Type of Loan or Borrowing" - see Section 3.1. The various Types of Loans
-----------
or Borrowings under this Agreement are as follows: Base Rate Loans or Borrowings
and LIBOR Rate Loans or Borrowings.
"UCC" shall mean the Uniform Commercial Code or comparable statute or any
successor statutes thereto, as in effect from time
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<PAGE>
to time in the relevant jurisdiction.
"Welfare Plan" shall mean a "welfare plan," as such term is defined in
section 3(1) of ERISA.
SECTION 1.2 Other Definitional Provisions.
-----------------------------
(a) All terms defined in this Agreement shall have the above-
defined meanings when used in any Related Document, or any
certificate, report or other document made or delivered pursuant to
this Agreement, unless the context therein shall clearly otherwise
require.
(b) The words "hereof," "herein," "hereunder" and similar terms
when used in this Agreement shall refer to this Agreement as a whole
and not to any particular provision of this Agreement.
(c) The words "amended or modified" when used in this Agreement
or any Related Document shall mean with respect to this Agreement or
any Related Document such document as from time to time, in whole or
in part, amended, modified, supplemented, restated, refinanced,
refunded or renewed.
(d) In the computation of periods of time in this Agreement from
a specified date to a later specified date, the word "from" means
"from and including" and the words "to" and "until" each means "to but
excluding."
(e) This Agreement and the Related Documents are the result of
negotiations among and have been reviewed by counsel to the Agent, the
Borrower and its Subsidiaries and the other parties, and are the
products of all such Persons. Accordingly, they shall not be construed
against the Agent or the Lenders merely because of the Agent's or
Lenders' involvement in their preparation.
SECTION 1.3 Accounting and Financial Determinations. For purposes of
---------------------------------------
this Agreement, unless otherwise specified, all accounting terms used herein or
in any Related Document shall be interpreted, all accounting determinations and
computations hereunder or thereunder shall be made, and all financial statements
required to be delivered hereunder or thereunder shall be prepared in accordance
with, those generally accepted accounting principles ("GAAP") applied in the
preparation of the financial statements referred to in Section 9.6, as such
-----------
principles are modified from time to time in order to comply with
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<PAGE>
DOE and Title IV standards of accounting; provided that prior to giving effect
to any modification of such principles for purposes of this Agreement, Borrower
agrees to negotiate in good faith any such changes to the financial covenants
set forth in Section 12 and the definitions related thereto to the extent the
Agent deems necessary, in its sole discretion, so that such covenants reflect
the financial condition of the Borrower and its Subsidiaries as nearly as
possible to that provided by such covenants immediately prior to the proposed
modification of such principles.
SECTION 2. THE COMMITMENTS
Subject to the terms and conditions of this Agreement and relying on the
representations and warranties herein set forth:
SECTION 2.1 Term Loan Commitment. Each of the Lenders, severally and for
--------------------
itself alone, agrees to make a loan (herein collectively called "Term Loans" and
individually called a "Term Loan") to the Borrower on or before the Term Loan
Termination Date in such Lender's Percentage of such aggregate amount as the
Borrower may request from all Lenders. Subject to Section 2.3, the aggregate
-----------
principal amount of the Term Loan which any Lender shall be committed to make to
the Borrower shall not exceed the amount with respect to Term Loans set opposite
such Lender's name on Schedule 2.1 and the aggregate principal amount of the
------------
Term Loans which all Lenders shall be committed to make to the Borrower shall
not exceed $12,500,000. Each Lender's Term Loan shall be disbursed in a single
takedown as of the borrowing date of the initial Term Loan. Once repaid no Term
Loan may thereafter be reborrowed. The foregoing commitment of each Lender is
herein called its "Term Loan Commitment" and for all Lenders the "Term Loan
Commitments."
SECTION 2.2 Revolving Loan Commitment. Each of the Lenders, severally
-------------------------
and for itself alone, agrees to make loans (herein collectively called
"Revolving Loans" and individually called a "Revolving Loan") to the Borrower on
a revolving basis from time to time before the Revolving Loan Termination Date
in such Lender's Percentage of such aggregate amounts as the Borrower may from
time to time request from all Lenders. Subject to Section 2.3, the aggregate
-----------
principal amount of Revolving Loans which any Lender shall be committed to have
outstanding to the Borrower, when added to the amount of such Lender's
participation in the Letters of Credit issued and outstanding pursuant to
Section 2.5 or drawn and not reimbursed pursuant to Section 4.10, shall not at
- ----------- ------------
any one time exceed the amount with respect to Revolving Loans set opposite such
Lender's name on Schedule 2.1 hereto. Subject to Section 2.3, the aggregate
------------ -----------
principal amount of Revolving Loans which all Lenders shall be committed to have
outstanding hereunder to the Borrower, when added to the aggregate amount of
Letters of
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<PAGE>
Credit issued and outstanding pursuant to Section 2.5 or drawn and not
-----------
reimbursed pursuant to Section 4.10, shall not at any one time exceed
------------
$37,500,000. The foregoing commitment of each Lender is herein called its
"Revolving Loan Commitment" and collectively the "Revolving Loan Commitments."
SECTION 2.3 Increase of Commitments. The Borrower has requested that the
-----------------------
aggregate Term Loan Commitments and Revolving Loan Commitments be increased pro
rata by an aggregate maximum principal amount of $10,000,000 ($7,500,000 with
respect to the Revolving Loan Commitments and $2,500,000 with respect to the
Term Loan Commitments) (the amount of such increase called the "Commitment
Increase"). For a period of 120 days after the Closing Date, the Agent shall
use its best commercially reasonable efforts to syndicate the Commitment
Increase through the increase of the Term Loan Commitments and Revolving Loan
Commitments of Lenders (each such Lender which is willing to increase its
Commitment being a "Step-up Lender") and/or by the addition of one or more new
lenders agreed to by the Borrower whose approval shall not be unreasonably
withheld or delayed (a "New Lender"). Any such Commitment Increase shall be
effective as of the date the Agent completes such syndication, whereupon it
shall promptly give written notice thereof to the Borrower, the Lenders, the
Step-up Lenders and the New Lenders, as the case may be, and shall be effective
as of the day after such notice is given (the "Commitment Increase Date");
provided, however, that:
- -------- ------- ----
(a) such notice of Commitment Increase shall specify as to each Step-
Up Lender and/or New Lender, the amount of the Commitment of such Lender
after giving effect to such Commitment Increase;
(b) it shall be in each Lender's sole discretion whether to increase
its Commitment hereunder in connection with the proposed Commitment
Increase;
(c) the Borrower may not propose any more Commitment Increases other
than the one reflected in the first sentence of this Section 2.3;
-----------
(d) the minimum proposed Commitment Increase shall be $10,000,000;
(e) in no event shall the aggregate Term Loan Commitments and
Revolving Loan Commitments (after giving effect to such Commitment
Increase) exceed $15,000,000 and $45,000,000, respectively;
(f) no Commitment Increase shall be permitted at any time the
Commitments shall have been reduced or terminated; and
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<PAGE>
(g) no Default or Event of Default shall have occurred and be
continuing on such Commitment Increase Date.
If by 10:00 A.M., Chicago time, on the proposed Commitment Increase Date, the
Agent shall have received to the satisfaction of the Agent each of the following
(the "Commitment Increase Closing Items"):
(x) from each Step-Up Lender and/or New Lender, as applicable, a duly
executed confirmation of Step-Up Commitment and/or New Lender Commitment,
such confirmation to be substantially in the form of Exhibit W-1 or W-2, as
----------- ---
applicable, and to be completed to reflect the amount of the Commitment of
such Lender as specified in the Agent's notice of Commitment Increase, and
(y) for each Step-up Lender and/or New Lender, as applicable, the
items provided for in Section 13 as may be requested by such Lender
----------
including, in the case of a Step-up Lender, a replacement Note and, in the
case of a New Lender, a new Note to reflect the principal amount of such
Lenders increased or new Commitment, as the case may be, and applicable
fees provided for in the Fee Letter.
then the Commitment Increase specified by the Agent in its notice of Commitment
Increase shall become effective on the Commitment Increase Date, whereupon each
New Lender (if any) shall automatically become a party to this Agreement, be
bound by the provisions hereof and be included in the definition of "Lender" and
"Lenders" hereunder. Upon the effectiveness of such Commitment Increase, the
Agent shall promptly notify the Lenders (including any New Lenders) and the
Borrower of the occurrence of such Commitment Increase, and the Agent shall
promptly distribute a revised Schedule 2.1 giving effect to such Commitment
------------
Increase. In the event that by 10:00 A.M., Chicago time, on the Commitment
Increase Date the Agent shall not have received from the Borrower or any of its
Subsidiaries each of the Commitment Increase Closing Items required to be
provided by the Borrower or any of its Subsidiaries, or the Borrower by notice
to the Agent prior to the Commitment Increase Date shall have withdrawn its
notice of Commitment Increase, then the Borrower's notice of Commitment Increase
shall be deemed to have been rescinded, whereupon any Commitment Increase
Closing Items delivered to the Agent in respect thereof shall be deemed to be of
no effect and all the rights and obligations of the parties shall continue as if
no such notice had been given (it being understood that the Borrower may not
thereafter propose any Commitment Increase).
SECTION 2.4 Automatic Reduction of Revolving Loan Commitments. The
-------------------------------------------------
aggregate amount of the Revolving Loan
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<PAGE>
Commitment shall automatically and permanently be reduced by $5,000,000 on the
fourth anniversary of the Closing Date. The Borrower agrees to make any payment
required under Section 6.4(a) in connection with any such reduction.
--------------
SECTION 2.5 LC Commitment. LaSalle, as Agent, agrees for itself and the
-------------
Lenders to issue from time to time before the Revolving Loan Termination Date
such standby letters of credit (such letters of credit being herein collectively
called "Letters of Credit" and individually a "Letter of Credit") as the
Borrower or any Guarantor may request, it being understood that, pursuant to
Section 4.3, concurrently with the issuance of each such Letter of Credit, each
- -----------
Lender shall be deemed to have automatically purchased from the Agent a
participation in such Letter of Credit. The aggregate amount of all Letters of
Credit issued and outstanding pursuant to this Section 2.5 or drawn and not
-----------
reimbursed pursuant to Section 4.10 shall not at any one time exceed $10,000,000
------------
(or such reduced amount as may be fixed by the Borrower pursuant to Section
-------
6.2). The foregoing commitment of each Lender is herein called its "LC
- ----
Commitment" and collectively the "LC Commitments."
SECTION 2.6 Commitments and Other Terms. The Term Loans and the
---------------------------
Revolving Loans are herein sometimes individually called a "Loan" and
collectively called "Loans." The Term Loan Commitments, the Revolving Loan
Commitments, and the LC Commitments are herein sometimes collectively called the
"Commitments" and individually as to each Lender called a "Commitment."
SECTION 3. THE LOANS
SECTION 3.1 Various Types of Loans. Each Loan shall be either a Base
----------------------
Rate Loan or a LIBOR Rate Loan (each being herein called a "Type" of Loan) as
the Borrower shall specify in the related Borrowing Request or
Continuation/Conversion Notice pursuant to Section 3.2 or Section 3.5. Base
----------- -----------
Rate Loans and LIBOR Rate Loans may be outstanding at the same time, provided
that (a) in the case of LIBOR Rate Loans, not more than five different Interest
Periods shall be outstanding at any one time for all such Loans, and (b) the
Borrower shall specify Loans and Interest Periods such that no payment or
prepayment of any principal on any Loan shall result in a break-up of any
Interest Period.
SECTION 3.2 Notice of Borrowing. The Borrower shall give an irrevocable
-------------------
notice (herein called a "Borrowing Request") to the Agent of each proposed
Borrowing by 10:00 A.M., Chicago time, in the case of a Base Rate Borrowing, on
the proposed date of such Borrowing, and in the case of a LIBOR Rate Borrowing,
at least three (3) Business Days' prior to the proposed date of such
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<PAGE>
Borrowing. Each Borrowing Request shall be effective upon receipt by the Agent,
shall be in writing (or by telephone to be promptly confirmed in writing) by the
Borrower, substantially in the form of Exhibit C, and shall specify the date,
---------
amount and Type of Borrowing, and in the case of a LIBOR Rate Borrowing, the
initial Interest Period for such Borrowing. Notwithstanding the foregoing, the
Borrower may revoke any Borrowing Request prior to the funding of the Borrowing
so requested; provided that Borrower shall pay all reasonable costs incurred by
the Lenders as a result thereof, on demand of the Agent or such Lender (together
with a written calculation in reasonable detail showing such costs).
SECTION 3.3 Funding. Promptly upon receipt of a Borrowing Request, the
-------
Agent shall advise each Lender thereof. Not later than 2:00 P.M., Chicago time,
on the date of a proposed Borrowing, each Lender shall provide the Agent at the
Office of the Agent in Chicago with immediately available funds covering such
Lender's Percentage of the Borrowing, and subject to receipt by the Agent of the
documents required under Section 13 with respect to such Borrowing, the Agent
----------
shall pay over such funds to the Borrower on the requested Borrowing date. Each
Borrowing involving Loans of the same Type shall be on a Business Day and, in
the case of Base Rate Loans, shall be in an aggregate principal amount of at
least $1,000,000 or any larger integral multiple of $250,000 in excess thereof
and, in the case of LIBOR Rate Loans shall be in an aggregate amount of at least
$2,500,000 or any larger integral multiple of $500,000 in excess thereof. All
Borrowings shall be pro rata among the Lenders in accordance with their
respective Commitments.
SECTION 3.4 Funding Reliance. Unless the Agent shall have been notified
----------------
by telephone, confirmed in writing, by any Lender by 2:00 P.M., Chicago time, on
the day of the proposed Borrowing that such Lender will not make available the
amount which would constitute its Percentage of such Borrowing on the date
specified therefor, the Agent may assume, subject to the satisfactory
fulfillment by the Borrower of the conditions precedent set forth in Section 13,
----------
that such Lender has made such amount available to the Agent and, in reliance
upon such assumption, make available to the Borrower a corresponding amount. If
and to the extent that such Lender shall not have made such amount available to
the Agent, such Lender and the Borrower severally agree to repay the Agent
forthwith on demand such corresponding amount together with interest thereon,
for each day from the date the Agent made such amount available to the Borrower
to the date such amount is repaid to the Agent, at the interest rate applicable
at the time to Loans comprising such Borrowing.
SECTION 3.5 Conversion and Continuation of Loans. The Borrower may, by
------------------------------------
delivery to the Agent of a Continuation/Conversion Notice (herein called a
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<PAGE>
"Continuation/Conversion Notice"), in the form of Exhibit D attached hereto with
---------
appropriate insertions, before 10:00 A.M., Chicago time, three (3) Business Days
prior to conversion or continuation, convert or continue Loans as follows: (a)
convert Base Rate Loans into LIBOR Rate Loans, (b) convert LIBOR Rate Loans into
Base Rate Loans, and (c) continue any such Loan into a subsequent Interest
Period of the same duration or of any other duration permitted hereunder,
subject to the following:
(i) the Interest Period applicable to any LIBOR Rate Loan
resulting from a conversion shall be specified by the Borrower in the
Continuation/ Conversion Notice delivered pursuant to this Section;
provided, however, that if no such Interest Period shall be specified,
-------- -------
the Borrower shall be deemed to have selected an Interest Period of
one month's duration. If the Borrower shall not have given timely
notice to continue any Loan into a subsequent Interest Period and
shall not otherwise have given notice to convert such Loan, such Loan,
unless repaid pursuant to the terms hereof, shall automatically be
converted into a Base Rate Loan;
(ii) if less than all Loans at the time outstanding shall be
converted or continued, such conversion or continuation shall be made
pro rata among the Lenders, as applicable, in accordance with the
respective principal amounts of Loans of such Type (and have the same
Interest Period) held by such Lenders immediately prior to such
conversion or continuation;
(iii) in the case of a conversion or continuation of less than
all Loans, the aggregate principal amount of such Loans converted or
continued shall not be less than 2,500,000 or any larger integral
multiple of $500,000 in excess thereof;
(iv) if any LIBOR Rate Loan is converted at a time other than
the last day of an Interest Period applicable thereto, the Borrower
shall at the time of conversion pay any loss or expense (including,
without limitation, breakage losses and expenses) associated therewith
pursuant to Section 7.5;
-----------
(v) any portion of a Loan maturing or required to be repaid in
less than one month may not be converted into, or continued as, a
LIBOR Rate Loan;
(vi) any portion of a LIBOR Rate Loan required to be paid on any
principal payment date occurring in less than one month after the end
of the then-current
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<PAGE>
Interest Period applicable to such Loan shall be automatically
converted at the end of such Interest Period into a Base Rate Loan;
(vii) no Interest Period for any Term Loan shall extend beyond
the Term Loan Termination Date and no Interest Period for any
Revolving Loan shall extend beyond the Revolving Loan Termination
Date; and
(viii) no Interest Period applicable to a Term Loan or portion
thereof shall extend beyond any date upon which is due any scheduled
principal payment in respect of the Term Loans unless the aggregate
principal amount of Term Loans represented by Base Rate Loans or LIBOR
Rate Loans having Interest Periods that will expire on or before such
date, equals or exceeds the amount of such principal payment.
Notwithstanding the foregoing, so long as any Default shall exist, no Loans
shall be converted to or continued as LIBOR Rate Loans.
SECTION 3.6 Repayment of Term Loans; Notes. Subject to prepayment
------------------------------
pursuant to Section 6.4, the Term Loans of the Lenders shall be payable (and the
-----------
Borrower agrees to pay such Term Loans) in equal principal installments of Six
Hundred Twenty-Five Thousand Dollars ($625,000) on each Quarterly Payment Date,
commencing on September 30, 1997; provided that such amount shall be increased
to Seven Hundred Fifty Thousand Dollars ($750,000) (or such lesser porportionate
amount to the extent the Term Loan Commitment is increased by an amount less
than $2,500,000 on the Commitment Increase Date) after the Commitment Increase
Date, and a final principal installment payable on the Term Loan Termination
Date sufficient to pay the outstanding principal amount of the Term Loans in
full. Subject to Section 2.3, the Term Loan of each Lender shall be evidenced
-----------
by a Term Note payable to the order of such Lender in the original principal
amount equal to such Lender's Term Loan Commitment (assuming for such purposes
that the Commitment Increase Date has not occurred).
SECTION 3.7 Repayment of Revolving Loans; Notes. The Revolving Loans of
-----------------------------------
each Lender shall be payable (and the Borrower agrees to pay such Revolving
Loans) on the Revolving Loan Termination Date. Subject to Section 2.3, the
-----------
Revolving Loans of each Lender shall be evidenced by a Revolving Note, payable
to the order of such Lender in the principal amount of the Revolving Loan
Commitment of such Lender (or, if less, in the aggregate unpaid principal amount
of all of such Lender's Revolving Loans hereunder outstanding on the Revolving
Loan Termination Date).
SECTION 3.8 Recordkeeping. Each Lender shall record in its records, or
-------------
at its option on the schedule attached to its relevant
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<PAGE>
Note, the date and amount of each Loan made by such Lender, each repayment or
conversion thereof, and in the case of each LIBOR Rate Loan the dates on which
each Interest Period for such Loan shall begin and end. The information so
recorded shall be conclusive absent manifest error. The failure to so record any
such information or any error in so recording any such information shall not,
however, limit or otherwise affect the obligations of the Borrower hereunder or
under any Note to repay the principal amount of the Loans together with all
interest accrued thereon.
SECTION 4. THE LETTERS OF CREDIT
SECTION 4.1 Request for Issuance of Letters of Credit. The Agent shall
-----------------------------------------
receive from the Borrower or any Guarantor at least five (5) Business Days'
prior written notice of a request for issuance of each Letter of Credit, each
such request to be accompanied by an application substantially in the form of
Exhibit E (an "LC Application") duly executed by the Borrower and in all
- ---------
respects in form and substance reasonably satisfactory to the Agent, together
with such other documentation as the Agent may reasonably request in support
thereof. The Agent shall promptly notify each Lender of any request from the
Borrower that such Letter of Credit be issued.
SECTION 4.2 Expiration and other Terms. Each Letter of Credit shall
--------------------------
expire on or before the Revolving Loan Termination Date.
SECTION 4.3 Participation. Concurrently with the issuance of each Letter
-------------
of Credit, the Agent shall be deemed to have sold and transferred to each
Lender, and each Lender shall be deemed irrevocably and unconditionally to have
automatically purchased and received from the Agent, without recourse or
warranty, an undivided interest and participation, to the extent of such
Lender's Percentage, in such Letter of Credit and the Borrower's related LC
Obligations and any security therefor.
SECTION 4.4 Notification of Demand for Payment. The Agent shall promptly
----------------------------------
notify the Borrower and each Lender of the amount of each demand for payment
under a Letter of Credit and of the date on which such payment is to be made.
SECTION 4.5 Funding by Agent. With respect to each demand for payment
----------------
pursuant to a Letter of Credit, the Agent shall, promptly following its receipt
thereof, examine all documents purporting to represent such demand to ascertain
that the same appear on their face to be in conformity with the terms and
conditions of such Letter of Credit. If the Agent determines (in accordance
with the standards and practices applicable thereto) that a demand for payment
under a Letter of Credit conforms to the
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<PAGE>
terms and conditions of such Letter of Credit, then the Agent shall make payment
to the Beneficiary in accordance with the terms of such Letter of Credit.
SECTION 4.6 Funding By Lenders. Not later than 11:00 A.M., Chicago time,
------------------
on each date on which payment is to be made under a Letter of Credit, each
Lender shall make available to the Agent, in Dollars and in same day funds, such
Lender's Percentage of the amount of such payment. If and to the extent any
Lender shall not have made such amount available to the Agent on any such date,
such Lender agrees (without limitation to any rights or remedies then available
to any party with respect to such failure to make payments) to pay interest on
such amount to the Agent for the account of the Agent forthwith on demand for
each day from the date on which such payment was to be made to the date such
amount is made available to the Agent. Such interest shall be determined at a
rate per annum equal to the Federal Funds Rate from time to time in effect,
based upon a year of 360 days. Any Lender's failure to make available to the
Agent its Percentage of any payment under a Letter of Credit shall not relieve
any other Lender of its obligation to make available to the Agent its Percentage
of such payment on the date such payment is to be made, but no Lender shall be
responsible for the failure of any other Lender to make available to the Agent
such other Lender's Percentage of any such payment.
SECTION 4.7 Non-Conforming Demand For Payment. If, after examination of
---------------------------------
a demand for payment under a Letter of Credit, the Agent shall have determined
that such demand does not conform to the terms and conditions of such Letter of
Credit, then the Agent shall, as soon as reasonably practicable, give notice to
the related Beneficiary and to the Borrower to the effect that demand was not in
accordance with the terms and conditions of such Letter of Credit, stating the
reasons therefor and that the relevant document is being held at the disposal of
the Beneficiary or is being returned to the Beneficiary, as the Agent may elect.
The Beneficiary may attempt to correct any such non-conforming demand for
payment under such Letter of Credit if, and to the extent that, the Beneficiary
is entitled (without regard to the provisions of this sentence) and able to do
so.
SECTION 4.8 Return of Funds Related to Non-Conforming Demand. If the
------------------------------------------------
Agent does not disburse funds to the Beneficiary for any reason after having
received such funds from any Lender pursuant to Section 4.6, the Agent shall
-----------
return such funds to such Lender on the next following Business Day together
with interest on such funds from the date on which the Agent received such funds
to the day on which the Agent so returns such funds at the Federal Funds Rate
for each such day, based upon a year of 360 days.
SECTION 4.9 Return of Letter of Credit. With respect to
--------------------------
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<PAGE>
each Letter of Credit, the Agent shall have the right; provided the Agent is not
--------
then in default under such Letter of Credit by reason of its having wrongfully
failed to honor a demand for payment previously made by the Beneficiary under
such Letter of Credit, to require the Beneficiary to surrender such Letter of
Credit to the Agent on the stated expiration date. The Borrower agrees, if
necessary, to use its best efforts to cause the Beneficiary to surrender such
Letter of Credit.
SECTION 4.10 Reimbursement Agreement of the Borrower. The Borrower hereby
---------------------------------------
unconditionally and irrevocably agrees to reimburse the Agent, immediately upon
demand, for each payment made by the Agent in accordance herewith under a Letter
of Credit honoring a demand for payment made by the Beneficiary thereunder, with
interest on the amount so paid by the Agent from the date paid by the Agent to
the date the Agent is reimbursed therefor, at a rate per annum equal to the Base
Rate from time to time in effect (but not less than the Base Rate in effect on
the date of such payment by the Agent) plus the Applicable Base Rate Margin.
Interest shall be computed for the actual number of days elapsed on the basis of
a year consisting of 360 days. Upon receipt of each payment under this Section
-------
4.10, the Agent shall promptly pay to each Lender which previously made the
- ----
entire payment required under Section 4.6, in Dollars and in the kind of funds
-----------
received, an amount equal to such Lender's Percentage of such payment.
SECTION 4.11 Obligation to Reimburse for or Participate in Letter of
-------------------------------------------------------
Credit Payments. The Borrower's obligation to reimburse the Agent for payments
- ---------------
made by the Agent under any Letter of Credit honoring a demand for payment by
the Beneficiary thereunder, and each Lender's obligation to participate in and
make available to the Agent its Percentage of such payments in accordance with
this Agreement, shall be irrevocable, absolute and unconditional under any and
all circumstances including, without limitation, any of the following
circumstances:
(a) any lack of legality, validity, regularity or enforceability
of this Agreement, any Letter of Credit or any other Related Document;
(b) the existence of any claim, setoff, defense or other right
which the Borrower may have or have had at any time against any
Beneficiary, the Agent, any Lender, any transferee of any Letter of
Credit (or any Person for whom any such transferee may be acting) or
any other Person, whether in connection with this Agreement, any
Letter of Credit, any other Related Document, the transactions
contemplated herein or therein or any unrelated transactions
(including any underlying transaction between the Borrower and the
Beneficiary of any Letter of Credit);
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<PAGE>
(c) any draft, certificate or any other document presented under
any Letter of Credit proving to be forged, fraudulent, invalid or
insufficient in any respect or any statement therein being untrue or
inaccurate in any respect;
(d) the surrender or impairment of any security for the
performance or observance of any of the terms of any of the Related
Documents;
(e) payment by the Agent under any Letter of Credit against
presentation of a draft or certificate or other document that does not
comply with the terms of such Letter of Credit; or
(f) the occurrence of any Default or Event of Default;
provided, however, that the Borrower shall not be obligated to reimburse the
Agent for, and no Lender shall be obligated to participate in, any wrongful
payment made by the Agent under any Letter of Credit as a result of acts or
omissions constituting gross negligence or willful misconduct on the part of the
Agent or any of its officers, employees or agents as finally judicially
determined by a court of competent jurisdiction.
SECTION 4.12 Mandatory Payment to Agent of LC Obligations. The Borrower
--------------------------------------------
agrees that, on any termination of the LC Commitments pursuant to Section 6.2 or
-----------
Section 14.2, it will pay to the Agent in Dollars and in same day funds an
- ------------
amount equal to the principal amount of all LC Obligations under any LC
Application, whether or not the related Letter of Credit has been drawn (which
amount shall be retained by the Agent in a separate collateral account as
security for the LC Obligations and the other Liabilities) plus the then
aggregate accrued amount of unpaid fees arising under Sections 5.7(b) and
---------------
5.7(c).
- ------
SECTION 5. INTEREST AND FEES, ETC.
SECTION 5.1 Interest Rates. With respect to each Loan, the Borrower
--------------
hereby promises to pay interest on the unpaid principal amount thereof for the
period commencing on the date of such Loan until such Loan is paid in full, as
follows:
(a) At all times while such Loan is a Base Rate Loan, at a rate
per annum equal to the Base Rate from time to time in effect, plus the
Applicable Base Rate Margin (as hereinafter defined); and
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<PAGE>
(b) At all times while such Loan is a LIBOR Rate Loan, for each
Interest Period, at a rate per annum equal to the LIBOR Rate (Reserve
Adjusted) applicable to such Interest Period, plus the Applicable
LIBOR Rate Margin, (as hereinafter defined).
For purposes hereof, the Applicable Base Rate Margin and the Applicable
LIBOR Rate Margin shall be determined based on the Funded Debt to Consolidated
EBITDA Ratio as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------
Funded Debt to Applicable Base Applicable LIBOR
Consolidated EBITDA Rate Margin Rate Margin
Ratio
- --------------------------------------------------------------
<S> <C> <C>
greater than .75% 2.00%
3.01:1.00
- --------------------------------------------------------------
2.51:1.00 - .50% 1.75%
3.00:1.00
- --------------------------------------------------------------
2.01:1.00 - .25% 1.50%
2.50:1.00
- --------------------------------------------------------------
less than 0% 1.25%
2.01:1.00
- --------------------------------------------------------------
</TABLE>
Any adjustment in the Applicable Base Rate Margin or the Applicable LIBOR
Rate Margin as a result of a change in the Funded Debt to Consolidated EBITDA
Ratio shall be effective upon receipt by the Agent of a Compliance Certificate
pursuant to Section 10.1.4 setting forth the calculation of the Funded Debt to
--------------
Consolidated EBITDA Ratio and the financial statements required to be delivered
in connection therewith; provided that, notwithstanding the foregoing, the
-------- ----
Applicable Base Rate Margin and the Applicable LIBOR Rate Margin for the period
commencing on the Closing Date through September 30, 1997 shall be .75% per
annum and 2.00% per annum, respectively; and provided, further, that in no event
-------- ------- ----
will the Applicable Base Rate Margin or the Applicable LIBOR Rate Margin be
reduced at any time when a Default has occurred and is continuing. Any increase
in the Applicable Base Rate Margin or the Applicable LIBOR Rate Margin shall be
effective retroactively to the date that any Compliance Certificate should have
been delivered to the Lenders pursuant to Section 10.1.4.
--------------
SECTION 5.2 Default Interest Rate. Notwithstanding the provisions of
---------------------
Section 5.1, in the event that any Default or Event of Default shall occur
- -----------
hereunder, the Borrower hereby promises to pay interest on the unpaid principal
amount of the Loans for the period commencing on the date of such Default or
Event of Default until such Default or Event of Default is cured or waived by
the Lenders in accordance with this Agreement at a rate per annum
-35-
<PAGE>
equal to the applicable rate(s) otherwise in effect with respect to such Loans,
plus 2.00% per annum.
SECTION 5.3 Interest Payment Dates. Accrued interest on each Loan shall
----------------------
be payable on each Interest Payment Date and at maturity, commencing with the
first of such dates to occur after the date hereof. After maturity, accrued
interest on all Loans shall be payable on demand.
SECTION 5.4 Interest Periods. Each "Interest Period" for a LIBOR Rate
----------------
Loan shall commence on the date such LIBOR Rate Loan was made, continued or
converted from a Loan of a different Type, or on the expiration of the
immediately preceding Interest Period for such LIBOR Rate Loan, and shall end on
the date which is 1, 2, 3 or 6 months thereafter, as the Borrower may specify
pursuant to Section 3.2 or Section 3.5 hereof.
----------- -----------
SECTION 5.5 Setting and Notice of Rates. The applicable LIBOR Rate
---------------------------
(Reserve Adjusted) for each Interest Period shall be determined by the Agent,
and notice thereof shall be given by the Agent promptly to the Borrower and each
Lender. Each determination of the applicable LIBOR Rate (Reserve Adjusted) by
the Agent shall be conclusive and binding upon the parties hereto, in the
absence of manifest error. If ABN AMRO does not furnish a timely quotation, the
provisions of Section 7.3 shall apply. If the Agent is unable to determine such
-----------
a rate, the provisions of Section 7.2 shall apply. The Agent shall, upon
-----------
written request of the Borrower or any Lender, deliver to the Borrower or such
Lender a statement showing the computations used by the Agent in determining any
applicable LIBOR Rate (Reserve Adjusted) hereunder.
SECTION 5.6 Computation of Interest. Interest on all Loans and LC
-----------------------
Obligations shall be computed for the actual number of days elapsed on the basis
of a 360-day year.
SECTION 5.7 Fees. The Borrower agrees to pay the following fees (all
----
such fees being non-refundable):
(a) The Borrower agrees to pay to the Agent, for the account of
each Lender, for the period (including any portion thereof when any of
its Commitments are suspended by reason of the Borrower's inability to
satisfy any condition of Section 13) commencing on the Effective Date
----------
and continuing to the Revolving Loan Termination Date, a commitment
fee (the "Commitment Fee") at the rate set forth in Section 5.7(e) on
--------------
such Lender's Percentage of the sum of the average daily unused
portion of the Commitments. Such Commitment Fees shall be payable by
the Borrower in arrears on each Quarterly Payment Date, commencing
with the first
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<PAGE>
such Quarterly Payment Date following the Effective Date, and on the
Revolving Loan Termination Date.
(b) The Borrower agrees to pay to the Agent, for the account of
each Lender, (i) a Commitment Fee for each Letter of Credit (the "LC
Commitment Fee"), from the date of issuance thereof to the earlier to
occur of the expiration or termination thereof or the date of payment
by the Agent thereunder, at a rate per annum equal to the amount set
forth in Section 5.7(e) of the aggregate outstanding undrawn amount of
--------------
each such Letter of Credit, such fee to be payable in arrears on each
Quarterly Payment Date (or at such other times as the Agent shall
reasonably request, for any period prior to such date or time for
which such Commitment Fee shall not have been theretofore paid).
(c) The Borrower agrees to pay, such published fees and other
amounts ("LC Administrative Fees") as the Agent shall customarily
require in connection with the issuance, negotiation, processing
and/or administration of Letters of Credit in similar situations, such
fees to be in addition to the fees payable under the Fee Letter, with
respect to the issuance and/or negotiation of each Letter of Credit.
(d) The Borrower agrees to pay to the Agent, for its own
account, the fees set forth in that certain fee letter, dated as of
April 30, 1997 (the "Fee Letter") from the Agent addressed to and
accepted by the Borrower, other than the fees otherwise expressly
described herein.
(e) For purposes hereof, the Commitment Fee and the LC
Commitment Fee shall be determined based on the Funded Debt to
Consolidated EBITDA Ratio as follows:
<TABLE>
<CAPTION>
- ----------------------------------------------------------
Funded Debt to Applicable Applicable LC
Consolidated EBITDA Commitment Fee Commitment Fee
Ratio
- ----------------------------------------------------------
<S> <C> <C>
greater than .375% 2.00%
3.01:1.00
- ----------------------------------------------------------
2.51:1.00 - .25% 1.75%
3.00:1.00
- ----------------------------------------------------------
2.01:1.00 - .25% 1.50%
2.50:1.00
- ----------------------------------------------------------
less than .25% 1.25%
2.01:1.00
- ----------------------------------------------------------
</TABLE>
-37-
<PAGE>
Any adjustment in the Commitment Fee or the LC Commitment Fee as a result
of a change in the Funded Debt to Consolidated EBITDA Ratio shall be effective
upon receipt by the Agent of a Compliance Certificate pursuant to Section 10.1.4
--------------
setting forth the calculation of the Funded Debt to Consolidated EBITDA Ratio
and the financial statements required to be delivered therewith; provided that,
-------- ----
notwithstanding the foregoing, the Commitment Fee and the LC Commitment Fee for
the period commencing on the Closing Date and September 30, 1997 thereafter
shall be .25% per annum and 2.00% per annum, respectively; and provided,
--------
further, that in no event will the Applicable Commitment Fee or the Applicable
- ------- ----
LC Commitment Fee be reduced at any time when a Default has occurred and is
continuing. Any increase in the Applicable Commitment Fee or the Applicable LC
Commitment Fee shall be effective retroactively to the date that any Compliance
Certificate should have been delivered to the Agent pursuant to Section 10.1.4.
--------------
All such fees shall be computed for the actual number of days elapsed on
the basis of a 360-day year without regard to any Default or Event of Default.
SECTION 6. REDUCTION OR TERMINATION OF THE COMMITMENTS;
PAYMENTS AND PREPAYMENTS
SECTION 6.1 Voluntary Reduction or Termination of the Revolving Loan
--------------------------------------------------------
Commitments. The Borrower may from time to time prior to the Revolving Loan
- -----------
Termination Date on at least three (3) Business Days' prior written notice
received by the Agent (which shall promptly advise each Lender thereof)
permanently reduce the amount of the Revolving Loan Commitments (such reduction
to be pro rata among the Lenders according to their respective Percentages) to
an amount not less than the aggregate unpaid principal amount of the Revolving
Loans then outstanding. Any such reduction shall be in an aggregate amount of
$5,000,000 or an integral multiple of $1,000,000 in excess thereof. The
Borrower may at any time on like notice from the Borrower prior to the Revolving
Loan Termination Date terminate the Revolving Loan Commitments upon payment in
full of the outstanding principal amount of the Revolving Loans and other
obligations of the Borrower hereunder pertaining to the Revolving Loans.
SECTION 6.2 Voluntary Reduction of the LC Commitments. The Borrower may,
-----------------------------------------
from time to time on at least three (3) Business Days' prior written notice to
the Agent, permanently reduce the amount of the LC Commitments to an amount not
less than the maximum amount of the Letters of Credit then outstanding or drawn
and not reimbursed. The Borrower may at any time on like notice terminate the
LC Commitments upon payment to the Agent in accordance with Section 4.12 of all
------------
LC Obligations (whether
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<PAGE>
absolute or contingent) in connection with the Letters of Credit.
SECTION 6.3 Voluntary Prepayments. The Borrower may from time to time
---------------------
prepay the Loans in whole or in part, without premium or penalty; provided that
--------
(a) the Borrower shall give the Agent (which shall promptly advise each Lender)
not less than three (3) Business Days' prior notice thereof, specifying the
Loans to be prepaid, and the date and amount of prepayment, (b) unless the fees
and costs are paid pursuant to Section 7.5, LIBOR Rate Loans shall be prepaid
-----------
only on the last day of the Interest Period relating thereto, (c) each partial
prepayment shall be in a principal amount of $1,000,000, or an integral multiple
$500,000 in excess thereof, (d) any prepayment of the principal amount of the
Loans, or any portion thereof, shall include accrued interest to the date of
prepayment, and (e) any prepayment of the Term Loans shall be applied to unpaid
installments of the Term Loans in the inverse order of the maturity of such
installments.
SECTION 6.4 Mandatory Prepayments. The Borrower agrees to make mandatory
---------------------
repayments of the Loans and LC Obligations as follows:
(a) If, on any date, the aggregate unpaid principal amount of
the Revolving Loans plus the aggregate amount of Letters of Credit
issued and outstanding or drawn and not reimbursed shall exceed the
aggregate Revolving Loan Commitments, the Borrower shall promptly
repay the Revolving Loans and/or LC Obligations in an amount equal to
such excess.
(b) If, on any date, the Borrower or any of its Subsidiaries
shall sell, assign, lease, transfer, contribute, convey or otherwise
dispose of, or grant options, warrants or other rights with respect
to, (any of the foregoing being a "Disposition") any of its assets,
other than a Disposition permitted under Section 11.4 or a Disposition
------------
(or a portion of such a Disposition) in which the aggregate Net
Proceeds received by the Borrower and its Subsidiaries during the
Fiscal Year in which such Net Proceeds earned do not exceed $250,000
(together with Net Proceeds from all other Dispositions during such
year which have not been applied as a prepayment pursuant to this
Section 6.4(b)), the Borrower shall promptly notify the Agent of such
--------------
Disposition, including the amount of Net Proceeds received by the
Borrower or any Subsidiary of the Borrower in respect of such
Disposition (and the amount and other type of consideration so
received) and such Net Proceeds in excess of such $250,000 threshold
shall be promptly applied to repay the principal installments of the
Term Loans (together with any
-39-
<PAGE>
interest accrued thereon) in the inverse order of maturities. To the
extent the Net Proceeds of any such Disposition exceed the amount of
the Term Loans then outstanding (together with any interest accrued
thereon), or, at the time of such Disposition, the Term Loans shall
have been paid in full, such Net Proceeds shall be applied to repay
first, any Revolving Loans then outstanding (including interest
accrued thereon), second, any LC Obligations then outstanding and due,
and third, any remaining Liabilities then due; provided that no such
payment with respect to Revolving Loans, LC Obligations and the
remaining Liabilities (excluding Term Loans) shall reduce the
Commitments.
(c) If, on any date, the Borrower or any of its Subsidiaries
shall sell, issue or grant options, contingent interest rights,
warrants or other rights with respect to any of its equity or debt
securities (any of the foregoing being a "Sale"), the Borrower shall
promptly notify the Agent of such Sale, including the amount of Net
Proceeds received by the Borrower or any such Subsidiary in respect of
such Sale (and the amount and other type of consideration so received)
and an amount equal to at least thirty-five percent (35%) of such Net
Proceeds shall be promptly applied after the receipt from time to time
of such Net Proceeds to repay outstanding principal of the Term Loans
(together with any interest accrued thereon) in the inverse order of
their maturities. To the extent the Net Proceeds of any such Sale
exceed the amount of the Term Loans then outstanding (together with
any interest accrued thereon), or, at the time of such Sale, the Term
Loans shall have been paid in full, such Net Proceeds shall be applied
to repay first, any Revolving Loans then outstanding (including
interest accrued thereon), second, any LC Obligations then outstanding
and due, and third, any remaining Liabilities then due; provided that
no such payment with respect to Revolving Loans, LC Obligations and
the remaining Liabilities (excluding Term Loans) shall reduce the
Commitments.
(d) Commencing April 15, 1999, and annually on such date
thereafter, the Borrower agrees to repay the Term Loans in an amount
equal to 50% of such Excess Cash Flow for the Fiscal Year most
recently ended. Such repayment shall be applied to repay installments
of the Term Loans (together with interest accrued) thereon in the
inverse order of maturities. To the extent that the amount to be
repaid exceeds the principal amount of Term Loans then outstanding
(together with any unpaid interest accrued thereon) or,
-40-
<PAGE>
at the time of such repayment, the Term Loans shall have been paid in
full, the proceeds of such Excess Cash Flow shall be applied to repay
first, any Revolving Loans then outstanding (including interest
accrued thereon), second, any LC Obligations then outstanding and due,
and third, any remaining Liabilities then due; provided that no such
payment with respect to Revolving Loans, LC Obligations and the
remaining Liabilities (excluding Term Loans) shall reduce the
Commitments.
SECTION 6.5 Making of Payments. Except as otherwise provided, all
------------------
payments (including those made pursuant to Section 5.7, Section 6.3 or Section
----------- ----------- -------
6.4) in respect of the Loans or the Letters of Credit shall be made by the
- ---
Borrower to the Agent in immediately available funds for the account of the
Lenders pro rata according to their respective Percentages of the unpaid
principal amount of the Loans or LC Obligations held by them. All payments of
fees pursuant to Section 5.7 (other than any such fee payable for the Agent's
-----------
sole account) shall be made by the Borrower to the Agent for the account of the
Lenders, pro rata according to their respective Percentages. All such payments
shall be made to the Agent at its office in Chicago, not later than 12:30 P.M.,
Chicago time, on the date due, and funds received after that hour shall be
deemed to have been received by the Agent on the next following Business Day.
The Agent shall promptly remit to each Lender its pro rata share (based on its
Percentage) of all such payments received in collected funds by the Agent for
the account of such Lender. All payments under Sections 7.1, 7.2 and 7.5 shall
------------ --- ---
be made by the Borrower directly to the Lender or Lenders entitled thereto. All
payments under Sections 5.7(d) and 15.5 shall be made directly to, and for the
--------------- ----
sole account of, the Agent.
SECTION 6.6 Due Date Extension. If any payment provided for hereunder
------------------
falls due on a Saturday, Sunday or other day which is not a Business Day, then
such due date shall be extended to the next following Business Day, and
additional interest shall accrue and be payable for the period of such
extension.
SECTION 6.7 Sharing of Payments. (a) If any Lender shall obtain any
-------------------
payment or other recovery (whether voluntary, involuntary, by application of
offset or otherwise) on account of any Loan or LC Obligation (other than
pursuant to the terms of Section 7) in excess of its pro rata share (based on
---------
its Percentage) of payments and other recoveries obtained by all Lenders of
Loans or LC Obligations on account of principal of and interest and fees with
respect to Loans or reimbursement or fees with respect to LC Obligations then
held by them, such Lender shall purchase from the other Lenders such
participation in the Loans and LC Obligations held by them as shall be necessary
to
-41-
<PAGE>
cause such purchasing Lender to share the excess payment or other recovery
ratably with each of them; provided, however, that if all or any portion of the
-------- -------
excess payment or other recovery is thereafter recovered from such purchasing
Lender, the purchase shall be rescinded and each Lender which has sold a
participation to the purchasing Lender shall repay to the purchasing Lender the
purchase price to the ratable extent of such recovery together with an amount
equal to such selling Lender's ratable share (according to the proportion of (i)
the amount of such selling Lender's required repayment to the purchasing Lender
to (ii the total amount so recovered from the purchasing Lender) of any interest
or other amount paid or payable by the purchasing Lender in respect of the total
amount so recovered.
(b) The Borrower agrees that any Lender so purchasing a participation from
another Lender pursuant to Section 6.7(a) may, to the fullest extent permitted
--------------
by law, exercise all its rights of payment (including pursuant to Section 6.8)
-----------
with respect to such participation as fully as if such Lender were the direct
creditor of the Borrower in the amount of such participation. If under any
applicable bankruptcy, insolvency or other similar law, any Lender receives a
secured claim in lieu of a setoff to which this Section applies, such Lender
shall, to the extent practicable, exercise its rights in respect to such secured
claim in a manner consistent with the rights of the Lenders entitled under this
Section to share in the benefits of any recovery of such secured claim.
SECTION 6.8 Setoff. Each Lender shall, upon the occurrence of any Event
------
of Default described in Section 14.1 or, with the consent of the Required
------------
Lenders, upon the occurrence of any other Event of Default, have the right to
appropriate and apply to the payment of the Liabilities owing to it (whether or
not then due), and (as security for such Liabilities) the Borrower hereby grants
to each Lender a continuing security interest in, any and all balances, credits,
deposits, accounts or moneys of the Borrower then or thereafter maintained with
such Lender. Any such appropriation and application shall be subject to the
provisions of Section 6.7. Each Lender agrees promptly to notify the Borrower
-----------
and the Agent after any such setoff and application made by such Lender;
provided, however, that the failure to give such notice shall not affect the
- -------- ------- ----
validity of such setoff and application. The rights of each Lender under this
Section are in addition to other rights and remedies (including other rights of
setoff under applicable law or otherwise) which such Lender may have.
SECTION 6.9 Net Payments. All payments by the Borrower of principal of,
------------
and interest on, the Loans and all other amounts payable hereunder shall be made
free and clear of and without deduction for any present or future income, stamp
or other Taxes, fees, duties, withholdings or other charges of any nature
-42-
<PAGE>
whatsoever imposed by any taxing authority, other than Income Taxes (such non-
excluded items being called "Charges"). In the event that any withholding or
deduction from any payment to be made by the Borrower hereunder is required in
respect of any Charges pursuant to any applicable law, rule or regulation, then
the Borrower will:
(a) pay directly to the relevant authority the full amount
required to be so withheld or deducted;
(b) promptly forward to the Agent an official receipt or other
documentation reasonably satisfactory to the Agent evidencing such
payment to such authority; and
(c) pay to the Agent, for the account of the Lenders, such
additional amount or amounts as is necessary to ensure that the net
amount actually received by each Lender will equal the full amount
such Lender would have received had no such withholding or deduction
been required.
Upon the request of the Borrower or the Agent, each Lender that is organized
under the laws of a jurisdiction other than the U.S. shall, prior to the due
date of any payments under the Loans or LC Obligations, execute and deliver to
the Borrower and the Agent, on or about the first scheduled payment date in each
calendar year, a United States Internal Revenue Service Form 4224 or Form 1001,
as may be applicable (or any successor form), appropriately completed. Without
prejudice to the survival of any other agreement of the Borrower hereunder or
any other document, the agreements of the Borrower contained in this Section
shall survive satisfaction of the Liabilities and termination of this Agreement.
SECTION 7. CHANGES IN CIRCUMSTANCES
SECTION 7.1 Increased Costs. If (a) Regulation D of the Board of
---------------
Governors of the Federal Reserve System, or (b) after the date hereof, the
adoption of any applicable law, rule or regulation, or any change therein, or
any change in the interpretation or administration thereof by any governmental
authority, central bank or comparable agency charged with the interpretation or
administration thereof, or compliance by any Lender (or any Lending Office of
such Lender) with any request or directive (whether or not having the force of
law) or any such authority, central bank or comparable agency,
(i) shall subject any Lender (or any Lending Office of such
Lender) to any tax (other than Income Taxes), duty or other charge
with respect to its Loans
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<PAGE>
or its LC Obligations or its obligation to make Loans, or issue or
participate in the issuance of Letters of Credit or shall change the
basis of taxation of payments to any Lender of the principal of or
interest on its Loans, LC Obligations or any other amounts due under
this Agreement in respect of its Loans or its obligation to make Loans
or its LC Obligations (except for changes in the rate of Income Tax);
or
(ii) shall impose, modify or deem applicable any reserve
(including, without limitation, any reserve imposed by the Board of
Governors of the Federal Reserve System, but excluding any reserve
included in the determination of interest rates pursuant to Section
-------
5), special deposit or similar requirement against assets of, deposits
-
with or for the account of, or credit extended by, any Lender (or any
Lending Office of such Lender); or
(iii) shall impose on any Lender (or its Lending Office) any
other condition affecting its Loans or its LC Obligations;
and the result of any of the foregoing is to increase the net cost to (or in the
case of Regulation D referred to above, to impose a cost on) such Lender (or any
Lending Office of such Lender) of making or maintaining any Loan, or any Letter
of Credit or participation therein or to reduce the amount of any sum received
or receivable by such Lender (or the Lending Office or such Lender) under this
Agreement or under its Loans with respect thereto, then within thirty (30) days
after demand by such Lender (which demand shall be accompanied by a statement
setting forth in reasonable detail the basis of such demand); provided that such
Lender makes the same demand on other of its similarly-situated borrowers, if
any, the Borrower shall pay directly to such Lender such additional amount or
amounts as will compensate such Lender for such increased cost or such
reduction.
SECTION 7.2 Change in Rate of Return. If, after the date hereof, any
------------------------
change in, or the introduction, adoption, effectiveness, interpretation,
reinterpretation or phase-in of, any law or regulation, directive, guideline,
decision or request (whether or not having the force of law) of any court,
central bank, regulator or other governmental authority affects or would affect
the amount of capital required or expected to be maintained by any Lender or any
person controlling such Lender, and such Lender reasonably determines that the
rate of return on its or such controlling person's capital as a consequence of
its Commitments, the Loans or the Letters of Credit made by such Lender (or any
participating interest therein held by such Lender) is reduced to a level below
that which such Lender or such
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<PAGE>
controlling person could have achieved but for the occurrence of any such
circumstance, then, in any such case the Borrower shall, within thirty (30) days
after demand (accompanied by the statement described below) by such Lender;
provided that such Lender makes the same demand on other of its similarly-
situated borrowers, if any, the Borrower shall pay directly to such Lender
additional amounts sufficient to compensate such Lender or such controlling
person for such reduction in rate of return. A written statement of such Lender
as to any such additional amount or amounts (including calculations thereof) in
reasonable detail shall, in the absence of manifest error, be conclusive and
binding on the Borrower. In determining such amount, such Lender may use any
method of averaging and attribution that it shall reasonably deem applicable.
Each Lender promptly shall notify the Borrower of any event of which it has
knowledge, occurring after the date hereof, which will entitle such Lender to
compensation pursuant to this Section 7.2.
-----------
SECTION 7.3 Basis for Determining Interest Rate Inadequate or Unfair. If
--------------------------------------------------------
with respect to any Interest Period:
(a) the Agent is advised by ABN AMRO that deposits in Dollars
(in the applicable amounts) are not being offered to ABN AMRO in the
relevant market for such Interest Period, or the Agent otherwise
determines (which determination shall be binding and conclusive on all
parties) that by reason of circumstances affecting the interbank
eurodollar market adequate and reasonable means do not exist for
ascertaining the applicable LIBOR Rate; or
(b) any Lender advises the Agent that, for reasons described in
Section 7.1, 7.2 or 7.4, the LIBOR Rate (Reserve Adjusted), as
----------- --- ---
determined by the Agent, will not adequately and fairly reflect the
cost to such Lender of maintaining or funding such Loans for such
Interest Period, or that the making or funding of LIBOR Rate Loans has
become impracticable as a result of an event occurring after the date
of this Agreement which in the opinion of such Lender materially and
adversely changes such Loans,
then, so long as such circumstances shall continue: (i) the Agent shall
promptly notify the other parties thereof, (ii no Lender shall be under any
obligation to make or convert into LIBOR Rate Loans so affected, and (ii on the
last day of the then current Interest Period for Loans of the Type so affected,
such Loans shall, unless then repaid in full, automatically convert to Base
Rate Loans. If conditions subsequently change so that the foregoing conditions
no longer exist, the Agent in the case of clause (a) or such Lender in the case
of clause (b) will promptly
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<PAGE>
notify the Borrower and the Lenders thereof, and upon the receipt of such
notice, the obligations of all Lenders to make or continue LIBOR Rate Loans
shall be reinstated. Notwithstanding the foregoing, the Agent and each Lender
shall take any reasonable actions available to it (including designation of a
different Lending Office), consistent with legal and regulatory restrictions,
that will avoid the need to take the steps described in this Section 7.3, which
-----------
will not, in the reasonable judgment of the Agent or such Lender, be
disadvantageous to the Agent or such Lender.
SECTION 7.4 Changes in Law Rendering Certain Loans Unlawful. In the event
-----------------------------------------------
that any change in (including the adoption of any new) applicable laws or
regulations, or any change in the interpretation of applicable laws or
regulations by any governmental or other regulatory body charged with the
administration thereof, should make it unlawful for a Lender or the Lending
Office of such Lender ("Affected Lender") to make, maintain or fund LIBOR Rate
Loans, then (a) the Affected Lender shall promptly notify each of the other
parties hereto, (b) the obligation of all Lenders to make, continue or convert
into LIBOR Rate Loans shall, upon the effectiveness of such event, be suspended
for the duration of such unlawfulness, and (c) on the last day of the current
Interest Period for LIBOR Rate Loans (or, in any event, if the Affected Lender
so requests, on such earlier date as may be required by the relevant law,
regulation or interpretation), LIBOR Rate Loans shall, unless then repaid in
full, automatically convert to Base Rate Loans. If conditions subsequently
change so that the foregoing conditions no longer exist, such Lender will
promptly notify the Borrower and the other Lenders thereof, and upon the receipt
of such notice, the obligations of all Lenders to make, convert or continue
LIBOR Rate Loans shall be reinstated. Notwithstanding the foregoing, the Agent
and each Lender shall take any reasonable actions available to it (including
designation of a different Lending Office), consistent with legal and regulatory
restrictions, that will avoid the need to take the steps described in this
Section 7.4, which will not, in the reasonable judgment of the Agent or such
- -----------
Lender, be disadvantageous to the Agent or such Lender.
SECTION 7.5 Funding Losses. The Borrower hereby agrees that upon demand
--------------
by any Lender (which demand shall be accompanied by a statement setting forth in
reasonable detail the basis for the calculations of the amount being claimed)
the Borrower will indemnify such Lender against any net loss or expense which
such Lender may sustain or incur (including, without limitation, any net loss or
expense incurred by reason of the liquidation or reemployment of deposits or
other funds acquired by such Lender to fund or maintain LIBOR Rate Loans), as
reasonably determined by such Lender, as a result of (a) any payment or
prepayment or conversion of any LIBOR Rate Loan of such Lender on a date other
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<PAGE>
than the last day of an Interest Period for such Loan, or (b) any failure of the
Borrower to borrow, continue or convert any Loans on a date specified therefor
in a Borrowing Request or Continuation/Conversion Notice pursuant to this
Agreement. For this purpose, all notices to the Agent pursuant to this
Agreement shall be deemed to be irrevocable.
SECTION 7.6 Right of Lenders to Fund Through Other Offices. Each Lender
----------------------------------------------
may, if it so elects, fulfill its Commitment as to any LIBOR Rate Loan by
causing its Lending Office to make such Loan; provided that in such event for
-------- ----
the purposes of this Agreement, such Loan shall be deemed to have been made by
such Lender and the obligation of the Borrower to repay such Loan shall
nevertheless be to such Lender and shall be deemed held by it, to the extent of
such Loan, for the account of such branch or affiliate.
SECTION 7.7 Discretion of Lenders as to Manner of Funding.
---------------------------------------------
Notwithstanding any provision of this Agreement to the contrary, each Lender
shall be entitled to fund and maintain its funding of all or any part of its
Loans in any manner it sees fit, it being understood, however, that for the
purposes of this Agreement all determinations hereunder shall be made as if such
Lender had actually funded and maintained each LIBOR Rate Loan during each
Interest Period for such Loan through the purchase of deposits having a maturity
corresponding to such Interest Period and bearing an interest rate equal to the
LIBOR Rate for such Interest Period.
SECTION 7.8 Conclusiveness of Statements; Survival of Provisions.
----------------------------------------------------
Determinations and statements of any Lender pursuant to Sections 7.1 through
------------
Section 7.5 shall be conclusive absent manifest error. The provisions of
- -----------
Sections 7.1 through Section 7.5 shall survive termination of this Agreement.
- ------------ -----------
SECTION 8. COLLATERAL AND OTHER SECURITY
SECTION 8.1 Security Documents. Concurrently with or prior to the
------------------
initial Borrowing or issuance of the initial Letter of Credit:
(a) Security Agreement. The Borrower and each of its
------------------
Subsidiaries shall execute and deliver to the Agent a security
agreement, substantially in the form of Exhibit F (herein, as the same
---------
may be amended or modified, called the "Security Agreement") covering,
among other things, inventory, equipment, accounts, and general
intangibles of the Borrower and its Subsidiaries.
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<PAGE>
(b) Borrower Trademark Security Agreement. The Borrower shall
-------------------------------------
execute and deliver to the Agent the Borrower Trademark Security
Agreement covering, among other things, all of the copyrights the
Borrower.
(c) Borrower Pledge Agreement. The Borrower shall execute and
-------------------------
deliver to the Agent a pledge agreement, substantially in the form of
Exhibit G (herein, as the same may be amended or modified, called the
---------
"Borrower Pledge Agreement"), covering, among other things, all of the
issued and outstanding capital stock of each Subsidiary of the
Borrower, including, without limitation, all the issued and
outstanding capital stock of each of the Guarantors.
(d) Gibbs Pledge Agreement. Gibbs shall execute and deliver to
----------------------
the Agent a pledge agreement, substantially in the form of Exhibit H
---------
(herein, as the same may be amended or modified, called the "Gibbs
Pledge Agreement"), covering, among other things, all of the issued
and outstanding capital stock of each Subsidiary of Gibbs.
(e) Subsidiary Guaranty. Each Subsidiary of the Borrower shall
-------------------
execute and deliver to the Agent a guaranty, substantially in the form
of Exhibit J (herein, as the same may be amended or modified, called
the "Subsidiary Guaranty") guarantying, among other things, the
indefeasible payment in full of the Liabilities and each such
Subsidiaries' obligations under the Subsidiary Guaranty.
SECTION 8.2 Further Assurances. The Borrower agrees that upon the
------------------
request of the Agent (a) it shall forthwith deliver, or cause to be delivered to
the Agent, in due form for transfer, all chattel paper, instruments, securities
and documents of title, if any, at any time representing all or any of the
Collateral, and (b) it shall forthwith execute and deliver or cause to be
executed and delivered to the Agent, in due form for filing or recording (and
pay the cost of filing or recording the same in all public offices reasonably
deemed necessary by the Agent), such further assignment agreements, security
agreements, pledge agreements, instruments, consents, waivers, financing
statements, stock or bond powers, searches, releases, and other documents, and
do such other acts and things, all as the Agent may from time to time reasonably
request to establish and maintain to the satisfaction of the Agent a valid first
priority perfected Lien on all Collateral (free of all other Liens, except
Permitted Liens) to secure payment of the Liabilities.
SECTION 9. REPRESENTATIONS AND WARRANTIES
To induce the Lenders to enter into this Agreement and to
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<PAGE>
make Loans and to issue or participate in Letters of Credit hereunder, the
Borrower represents and warrants to the Agent and to each of the Lenders that:
SECTION 9.1 Organization, etc. The Borrower is a corporation duly
------------------
organized, validly existing and in good standing under the laws of the State of
Delaware; each of its Subsidiaries is a corporation duly organized, validly
existing and in good standing under the laws of its state of incorporation; and
the Borrower and each such Subsidiary is duly qualified to transact business and
in good standing as a foreign corporation authorized to do business in each
jurisdiction where the nature of its business makes such qualification necessary
and where failure to so qualify reasonably could have a Material Adverse Effect.
The shares of capital stock of the Borrower and each of its Subsidiaries are
owned by the Persons set forth in Schedule 9.1 in the amounts set forth therein.
------------
SECTION 9.2 Authorization. The Borrower and each of its Subsidiaries (to
-------------
the extent it is a named party thereto) (a) has the corporate power to execute,
deliver and perform this Agreement and the Related Documents, and (b) has taken
all necessary corporate action to authorize the execution, delivery and
performance by it of this Agreement and the Related Documents.
SECTION 9.3 No Conflict. The execution, delivery and performance by the
-----------
Borrower and each of its Subsidiaries (to the extent it is a named party
thereto), of this Agreement and the Related Documents does not and will not (a)
contravene or violate any provision of any law, statute, rule or regulation, (b)
contravene or conflict with, result in any breach of, or constitute a default
under, any material agreement or instrument binding on it, (c) result in the
creation or imposition of or the obligation to create or impose any Lien (except
for Permitted Liens) upon any of the property or assets of the Borrower or any
such Subsidiary, or (d) contravene or violate any provision of the certificate
or articles of incorporation or by-laws of the Borrower or any such Subsidiary.
SECTION 9.4 Governmental Consents. No order, consent, approval, license,
---------------------
authorization or validation of, or filing, recording or registration with
(except as have been obtained or made prior to the Closing Date and except for
filings or recordings of the UCC statements, the Fee Mortgages and any other
documents contemplated to be filed or recorded by this Agreement or any Related
Document with respect to the Collateral) or exemption by, any governmental or
public body or authority, or any subdivision thereof, is required in connection
with the execution, delivery and performance by the Borrower or any Subsidiary
of the Borrower (to the extent it is a named party thereto) of this Agreement or
the Related Documents, except those which have been
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<PAGE>
made or obtained or will be made or obtained as and when required thereby.
SECTION 9.5 Validity. The Borrower and each of its Subsidiaries has duly
--------
executed and delivered this Agreement (to the extent it is a named party hereto)
and will have duly executed as and when required hereby the Related Documents
(to the extent it is named as a party thereto), and each of such documents
constitutes, or when so delivered will constitute the legal, valid and binding
obligation of the Borrower and each such Subsidiary party thereto, enforceable
in accordance with its terms.
SECTION 9.6 Financial Statements. The Borrower's audited consolidated
--------------------
financial statements as at December 31, 1996 and its unaudited consolidated
financial statements as at March 31, 1997, copies of which have been furnished
to the Agent, have been prepared in conformity with GAAP (except in the case of
such unaudited statements, for the absence of notes and subject to normal year-
end adjustments) applied on a basis consistent with that of the preceding Fiscal
Year, except as disclosed therein, and accurately present in all material
respects the financial condition of the Borrower and its Subsidiaries as at such
dates and the results of operations for the periods then ended. The Borrower's
pro forma financial statements for the periods ended December 31, 1996 through
December 31, 2002, which were delivered to the Agent on March 14, 1997, are the
most recent pro forma financial statements prepared by the Borrower and the
projections and pro forma financial information contained therein are based upon
good faith estimates and assumptions believed by such Persons to be reasonable
at the time made, it being recognized by the Lenders that such projections as to
future events are not to be viewed as facts or guarantees and that actual
results during the period or periods covered by any such projections may differ
from the actual results.
SECTION 9.7 Material Adverse Change. No Material Adverse Change has
-----------------------
occurred since December 31, 1996.
SECTION 9.8 Litigation and Contingent Obligations. No Material
-------------------------------------
Litigation is pending or, to the Borrower's knowledge after due inquiry,
threatened except as set forth (including good faith estimates of the Dollar
amounts involved with respect thereto) in Schedule 9.8. Neither the Borrower
------------
nor any of its Subsidiaries has any material Contingent Obligations other than
as provided for or disclosed on Schedule 9.8 or in the financial statements
------------
referred to in Section 9.6.
-----------
SECTION 9.9 Liens. None of the assets of the Borrower or any its
-----
Subsidiaries is subject to any Lien, except for Permitted Liens.
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<PAGE>
SECTION 9.10 Subsidiaries. The Borrower has no Subsidiaries, except as
------------
set forth on Schedule 9.10.
-------------
SECTION 9.11 Pension and Welfare Plans.
-------------------------
(a) During the twelve-consecutive-month period prior to the
Effective Date of this Agreement and prior to the date of any
Borrowing hereunder, no steps have been taken to terminate or
completely or partially withdraw from any Pension Plan or Welfare
Plan, and no contribution failure has occurred with respect to any
Pension Plan sufficient to give rise to a Lien on any assets of the
Borrower or its Subsidiaries under section 302(f) of ERISA;
(b) no condition exists or event or transactions have occurred
with respect to any Pension Plan which might result in the incurrence
by the Borrower or any other member of the Controlled Group of any
material liability, fine, Tax or penalty which reasonably could have a
Material Adverse Effect;
(c) except as disclosed in Schedule 9.11 or the financial
-------------
statement referred to in Section 9.6, neither the Borrower nor any
-----------
member of the Controlled Group has any vested or contingent liability
with respect to any post-retirement benefit under a Welfare Plan,
other than liability for continuation coverage described in Part 6 of
Title I of ERISA;
(d) with respect to each Pension Plan maintained or contributed
to by the Borrower which is intended to qualify under Section 401(a)
of the Code, a favorable determination letter has been received from
the Internal Revenue Service stating that such Pension Plan so
qualifies and nothing has occurred since the date of issuance of such
determination letter which would cause any such Pension Plan to cease
to qualify under Section 401(a) of the Code;
(e) each fiduciary (as defined in section 3(21) of ERISA) with
respect to any Pension Plan or Welfare Plan and any Person who handles
funds of any Pension Plan or Welfare Plan is bonded to the extent
required under section 412 of ERISA; and
(f) no Pension Plan maintained by or contributed to by the
Borrower or any other member of the Controlled Group and subject to
section 302 of ERISA or section 412 of the Code has incurred an
accumulated funding deficiency as defined in section 302(a)(2) of
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ERISA and Section 412(a) of the Code, whether or not waived.
SECTION 9.12 Investment Company Act. Neither the Borrower nor any
----------------------
Subsidiary of the Borrower is an "investment company" or a company "controlled"
by an "investment company," within the meaning of the Investment Company Act of
1940, as amended.
SECTION 9.13 Public Utility Holding Company Act. Neither the Borrower nor
----------------------------------
any Subsidiary of the Borrower is a "holding company," or a "subsidiary company"
of a "holding company," or an "affiliate" of a "holding company" or of a
"subsidiary company" of a "holding company," within the meaning of the Public
Utility Holding Company Act of 1935, as amended.
SECTION 9.14 Margin Regulation. Neither the Borrower nor any Subsidiary
-----------------
of the Borrower is engaged principally, or as one of its important activities,
in the business of extending credit for the purpose of purchasing or carrying
margin stock (within the meaning of Regulation G or Regulation U of the Board of
Governors of the Federal Reserve System).
SECTION 9.15 Collateral. As security for the Liabilities, the Agent has
----------
or upon the filing or recording of the Fee Mortgages and UCC financing
statements in the offices set forth in Schedule 9.15 and the other documents
-------------
contemplated to be filed or recorded under the Related Documents and possession
by the Agent of all Collateral which consists of instruments or securities as
defined in the UCC will have a valid, first-priority Lien on the Collateral,
subject only to Permitted Liens. There are no Liens or UCC financing statements
on file in favor of any Person with respect to the Borrower or any of its
Subsidiaries, except for Permitted Liens or Liens in connection with the
Indebtedness to be Refinanced (which will be released concurrently with the
Closing Date).
SECTION 9.16 Taxes. The Borrower and each of its Subsidiaries has filed
-----
all tax returns and reports required by law to have been filed by them and have
paid or provided adequate reserves for all Taxes thereby shown to be owing,
except any such Taxes which are being diligently contested in good faith by
appropriate proceedings and for which adequate reserves have been established
and are being maintained in accordance with GAAP. There is no ongoing audit or,
to the Borrower's knowledge, other governmental investigation of the tax
liability of the Borrower or any of its Subsidiaries and there is no unresolved
claim by a taxing authority concerning the Borrower's or of its Subsidiary's tax
liability, for any period for which returns have been filed or were due. The
liability stated for Taxes as of December 31, 1996 in the financial statements
described in Section 9.6 is sufficient in all material respects for all Taxes as
-----------
of such date.
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SECTION 9.17 Accuracy of Information. All factual information heretofore
-----------------------
or contemporaneously furnished by or on behalf of the Borrower or any its
Subsidiaries in writing to the Agent or any Lender for purposes of or in
connection with this Agreement or any transaction contemplated hereby is, and
all other such factual information hereafter furnished by or on behalf of the
Borrower or any of its Subsidiaries to the Agent or any Lender will be, true and
accurate in every material respect on the date as of which such information is
dated or certified and as of the Effective Date, and such information is not, or
shall not be, as the case may be, incomplete by omitting to state any material
fact necessary to make such information not misleading.
SECTION 9.18 Environmental Warranties. Except as set forth in Schedule
------------------------ --------
9.18:
- ----
(a) all facilities and property (including underlying
groundwater) owned or leased by the Borrower or any of its
Subsidiaries have been, and continue to be, owned or leased by the
Borrower and its Subsidiaries in material compliance with all
Environmental Laws;
(b) there have been no past, and there are no pending or,
to the best knowledge of the Borrower, threatened (i) claims,
complaints, notices or requests for information received by the
Borrower or any of its Subsidiaries with respect to any alleged
violation of any Environmental Law, or (ii complaints, notices or
inquiries as to the Borrower or any of its Subsidiaries regarding
potential liability under any Environmental Law;
(c) there have been no releases of Hazardous Materials at,
on or under any property now or previously owned or leased by the
Borrower or any of its Subsidiaries that, individually or in the
aggregate, have had, or could have, a Material Adverse Effect;
(d) the Borrower and each of its Subsidiaries has been
issued and is in material compliance with all permits,
certificates, approvals, licenses and other authorizations
relating to environmental matters necessary for its business;
(e) no property now or previously owned or leased by the
Borrower or any of its Subsidiaries is listed or proposed for
listing (with respect to owned property only) on the National
Priorities List pursuant to
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<PAGE>
CERCLA, on the CERCLIS or on any similar state list of sites
requiring investigation or clean-up;
(f) there are no underground storage tanks, active or
abandoned, including petroleum storage tanks, on or under any
property now or previously owned or leased by the Borrower or any
of its Subsidiaries that, individually, or in the aggregate, have
had, or could have a Material Adverse Effect;
(g) neither the Borrower nor any of its Subsidiaries has
directly transported or directly arranged for the transportation
of any Hazardous Material to any location which is listed or
proposed for listing on the National Priorities List pursuant to
CERCLA, on the CERCLIS or on any similar state list or which is
the subject of federal, state or local enforcement actions or
other investigations which may lead to material claims against
the Borrower or any of its Subsidiaries for any remedial work,
damage to natural resources or personal injury, including claims
under CERCLA;
(h) there are no polychlorinated biphenyls or friable
asbestos present at any property now or previously owned or
leased by the Borrower or any of its Subsidiaries that,
individually or in the aggregate, has had, or could have, a
Material Adverse Effect; and
(i) to the best of Borrower's knowledge, no conditions
exist at, on or under any property now or previously owned or
leased by the Borrower or any of its Subsidiaries which, with the
passage of time, or the giving of notice or both, would give rise
to material liability under any Environmental Law.
SECTION 9.19 Proceeds. The proceeds of the Term Loans and the initial
--------
Revolving Loans will be used (a) for the payment in part of the obligations of
the Borrower in connection with the Stock Purchase Transactions or other
Permitted Acquisitions (in an aggregate amount not to exceed $20,000,000
excluding the Stock Purchase Transactions), (b) for the costs, expenses, fees
and Taxes incurred by Borrower and its Subsidiaries in connection with the Stock
Purchase Transactions or other Permitted Acquisitions, the Equity Purchase
Transaction referred to in clause (c) of the definition thereof, and this
----------
Agreement, including, without limitation, costs, expenses, fees and Taxes
incurred pursuant to Section 17.4; provided that the fees payable to Heller and
------------
Electra in connection with their purchase and/or commitment to purchase Series D
Preferred Stock of the Borrower on the Closing Date shall
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<PAGE>
not exceed $200,000, (c) for payment in full (or in the case of letters of
credit issued under the Provident Bank Credit Agreement, to back up such letters
of credit with Letters of Credit) of the Indebtedness to be Refinanced, and (d)
for working capital purposes.
SECTION 9.20 Insurance. Schedule 9.20 hereto sets forth a true and
--------- -------------
correct summary of all insurance carried by the Borrower and its Subsidiaries
(or on their behalf). The Borrower and its Subsidiaries are, to the Borrower's
best knowledge, adequately insured for their benefit under policies issued by
insurers of recognized responsibility. No notice of any pending or threatened
cancellation or material premium increase has been received by the Borrower or
any of its Subsidiaries with respect to any of such insurance policies. The
Borrower and its Subsidiaries are in substantial compliance with all conditions
contained in such insurance policies.
SECTION 9.21 Securities Laws. Neither the Borrower nor any Affiliate of
---------------
the Borrower, nor anyone acting on behalf of any such Person, has directly or
indirectly offered any interest in the Loans or any other Liabilities for sale
to, or solicited any offer to acquire any such interest from, or has sold any
such interest to, any Person that would subject the issuance or sale of the
Loans or any other Liabilities to registration under the Securities Act of 1933,
as amended.
SECTION 9.22 Governmental Authorizations. The Borrower and each of its
---------------------------
Subsidiaries has all licenses, franchises, permits and other governmental
authorizations necessary for all businesses presently carried on by them
(including ownership and leasing the real and personal property owned and leased
by them), except where failure to obtain such licenses, franchises, permits and
other governmental authorizations could not have a Material Adverse Effect, and
except such authorizations as are required to be obtained (it being understood
that the Borrower hereby agrees to promptly obtain such authorizations)
following consummation of the Stock Purchase transactions.
SECTION 9.23 Stock Purchase Transaction. The Borrower has furnished to
--------------------------
the Agent and each Lender a true and correct copy of the Gibbs Acquisition
Agreement. At the time of the making of the Loans to fund the acquisition
contemplated thereby: (a) the transactions contemplated by Gibbs Acquisition
Agreement will have been, or concurrently with the making of the Loans with
respect thereto will be, consummated in accordance with the terms of the Gibbs
Acquisition Agreement without material modification or waiver of any such terms;
(b) all consents and approvals of, and filings and registrations with and all
other actions in respect of, all Persons (including all governmental agencies,
authorities or instrumentalities) required in order to consummate the
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transactions contemplated by Gibbs Acquisition Agreement will have been
obtained, given, filed or taken and shall be in full force and effect, and all
required waiting periods will have elapsed, except as provided in Section 9.22;
and (c) all actions by the Borrower or any of its Subsidiaries pursuant to or in
furtherance of the transactions contemplated by Gibbs Acquisition Agreement will
have been taken in compliance with all requirements of law, except as provided
in Section 9.22.
SECTION 9.24 Representations in Other Agreements True and Correct. Each
----------------------------------------------------
of the representations and warranties contained in (a) Gibbs Acquisition
Agreement, (b) the IAMD Acquisition Agreements, and (c) each Related Document
(each as originally executed notwithstanding any amendment, modification or
termination thereof except to the extent consented to by the Required Lenders)
are true and correct; provided, however, to the extent any such representations
and warranties in any of the Gibbs Acquisition Agreement or the IAMD Acquisition
Agreements are made by a Person other than the Borrower or any of its
Subsidiaries, the representations and warranties made pursuant to this Section
-------
9.24 with respect thereto are limited to the Borrower's or such Subsidiaries'
- ----
best knowledge after due inquiry.
SECTION 9.25 Business Locations; Trade Names. Schedule 9.25 lists each of
------------------------------- -------------
the locations where the Borrower or any of its Subsidiaries maintains an office,
a place of business, any records or Collateral together with each corporate,
fictitious or trade name under or by which the Borrower or any of its
Subsidiaries conducts or has conducted its business.
SECTION 9.26 Solvency. The Borrower and each of its Subsidiaries is, and
--------
after consummation of the transactions contemplated by this Agreement and the
Stock Purchase Transactions, and after giving effect to all Indebtedness
incurred and Liens created by the Borrower and its Subsidiaries in connection
herewith and therewith will be, Solvent.
SECTION 9.27 Title IV Compliance.
-------------------
With respect to each Education Institution which is subject to Title IV:
(a) Each Educational Institution is (or, in the case of any Educational
Institution acquired on or after the Closing Date, immediately prior to the
acquisition such Educational Institution was, and in the ordinary course of
review by the DOE, will be) an "eligible proprietary institution of higher
education," as defined in 34 C.F.R. Section 600.5.
(b) Each Educational Institution has (or, in the case of any Educational
Institution acquired on or after the Closing Date,
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immediately prior to the acquisition such Educational Institution was, and in
the ordinary course of review by the DOE, will be) received an eligibility
notification, as that term is defined in 34 C.F.R. Section 600.21.
(c) The Borrower has not changed, nor does the Borrower anticipate any
change, in any of the information required by 34 C.F.R. Section 600.30 to be
reported by each Educational Institution to the Secretary, except as provided in
Schedule 9.27(c).
- ----------------
(d) Each Educational Institution has (or, in the case of any Educational
Institution acquired on or after the Closing Date, immediately prior to the
acquisition such Educational Institution was, and in the ordinary course of
review by the DOE, will be) met the standards for participation in Title IV
Programs as set forth in 34 C.F.R., Party 668, Subpart B, and has a current
program participation agreement with the Secretary.
(e) Each Educational Institution has at all times during which it has been
owned by the Borrower or a Subsidiary of the Borrower, and to the Borrower's or
any such Subsidiary's knowledge at all times prior thereto, acted with the
competency and integrity necessary to qualify as a fiduciary in the
administration of Title IV Programs, as provided by 34 C.F.R. Section 668.82.
(f) To the best of the Borrower's and each of its Subsidiaries' knowledge,
and except as disclosed on Schedule 9.27(f), the Borrower's and each such
----------------
Subsidiary's operations with respect to each Educational Institution have, in
all material respects, been conducted in all material respects in accordance
with the Policy Guidelines and all relevant standards imposed by Accrediting
Bodies, agencies administering state or federal government student aid programs
in which any such Subsidiary participates, and all other applicable laws and
regulations. The Borrower and each of its Subsidiaries have submitted all
reports, audits and other information, whether periodic in nature or pursuant to
specific requests, for each Educational Institution ("Compliance Reports") to
all agencies or other entities with which such filings are required relating to
its compliance with (i) applicable accreditation standards governing its
activities or (ii) laws or regulations governing programs pursuant to which any
Subsidiary or its students receive funding, and (iii) all articulation
agreements, if any, with degree-granting colleges and universities in effect as
of the date of this Agreement. To the best of the Borrower's and each such
Subsidiary's knowledge after due inquiry, all such forms and records with
respect to each Educational Institution have been prepared, completed,
maintained and filed in all material respects in accordance with all applicable
federal and state laws and regulations, and are true
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and correct in all material respects. To the best knowledge of the Borrower and
each Subsidiary of the Borrower, all financial aid grants and loans,
disbursements and record keeping relating thereto have been completed in
substantial compliance with all federal and state requirements, and there are no
material deficiencies in respect thereto. To the best of the Borrower's and each
of its Subsidiaries' knowledge and except as previously disclosed in prior
audits by DOE, no student at any Educational Institution has been funded prior
to the date for which such student was eligible for funding, and such student's
records conform in all material respects in form and substance to all relevant
regulatory requirements.
(g) Schedule 9.27(g) sets forth the cohort default rate for each
----------------
Educational Institution, as calculated and published by the DOE, for each
Educational Institution for the federal fiscal years ended December 31, 1993,
1994 and 1995. Except as set forth in the appeals described on Schedule
--------
9.27(f), to the best of the Borrower's and each of its Subsidiaries' knowledge,
- -------
such schedule is materially accurate in all respects. To the best of the
Borrower's and each of its Subsidiaries' knowledge, they have received no notice
as to the calculation or publication of the cohort default rates for either
Educational Institution for the federal fiscal year ended December 31, 1996.
As used in this Section, all terms, unless otherwise defined herein, shall
have the meanings as set forth in the citations referred to above or as
otherwise defined in 34 C.F.R., Part 600 or Part 668, as the context requires.
Section 9.28 No Burdensome Restrictions. Neither the Borrower nor any of
--------------------------
its Subsidiaries is a party to or bound by any agreement, or subject to any
restriction in its charter, by-laws or any other organizational document, or any
federal, state or local law, rule or regulation, which could have a Material
Adverse Effect.
Section 9.29 Copyrights, Patents, Trademarks and Licenses, etc. The
-------------------------------------------------
Borrower and each of its Subsidiaries owns or is licensed or otherwise has the
right to use all of the patents, trademarks, service marks, trade names,
copyrights, contractual franchises, authorizations and other rights that are
reasonably necessary for the operation of their respective businesses, to
Borrower's best knowledge without conflict with or violation of the rights of
any other Person. To the best knowledge of the Borrower and its Subsidiaries,
no slogan or other advertising device, product, process, method, substance, part
or other material now employed, or now contemplated to be employed, by the
Borrower or any of its Subsidiaries infringes upon any rights held by any other
Person. Except as specifically disclosed in Schedule 9.29, no Litigation
-------------
regarding any of the foregoing is pending or
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to the Borrower's and its Subsidiaries' best knowledge, threatened, and no
patent, invention, device, application, principle or any statute, law, rule,
regulation, standard or code is pending or, to the knowledge of the Borrower or
such Subsidiary, proposed, which, in either case, could have a Material Adverse
Effect.
SECTION 9.30 Title to Assets; Leases. The Borrower or its Subsidiaries,
-----------------------
as the case may be, has good, sufficient and legal title to, or leasehold
interest in, all the property and assets reflected as owned in the financial
statements provided under Section 9.6, except such property and assets as have
-----------
been disposed of in the ordinary course of business since the relevant dates
thereof. The Borrower or its Subsidiaries, as the case may be, enjoys peaceful
and undisturbed possession of all material property subject to leases and all
such leases are valid and in full force and effect. All leases in effect on the
Closing Date are set forth in Schedule 9.30.
-------------
SECTION 9.31 Labor Disputes. There are no strikes or other labor
--------------
disputes or grievances pending or, to the best knowledge of the Borrower,
threatened against the Borrower or its Subsidiaries that could reasonably be
expected to have a Material Adverse Effect.
SECTION 10. AFFIRMATIVE COVENANTS
The Borrower agrees that, on and after the Effective Date and for so long
thereafter as any Lender has any Commitment hereunder or any of the Liabilities
remain unpaid or outstanding, the Borrower will:
SECTION 10.1 Reports, Certificates and Other Information. Unless
-------------------------------------------
otherwise provided herein, furnish or cause to be furnished to the Agent and
each Lender:
10.1.1 Audit Report. As soon as available, but in any event
------------
within ninety (90) days after the end of each Fiscal Year of the
Borrower: (a) copies of the consolidated and consolidating balance
sheet of the Borrower and its Subsidiaries as at the end of such
Fiscal Year and the related statements of earnings, stockholders'
equity and cash flow of the Borrower and its Subsidiaries for such
Fiscal Year, in each case setting forth the figures for the previous
year, prepared in reasonable detail and in accordance with GAAP
applied consistently throughout the periods reflected therein,
certified, without Qualification by Arthur Anderson, L.L.P. (or such
other independent certified public accountants of recognized standing
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reasonably acceptable to the Required Lenders); (b) a certificate from
such accountants containing a computation of, and showing compliance
with, each of the financial ratios and restrictions contained in
Section 12, and to the effect that, in making the examination
------- --
necessary for the signing of the annual audit report of the Borrower
and its Subsidiaries by such accountants, they have not become aware
of any non-compliance by the Borrower or any of its Subsidiaries, or
any Default or Event of Default, under this Agreement or the Related
Documents; and (c) a letter addressed to the Borrower from such
accountants stating that such accountants have been informed that a
primary intent of the Borrower was for the professional services such
accountants provided to the Borrower and its Subsidiaries in preparing
the financial statements and the certificate referred to above to
benefit or influence the Agent and the Lenders, and identifying the
Agent and the Lenders as parties that the Borrower has indicated
intend to rely on such professional services provided to the Borrower
and its Subsidiaries by such accountants;
10.1.2 Quarterly Reports. As soon as available, but in any
-----------------
event within forty-five (45) days after the end of each Fiscal Quarter
of the Borrower, copies of the unaudited consolidated and
consolidating balance sheet of the Borrower and its Subsidiaries as at
the end of such Fiscal Quarter and the related unaudited statements of
earnings, stockholders' equity and cash flow for such Fiscal Quarter
and the portion of the Fiscal Year through such Fiscal Quarter, in
each case setting forth in comparative form the figures for the
corresponding periods of the previous Fiscal Year, prepared in
reasonable detail and in accordance with GAAP applied consistently
throughout the periods reflected therein and certified by the chief
financial officer of the Borrower as presenting fairly the financial
condition and results of operations of the Borrower and its
Subsidiaries (subject to normal year-end audit adjustments and absence
of footnotes);
10.1.3 Monthly Reports. As soon as available, but in any
---------------
event within thirty (30) days after the end of each calendar month,
copies of the unaudited consolidated and consolidating balance sheet
of the Borrower and its Subsidiaries as at the end of such month and
the related unaudited statements of earnings, stockholders' equity and
cash flow for such month and the portion of the Fiscal Year through
such month, in each case setting forth in comparative form the figures
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for the corresponding periods of the previous Fiscal Year, prepared in
reasonable detail and in accordance with GAAP applied consistently
throughout the periods reflected therein and certified by the chief
financial officer of the Borrower as presenting fairly the financial
condition and results of operations of the Borrower and its
Subsidiaries (subject to normal year-end audit adjustments and absence
of footnotes);
10.1.4 Compliance Certificate. Contemporaneously with the
----------------------
furnishing of a copy of each set of the statements and reports
provided for in Sections 10.1.1 and 10.1.2, a duly completed
--------------- ------
certificate, substantially in the form of Exhibit O (the "Compliance
---------
Certificate"), signed by the chief financial officer of the Borrower,
containing, among other things, (a) a computation of, and showing
compliance with, each of the applicable financial ratios and
restrictions contained in Section 12, (b) setting forth the most
------- --
recent cohort default rate for each Educational Institution, as
calculated and published by the DOE, (c) setting forth the Funded Debt
to Consolidated EBITDA Ratio, (d) such other financial ratios required
by the DOE including revenue breakdowns, acid test (annually only),
profitability and 85/15 ratios with respect to each Educational
Institution, and (e) to the effect that as of such date no Default or
Event of Default has occurred and is continuing;
10.1.5 Auditors' Materials. Promptly upon receipt thereof,
-------------------
copies of all detailed financial and management reports regarding the
Borrower or any of its Subsidiaries submitted to the Borrower or any
such Subsidiary by independent public accountants in connection with
each annual or interim audit report made by such accountants of the
books of the Borrower or any of its Subsidiaries;
10.1.6 Business Plan. As soon as available, but in any event:
-------------
(a) within 30 days after the beginning of each Fiscal Year of the
Borrower, a copy of the plan and forecast (including a projected
closing consolidated and consolidating balance sheet, income statement
and funds flow statements) of the Borrower and its Subsidiaries for
such Fiscal Year; and (b) within 30 days after the end of the second
Fiscal Quarter of the Borrower in each Fiscal Year, an update of each
plan and forecast delivered with respect to the Fiscal Year in which
such Fiscal Quarter occurs, reflecting changes in such plan resulting
from actual and then anticipated results and forecasts;
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10.1.7 Reports to SEC and to Stockholders. Promptly upon the
----------------------------------
filing or making thereof, copies of each filing and report made by the
Borrower or any of its Subsidiaries with or to any securities exchange
or the Securities and Exchange Commission and of each communication
from the Borrower or to stockholders generally;
10.1.8 Notice of Default, Litigation and License Matters.
-------------------------------------------------
Promptly upon learning of the occurrence of any of the following,
written notice thereof, describing the same and the steps being taken
by the Borrower with respect thereto: (a) the occurrence of a Default
or Event of Default, (b) the institution of any Material Litigation or
the occurrence of any Material Litigation Development, (c) the
commencement of any dispute which might lead to the material
modification, transfer, revocation, suspension or termination of any
Related Document, (d) any Material Adverse Change, or (e) the
termination or suspension of an Educational Institution's
participation in Title IV Program, as set forth in 34 C.F.R. Section
668.26;
10.1.9 Insurance Reports. (a) within ninety (90) days after
-----------------
the end of each Fiscal Year of the Borrower, a certificate signed by a
Responsible Officer that summarizes the insurance policies carried by
the Borrower or any of its Subsidiaries (such certificate to be in
form and substance satisfactory to the Agent), (b) written
notification thirty (30) days prior to any cancellation or material
change of any such insurance by the Borrower or any of its
Subsidiaries and within five (5) days after receipt of any notice
(whether formal or informal) of cancellation or change by any of its
insurers;
10.1.10 ERISA Liability. Promptly upon learning of the
---------------
occurrence of the following, written notice thereof describing the
same and the steps being taken by the Borrower with respect thereto:
(a) the failure of any member of the Controlled Group to make a
required contribution to any Pension Plan if such failure is
sufficient to give rise to a Lien on the assets of the Borrower or any
of its Subsidiaries under section 302(f)(1) or accumulated funding
deficiency under section 302 of ERISA, (b) the institution of any
steps by any member of the Controlled Group to withdraw from, or the
institution of any steps by the Borrower to terminate, any Pension
Plan, (c) the taking of any action with respect to a Pension Plan
which could
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result in the requirement that the Borrower or any of its Subsidiaries
furnish a bond or other security to the Pension Benefit Guaranty
Corporation or such Pension Plan, or (d) the occurrence of any event
with respect to any Pension Plan which could result in the incurrence
by the Borrower or any of its Subsidiaries of any liability, fine, Tax
or penalty or any increase in the vested or contingent liability of
the Borrower or any of its Subsidiaries with respect to any post-
retirement Welfare Plan benefit if such penalty or increased liability
would exceed $250,000;
10.1.11 Pension Plan Withdrawals. With respect to each Pension
------------------------
Plan which is a "multi-employer plan," as defined in section 4001 of
ERISA as to which any member of the Controlled Group may incur any
liability, (a) no less frequently than annually, a written estimate
(which shall be based on information received from each such plan, it
being expressly understood that the Borrower shall take all reasonable
steps to obtain such information) of the withdrawal liability that
would be incurred by the Controlled Group in the event that all
members of the Controlled Group were to completely withdraw from such
plan, and (b) written notice thereof, as soon as it has reason to
believe (on the basis of the most recent information available to it)
that the sum of (i) the withdrawal liability that would be incurred by
the Controlled Group if all members of the Controlled Group completely
withdrew from all multi-employer plans as to which any member of the
Controlled Group has an obligation to contribute, and (ii) the
aggregate amount of the outstanding withdrawal liability (without
unaccrued interest) incurred by the Controlled Group to multi-employer
plans exceeds $250,000;
10.1.12 Other Information Concerning the Borrower and its
-------------------------------------------------
Subsidiaries. Promptly upon learning thereof, written notice of (a)
------------
the occurrence with respect to the Borrower or any Subsidiary of the
Borrower of any of the events the occurrence of which in relation to
the Borrower would constitute an Event of Default under Sections
--------
14.1.3 or 14.1.4; (b) the execution of any agreement by the Borrower
------ ------
or any of its Subsidiaries to merge with or consolidate into or with,
or purchase or otherwise acquire all or substantially all of the
assets or stock of any class of, or any partnership or joint venture
interest in, any other Person, or for the sale, transfer, lease or
conveyance by the Borrower or any of its Subsidiaries of all or any
substantial part of its assets or sale or assignment without recourse
of
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any of its receivables; and (c) any action which may reasonably be
expected to result in a Change in Control provided that nothing
contained herein shall be deemed to permit any breach or violation of
any other provision of this Agreement or any Related Document;
10.1.13 Environmental Liabilities. Promptly upon learning
-------------------------
thereof, written notice (together with copies, if available) of all
written claims, complaints, notices or inquiries relating to the
Borrower's or any of its Subsidiaries' (a) properties or facilities,
or (b) alleged non-compliance with Environmental Laws, together with a
description of the steps being taken by the Borrower or such
Subsidiary with respect thereto;
10.1.14 List of Officers and Directors. As soon as available,
------------------------------
but in any event (a) within 10 Business Days after each anniversary
date of the initial Loan, a complete list of the officers and
directors of the Borrower and each of its Subsidiaries to the extent
changed from the prior Fiscal Year, and (b) within 15 Business Days of
any change in such list, written notice of such change;
10.1.15 Excess Cash Flow Certificate. Contemporaneously with
----------------------------
the furnishing of a copy of each set of the statements and reports
provided for in Section 10.1.1, a duly completed certificate,
--------------
substantially in the form attached hereto as Exhibit Q, signed by a
---------
Responsible Officer of the Borrower, containing, among other things, a
computation of Excess Cash Flow for the previous Fiscal Year; and
10.1.16 Other Information. From time to time such other
-----------------
information and certifications concerning the Borrower and any
Subsidiary of the Borrower as the Agent or the Lender may reasonably
request.
SECTION 10.2 Corporate Existence; Foreign Qualification. Do, and cause
------------------------------------------
to be done at all times, all things necessary to (a) maintain and preserve the
corporate existence of the Borrower and each Subsidiary of the Borrower, (b) be,
and ensure that the Borrower and each Subsidiary of the Borrower is, duly
qualified to do business and in good standing as foreign corporations in each
jurisdiction where the nature of their business makes such qualification
necessary and where failure to so qualify could have a Material Adverse Effect,
and (c) comply, and cause its Subsidiaries to comply, with all contractual
obligations and requirements of law binding upon such entity, except to the
extent that the failure to comply therewith could not individually or in the
aggregate have a Material Adverse Effect.
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SECTION 10.3 Books, Records and Inspections. (a) Maintain, and cause
------------------------------
each of its Subsidiaries to maintain, complete and accurate books and records;
(b) permit, and cause each of its Subsidiaries to permit, access at reasonable
times by the Agent to its books and records; (c) permit, and cause each of its
Subsidiaries to permit, the Agent to inspect at reasonable times its properties
and operations; and (d) permit, and cause each of its Subsidiaries to permit,
the Agent to discuss its business, operations and financial condition with its
officers and internal and external accountants.
SECTION 10.4 Insurance. Maintain, and cause each of its Subsidiaries to
---------
maintain, with responsible insurance companies insurance with respect to its
properties and business (including business interruption insurance) against such
casualties and contingencies and of such types and in such amounts as is
customary in the case of similar businesses.
SECTION 10.5 Taxes and Liabilities. Pay, and cause each of its
---------------------
Subsidiaries to pay, when due all Taxes and other material liabilities, except
as contested in good faith and by appropriate proceedings with respect to which
reserves have been established, and are being maintained, in accordance with
GAAP if, and so long as, forfeiture of any part of the Collateral will not
result from the failure to pay any such Taxes or other material liabilities
during the period of any such contest.
SECTION 10.6 Pension Plans and Welfare Plans. Maintain, and cause each
-------------------------------
of its Subsidiaries to maintain, each Pension Plan and Welfare Plan as to which
it may have any liability, in compliance in all material respects with all
applicable requirements of law (including any rules and regulations promulgated
thereunder).
SECTION 10.7 Compliance with Laws. Comply, and cause each of its
--------------------
Subsidiaries to comply, with all federal, state and local laws, rules and
regulations related to its businesses (including, without limitation, all such
laws, rules and regulations relating to Hazardous Materials or the disposal
thereof) if the failure so to comply could have a Material Adverse Effect.
SECTION 10.8 Title IV Compliance. The Borrower and each of its
-------------------
Subsidiaries will:
(a) other than actions for continued DOE and Accrediting Body
approvals obtained in connection with an Acquisition, take no action which would
cause any Educational Institution to fail to qualify as an "eligible
institution," as defined in 34 C.F.R. Section 600.2, including, without
limitation, under 34 C.F.R. Section 600.40;
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(b) take no action which would cause any Educational Institution to
fail to qualify as a Proprietary Institution of Higher Education in accordance
with 34 C.F.R. Section 600.5;
(c) not permit more than eighty five percent (85%) of each
Educational Institution's revenues during the most recent twelve-month period
to be derived from Title IV Program funds based on the formula set forth in 34
C.F.R. Section 600.5(d) except that with respect to the Al Collins Graphic
Design School, during the first Loan Year such rate shall not exceed eighty-five
percent (85%) and with respect to any Educational Institution acquired after the
Closing Date, the Borrower shall have a period of 12 months to bring such
Educational Institution in compliance with the first clause of this Section
-------
10.8(c);
- -------
(d) submit to the Agent, for each Educational Institution, within one
hundred twenty (120) days following the end of each Fiscal Year of such
Educational Institution, the certified public accountant's report required by 34
C.F.R. Section 600.5(e), except that the report shall certify that the
percentage of revenue derived from Title IV Program funds is not more than the
amount of its revenue allowable under Section 10.8(c);
---------------
(e) other than actions for continued DOE and Accrediting Body
approvals obtained in connection with an acquisition, maintain each Educational
Institution as an accredited institution, as defined in 34 C.F.R. Section 600.2;
(f) except as provided in 34 C.F.R. Section 600.7(b)(3), take no
action which would cause or permit, for the latest complete award year (i) more
than forty percent (40%) of each Educational Institution's courses to be
"correspondence courses" as calculated based on 34 C.F.R. Section 600.7(b) and
defined in 34 C.F.R. Section 600.2; (ii) forty percent (40%) or more of each
Educational Institution's regular enrolled students to be enrolled in
correspondence courses; (iii) twenty percent (20%) or more of each Educational
Institution's regular enrolled students to be incarcerated; (iv) forty percent
(40%) or more of each Educational Institution's regular enrolled students to
have neither a high school diploma nor the recognized equivalent of a high
school diploma in cases where the Educational Institution provides a four-year
or two-year educational program for which it awards a bachelor's degree or
associate's degree, respectively;
(g) take no action to commence, consent to, or acquiescence in any
case, proceeding, or other action relating to bankruptcy, insolvency,
reorganization or similar relief of any Subsidiary;
(h) notify the Secretary and the Agent within ninety (90) days prior
to the expiration of any Educational Institution's
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program participation agreement and submit a materially completed application
for a renewal of certification to the Secretary at least ninety (90) days prior
to the expiration of such Educational Institution's current period of
participation or, in the event of the Secretary's selection of an Educational
Institution for recertification, submit a materially completed application for
renewal to the Secretary on or before the date specified in the notice of
selection for recertification;
(i) comply with the application procedures set forth in 34 C.F.R.
Section 600.20 and Section 668.12;
(j) notify the Secretary and the Agent in writing no later than seven
(7) days after a change occurs in any of the information provided in any
Educational Institution's eligibility application, as set forth in 34 C.F.R.
Section 600.30;
(k) unless such action is contingent upon approval of or a ruling
from the Secretary under 34 C.F.R. Section 600.31, take no action that would
cause any Educational Institution to undergo a change of ownership that would
result in a change of control, as set forth in 34 C.F.R. Section 600.31;
(l) cause each Educational Institution to meet the standards for
participation in Title IV Programs in 34 C.F.R., Part 668, Subpart B, and to
have a current program participation agreement with the Secretary or in the case
of an Acquired Person, immediately following its approval by the DOE, take such
action as is necessary to comply with the foregoing;
(m) cause not less than eighty percent (80%) of the tuition revenue
derived from the programs provided at each Educational Institution to be derived
from programs which qualify as eligible programs pursuant to 34 C.F.R. Section
668.8;
(n) cause each Educational Institution to comply with all of the
factors of financial responsibility set forth in 34 C.F.R. Section 668.15,
except that (i) all payments of existing debt obligations shall be made within
ninety (90) days; and (ii) no Educational Institution shall have operating
losses for the two (2) latest fiscal years that result in a decrease in
Consolidated Tangible Net Worth in excess of eight percent (8%) of such
Educational Institution's Tangible Net Worth at the beginning of the first year
of the two-year period (operating losses and tangible net worth being defined as
set forth in 34 C.F.R. Section 668.15(B)(7);
(o) monitor and prevent the Federal Stafford loan and Federal SLS
published cohort default rate for each Educational Institution from exceeding
twenty-five percent (25%) for any two consecutive 12-month periods or thirty
percent (30%) for any
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twelve month period;
(p) cause each Educational Institution to comply with the standard of
conduct required by each fiduciary in the administration of Title IV Programs,
as set forth in 34 C.F.R. Section 668.82.
As used in this Section, all terms shall have the meanings as set forth in
the citations referred to above or as otherwise defined in 34 C.F.R., Part 600
or Part 668, as the context requires.
SECTION 10.9 Maintenance of Permits. Maintain, and cause each of its
----------------------
Subsidiaries to maintain, all permits, licenses and consents as may be required
for the conduct of its business by any state, federal or local government agency
or instrumentality (including, without limitation, any such license, consent or
permit relating to Hazardous Materials or the disposal thereof) if the failure
to maintain such licenses, permits and consents could have a Material Adverse
Effect.
SECTION 10.10 Environmental Compliance. Maintain, and cause each of its
------------------------
Subsidiaries to maintain, (a) all necessary permits, approvals, certificates,
licenses and other authorizations relating to environmental matters in effect
and use and operate all of its facilities and properties in material compliance
with all Environmental Laws, and (b) appropriate procedures for the handling of
all Hazardous Materials in material compliance with all applicable Environmental
Laws, and comply in all material respects with such procedures at all times.
SECTION 11. NEGATIVE COVENANTS
The Borrower agrees that, on and after the Effective Date and for so long
thereafter as any Lender has any Commitment hereunder or any of the Liabilities
remains unpaid or outstanding, the Borrower will:
SECTION 11.1 Limitation on Indebtedness. Not, and not permit any of its
--------------------------
Subsidiaries to, incur or at any time be liable with respect to any Indebtedness
except:
(a) Indebtedness outstanding under this Agreement in respect of
the Loans and other Liabilities;
(b) Subordinated Debt in an aggregate principal amount at any
time outstanding not to exceed $5,000,000 without duplication of
Indebtedness permitted by Section 11.1(c); provided that such
--------------- -------- ----
Subordinated Debt (i) is unsecured, (ii) principal payments thereon
are
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<PAGE>
not paid or scheduled for payment prior to six months after the Term
Loan Termination Date and the Revolving Loan Termination Date, and
(iii) does not contain any event of default, affirmative, negative or
financial covenant that is more onerous than those provided in this
Agreement;
(c) Indebtedness outstanding on the Effective Date described on
Schedule 11.1; provided that Indebtedness permitted by this clause (c)
------------- -------- ---- ----------
does not include any extension, renewal or refunding of any such
outstanding Indebtedness; and provided, further, that the Indebtedness
-------- ------- ----
to be Refinanced shall be repaid (or in the case of letters of credit
issued under the Provident Bank Credit Agreement, be backed up with
Letters of Credit) with the proceeds of the initial Borrowing and
shall not thereafter be outstanding;
(d) Indebtedness of Subsidiaries of the Borrower owing to the
Borrower and unsecured Indebtedness of the Borrower owing to its
Subsidiaries; provided that such Indebtedness is evidenced by
promissory notes which are pledged to the Agent concurrently with the
incurrence of such Indebtedness by such Subsidiary, for the benefit of
the Lenders, under the Borrower Pledge Agreement or Gibbs Pledge
Agreement, as the case may be;
(e) Indebtedness secured by a Permitted Lien;
(f) Indebtedness with respect to Contingent Obligations
outstanding on the Effective Date and described on Schedule 11.1 and
-------------
other Contingent Obligations in an aggregate principal amount not
exceeding $1,000,000 per year (excluding any Contingent Obligation
with respect to Indebtedness permitted by Section 11.7 and not set
------------
forth on Schedule 11.1);
-------------
(g) Indebtedness in respect of deferred Taxes;
(h) unsecured Indebtedness in respect of current accounts
payable arising in the ordinary course of business (including open
accounts extended by suppliers on normal trade terms in connection
with purchases of goods and services, but excluding Indebtedness
incurred through the borrowing of money or Contingent Obligations),
except, without duplication, to the extent permitted by clause (f)
----------
above;
(i) Indebtedness in respect of non-current accounts payable
which the Borrower is contesting in
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good faith and by appropriate proceedings, and with respect to which
reserves have been established, and are being maintained, in
accordance with GAAP; and
(j) Indebtedness in the nature of seller holdbacks issued by the
Borrower with respect to any Educational Institution acquired after
the Closing Date for the period from such Acquisition until receipt of
DOE approval of such Acquisition.
SECTION 11.2 Liens. Not, and not permit any Subsidiary of the Borrower
-----
to, create, assume or suffer to exist any Lien on any asset now owned or
hereafter acquired by it, except for the following (collectively called
"Permitted Liens"):
(a) Liens in favor of the Agent, for the benefit of the Lenders,
pursuant to this Agreement and the Related Documents and, until
released in accordance herewith, Liens evidencing the Indebtedness to
be Refinanced;
(b) Liens for current Taxes not delinquent or for Taxes being
contested in good faith and by appropriate proceedings and with
respect to which adequate reserves are being maintained in accordance
with GAAP;
(c) Liens in connection with the acquisition of fixed or capital
assets after the date hereof to the extent permitted under Section
-------
12.4 and attaching only to the property being acquired, provided the
----
Indebtedness secured thereby does not exceed one hundred percent
(100%) of the fair market value of such property at the time of
acquisition thereof nor $500,000 in the aggregate at any one time
outstanding;
(d) Liens shown on Schedule 11.2;
-------------
(e) Liens incurred in the ordinary course of business in
connection with worker's compensation, unemployment insurance or other
forms of governmental insurance or benefits or to secure performance
of tenders, statutory obligations, leases and contracts (other than
for borrowed money) entered into in the ordinary course of business or
to some obligations on surety or appeal bonds; and
(f) Liens of mechanics, carriers, materialmen and other like
Liens arising in the ordinary course of business in respect of
obligations which are not delinquent or which are being contested in
good faith and by appropriate proceedings and with respect to
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which adequate reserves are being maintained in accordance with GAAP.
SECTION 11.3 Consolidation, Merger, etc. Not, and not permit any of its
---------------------------
Subsidiaries to, liquidate or dissolve, consolidate with, or merge into or with,
any other Person, or purchase or otherwise acquire all or substantially all of
the assets of any Person (or of any division thereof) except:
(a) any such Subsidiary may liquidate or dissolve voluntarily
into, and may merge with and into, the Borrower or any other
Subsidiary of the Borrower; and
(b) so long as no Default or Event of Default has occurred and
is continuing or would occur after giving effect thereto, any
Permitted Acquisition, if permitted by Section 12.4 if made as a
------------
Consolidated Capital Expenditure.
SECTION 11.4 Asset Disposition, etc. Not, and not permit any of its
-----------------------
Subsidiaries to, sell, assign, lease, transfer, contribute, convey or otherwise
dispose of, or grant options, warrants or other rights with respect to, any of
its assets to any Person, unless:
(a) such sale, assignment, transfer, lease, contribution,
conveyance or other disposition constitutes bona fide sales of
inventory in the ordinary course of its business or obsolete equipment
or other property no longer used or useful in the business; or
(b) the net book value of such assets, together with the net
book value of all other assets sold, transferred, leased, contributed
or conveyed otherwise than in the ordinary course of business by the
Borrower or any of its Subsidiaries pursuant to this clause since the
Effective Date, does not exceed $500,000.
; provided that (i) the consideration received is at least equal to the fair
market value of such assets, (ii) the Net Proceeds received in connection with
any such asset disposition are applied as required by Section 6.4(b) and (iii)
--------------
no Default exists prior to or results from the consummation of such sale of
assets.
SECTION 11.5 Dividends, etc. Except with respect to (a) dividends paid
---------------
to the Borrower to pay the Liabilities, (b) so long as no Default exists, the
Electra Permitted Cash Dividends, and (c) if the purchase of IAMD (U.S.) and
IAMD (Canada) is not consummated, the redemption of Series D Preferred Stock of
the Borrower held by Heller, EIT and William Klettke issued on the
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<PAGE>
Closing Date in an aggregate amount not to exceed $4,125,000, not (i) declare,
pay or make any dividend or distribution (in cash, property or obligations) on
any shares of any class of capital stock (now or hereafter outstanding) of the
Borrower or on any warrants, options or other rights with respect to any shares
of any class of capital stock (now or hereafter outstanding) of the Borrower
(other than dividends or distributions payable in its common stock or warrants
to purchase its common stock or splitups or reclassifications of its stock into
additional or other shares of its common stock) or apply, or permit any of its
Subsidiaries to apply, any of its funds, property or assets to the purchase,
redemption, sinking fund or other retirement of any shares of any class of
capital stock (now or hereafter outstanding) of the Borrower or any option,
warrant or other right to acquire shares of the Borrower's capital stock (other
than any such payment pursuant to stock appreciation rights granted and
exercised in accordance with applicable rules and regulations of the Securities
and Exchange Commission); and (ii) make any deposit for any of the foregoing
purposes.
SECTION 11.6 Investments. Not, and not permit any of its Subsidiaries
-----------
to, make, incur, assume or suffer to exist any Investment in any other Person,
except:
(a) Investments existing on the Effective Date and identified in
Schedule 11.6;
-------------
(b) Cash Equivalent Investments;
(c) without duplication, Investments permitted as Indebtedness
pursuant to Section 11.1;
------------
(d) in the ordinary course of business, Investments by the
Borrower in any of its Subsidiaries, or by any such Subsidiary in any
of its Subsidiaries, by way of contributions to capital or loans or
advances;
(e) other Investments in an aggregate amount at any one time not
to exceed $100,000; and
(f) Investments in connection with any Permitted Acquisition;
provided, however, that no Investment otherwise permitted by clause (d), (e) and
---------- ---
(f) shall be permitted to be made if, immediately before or after giving effect
- ---
thereto, any Default or Event of Default shall exist.
SECTION 11.7 Rental Obligations. Not, and not permit any of its
------------------
Subsidiaries to, enter into at any time any arrangement which
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<PAGE>
involves the leasing by the Borrower or any of its Subsidiaries from any lessor
of any real or personal property (or any interest therein), except arrangements
which, together with all other such arrangements then in effect, will not
require the payment of an aggregate amount of rentals by the Borrower and its
Subsidiaries in excess of $14,000,000 for any Fiscal Year or $60,000,000 during
the full remaining term of such arrangements;
SECTION 11.8 Subordinated Debt. Not, and not permit any of its
-----------------
Subsidiaries to:
(a) make any payment (whether of principal, interest or
otherwise) on any Subordinated Debt prior to the later of the Term
Loan Termination Date and the Revolving Loan Termination Date, other
than regularly scheduled payments of interest thereon so long as no
Default or Event of Default exists; or
(b) make any payment on any Subordinated Debt in contravention
or violation of the subordination provisions thereof; or
(c) prepay, redeem, purchase or defease any Subordinated Debt,
or make any deposit for any of the foregoing purposes; or
(d) enter into any amendment, supplement or modification of any
Subordinated Debt, which results in a violation of the foregoing
provisions of this Section or which adversely affects the interests or
rights of any of the Borrower, any of its Subsidiaries, the Agent or
the Lenders.
SECTION 11.9 Take or Pay Contracts. Not, and not permit any of its
---------------------
Subsidiaries to, enter into or be a party to any arrangement for the purchase of
materials, supplies, other property or services if such arrangement by its
express terms requires that payment be made by the Borrower or any Subsidiary of
the Borrower regardless of whether such materials, supplies, other property or
services are delivered or furnished to it.
SECTION 11.10 Regulations G and U. Not, and not permit any of its
-------------------
Subsidiaries to, use or permit any proceeds of the Loans or LC Obligations to be
used, either directly or indirectly, for the purpose, whether immediate,
incidental or ultimate, of "purchasing or carrying margin stock" within the
meaning of Regulations G and U of the Board of Governors of the Federal Reserve
System, as amended from time to time.
SECTION 11.11 Subsidiaries. Notwithstanding any provision of this
------------
Agreement to the contrary, not, and not permit any of its
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<PAGE>
Subsidiaries to, create or permit to exist any Subsidiary other than the
Subsidiaries of the Borrower listed on Schedule 9.10 unless (a) such new
-------------
Subsidiary shall promptly execute and deliver to the Agent, for the benefit of
the Lenders, a supplement to the Subsidiary Guaranty and the Security Agreement,
whereby such new Subsidiary agrees to be bound under each such agreement as a
"Guarantor" and a "Subsidiary Grantor", respectively, and (b) (i) if any stock
of such new Subsidiary is owned by another Subsidiary of the Borrower, such
other Subsidiary shall promptly execute and deliver to the Agent, for the
benefit of the Lenders, a pledge agreement, in the form of the Borrower Pledge
Agreement, whereby such other Subsidiary pledges, to secure payment of the
Liabilities and its obligations under the Subsidiary Guaranty, a first priority
security interest (subject only to Permitted Liens) in all the outstanding
capital stock of such new Subsidiary owned by such other Subsidiary, and (ii) if
any stock of such new Subsidiary is owned by the Borrower or Gibbs, the Borrower
or Gibbs, as the case may be, shall promptly pledge such stock under the
Borrower Pledge Agreement or the Gibbs Pledge Agreement, as the case may be; the
documents contemplated by each of the foregoing clauses (a) and (b) shall be in
-------------------
form and substance satisfactory to the Agent and shall be accompanied by such
other documents, agreements, filings, opinions or certificates reasonably
requested by the Agent, including, without limitation, such other deliveries
requested by the Agent pursuant to Section 8.2.
-----------
SECTION 11.12 Other Agreements. Not, and not permit any of its
----------------
Subsidiaries to, enter into any agreement containing any provision which (a)
would be violated or breached by the performance of its obligations hereunder or
under any instrument or document delivered or to be delivered by it hereunder or
in connection herewith, (b) prohibits or restricts the creation or assumption of
any Lien upon its properties, revenues or assets (whether now owned or hereafter
acquired) as security for the Liabilities hereunder, (c) prohibits or restricts
the ability of any Subsidiary of the Borrower to make dividends or advances or
payments to the Borrower, or (d) prohibits or restricts the ability of the
Borrower or any of its Subsidiaries to amend or otherwise modify this Agreement
or any other document executed in connection herewith, except in each case, to
the extent required to comply in Title IV or other applicable laws, regulations,
rules and guidelines of governmental authorities and Accreditating Bodies.
SECTION 11.13 Business Activities. Not, and not permit any of its
-------------------
Subsidiaries to, (a) engage in any type of business except the businesses which
the Borrower and its Subsidiaries are presently engaged in, or (b) substantially
alter the methods by which the Borrower or its Subsidiaries conduct such
business.
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<PAGE>
SECTION 11.14 Change of Location or Name. Not, and not permit any of its
--------------------------
Subsidiaries to, change (a) the location of its principal place of business,
chief executive office, major executive office, chief place of business or its
records concerning its business and financial affairs, or (b) its name or the
name under or by which it conducts its business, in each case without first
giving the Agent at least thirty (30) days' advance written notice thereof and
having taken any and all action reasonably required or desirable to maintain and
preserve the first perfected Lien on Collateral in favor of the Agent free and
clear of any other Lien whatsoever (except for Permitted Liens); provided,
--------
however, that notwithstanding the foregoing, neither the Borrower nor any of its
- -------
Subsidiaries shall change the location of its principal place of business, chief
executive office, major executive office, chief place of business or its records
concerning its business and financial affairs to any place outside the
contiguous continental United States of America or, with respect to IAMDC
(Canada), Canada.
SECTION 11.15 Transactions with Affiliates. Except for loans made by the
----------------------------
Borrower to officers of the Borrower in an aggregate principal amount not to
exceed $150,000 which are evidenced by notes which have been pledged to the
Agent pursuant to the Borrower Pledge Agreement, not, and not permit any of its
Subsidiaries to, enter into, or cause, suffer or permit to exist any arrangement
or contract with any of its other Affiliates unless such arrangement (a) is fair
and equitable to the Borrower or such Subsidiary, (b) is of a sort which would
be entered into by a prudent Person in the position of the Borrower or such
Subsidiary with a Person which is not one of its Affiliates, and (c) is on terms
which are not less favorable to the Borrower or such Subsidiary than are
obtainable from a Person which is not one of its Affiliates.
SECTION 11.16 Bank Accounts. Except as provided on Schedule 11.16, the
------------- --------------
Borrower and its Subsidiaries have no bank accounts and hereby agree that
neither the Borrower nor any of its Subsidiaries shall open, maintain or
otherwise have any bank account, except to the extent the Borrower notifies the
Agent prior to opening any other bank account and (a) such bank account is a
petty cash, payroll, restricted cash and other like accounts or accounts
required under Title IV or other applicable standards or (b) the Borrower or its
Subsidiary, as the case may be, promptly grants the Agent, for the benefit of
the Lenders, a perfected security interest in such bank accounts subject to no
Liens (other than Permitted Liens).
SECTION 11.17 Limitation on Sales and Leasebacks. Not, and not permit its
----------------------------------
Subsidiaries to, at any time, directly or indirectly, sell and thereafter lease
back any of their respective assets or properties.
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<PAGE>
SECTION 11.18 Modification of Certain Documents. The Borrower will not
---------------------------------
consent to any amendment, supplement or other modification of any of the terms
or provisions contained in, or applicable to, its charter, by-laws or other
organizational documents, the Gibbs Acquisition Agreements, the IAMD Acquisition
Agreements, or the Equity Purchase Documents, without the prior written consent
of the Required Lenders if such amendment, supplement or other modification
could have an adverse effect on the Borrower, or any of its Subsidiaries, the
Agent or the Lenders or any rights of the Agent or Lenders under this Agreement
or any of the Related Documents.
SECTION 12. FINANCIAL COVENANTS
The Borrower agrees that, on and after the Effective Date and for so long
thereafter as any Lender has any Commitment hereunder or any of the Liabilities
remain unpaid or outstanding, it will:
SECTION 12.1 Minimum Fixed Charge Coverage Ratio. Not permit the Fixed
-----------------------------------
Charge Coverage Ratio, at the end of any Fiscal Quarter (for the four Fiscal
Quarters then ended) during any Fiscal Year of the Borrower, to be less than
1.25:1.00.
SECTION 12.2 Minimum Interest Coverage Ratio. Not permit the Interest
-------------------------------
Coverage Ratio, at the end of any Fiscal Quarter (for the four Fiscal Quarters
then ended) during any Fiscal Year of the Borrower, to be less than 3.00:1.00.
SECTION 12.3 Maximum Leverage Ratio. Not permit the Funded Debt to
----------------------
Consolidated EBITDA Ratio to exceed, at the end of any Fiscal Quarter (for the
four Fiscal Quarters then ended) during any period set forth below, the
applicable ratio set forth below opposite such period:
<TABLE>
<CAPTION>
Period Ending Maximum Ratio
------------- -------------
<S> <C>
6/30/97-6/30/98 3.75:1.00
6/30/98-6/30/99 3.00:1.00
6/30/99 and thereafter 2.50:1
</TABLE>
SECTION 12.4 Maximum Capital Expenditures. Not permit Consolidated
----------------------------
Capital Expenditures to exceed in any Fiscal Year of the Borrower an amount
equal to four percent (4%) of the consolidated revenues of the Borrower and its
Subsidiaries for the immediately preceding Fiscal Year; provided, that to the
-------- ----
extent that Consolidated Capital Expenditures in any such Fiscal Year are less
than the applicable maximum amount set forth above, the maximum amount set forth
above for any subsequent Fiscal Year may be increased (but not to more than 50%
of the amount set forth
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<PAGE>
above) by the amount of such shortfall.
SECTION 12.5 Minimum Tangible Net Worth. Not permit Consolidated Tangible
--------------------------
Net Worth, at the end of any Fiscal Quarter during any Fiscal Year of the
Borrower, to be less than $7,500,000, plus (a) 50% of Consolidated Net Income,
plus (b) 35% of the Net Proceeds received by the Borrower or its Subsidiaries in
connection with the private or public sale of equity securities after the
Closing Date.
Notwithstanding the foregoing, for the purposes of Sections 12.1, 12.2 and
-------------------
12.3, Consolidated EBITDA shall be calculated for the Fiscal Quarters ending (a)
- ----
June 30, 1997, based on the then ending Fiscal Quarter and shall be annualized
by multiplying Consolidated EBITDA for such Fiscal Quarter by 4, and (b)
September 30, 1997, based on the then ending Fiscal Quarter and the immediately
preceding Fiscal Quarter and shall be annualized by multiplying the Consolidated
EBITDA for such two Fiscal Quarters by 2.
SECTION 13. CONDITIONS
The obligation of each of the Lenders to make its Loans and of the Agent to
issue Letters of Credit is subject to the performance by the Borrower of all of
its obligations under this Agreement and to the satisfaction of the following
conditions precedent or concurrent:
SECTION 13.1 Initial Borrowing. In the case of the initial Borrowing, the
-----------------
Agent shall have received all of the following, each, except to the extent
otherwise specified below, duly executed by a Responsible Officer of the
applicable party, dated the date of such Loan or Letter of Credit (or such
earlier date as shall be satisfactory to the Agent), in form and substance
reasonably satisfactory to the Agent, and each in sufficient number of signed
counterparts to provide one for each Lender:
13.1.1 Evidence that the Borrower shall have paid (or the in the
case of letters of credit issued under the Provident Bank Credit
Agreement, shall have backed up such letters of credit with Letters of
Credit), and caused to have been paid, in full all obligations (other
than the Letters of Credit issued under the Provident Bank Credit
Agreement) with respect to the Indebtedness to be Refinanced, together
with UCC-3 termination statements releasing all Liens relating to such
Indebtedness;
13.1.2 For each Lender, an appropriately completed Term Note,
payable to the order of such
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Lender in the principal amount of such Lenders Term Loan Commitment;
13.1.3 For each Lender, an appropriately completed Revolving
Note, payable to the order of such Lender in the principal amount of
such Lender's Revolving Loan Commitment;
13.1.4 An appropriately completed Borrowing Request;
13.1.5 The Security Agreement;
13.1.6 The Borrower Trademark Security Agreement;
13.1.7 The Post-Closing Agreement;
13.1.8 The Borrower Pledge Agreement, together with (a) the
stock certificates evidencing all shares pledged under such Pledge
Agreement, and (b) appropriate undated stock powers for such shares
signed in blank;
13.1.9 The Gibbs Pledge Agreement, together with (a) the stock
certificates evidencing all shares pledged under such Pledge
Agreement, and (b) appropriate undated stock powers for such shares
signed in blank;
13.1.10 The Subsidiary Guaranty;
13.1.11 The Subordination Agreement;
13.1.12 A favorable opinion of Messrs. D'Ancona & Pflaum,
counsel to the Borrower and its Subsidiaries, substantially in the
form of Exhibit T hereto, and addressing such other legal matters as
---------
the Agent or its counsel reasonably may require;
13.1.13 An officer's certificate of the Borrower and its
Subsidiaries, substantially in the form of Exhibits K-1 and K-2 hereto
------------ ---
and dated as of the date hereof, signed by the president or a vice-
president of the Borrower and each such Subsidiary, as the case may
be, and attested to by its secretary, together with certified copies
of the Borrower's, and each such Subsidiary's certificate or articles
of incorporation, by-laws, resolutions, incumbency and any other
documents pursuant to the terms thereof;
13.1.14 Evidence of the good standing of the
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Borrower and each Subsidiary of the Borrower in the jurisdiction in
which such Person is incorporated and any jurisdiction in which
Collateral is located;
13.1.15 A certificate, substantially in the form of Exhibit N
---------
hereto, signed by the chief financial officer of the Borrower to the
effect that the Borrower is Solvent, together with copies of the pro
forma financial statements;
13.1.16 Evidence that the Borrower and the Subsidiaries of the
Borrower have obtained the insurance policies required by this
Agreement and the Related Documents, or such policies have been
obtained on the Borrower's or such Subsidiary's behalf;
13.1.17 Evidence that the Borrower shall have paid to the Agent
the fees and expenses provided for herein and in the Fee Letter;
13.1.18 A letter from the Process Agent agreeing to receive
service of process on behalf of the Borrower and each of its
Subsidiaries pursuant to Section 17.11 hereof, unless a registered
-------------
agent exists in the State of Illinois for such party;
13.1.19 Evidence of each filing, registration or recordation
(and payment of any necessary fee, Tax or expense relating thereto)
with respect to each document (including, without limitation, any UCC
financing statement) required by the Related Documents or under law or
reasonably requested by the Agent to be filed, registered or recorded
in order to create, in favor of the Agent, for the benefit of the
Lenders, a perfected first Lien on the Collateral (subject to
Permitted Liens);
13.1.20 A calculation of the Funded Debt to Consolidated EBITDA Ratio
as of the Closing Date certified by the chief financial officer of the
Borrower; and
13.1.21 Such other information and documents as may reasonably
be required by the Agent and the Agent's counsel.
SECTION 13.2 Conditions of each Letter of Credit. The obligation of the
-----------------------------------
Agent to issue each Letter of Credit is subject to the conditions precedent that
(a) the Agent shall have received the related LC Application and, (b) the
conditions set forth in Sections 13.1 and 13.3 have been satisfied.
------------- ----
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SECTION 13.3 All Loans and Letters of Credit. The obligation of each
-------------------------------
Lender to make each Loan and of the Agent to issue each Letter of Credit is
subject to the following further conditions precedent that:
13.3.1 The Agent and each Lender shall have received a
Borrowing Request or an LC Application;
13.3.2 No Default or Event of Default exists or will result
from the making of such Loan or issuance of such Letter of Credit;
13.3.3 The representations and warranties of the Borrower
contained in Section 9 (except, with respect to Loans made or Letters
---------
of Credit issued after the Effective Date, Sections 9.7 and 9.8) are
------------ ---
true and correct with the same effect as though made on the date of
the making of such Loan or issuance of such Letter of Credit (except
to the extent they expressly relate solely to an earlier date, in
which case, as of such date);
13.3.4 No Material Litigation exists except as disclosed on
Schedule 9.8, and since the Effective Date of this Agreement no
------------
Material Litigation Development has occurred with respect to any
Litigation so disclosed on Schedule 9.8; and
------------
13.3.5 No Material Adverse Change has occurred since the date
of the most recent financial statements delivered or required to be
delivered pursuant to Section 9.6.
-----------
SECTION 13.4 Loans for Stock Purchase Transactions. In addition to the
-------------------------------------
satisfaction of the conditions precedent in Sections 13.1 through 13.3, the
------------- ----
obligation of the Lenders to make Loans to consummate any Stock Purchase
Transaction permitted by this Agreement is subject to the following further
conditions precedent:
13.4.1 The Borrower shall have delivered to the Agent in form and
detail satisfactory to the Agent,
(a) evidence that (i) the respective Stock Purchase
Agreement has been duly executed, and (ii) the transactions
contemplated by the respective Acquisition Agreement shall have
been duly consummated in accordance with its terms, without
material modification or waiver of any of such terms; and
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<PAGE>
(b) evidence that the Borrower shall have received not less
than a total of (i) at least $15,000,000, in the case of the
acquisition of Gibbs, and (ii) at least $5,500,000 in the case of
the acquisition of IAMD, in net cash proceeds from the Equity
Purchase Transaction set forth in clause (a) of the definition
----------
thereof in accordance with the terms of the respective Equity
Purchase Documents, without material modification or waiver of
any such terms, execution copies of which shall have been
delivered to the Agent; and
13.4.2 The Borrower shall have delivered to the Agent and the Lenders
such other information and documents as may reasonably be required or
requested by the Agent, the Required Lenders and the Agents's counsel.
SECTION 13.5 Loans for Permitted Acquisitions. In addition to the
--------------------------------
satisfaction of the conditions precedent in Sections 13.1, 13.2, and 13.3 (as
------------------- ----
applicable), the obligation of the Lenders to make Loans to consummate any
Permitted Acquisition is subject to the following further conditions precedent:
13.5.1 The Borrower shall have delivered to the Agent in form and
detail satisfactory to the Agent and the Required Lenders,
(a) at least thirty (30) days prior to any requested Borrowing,
a duly executed preliminary financing request, substantially in the
form of Exhibit V, outlining the aggregate principal amount of any
---------
requested Borrowing which the Borrower will request to facilitate or
consummate such Permitted Acquisition and containing pro forma
financial projections of the Borrower and its Subsidiaries for the
three years immediately following such acquisition and after giving
effect thereto;
(b) certified copies of any acquisition agreements, letters of
intent, asset purchase agreements, stock purchase agreements or other
related documentation or instruments proposed to be executed and
delivered in connection therewith as the Agent shall reasonably
request and all other documents required to be delivered pursuant to
clause (i) of the definition of "Permitted Acquisition"; and
----------
(c) evidence of compliance with Section 9.19 both before and
------------
after giving effect to the requested Loans; and
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13.5.2 The Borrower shall have delivered to the Agent and the Lenders
such other information and documents as may reasonably be required or
requested by the Agent, the Required Lenders and the Agents's counsel.
SECTION 14. EVENTS OF DEFAULT AND THEIR EFFECT
SECTION 14.1 Events of Default. An "Event of Default" shall exist if any
-----------------
one or more of the following events (herein collectively called "Events of
Default") shall occur and be continuing:
14.1.1 Non-Payment of Loans, etc. (a) Default in the payment or
-------------------------
prepayment when due of any principal on any Loan; or (b) default in
the payment or prepayment when due of any reimbursement obligation
with respect to any LC Obligation; or (c) default and continuance for
three (3) days in the payment when due of any other amount owing by
the Borrower or any other Person pursuant to this Agreement.
14.1.2 Non-Payment of Other Indebtedness. Default in the
---------------------------------
payment when due (subject to any applicable grace period), whether by
acceleration or otherwise, of any Indebtedness of the Borrower or any
Subsidiary of the Borrower (other than Indebtedness in respect of this
Agreement) in an amount in excess of $250,000 in the aggregate, or
default in the performance or observance of any obligation or
condition with respect to any such Indebtedness if the effect of such
default is to accelerate the maturity of any such Indebtedness or to
permit the holder or holders thereof, or any trustee or agent for such
holders, to cause such Indebtedness to become due and payable prior to
its expressed maturity.
14.1.3 Bankruptcy, Insolvency, etc. The Borrower or any
Subsidiary of the Borrower becomes insolvent or generally fails to
pay, or admits in writing its inability to pay, debts as they become
due; or the Borrower or any such Subsidiary applies for, consents to,
or acquiesces in the appointment of, a trustee, receiver or other
custodian for the Borrower or such Subsidiary or any property thereof,
or makes a general assignment for the benefit of creditors, or, in the
absence of such application, consent or acquiescence; a trustee,
receiver or other custodian is appointed for the Borrower or any such
Subsidiary or for a substantial part of the property of any thereof
and is not discharged within forty five (45) days; or any
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bankruptcy, reorganization, debt arrangement, or other case or proceeding
under any bankruptcy or insolvency law, or any dissolution or liquidation
proceeding (except the voluntary dissolution, not under any bankruptcy or
insolvency law, of a Subsidiary), is commenced in respect of the Borrower
or any such Subsidiary and if such case or proceeding is not commenced by
the Borrower or such Subsidiary, it is consented to or acquiesced in by the
Borrower or such Subsidiary or remains for forty five (45) days
undismissed; or the Borrower or any such Subsidiary takes any corporate
action to authorize, or in furtherance of, any of the foregoing.
14.1.4 Defaults Under this Agreement. Failure by the Borrower
-----------------------------
to comply with or perform any of the covenants or agreements of the
Borrower set forth in Sections 10, 11 and 12.
----------- -- --
14.1.5 Other Noncompliance with this Agreement. Failure by the
---------------------------------------
Borrower or any Subsidiary of the Borrower to comply with or perform
any other provision of this Agreement or the Related Documents
applicable to it (other than those listed in Sections 14.1.4 or those
---------------
constituting an Event of Default under any of the other provisions of
this Section 14) and continuance of such failure for fifteen (15) days
----------
after notice thereof to the Borrower from the Agent or any Lender.
14.1.6 Representations and Warranties. Any representation or
------------------------------
warranty made by the Borrower, or any Subsidiary of the Borrower
herein or in any of the Related Documents is false or misleading in
any material respect as of the date hereof or as of the date hereafter
certified, or any schedule, certificate, financial statement, report,
notice, or other writing furnished by the Borrower, or any such
Subsidiary to the Agent or any Lender is false or misleading in any
material respect on the date as of which the facts therein set forth
are stated or certified.
14.1.7 Pension Plans and Welfare Plans. With respect to any
-------------------------------
Pension Plan as to which the Borrower or any Subsidiary of the
Borrower may have any liability, there shall exist a deficiency of
more than $250,000 in the Pension Plan assets available to satisfy the
benefits guaranteeable under ERISA with respect to such Pension Plan,
and steps are undertaken to terminate such plan or such Pension Plan
is terminated or the Borrower or such Subsidiary withdraws from or
institutes steps to withdraw from such Pension Plan or
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any material Reportable Event with respect to such Pension Plan shall
occur. With respect to any Welfare Plans as to which the Borrower may
have any liability, there shall occur any event which could result in
the incurrence by the Borrower of any increase in excess of $250,000
in the vested or contingent liability of the Borrower or with respect
to any post-retirement Welfare Plan benefit.
14.1.8 Adverse Judgment. One or more final judgments or decrees
----------------
shall be entered against the Borrower or any of its Subsidiaries
involving, in the aggregate, a liability (not covered by collectible
insurance) of $250,000 or more and all such judgments or decrees shall
not have been vacated, satisfied, discharged or stayed or bonded
pending appeal within thirty (30) days from the entry thereof.
14.1.9 Related Documents. Any of the Related Documents shall
-----------------
fail to remain in full force and effect or any action shall be taken
by the Borrower or any Subsidiary of the Borrower to discontinue any
of the Related Documents or to assert the invalidity of any thereof.
14.1.10 Change in Control. The occurrence of a Change in
-----------------
Control.
14.1.11 Material Adverse Change. The occurrence of a Material
-----------------------
Adverse Change.
SECTION 14.2 Effect of Event of Default. If any Event of Default
--------------------------
described in Section 14.1.3 shall occur and be continuing, the Commitments (if
--------------
they have not theretofore terminated) shall immediately terminate and all
Liabilities shall become immediately due and payable, all without notice,
demand, presentment or protest of any kind; and, in the case of any other Event
of Default, the Agent may (or shall, upon the written request of the Required
Lenders) declare the Commitments (if they have not theretofore terminated) to be
terminated and all Liabilities to be due and payable, whereupon the Commitments
(if they have not theretofore terminated) shall immediately terminate and all
Liabilities shall become immediately due and payable, all without presentment,
demand, protest or notice of any kind. The Agent shall promptly advise the
Borrower and each Lender of any such declaration, but failure to do so shall not
impair the effect of such declaration. Notwithstanding the foregoing or any
provision of Section 17.1, the effect as an Event of Default of any event
------------
described in Section 14.1.3 may be waived only by the written concurrence of the
--------------
Lenders holding 100% of the aggregate unpaid principal amount of the Loans and
LC Obligations, and the effect
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as an Event of Default of any other event described in this Section 14 may be
----------
waived as provided in Section 17.1.
------------
SECTION 15. THE AGENT
SECTION 15.1 Authorization and Action. Each Lender hereby appoints and
------------------------
authorizes the Agent to take such action as agent on its behalf and to exercise
such powers to the extent provided herein or in any document or instrument
delivered hereunder or in connection herewith, together with such other action
as may be reasonably incidental thereto. As to matters not expressly provided
for by this Agreement (including, without limitation, enforcement or collection
of this Agreement or any Related Document) the Agent shall not be required to
exercise any discretion, but shall be required to act or to refrain from acting
(and shall be fully protected in so acting or refraining from acting) upon the
instructions of the Required Lenders and such instructions shall be binding upon
all Lenders. Under no circumstances shall the Agent be required to take any
action which exposes the Agent to personal liability or which is contrary to
this Agreement or to the Related Documents or applicable law.
SECTION 15.2 Liability of the Agent. Neither the Agent nor any of its
----------------------
directors, officers, agents or employees shall be liable to any Lender or any of
such Lender's Affiliates for any action taken or omitted to be taken by it or
them under or in connection with this Agreement and the Related Documents,
except for its or their own gross negligence or willful misconduct as finally
judicially determined by a court of competent jurisdiction. Without limiting
the generality of the foregoing, the Agent (a) may treat the payee of any Note
as the holder thereof until the Agent receives an executed Assignment Agreement
entered into between a Lender and an Eligible Assignee pursuant to Section 16.1;
------------
(b) may consult with legal counsel (including counsel for the Borrower or any of
its Subsidiaries), independent public accountants and other experts or
consultants selected by it; (c) shall not be liable for any action taken or
omitted to be taken in good faith by the Agent in accordance with the advice of
counsel, accountants, consultants or experts; (d) makes no warranty or
representation to any Lender and shall not be responsible to any Lender for any
recitals, statements, warranties or representations, whether written or oral,
made in or in connection with this Agreement or the Related Documents; (e) shall
not have any duty to ascertain or to inquire as to the performance or observance
of any of the terms, obligations, covenants or conditions of this Agreement on
the part of the Borrower or any of its Subsidiaries or to inspect the property
(including, without limitation, any books and records) of the Borrower or any
Subsidiary of the Borrower; (f) shall not be responsible to any Lender for the
due execution, legality, validity, enforceability,
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genuineness, sufficiency or value of this Agreement, any Related Document, any
Collateral or other support or security, or any other document furnished in
connection with any of the foregoing; and (g) shall incur no liability under or
in respect of this Agreement or any Related Document by action upon any written
notice, statement, certificate, order, telephone message, facsimile or other
document which the Agent believes in good faith to be genuine and correct and to
have been signed, sent or made by the proper Person.
SECTION 15.3 LaSalle and Affiliates. With respect to the Loans made by it
----------------------
and Letters of Credit issued by it, LaSalle shall have the same rights and
powers under this Agreement and the other Related Documents as any other Lender
and may exercise the same as though it were not the Agent; and the term "Lender"
or "Lenders" shall, unless otherwise expressly indicated, include LaSalle in its
individual capacity. LaSalle and its Affiliates may accept deposits from, lend
money to, act as trustee under indentures of, and generally engage in any kind
of business with, the Borrower and any of its Subsidiaries and any Person who
may do business with or own securities of the Borrower or any such Subsidiary,
all as if LaSalle were not the Agent and without any duty to account therefor to
the Lenders.
SECTION 15.4 Lender Credit Decision. Each Lender acknowledges that it
----------------------
has, independently and without reliance upon the Agent or any other Lender and
based on the financial statements referred to in Section 9.6 and such other
-----------
documents and information as it has deemed appropriate, made its own credit
analysis and decision to enter into this Agreement. Each Lender also
acknowledges that it will, independently and without reliance upon the Agent or
any other Lender and based on such documents and information as it shall deem
appropriate at the time, continue to make its own credit decisions in taking or
not taking action under this Agreement.
SECTION 15.5 Indemnification. The Lenders agree to indemnify the Agent
---------------
(to the extent not reimbursed by the Borrower), ratably according to their
Percentages, from and against any and all liabilities, obligations, losses,
damages, penalties, actions, judgments, suits, costs, expenses or disbursements
of any kind or nature whatsoever which may be imposed on, incurred by, or
assessed against the Agent in any way relating to or arising out of this
Agreement or the Related Documents, or any action taken or omitted by the Agent
under this Agreement or the Related Documents; provided that no Lender shall be
--------
liable for any portion of such liabilities, obligations, losses, damages,
penalties, actions, judgments, suits, costs, expenses or disbursements resulting
from the Agent's gross negligence or willful misconduct as finally judicially
determined by a court of competent jurisdiction. Without limiting any of the
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foregoing, each Lender agrees to reimburse the Agent promptly upon demand for
its Percentage of any out-of-pocket expenses (including reasonable counsel fees
and expenses) incurred by the Agent in connection with the preparation,
execution, delivery, administration, modification, amendment, waiver or
enforcement (whether through negotiations, legal proceedings or otherwise) of,
or legal advice in respect of rights or responsibilities under this Agreement or
the Related Documents to the extent that the Agent is not reimbursed for such
expenses by the Borrower. All obligations provided for in this Section 15.5
------------
shall survive termination of this Agreement.
SECTION 15.6 Successor Agent. The Agent may resign at any time by giving
---------------
written notice thereof to the Lenders and the Borrower and may be removed at any
time with or without cause by the Required Lenders. Upon any such resignation
or removal, the Required Lenders shall have the right to appoint a successor
Agent. If no successor Agent shall have been so appointed by the Required
Lenders, and shall have accepted such appointment within thirty (30) days after
the retiring Agent's giving of notice of resignation or the Required Lenders'
removal of the retiring Agent, then the retiring Agent may, on behalf of the
Lenders, appoint a successor Agent which shall be a commercial bank having a
combined capital and surplus of at least $250,000,000. Upon the acceptance of
any appointment as Agent hereunder by a successor Agent, such successor Agent
shall thereupon succeed to and become vested with all the rights, powers,
privileges and duties of the retiring Agent, and the retiring Agent shall be
discharged from its duties and obligations in its capacity as Agent under this
Agreement. After any retiring Agent's resignation or removal hereunder as
Agent, the provisions of this Section 15 shall inure to its benefit as to any
----------
actions taken or omitted to be taken by it while it was Agent under this
Agreement.
SECTION 15.7 Collateral Matters. (a) The Agent is authorized on behalf of
------------------
all the Lenders, without the necessity of any notice to or further consent from
the Lenders, from time to time to take any action with respect to any Collateral
or the Related Documents which may be necessary to perfect and maintain
perfected the security interest in and Liens upon the Collateral granted
pursuant to the Related Documents.
(b) The Lenders irrevocably authorize the Agent, at its option and in
its discretion, to release any Lien granted to or held by the Agent upon any
Collateral (i) upon termination of the Commitments and payment in full of all
Loans, LC Obligations and all other Liabilities known to the Agent and payable
under this Agreement or any Related Document; (ii) constituting property sold or
to be sold or disposed of as part of or in connection with any disposition
permitted hereunder; (iii) constituting property in which the Borrower or any of
its Subsidiaries owned no interest
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at the time such Lien was granted or at any time thereafter; (iv) constituting
property leased to the Borrower or any of its Subsidiaries under a lease which
has expired or been terminated in a transaction permitted under this Agreement
or is about to expire and which has not been, and is not intended by the
Borrower or such Subsidiary to be, renewed or extended; (v) consisting of an
instrument evidencing Indebtedness or other debt instrument, if the Indebtedness
evidenced thereby has been paid in full; or (vi) if approved, authorized or
ratified in writing by the Required Lenders or all the Lenders, as the case may
be, as provided in Section 17.1. Upon request by the Agent at any time, the
------------
Lenders will confirm in writing the Agent's authority to release particular
types or items of Collateral pursuant to this Section 15.7.
------------
SECTION 16. ASSIGNMENTS AND PARTICIPATIONS
SECTION 16.1 Assignments. (a) Each Lender shall have the right at any
-----------
time to assign, to any Eligible Assignee, all or any part of such Lender's
rights and obligations under this Agreement and each Related Document including
its rights in respect of Loans, Notes, Letters of Credit and LC Obligations and
its obligations in respect of Commitments to make Loans or participate in
Letters of Credit. Any such assignment shall be pursuant to an assignment
agreement, substantially in the form of Exhibit U (an "Assignment Agreement"),
---------
duly executed by such Lender and the Eligible Assignee, and acknowledged by the
Agent. Although its failure to do so will not affect any of the rights or
obligations provided for therein or herein, the Borrower agrees to duly
acknowledge any Assignment Agreement executed by any assigning Lender promptly
after its receipt of the same. No assignment by the Agent shall relieve it from
its obligations in respect of the Letters of Credit, it being understood that
any assignment by the Agent as to Letters of Credit shall be deemed to
automatically constitute an assignment by the Agent and the purchase by the
Eligible Assignee of a participating interest in such Letters of Credit.
(b) Each assignment shall be pro rata with respect to all rights and
obligations of the assigning Lender including the Loans, Notes, LC Obligations
and Commitments of the assigning Lender. Each assignment, if to a Person other
than a Lender or its Affiliate, shall be in an amount equal to or in excess of
$5,000,000 (except for assignments of the entire unpaid balance of a Lender and
if less than $5,000,000). In the case of any such assignment, the satisfaction
or waiver of the conditions specified in clause (c) below, this Agreement shall
----------
be deemed to be amended to the extent, and only to the extent, necessary to
reflect the addition of such Eligible Assignee, and the Eligible Assignee shall
for all purposes be a Lender party hereto and shall have, to
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the extent of such assignment, the same rights and obligations as a Lender
hereunder, including the right to approve or disapprove actions which, in
accordance with the terms hereof, require the approval of the Lenders or the
Required Lenders, as the case may be, and the obligations to make Loans and to
participate in Letters of Credit.
(c) An assignment shall become effective hereunder when all of the
following shall have occurred:
(i) the Assignment Agreement shall have been executed by the
assigning Lender and the Eligible Assignee,
(ii) the Assignment Agreement shall have been acknowledged by the
Agent and consented to by Borrower (which consent shall not be unreasonably
withheld or delayed),
(iii) either the assigning Lender or the Eligible Assignee shall have
paid a processing fee of $3,500 to the Agent for its own account (other
than in connection with an assignment to an Affiliate of such Lender), and
(iv) the assigning Lender and the Agent shall have agreed upon a date
upon which the Assignment shall become effective. Upon the Assignment
becoming effective, the Agent shall forward all payments of interest,
principal, fees and other amounts that would have been made to the
assigning Lender, in proportion to the percentage of the assigning Lender's
rights transferred, to the Eligible Assignee.
(d) Upon the effectiveness of any assignment, the assigning Lender shall
be relieved from its obligations hereunder to the extent of the obligations so
assigned (except, (i) obligations of the Agent in respect of the Letters of
Credit issued by it, and (ii) to the extent, if any, that the Borrower, any
other Lender or the Agent has rights against such assigning Lender as a result
of any default by such Lender under this Agreement) and appropriate arrangements
shall be made so that, if required, replacement Notes are issued to such
assigning Lender and new Notes or, as appropriate, replacement Notes are issued
to the Eligible Assignee, in each case in principal amounts reflecting their
outstanding Loans as adjusted pursuant to such Assignment Agreement. Promptly
following the consummation of each assignment, the Agent shall furnish to the
Borrower and each Lender, a revised Schedule 2.1, revised to reflect such
------------
assignment.
SECTION 16.2 Participations. Each Lender may grant participations in all
--------------
or any part of its Loans, Notes, Letters of Credit and LC Obligations to any
commercial lender or other financial institution. A participant not shall have
any rights
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under this Agreement or any other document delivered in connection herewith (the
participant's rights against such Lender in respect of such participation to be
those set forth in the agreement executed by such Lender in favor of the
participant relating thereto, which agreement with respect to such participation
shall not restrict such Lender's ability to make any modification, amendment or
waiver to this Agreement without the consent of the participant except that the
consent of such participant may be required in connection with matters requiring
the consent of all of the Lenders under Section 17.1). All amounts payable by
------------
the Borrower under this Agreement shall be determined as if the Lender had not
sold such participation. In the event of any such sale by a Lender of
participating interests to a participant, such Lender's obligations under this
Agreement shall remain unchanged, such Lender shall remain solely responsible
for the performance thereof, such Lender shall remain the holder of any
obligation for all purposes under this Agreement, and the Borrower and the Agent
shall continue to deal solely and directly with such Lender in connection with
such Lender's rights and obligations under this Agreement.
SECTION 16.3 Disclosure of Information. The Borrower authorizes each
-------------------------
Lender to disclose to any participant, assignee or Eligible Assignee (each, a
"Transferee") and any prospective Transferee any and all financial and other
information in such Lender's possession concerning the Borrower and any of its
Subsidiaries which has been delivered to such Lender by or on behalf of the
Borrower or any of its Subsidiaries in connection with such Lender's credit
evaluation of the Borrower prior to entering into this Agreement or which has
been delivered to such Lender by or on behalf of the Borrower or any of its
Subsidiaries pursuant to this Agreement; provided that each Lender agrees that
it shall hold all non-public, confidential and proprietary information obtained
pursuant to the requirements of this Agreement (the "Information") confidential
in accordance with safe and sound banking and business practices and may only
make disclosure reasonably required by a Transferee or a prospective Transferee
in connection with the contemplated transfer of any portion of the Loans.
Notwithstanding anything to the contrary herein, any Lender may disclose
Information: (a) that consists of information that has been filed with, and
made public and generally available by, any governmental agency, or which has
otherwise been publicly disclosed, (b) to regulatory authorities having
jurisdiction to examine its books and records, (c) pursuant to subpoena or other
legal process or as otherwise required by law, and (d) to its counsel and
auditors in connection with matters concerning the transactions contemplated by
this Agreement.
SECTION 16.4 Foreign Transferees. If, pursuant to this Section 16, any
------------------- ----------
interest in this Agreement or any Loan, Letter of
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Credit, Note or LC Obligation is transferred to any Transferee which is
organized under the laws of any jurisdiction other than the United States or any
state thereof, the transferor Lender shall cause such Transferee (other than any
participant), and may cause any participant, concurrently with the effectiveness
of such transfer, (a) to represent to the transferor Lender (for the benefit of
the transferor Lender, the Agent, and the Borrower) that under applicable law
and treaties no Taxes will be required to be withheld by the Agent, the Borrower
or the transferor Lender with respect to any payments to be made to such
Transferee in respect of the Loans, Notes, Letters of Credit or LC Obligations,
(b) to furnish to the transferor Lender, the Agent and the Borrower either U.S.
Internal Revenue Service Form 4224 or U.S. Internal Revenue Service Form 1001
(wherein such transfer claims entitlement to complete exemption from U.S.
federal withholding tax on all interest payments hereunder), and (c) to agree
(for the benefit of the transferor Lender, the Agent and the Borrower) to
provide the transferor Lender, the Agent and the Borrower a new Form 4224 or
Form 1001 upon the obsolescence of any previously delivered form and comparable
statements in accordance with applicable U.S. laws and regulations and
amendments duly executed and completed by such Transferee, and to comply from
time to time with all applicable U.S. laws and regulations with regard to such
withholding tax exemption.
SECTION 17. MISCELLANEOUS
SECTION 17.1 Waivers and Amendments. The provisions of this Agreement and
----------------------
of each Related Document may from time to time be amended, modified or waived,
if such amendment, modification or waiver is in writing and consented to by the
Borrower and the Required Lenders; provided that no such amendment, modification
-------- ----
or waiver:
(a) which would modify any requirement hereunder that any
particular action be taken by all Lenders or by the Required Lenders,
shall be effective without the consent of each Lender;
(b) which would modify this Section 17.1, change the definition
------------
of "Required Lenders," change any Percentage for any Lender (except
pursuant to an Assignment Agreement), reduce any fees (other than any
fees payable to the Agent for its sole account), extend the Revolving
Loan Termination Date, or subject any Lender to any additional
obligations, shall be effective without the consent of each Lender;
(c) which would permit the release of all or substantially all
of the Collateral other than a
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release in connection with a disposition permitted hereunder or
otherwise permitted under the terms of the Related Documents, shall be
effective without the consent of each Lender;
(d) which would extend the due date for, or reduce the amount
of, any payment or prepayment of principal of or interest on any Loan
or any reimbursement obligation, interest or fees with respect to any
LC Obligation, shall be effective without the consent of the holder of
such Loan or LC Obligation; or
(e) which would affect adversely the interests, rights or
obligations of the Agent (in its capacity as the Agent), shall be
effective without consent of the Agent.
SECTION 17.2 Notices. All notices, requests and other communications to
-------
any party hereunder shall be in writing (including bank wire, telex or similar
writing) and shall be given to such party at its address or facsimile number set
forth on the signature pages hereof or such other address or facsimile number as
such party may hereafter specify for the purpose by notice to the Agent and the
Borrower. Each such notice, request or other communication shall be effective
(a) if given by facsimile, when such facsimile is transmitted to the facsimile
number specified in this Section and the appropriate answerback is received, (b)
if given by certified mail or overnight mail (via a reputable courier), 72 hours
after such communication is deposited in the mails with first class postage
prepaid, addressed as aforesaid or (c) if given by any other means, when
delivered at the address specified in this Section, provided that notices to the
Agent under Sections 3, 4 and 15 shall not be effective until received by the
---------- - --
Agent.
SECTION 17.3 Regulation U. Each Lender represents that it in good faith
------------
is not relying, either directly or indirectly, upon any margin stock (as such
term is defined in Regulation U promulgated by the Board of Governors of the
Federal Reserve System) as collateral security for the extension or maintenance
by it of any credit provided for in this Agreement.
SECTION 17.4 Payment of Costs and Expenses. The Borrower agrees to pay on
-----------------------------
demand all reasonable expenses of the Agent (including the reasonable fees and
out-of-pocket expenses of counsel to the Agent and of local counsel, if any, who
may be retained by counsel to the Agent) in connection with
(a) the negotiation, preparation, execution and delivery of this
Agreement and of each Related Document, including schedules and
exhibits, and any
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amendments, waivers, consents, supplements or other modifications to
this Agreement or any Related Document as may from time to time
hereafter be required, whether or not the transactions contemplated
hereby or thereby are consummated,
(b) the filing, recording, refiling or rerecording of any of the
Related Documents (including the Fee Mortgages, the Borrower Pledge
Agreement, the Gibbs Pledge Agreement, the Security Agreement, and the
Borrower Trademark Security Agreement) and/or any Uniform Commercial
Code financing statements or Uniform Commercial Code, judgement, tax
or other lien searches relating thereto and all amendments,
supplements and modifications to any thereof and any and all other
documents or instruments of further assurance required to be filed or
recorded or refiled or rerecorded by the terms hereof or of the
Related Documents, and
(c) the preparation and/or review of the form of any document or
instrument relevant to this Agreement or any Related Document.
The Borrower further agrees to pay, and to save the Agent and the Lenders
harmless from all liability for, any stamp or other Taxes which may be payable
in connection with the execution or delivery of this Agreement, the Borrowings
hereunder, or the issuance of the Notes, Letters of Credit or any other Related
Documents. The Borrower also agrees to reimburse the Agent and each Lender upon
demand for all reasonable out-of-pocket expenses (including reasonable
attorneys' fees and legal expenses) incurred by the Agent or such Lender in
connection with the enforcement of any Liabilities and the consideration of
legal issues relevant to such enforcement. All obligations of the Borrower
provided for in this Section 17.4 shall survive termination of this Agreement.
------------
SECTION 17.5 Indemnity. The Borrower agrees to indemnify the Agent and
---------
each Lender and hold each Lender harmless from and against any and all
liabilities, losses, damages, costs and expenses of any kind (including, without
limitation, the reasonable fees and disbursements of counsel for any Lender or
the Agent) in connection with any investigative, administrative or judicial
proceedings whether or not such Lender shall be designated a party thereto,
which may be incurred by such Lender (or by the Agent in connection with its
actions as Agent hereunder), relating to or arising out of this Agreement or any
actual or proposed use of the proceeds of the Loans or LC Obligations hereunder;
provided that neither the Agent nor any Lender shall have the right to be
- -------- ----
indemnified hereunder for its own gross negligence or willful misconduct as
finally judicially determined by a court of competent jurisdiction. All
obligations
-93-
<PAGE>
of the Borrower provided for in this Section 17.5 shall survive termination of
------------
this Agreement.
SECTION 17.6 Subsidiary References. The provisions of this Agreement
---------------------
relating to Subsidiaries shall apply only during such times as the Borrower have
one or more Subsidiaries.
SECTION 17.7 Captions. Section captions used in this Agreement are for
--------
convenience only, and shall not affect the construction of this Agreement.
SECTION 17.8 Governing Law. This Agreement, the Notes and each Loan and
-------------
Letter of Credit and each other Related Document shall be a contract made under
and governed by the laws of the State of Illinois, without regard to conflict of
laws principles. All obligations of the Borrower and rights of the Agent and
the Lenders expressed herein or in the Related Documents shall be in addition to
and not in limitation of those provided by applicable law.
SECTION 17.9 Counterparts. This Agreement may be executed in any number
------------
of counterparts and by the different parties on separate counterparts and each
such counterpart shall be deemed to be an original, but all such counterparts
shall together constitute but one and the same Agreement. When counterparts
executed by all the parties shall have been lodged with the Agent (or, in the
case of any Lender as to which an executed counterpart shall not have been so
lodged, the Agent shall have received telegraphic, facsimile, telex or other
written confirmation from such Lender of execution of a counterpart hereof by
such Lender), this Agreement shall become effective as of the Effective Date
hereof, and at such time the Agent shall notify the Borrower and each Lender.
SECTION 17.10 SUBMISSION TO JURISDICTION; WAIVER OF VENUE. THE BORROWER,
-------------------------------------------
ON BEHALF OF ITSELF AND EACH SUBSIDIARY OF THE BORROWER (A) HEREBY IRREVOCABLY
SUBMITS TO THE JURISDICTION OF ANY ILLINOIS STATE OR FEDERAL COURT SITTING IN
CHICAGO, ILLINOIS OVER ANY ACTION OR PROCEEDING ARISING OUT OF OR RELATING TO
THIS AGREEMENT OR ANY RELATED DOCUMENT, AND THE BORROWER HEREBY IRREVOCABLY
AGREES THAT ALL CLAIMS IN RESPECT OF SUCH ACTION OR PROCEEDING MAY BE HEARD AND
DETERMINED IN SUCH ILLINOIS STATE OR FEDERAL COURT, AND (B) AGREES NOT TO
INSTITUTE ANY LEGAL ACTION OR PROCEEDING AGAINST THE AGENT OR ANY LENDER OR THE
DIRECTORS, OFFICERS, EMPLOYEES, AGENTS OR PROPERTY OF ANY THEREOF, ARISING OUT
OF OR RELATING TO THIS AGREEMENT OR ANY RELATED DOCUMENT, IN ANY COURT OTHER
THAN AS HEREINABOVE SPECIFIED IN THIS SECTION 17.10. THE BORROWER, ON BEHALF OF
-------------
ITSELF AND EACH SUBSIDIARY, HEREBY IRREVOCABLY WAIVES, TO THE FULLEST EXTENT
PERMITTED OF THE BORROWER BY LAW, ANY OBJECTION IT MAY NOW OR HEREAFTER HAVE TO
THE LAYING OF VENUE IN ANY ACTION OR PROCEEDING (WHETHER BROUGHT BY
-94-
<PAGE>
THE BORROWER, ANY SUBSIDIARY, THE AGENT, ANY LENDER, OR OTHERWISE) IN ANY COURT
HEREINABOVE SPECIFIED IN THIS SECTION 17.10 AS WELL AS ANY RIGHT IT MAY NOW OR
-------------
HEREAFTER HAVE TO REMOVE ANY SUCH ACTION OR PROCEEDING, ONCE COMMENCED, TO
ANOTHER COURT ON THE GROUNDS OF FORUM NON CONVENIENS OR OTHERWISE. THE BORROWER
----- --- ----------
ON BEHALF OF ITSELF AND EACH SUBSIDIARY OF THE BORROWER AGREES THAT A FINAL
JUDGMENT IN ANY SUCH ACTION OR PROCEEDING SHALL BE CONCLUSIVE AND MAY BE
ENFORCED IN OTHER JURISDICTIONS BY SUIT ON THE JUDGMENT OR IN ANY OTHER MANNER
PROVIDED BY LAW.
SECTION 17.11 Service of Process. The Borrower on behalf of itself and
------------------
each Subsidiary of the Borrower hereby irrevocably appoints C.T. Corporation
(the "Process Agent"), with an office on the date hereof at 208 South LaSalle
Street, Chicago, Illinois 60604, United States, as its agent to receive on
behalf of the Borrower and its Subsidiaries and its property service of copies
of the summons and complaint and any other process which may be served in any
such action or proceeding, in each case, in the event it has no other duly
appointed registered agent in Illinois, provided that a copy of such process is
also mailed by registered or certified mail, postage prepaid, to the Borrower at
its address specified pursuant to Section 17.2. Such service may be made by
------------
mailing or delivering a copy of such process to the Borrower in care of the
Process Agent at the Process Agent's above address, and the Borrower hereby
irrevocably authorizes and directs the Process Agent to accept such service on
its behalf. The Borrower agrees to indemnify such Process Agent in connection
with all matters relating to its appointment as agent of the Borrower for such
purposes, to enter into any agreement relating to such appointment which such
Process Agent may customarily require, and to pay such Process Agent's customary
fees upon demand. As an alternative method of service, the Borrower for itself
and its Subsidiaries also irrevocably consents to the service of any and all
process in any such action or proceeding by the mailing of the Borrower at its
address specified pursuant to Section 17.2. Nothing in this Section 17.11 shall
------------- -------------
affect the right of the Agent or any Lender to serve legal process in any other
manner permitted by law or affect the right of the Agent or any Lender to bring
any action or proceeding against the Borrower or its properties in the courts of
any other jurisdictions.
SECTION 17.12 WAIVER OF JURY TRIAL. THE BORROWER (ON BEHALF OF ITSELF AND
--------------------
EACH OF ITS SUBSIDIARIES), THE AGENT AND EACH LENDER HEREBY KNOWINGLY,
VOLUNTARILY AND INTENTIONALLY WAIVE ANY RIGHT TO A TRIAL BY JURY IN ANY ACTION,
PROCEEDING OR COUNTERCLAIM CONCERNING ANY RIGHTS UNDER THIS AGREEMENT, ANY
RELATED DOCUMENT OR UNDER ANY OTHER DOCUMENT OR AGREEMENT DELIVERED OR WHICH MAY
IN THE FUTURE BE DELIVERED IN CONNECTION HEREWITH OR THEREWITH, OR ARISING FROM
ANY BANKING RELATIONSHIP EXISTING IN CONNECTION WITH THIS AGREEMENT, AND AGREE
THAT ANY SUCH ACTION, PROCEEDING OR COUNTERCLAIM SHALL BE TRIED BEFORE A COURT
AND NOT BEFORE A JURY;
-95-
<PAGE>
THIS PROVISION IS A MATERIAL INDUCEMENT FOR THE AGENT AND THE LENDERS ENTERING
INTO THIS AGREEMENT.
SECTION 17.13 Successors and Assigns. This Agreement shall be binding
----------------------
upon and shall inure to the benefit of the parties hereto and their respective
successors and permitted assigns; provided, however, that: (a) the Borrower may
-------- ------- ----
not assign or transfer its rights or obligations hereunder without the prior
written consent of the Agent and all Lenders; and (b) the rights of the Lenders
to make assignments or grant participations are subject to the provisions of
Section 16.
- ----------
-96-
<PAGE>
Delivered at Chicago, Illinois, as of the day and year first above written.
CAREER EDUCATION CORPORATION
By: /s/ WILLIAM A. KLETTKE
------------------------------
Name: William A. Klettke
----------------------------
Title: Senior Vice President
---------------------------
Address: _________________________
Attention: _______________________
Telephone: _______________________
Facsimile: _______________________
LASALLE NATIONAL BANK, in its
individual corporate capacity and
as Agent
By: /s/ MICHAEL FOSTER
------------------------------
Name: Michael Foster
----------------------------
Title: Senior Vice President
----------------------------
Notice Information
Address: _________________________
Attention: _______________________
Telephone: _______________________
Facsimile: _______________________
Lending Office (Base Rate Loans)
Address: _________________________
Attention: _______________________
Telephone: _______________________
Facsimile: _______________________
Lending Office (LIBOR Rate Loans)
Address: _________________________
Attention: _______________________
Telephone: _______________________
Facsimile: _______________________
-97-
<PAGE>
June 5, 1997
CAREER EDUCATION CORPORATION
2800 W. Higgins Road; Suite 790
Hoffman Estates, IL 60195
Re: Amendment No. 1 to Credit Agreement
-----------------------------------
Ladies and Gentlemen:
We make reference to that certain Credit Agreement (as amended or
modified, the "Credit Agreement") dated as of May 30, 1997 among Career
Education Corporation ("CEC"), the lenders party thereto (the "Lenders") and
LaSalle National Bank, as agent for the Lenders (the "Agent"). Capitalized terms
used herein and not otherwise defined shall have the respective meanings
provided in the Credit Agreement.
We understand that CEC is currently negotiating a Stock Purchase
Agreement with the shareholders of International Academy of Merchandising and
Design (Canada), Limited, an Ontario corporation ("IAMD Canada"), pursuant to
which CEC will acquire all of the issued and outstanding shares in the capital
of IAMD Canada. We also understand that IAMD Acquisition I, Ltd., a Delaware
corporation and a wholly-owned subsidiary of CEC ("IAMD Acquisition"), is
currently negotiating a Stock Purchase Agreement with the shareholders of IAMD,
Limited, an Illinois corporation ("IAMD U.S."), pursuant to which IAMD
Acquisition will acquire all of the issued and outstanding shares of capital
stock of IAMD U.S.
In order to consummate the above referenced acquisitions of the shares
of IAMD Canada and IAMD U.S., CEC and IAMD Acquisition will be required to
deliver letters of credit to the sellers in an aggregate face amount in excess
of the LC Commitments ($10,000,000). CEC has requested that the Agent and the
Lenders agree to increase the aggregate LC Commitments to $20,000,000 to
accommodate this obligation.
The Agent and the Lenders agree that, effective as of the date first
written above, Section 2.5 of the Credit Agreement is amended by deleting the
number $10,000,000 from the second sentence thereof and replacing it with
$20,000,000.
Except as amended and modified by this letter, the Credit Agreement
remains in full force and effect. CEC confirms that its representations,
warranties, agreements and covenants contained in, and obligations and
liabilities under, the Credit Agreement and the Related Documents are true and
correct in all material respects as if made on the date hereof, except where
such representation, warranty, agreement or covenant speaks as of
<PAGE>
a specified date. CEC also represents and warrants that no Default exists.
If the foregoing is in accordance with your understanding and is
acceptable to you, please so indicate by executing this letter in the space
provided below and returning it to our counsel, Michael L. Boykins, at
McDermott, Will & Emery, 227 West Monroe Street, Chicago, Illinois 60606.
Very truly, yours,
LaSalle National Bank, in its
individual corporate capacity and
as Agent
By: /s/ MICHAEL FOSTER
-------------------------------
Name: Michael Foster
-----------------------------
Its: SVP
-----------------------------
Agreed and Accepted this 5th
day of June, 1997:
CAREER EDUCATION CORPORATION
By: /s/ WILLIAM A. KLETTKE
-------------------------------
Name: William A. Klettke
-----------------------------
Its: Sr VP & CFO
-----------------------------
<PAGE>
June 20, 1997
CAREER EDUCATION CORPORATION
2800 W. Higgins Road; Suite 790
Hoffman Estates, IL 60195
Re: Amendment No.2 to Credit Agreement
----------------------------------
Ladies and Gentlemen:
We make reference to that certain Credit Agreement (as amended or
modified, the "Credit Agreement") dated as of May 30, 1997, as amended as of
June 5, 1997, among Career Education Corporation ("CEC"), the lenders party
thereto (the "Lenders") and LaSalle National Bank, as agent for the Lenders (the
"Agent"). Capitalized terms used herein and not otherwise defined shall have
the respective meanings provided in the Credit Agreement.
We understand that CEC is currently negotiating a Stock Purchase
Agreement with the shareholders of International Academy of Merchandising and
Design (Canada), Limited, an Ontario corporation ("IAMD Canada"), pursuant to
which CEC will acquire all of the issued and outstanding shares in the capital
of IAMD Canada. As a result of such acquisition, CEC be the ultimate parent of
Academie Internationale du Design Inc. (a/k/a International Academy of Design,
Inc.), a Quebec Corporation and a Subsidiary of IAMD Canada (the "Quebec
Subsidiary").
Section 11.11 of the Credit Agreement requires each Subsidiary of CEC
to execute and deliver a security agreement and a guaranty to secure the full
payment of the Liabilities. Nonetheless, Quebec law limits the amount of
liabilities that a subsidiary guarantor may guaranty, such that after giving
effect to such guaranty the book of value of the subsidiary guarantor's assets
would not thereby be less than the sum of its liabilities and its issued and
paid-up share capital account.
Accordingly, notwithstanding the provisions of Section 11.11 of the
Credit Agreement, the Lenders agree that the Quebec Subsidiary's security
agreement and guaranty shall be limited to secure the payment of Liabilities of
CEC not exceeding $1,000,000 (Canadian). In consideration of such limitation:
(i) Section 11.4(d) of the Credit Agreement is hereby amended to
read in its entirety as follows:
" (d) Indebtedness of Subsidiaries of the Borrower owing to the
Borrower and unsecured Indebtedness of the Borrower owing to its
Subsidiaries; provided that such Indebtedness is evidenced by
promissory notes which are pledged to the Agent concurrently with the
incurrence of such Indebtedness by such Subsidiary, for the benefit
<PAGE>
of the Lenders, under the Borrower Pledge Agreement, Gibbs Pledge
Agreement, or such other pledge agreement which is in form and
substance to the Agent, as the case may be; and provided, further,
Indebtedness of Academie Internationale du Design Inc. (a/k/a
International Academy of Design, Inc.), a Quebec Corporation (the
"Quebec Subsidiary") to the Borrower and/or any of its Subsidiaries
shall at no time exceed $[1,000,000] in the aggregate minus the
aggregate amount of Investments then made by the Borrower and/or any
of its Subsidiaries in the Quebec Subsidiary pursuant to Section
-------
11.6(d);"
-------
(ii) Section 11.6(d) of the Credit Agreement is hereby amended to
read in its entirety as follows:
" (d) in the ordinary course of business, Investments by the
Borrower in any of its Subsidiaries, or by any such Subsidiary in any
of its Subsidiaries, by way of contributions to capital or loans or
advances; provided, however, neither the Borrower nor any of its
Subsidiaries shall make Investments in the Quebec Subsidiary which at
any time exceeds $[1,000,000] in the aggregate minus the aggregate
amount of Indebtedness of the Quebec Subsidiary then owing to the
Borrower and/or any of its Subsidiaries pursuant to Section 11.1(d);"
---------------
Except as amended and modified by this letter, the Credit Agreement
remains in full force and effect. CEC confirms that its representations,
warranties, agreements and covenants contained in, and obligations and
liabilities under, the Credit Agreement and the Related Documents are true and
correct in all material respects as if made on the date hereof, except where
such representation, warranty, agreement or covenant speaks as of a specified
date. CEC also represents and warrants that no Default exists.
<PAGE>
If the foregoing is in accordance with your understanding and is
acceptable to you, please so indicate by executing this letter in the space
provided below and returning it to our counsel, Michael L. Boykins, at
McDermott, Will & Emery, 227 West Monroe Street, Chicago Illinois 60606.
Very truly yours,
LaSalle National Bank, in its
individual corporate capacity and
as Agent
By: /s/ MICHAEL FOSTER
------------------------------
Name: Michael Foster
----------------------------
Its: SVP
----------------------------
Agreed and Accepted this 20
day of June, 1997:
CAREER EDUCATION CORPORATION
By: /s/ WILLIAM A. KLETTKE
----------------------------
Name: William A. Klettke
--------------------------
Its: Vice President
--------------------------
<PAGE>
(b) A new definition called "Consolidated Net Worth" shall be added
to Section 1.1 of the Existing Credit Agreement in appropriate alphabetical
order and shall read in its entirety as follows:
"Consolidated Net Worth" shall mean the consolidated net worth of
the Borrower and its Subsidiaries.
(c) The definition of Consolidated EBITDA set forth in Section 1.1 of
the Existing Credit Agreement is deleted in its entirety and replaced with
the following:
"Consolidated EBITDA" shall mean, for any period, Consolidated
Net Income for such period, plus (a) Consolidated Interest Expense for
such period, plus (b) the aggregate amounts deducted in determining
Consolidated Net Income in respect of (i) cash Income Taxes paid, (ii)
depreciation and amortization, and (iii) interest income, plus or
minus, (c) without duplication, any Non-Recurring Items to the extent
agreed to by the Agent in its sole and absolute discretion, plus (d)
without duplication, Acquired Person Adjusted Earnings of each
Acquired Person acquired within the last four (4) Fiscal Quarters of
the Borrower (calculated for the four (4) Fiscal Quarters then ended
of such Acquired Person).
(d) Clause (a) (ii) of the definition of Fixed Charge Coverage Ratio
set forth in Section 1.1 of the Existing Credit Agreement is amended by
deleting the word "plus" at the end thereof and replacing it with the word
"minus".
(e) The second sentence of the definition of "Net Proceeds" set forth
in Section 1.1 of the Existing Credit Agreement is amended by moving the
following words therein and inserting such words at the end of clause (b)
of the first sentence thereof:
", and (c) any reserves required in accordance with GAAP relating to
any liabilities assumed or incurred by the Borrower in connection with
any transaction resulting in Net Proceeds under Section 6.4(b) or
6.4(c)".
(f) Clause (i) of the definition of Permitted Acquisition set forth
in Section 1.1 of the Existing Credit Agreement is amended by
(i) deleting the word "and" at the end of clause (iv) thereof,
(ii) deleting the "." at the end of clause (v) thereof and
replacing it with "; and", and
-2-
<PAGE>
AMENDMENT NO. 3 TO CREDIT AGREEMENT, DATED AS OF MAY 30, 1997
This Amendment No. 3 (this "Amendment") , dated as of September 24, 1997,
is made by and among CAREER EDUCATION CORPORATION, a Delaware corporation (the
"Borrower"), the financial institutions party hereto (the "Lenders"), and
LASALLE NATIONAL BANK, as agent for the Lenders (in such capacity, the "Agent").
Terms defined in the Credit Agreement shall have the same respective meanings
when used herein and the provisions of Sections 1.2 and 1.3 of the Credit
Agreement shall apply, mutatis mutandis, to this Amendment.
W I T N E S S E T H :
WHEREAS, the parties hereto are parties to that certain Credit Agreement,
dated as of May 30, 1997, as amended (as in effect on the date hereof, the
"Existing Credit Agreement" and as amended and modified by this Amendment, the
"Credit Agreement");
WHEREAS, the Borrower has requested that the Lenders and the Agent agree to
amend and modify the Existing Credit Agreement as described herein; and
WHEREAS, the Lenders and the Agent are willing to amend and modify the
Existing Credit Agreement on the terms and conditions contained herein;
NOW, THEREFORE, in consideration of the premises, the mutual covenants
herein contained and other good and valuable consideration (the receipt,
adequacy and sufficiency of which is hereby acknowledged), the parties hereto,
intending legally to be bound, hereby agree as follows:
1. Amendments. Subject to the satisfaction of the conditions precedent
set forth in Section 5 below, the Existing Credit Agreement is hereby amended as
follows:
(a) A new definition called "Acquired Person Adjusted Earnings" shall
be added to Section 1.1 of the Existing Credit Agreement in appropriate
alphabetical order and shall read in its entirety as follows:
""Acquired Person Adjusted Earnings" shall mean for any Acquired
Person, for any period, Consolidated Net Income of such Acquired
Person for such period, plus (a) Consolidated Interest Expense of such
Acquired Person for such period, plus (b) the aggregate amounts
deducted in determining consolidated Net Income in respect of (i) cash
Income Taxes paid by such Acquired Person, (ii) depreciation and
amortization, and (iii) interest income, plus or minus (c) without
duplication, any Non-Recurring Items of such Acquired Person to the
extent agreed to by the Agent in its sole and absolute discretion."
<PAGE>
(iii) adding a new clause (vi) thereto which shall read in its
entirety as follows:
"(vi) copies of the consolidated and consolidating balance sheet
of each Acquired Person and its Subsidiaries as at the end of its most
recent Fiscal Year and the related statements of earnings,
stockholders' equity and cash flow of such Acquired Person and its
Subsidiaries for such Fiscal Year, in each case setting forth the
figures for the previous year, prepared in reasonable detail and in
accordance with GAAP applied consistently throughout the periods
reflected therein, certified, without Qualification by independent
certified public accountants of recognized national standing
reasonably acceptable to the Agent, and such other interim financial
statements of such Acquired Person as the Agent or the Required
Lenders shall request."
(g) The first sentence of Section 2.3 of the Existing Credit
Agreement is deleted in its entirety and replaced with the following;
"The Borrower has requested that the aggregate Term Loan
Commitments and Revolving Loan Commitments be increased pro rata by an
aggregate maximum principal amount of $30,000,000 ($27,500,000 with
respect to the Revolving Loan Commitments and $2,500,000 with respect
to the Term Loan Commitments) (the amount of such increase called the
"Commitment increase")."
(h) Clause (e) of Section 2.3 of the Existing Credit Agreement is
deleted in its entirety and replaced with the following;
"(e) in no event shall the aggregate Term Loan Commitments and
Revolving Loan Commitments (after giving effect to such Commitment
Increase) exceed $15,000,000 and $65,000,000, respectively;"
(i) Section 2.4 of the Existing Credit Agreement is amended by
deleting the number $5,000,000 therefrom and replacing it with $10,000,000.
(j) The second paragraph of Section 5.1 of the Existing Credit
Agreement is amended by inserting the following phrase after the word
"follows" in the third line thereof:
"(rounded upward to the nearest hundredth)".
(k) Section 5.4 of the Existing Credit Agreement is amended by adding
the following sentence to the end thereof:
-3-
<PAGE>
"NotwithstandIng the foregoing, if any Interest Period would
otherwise end on a day that is not a Business Day, such Interest
Period shall be extended to the following Business Day unless the
result of such extension would be to carry each Interest Period into
another calendar month, in which event such Interest Period shall end
on the preceding Business Day."
(l) Clause (e) of Section 5.7 of the Existing Credit Agreement is
amended by deleting the first proviso contained therein in its entirety and
replacing it with the following:
"provided that, notwithstanding the foregoing, the Commitment Fee
and the LC Commitment Fee for the period commencing on the Closing
Date and ending September 30, 1997 shall be .375% per annum and 2.00%
per annum, respectively;"
(m) Clause (e) of Section 5.7 of the Existing Credit Agreement is
amended by inserting the following phrase after the word "follows" in the
first sentence:
"(rounded upward to the nearest hundredth)".
(n) A new clause (f) shall be added to Section 5.7 of the Existing
Credit Agreement and shall read in its entirety as follows;
(f) On the Commitment Increase Date, (i) the Borrower agrees to
pay to the Agent, for its own account, the fees set forth in that
certain fee letter, dated as of September 24, 1997 (the "Additional
Fee Letter") from the Agent addressed to and accepted by the Borrower,
and (ii) the Borrower agrees to pay to the Agent, for the benefit of
the Lenders, a fee of $105,000.
(o) The second sentence of Section 7.3 of the Existing Credit
Agreement is amended by adding the following proviso at the end thereof:
"; provided that in the case of clause (b), no such condition then exists
with respect to any Lender".
(p) The word "and" at the end of Section 10.1.15 is deleted;
(q) Section 10.1.16 is renumbered Section 10.1.17 and a new Section
10.1.16 shall be added to Section 10 and shall read in its entirety as
follows:
"As soon as available, but in any event within ninety (90) days
after the end of each Fiscal Year of the Borrower, each annual
compliance report prepared by the Company's independent public
accountants and delivered to the DOE; and
-4-
<PAGE>
(r) A new Section 10.11 shall be added to Section 10 of the Existing
Credit Agreement and shall read in its entirety as follows:
"Section 10.11 Interest Hedge Agreements. On or prior to
December 31, 1997, the Borrower shall have entered into Hedging
Obligations, with counterparties satisfactory to the Agent, on terms
and conditions (which terms and conditions shall not include the
granting of collateral to any Person other than a Lender) reasonably
acceptable to the Agent having (i) an aggregate notional principal
amount of at least $7,500,000 and (ii) a maturity of at one year,
which one year period will be automatically renewed for two additional
one year periods."
(s) Section 12.5 of the Existing Credit Agreement is deleted in its
entirety and replaced with the following:
"SECTION 12.5. Minimum Net Worth. Not permit Consolidated Net
Worth, at the end of any Fiscal Quarter during any Fiscal Year of the
Borrower (commencing June 30, 1997), to be less than $34,000,000, plus
(a) 100% of Consolidated Net Income (if positive), plus (b) 35% of the
Net Proceeds received by the Borrower or its Subsidiaries in
connection with the private or public sale of equity securities after
the Closing Date, minus (c) Electra Permitted Cash Dividend."
(t) A new Section 12.6 shall be added to the Existing Credit
Agreement immediately prior to the last paragraph of Section 12 and shall
read in its entirety as follows:
"Section 12.6 Consolidated Tangible Net Worth. Not permit
Consolidated Tangible Net Worth, at any time, to be less than $1.00."
(u) The final paragraph of Section 12 of the Existing Credit
Agreement shall be deleted in its entirety and replaced with the following:
"Notwithstanding the foregoing, for the purposes of Sections
12.1, 12.2 and 12.3, Consolidated EBITDA shall be calculated for the
four (4) Fiscal Quarters then ended."
(v) Clause (c)(ii) of Section 16.1 shall be amended by adding the
following proviso at the end thereof:
"; provided, that the consent of the Borrower shall not be required if
a default or Event of Default shall exist at the time of such
Assignment".
-5-
<PAGE>
(w) Clause (c) of 17.1 is amended by deleting the words "all or
substantially all" in the first and second line thereof and replacing such
words with the word "any".
(x) Section 17.1 of the Existing Credit Agreement is amended by:
(i) deleting the word "or" at the end of clause (d) thereof;
(ii) deleting the "." at the end of clause (e) thereof and
replacing it with ";", and
(iii) adding new clause (f) and (g) thereto which will read in
their entirety as follows:
"(f) would increase the Revolving Loan Commitment or Term
Loan Commitment of any Lender, without the consent of such
Lender;
(g) which would permit the release of any guaranty of any
guarantor other than in connection with a disposition permitted
hereunder or otherwise permitted under the terms of the Related
Documents, shall be effective without the consent of each
Lender."
(y) Exhibit O to the Existing Credit Agreement is deleted in its
entirety and replaced with Exhibit A attached hereto.
2. Documents Remain in Effect. Except as amended and modified by this
Amendment, the Existing Credit Agreement remains in full force and effect and
the Borrower confirms that its representations, warranties, agreements and
covenants contained in, and obligations and liabilities under, the Credit
Agreement and each of the other Related Documents are true and correct in all
material respects as if made on the date hereof, except where such
representation, warranty, agreement or covenant speaks as of a specified date.
3. References in Other Documents. References to the Existing Credit
Agreement in any other document shall be deemed to include a reference to the
Credit Agreement, whether or not reference is made to this Amendment.
4. Representations. The Borrower hereby represents and warrants to the
Lenders and the Agent that:
(a) The execution, delivery and performance of this Amendment is
within the Borrower's corporate authority, has been duly authorized by all
necessary corporate action, has received all necessary consents and
approvals (if any shall be required), and does not and will not contravene
or conflict with any
-6-
<PAGE>
provision of law or of the Certificate of Incorporation or By-laws of the
Borrower or its Subsidiaries, or of any other agreement binding upon the
Borrower or its Subsidiaries or their respective property;
(b) This Amendment constitutes the legal, valid, and binding
obligation of the Borrower, enforceable against the Borrower in accordance
with its terms; and
(c) no Default has occurred and is continuing or will result from
this Amendment.
5. Conditions Precedent. The effectiveness of this Amendment is subject
to the receipt by the Agent of each of the following, each appropriately
completed and duly executed as required and otherwise in form and substance
satisfactory to the Agent:
(a) Certified copies of resolutions of the Board of Directors of the
Borrower authorizing or ratifying the execution, delivery and performance
by the Borrower of this Amendment;
(b) A certificate of the President or a Vice-President of the
Borrower that all necessary consents or approvals with respect to this
Amendment have been obtained;
(c) A certificate of the Secretary or Assistant Secretary of the
Borrower, certifying the name(s) of the officer(s) of the Borrower
authorized to sign this Amendment and the documents related hereto on
behalf of the Borrower;
(d) An opinion of Katten Muchin & Zavis covering those matters set
forth in clauses (a) and (b) of Section 4 and such other legal matters as
the Agent or its counsel may request; and
(e) Such other instruments, agreements and documents as the
Administrative Agent may reasonably request, in each case duly executed as
required and otherwise in form and substance satisfactory to the Lenders.
6. Miscellaneous.
(a) Section headings used in this Amendment are for convenience of
reference only, and shall not affect the construction of this Amendment.
(b) This Amendment and any amendment hereof or supplement hereto may
be executed in any number of counterparts and by the different parties on
separate counterparts and each such counterpart shall be deemed to be an
original, but all such counterparts shall together constitute but one and the
same agreement.
(c) This Amendment shall be a contract made under and governed by the
internal laws of the State of Illinois, without giving effect to principles of
conflicts of laws.
-7-
<PAGE>
(d) All obligations of the Borrower and rights of the Lenders and the
Agent, that are expressed herein, shall be in addition to and not in limitation
to those provided by applicable law.
(e) Whenever possible, each provision of this Amendment shall be
interpreted in such manner as to be effective and valid under applicable law;
but if any provision of this Amendment shall be prohibited by or invalid under
applicable law, such provision shall be ineffective to the extent of such
prohibition or invalidity, without invalidating the remainder of such provision
or the remaining provisions of this Amendment.
(f) This Amendment shall be binding upon the Borrower, the Lenders
and the Agent and their respective successors and assigns, and shall inure to
the benefit of the Borrower, the Lenders and the Agent and their respective
successors and assigns.
* * *
-8-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused the execution and
delivery hereof by their respective representatives thereunto duly authorized as
of the date first herein appearing.
CAREER EDUCATION CORPORATION
By: /s/ WILLIAM A. KLETTKE
--------------------------------------
Name: William A. Klettke
------------------------------------
Title: Sr. VP & CFO
-----------------------------------
LASALLE NATIONAL BANK, in its individual
corporate capacity and as Agent
By: /s/ MICHAEL FOSTER
--------------------------------------
Name: Michael Foster
------------------------------------
Title: SVP
-----------------------------------
<PAGE>
EXHIBIT 10.9
SUPPLEMENTAL OPTION AGREEMENT
THIS SUPPLEMENTAL OPTION AGREEMENT (this "AGREEMENT"), dated as of
July 31, 1995, is between Career Education Corporation, a Delaware corporation
("CEC"), and John M. Larson ("LARSON").
RECITALS
A. Larson and CEC are parties to that certain Larson Option
Agreement, dated as of January 31, 1994 (the "ORIGINAL AGREEMENT") pursuant to
which Larson was granted options to purchase certain shares of CEC's common
stock, $.01 par value based upon the returns achieved by Heller Equity Capital
Corporation ("HECC"), on its behalf and as successor to Heller Financial, Inc.
B. Larson and CEC have decided to restructure a portion of Larson's
rights to receive the options in connection with the extension of Larson's
Employment Agreement as reflected in this Agreement and the Amended and Restated
Option Agreement of even date herewith between Larson and CEC.
AGREEMENTS
In consideration of the recitals and the mutual covenants herein
contained and other good and valuable consideration, the receipt and sufficiency
of which are hereby acknowledged, the parties hereto agree as follows:
ARTICLE I
DEFINITIONS
-----------
I.1 In addition to the terms defined elsewhere in this Agreement, as
used in this Agreement:
(a) "CAUSE" has the meaning set forth in the Larson Employment
Agreement.
(b) "CEC COMMON" means the common stock of CEC, $.01 par value,
regardless of class.
(c) "COMMISSION" means the Securities and Exchange Commission.
(d) "DOWDELL OPTION" means the option granted to Robert E. Dowdell
("Dowdell") pursuant to the Amended and Restated Dowdell Option Agreement,
of even date
<PAGE>
herewith, between CEC and Dowdell.
(e) "EXERCISE PRICE" means $.01 per share (adjusted proportionately
in the event the CEC Common is combined into a lesser number or divided
into a greater number but in no event less than the par value of such CEC
Common).
(f) "EXISTING STOCKHOLDERS" means Larson, Dowdell and HECC and each
of their respective successors and permitted assigns.
(g) "GOOD REASON" has the meaning set forth in the Larson Employment
Agreement.
(h) "LARSON EMPLOYMENT AGREEMENT" means the Employment and Non-
Competition Agreement, dated as of January 31, 1994, between Larson and
CEC, as amended as of July 31, 1994.
(i) "LARSON OPTION" means the option granted to Larson pursuant to
the Amended and Restated Larson Option Agreement, of even date herewith,
between CEC and Larson.
(j) "OPTION" has the meaning set forth in Section 2.1 hereof.
-----------
(k) "OPTION AMOUNT" means 2,199 shares of CEC Common, constituting
the number of shares of CEC Common equal to 2.0% of the number of shares of
CEC Common on a fully diluted basis outstanding as of the date hereof
(excluding any shares of CEC Common to be issued pursuant to the Larson
Option or the Dowdell Option) after giving effect to the issuance, and
assuming the exercise, of warrants to Electra Investment Trust PLC and
Electra Associates, Inc. (collectively, "ELECTRA") or their respective
successors or assigns pursuant to the Securities Purchase Agreement of even
date herewith among CEC and Electra and the issuance of warrants to
Provident National Bank pursuant to the Warrant Agreement of even date
herewith between Provident National Bank and CEC; provided, that the Option
Amount shall be adjusted proportionately in the event the CEC Common is
combined into a lesser number, divided into a greater number or converted
into or exchanged for other shares of capital stock as the result of any
recapitalization, recombination or stock split.
(l) "OPTION TERMINATION DATE" means the earliest of (i) January 31,
2004, (ii) the date Larson ceases to be employed by CEC resulting from
Larson's voluntary
<PAGE>
decision to terminate his employment (other than for Good Reason) or a
termination of Larson's employment with CEC for Cause, (iii) the date of
any material violation by Larson of any provision of Section 5 of the
---------
Larson Employment Agreement following the termination of his employment
with CEC and (iv) twenty-four (24) months after the date Larson and his
Permitted Transferees cease to be stockholders of CEC.
(m) "PERMITTED TRANSFEREE" has the meaning set forth in Section 2.6
-----------
of the Stockholders' Agreement.
(n) "PERSON" means a natural person, a partnership, a corporation, an
association, a joint stock company, a trust, an estate, a joint venture, an
unincorporated organization or other entity or a governmental entity or any
department, agency or political subdivision thereof.
(o) "SECURITIES ACT" means the Securities Act of 1933, as amended.
(w) "VESTED PERCENTAGE" means the percentage identified below as
determined by the number of years from the date hereof Larson is a director
of CEC or is employed as an executive officer of CEC (pursuant to the
Larson Employment Agreement or otherwise), plus any additional period
during which Larson continues to receive his Base Salary pursuant to
Section 5.1 of the Larson Employment Agreement, as determined below:
<TABLE>
<CAPTION>
Years of Employment Vested Percentage
------------------- -----------------
<S> <C>
January 31, 1995 20%
January 31, 1996 40%
January 31, 1997 60%
January 31, 1998 80%
January 31, 1999 100%
</TABLE>
Notwithstanding the foregoing, if Larson ceases to be an executive officer
of CEC as the direct result of (i) a the consummation of a transaction
described in Section 2.4(c) of the Stockholders' Agreement prior to January
--------------
31, 1999 or (ii) any person other than Dowdell, Larson or Heller acquiring
a majority of the CEC Common and exercising the power to elect a majority
of CEC's Board of Directors, the Vested Percentage shall be 100%.
-3-
<PAGE>
ARTICLE II
THE OPTION PROVISIONS
---------------------
2.1 GRANT OF THE OPTION. Subject to the terms and conditions set
-------------------
forth herein, CEC hereby grants to Larson an option (the "OPTION") to
purchase CEC Common from CEC at a price, per share, equal to the Exercise
Price. The Option shall be exercisable with respect to the Vested
Percentage of the Option Amount from time to time.
2.2 PROCEDURES FOR EXERCISE. Larson or a Permitted Transferee may
-----------------------
exercise the Vested Percentage of the Option Amount (in whole or in part)
at any time prior to the Option Termination Date by delivering written
notice to CEC setting forth the portion of the Option (not to exceed the
Vested Percentage of the Option Amount) to be exercised, together with cash
(or a bank check payable to the order of CEC or its designee) in an amount
equal to the aggregate Exercise Price for the shares of CEC Common with
respect to which Larson or a Permitted Transferee is exercising such
Option. The shares subject to the Option shall be shares of such class or
classes of the CEC Common as CEC shall determine. As promptly as
practicable after receiving such written notice and payment, CEC shall
deliver to Larson or a Permitted Transferee, as the case may be,
certificates for the shares of CEC Common with respect to which Larson or a
Permitted Transferee has exercised the Option. For all purposes, Larson or
a Permitted Transferee, as the case may be, will be deemed to have
exercised the Option and to have purchased and become the holder of the
applicable CEC Common as of the date CEC receives written notice and
payment from Larson or a Permitted Transferee, as the case may be, as
provided in this Section 2.2.
-----------
2.3 PAYMENTS IN LIEU OF EXERCISE OF OPTION. If at the time the
--------------------------------------
Option or any portion thereof is exercised neither Larson nor his Permitted
Transferees are stockholders of CEC, CEC shall have the right, but not the
obligation, to pay Larson or his Permitted Transferees the cash or cash
equivalent consideration attributable to the CEC Common that Larson would
have otherwise been entitled to purchase pursuant to Section 2.2 above. To
-----------
the extent that Larson or his Permitted Transferees are to receive cash or
cash equivalent consideration pursuant to this Section 2.3 in lieu of the
-----------
issuance of shares of CEC Common, CEC shall transfer to Larson an aggregate
amount of cash or cash equivalent consideration equal to the value of the
CEC Common that Larson would have been entitled to purchase pursuant to
such exercised Options less the Exercise Price with respect to such CEC
Common. The per share value of the CEC Common referred to in the preceding
sentence shall be equal to the Fair Market Value of such shares, as
determined in accordance with the Stockholders' Agreement.
-4-
<PAGE>
2.4 TERMINATION OF THE OPTIONS. Notwithstanding anything else to
--------------------------
the contrary in this Agreement, the Options will expire and terminate
immediately upon the Option Termination Date and thereafter will be void
and of no force and effect.
2.5 NON-TRANSFERABLE. Larson or any Permitted Transferee feree will
----------------
not transfer, sell, convey, exchange or otherwise dispose of (herein referred to
as "DISPOSITION" or "TO DISPOSE OF") the Options and the rights and privileges
of Larson or such Permitted Transferee under this Agreement, except (i) in the
event of Larson's death or incompetency, to a Permitted Transferee who consents
in writing to be bound by the terms of this Agreement to the same extent as
Larson or (ii) by exercise pursuant to the terms of this Agreement.
2.6 NO RIGHTS AS A STOCKHOLDER. The Options do not confer upon
--------------------------
Larson or a Permitted Transferee any right to vote or consent or to receive
notice as a stockholder of CEC that do not otherwise exist in respect of
any matters whatsoever, or any other rights or liabilities as a
stockholder, prior to the exercise of the Options as hereinbefore provided.
ARTICLE III
MISCELLANEOUS
-------------
3.1 NOTICES. All notices, demands or other COMMUNICATIONS D to be
-------
given or delivered under or by reason of the provisions of this Agreement shall
be in writing and shall be deemed to have been given when delivered personally
to the recipient, sent to the recipient by reputable express courier service
(charges prepaid), sent by facsimile or mailed to the recipient by certified or
registered mail, return receipt requested and postage prepaid. Such notices,
demands and other communications shall be sent to the Company and to Larson at
the addresses indicated below:
If to CEC:
Career Education Corporation
2300 N. Barrington Road, Suite 400
Hoffman Estates, Illinois 60195
Attention: President
Facsimile: (708) 884-9423
With copies to:
Heller Equity Capital Corporation
500 West Monroe Street
Chicago, Illinois 60661
Attention: Todd H. Steele
Facsimile: (312) 441-7378
-5-
<PAGE>
Heller International Corporation
500 West Monroe Street
Chicago, Illinois 60661
Attention: Charles P. Brissman, Esq.
Facsimile: (312) 441-7208
and
Goldberg, Kohn, Bell, Black,
Rosenbloom & Moritz, Ltd.
55 East Monroe Street
Suite 3700
Chicago, Illinois 60603
Attention: Robert M. Heinrich, Esq.
Facsimile: (312) 332-2196
If to Larson:
John M. Larson
36 Lakeside Drive
South Barrington, Illinois 60010
With copies to:
Quinn, Kully & Morrow
520 South Grand Avenue
Los Angeles, California 90071
Attention: Russel Kully, Esq.
Facsimile: (213) 622-3799
or to such other address or to the attention of such other person as the
recipient party has specified by prior written notice to the sending party.
3.2 ENTIRE AGREEMENT. Except as otherwise expressly set forth
----------------
herein, this Agreement and the other agreements executed in connection here
embody the complete agreement and understanding among the parties and supersede
and preempt any prior understand understandings, agreements or representations
by or among the parties, written or oral, which may have related to the subject
matter hereof in any way, including, without limitation, the Original Agreement.
3.3 SUCCESSORS AND ASSIGNS. All covenants and agree agreements
----------------------
contained in this Agreement by or on behalf of either party hereto shall bind
and inure to the benefit of the other party hereto and their heirs, legal
representatives, successors and assigns whether so expressed or not.
3.4 GOVERNING LAW. This Agreement shall be construed and enforced
-------------
in accordance with, and all questions concerning the
-6-
<PAGE>
construction, validity, interpretation and performance of this Agreement shall
be governed by the laws of the State of Illinois without giving effect to the
provisions thereof regarding conflict of laws.
3.5 CONSENT TO JURISDICTION AND SERVICE OF PROCESS. EACH PARTY
----------------------------------------------
HERETO HEREBY CONSENTS TO THE JURISDICTION OF ANY STATE OR FEDERAL COURT LOCATED
WITHIN THE COUNTY OF COOK, STATE OF ILLINOIS AND IRREVOCABLY AGREES THAT SUBJECT
TO CEC'S ELECTION, ALL ACTIONS OR PROCEEDINGS ARISING OUT OF OR RELATING TO THIS
AGREEMENT OR THE OTHER RELATED DOCUMENTS SHALL BE LITIGATED IN SUCH COURTS. EACH
PARTY HERETO ACCEPTS FOR ITSELF AND HIMSELF, GENERALLY AND UNCONDITIONALLY, THE
NONEXCLUSIVE JURISDICTION OF THE AFORESAID COURTS AND WAIVES ANY DEFENSE OF
FORUM NON CONVENIENS, AND IRREVOCABLY AGREES TO BE BOUND BY ANY JUDGMENT
RENDERED THEREBY IN CONNECTION WITH THIS AGREEMENT. LARSON DESIGNATES AND
APPOINTS CT CORPORATION SYSTEM AND SUCH OTHER PERSONS AS MAY HEREINAFTER BE
SELECTED BY CEC WHO IRREVOCABLY AGREE IN WRITING TO SO SERVE AS AGENT TO RECEIVE
ON SUCH PARTY'S BEHALF SERVICE OF ALL PROCESS IN ANY SUCH PROCEEDINGS IN ANY
SUCH COURT, SUCH SERVICE BEING HEREBY ACKNOWLEDGED BY EACH PARTY TO BE EFFECTIVE
AND BINDING SERVICE IN EVERY RESPECT. A COPY OF ANY SUCH PROCESS SO SERVED SHALL
BE MAILED BY REGISTERED MAIL TO EACH PARTY AS PROVIDED HEREIN, EXCEPT THAT
UNLESS OTHERWISE PROVIDED BY APPLICABLE LAW, ANY FAILURE TO MAIL SUCH COPY SHALL
NOT AFFECT THE VALIDITY OF SERVICE OF PROCESS. IF ANY AGENT APPOINTED BY A PARTY
REFUSES TO ACCEPT SERVICE, SUCH PARTY HEREBY AGREES THAT SERVICE UPON IT BY MAIL
SHALL CONSTITUTE SUFFICIENT NOTICE. NOTHING HEREIN SHALL AFFECT THE RIGHT TO
SERVE PROCESS IN ANY OTHER MANNER PERMITTED BY LAW OR SHALL LIMIT THE RIGHT OF
CEC TO BRING PROCEEDINGS AGAINST LARSON IN ANY OTHER COURT HAVING JURISDICTION
OVER LARSON.
3.6 WAIVER OF JURY TRIAL. EACH PARTY HERETO HEREBY WAIVES ITS
--------------------
RESPECTIVE RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR
ARISING OUT OF THIS AGREEMENT OR ANY DEALINGS BETWEEN THEM RELATING TO THE
SUBJECT MATTER OF THIS TRANSACTION AND THE RELATIONSHIP THAT IS BEING
ESTABLISHED. EACH PARTY HERETO ALSO WAIVES ANY BOND OR SURETY OR SECURITY UPON
SUCH BOND WHICH MIGHT, BUT FOR THIS WAIVER, BE REQUIRED OF THE OTHER PARTY. THE
SCOPE OF THIS WAIVER IS INTENDED TO BE ALL-ENCOMPASSING OF ANY AND ALL DISPUTES
THAT MAY BE FILED IN ANY COURT AND THAT RELATE TO THE SUBJECT MATTER OF THIS
AGREEMENT, INCLUDING WITHOUT LIMITATION, CONTRACT CLAIMS, TORT CLAIMS, BREACH OF
DUTY CLAIMS, AND ALL OTHER COMMON LAW AND STATUTORY CLAIMS. EACH PARTY HERETO
ACKNOWLEDGES THAT THIS WAIVER IS A MATERIAL INDUCEMENT TO ENTER INTO A BUSINESS
RELATIONSHIP, THAT EACH HAS ALREADY RELIED ON THE WAIVER IN ENTERING INTO THIS
AGREEMENT AND THAT EACH WILL CONTINUE TO RELY ON THE WAIVER IN THEIR RELATED
FUTURE DEALINGS. EACH PARTY HERETO FURTHER WARRANTS AND REPRESENTS THAT EACH
HAS REVIEWED THIS WAIVER WITH ITS LEGAL COUNSEL, AND THAT EACH KNOWINGLY AND
VOLUNTARILY WAIVES ITS OR HIS JURY TRIAL RIGHTS
-7-
<PAGE>
FOLLOWING CONSULTATION WITH LEGAL COUNSEL. THIS WAIVER IS IRREVOCABLE, MEANING
THAT IT MAY NOT BE MODIFIED EITHER ORALLY OR IN WRITING, AND THE WAIVER SHALL
APPLY TO ANY SUBSEQUENT AMENDMENTS, RENEWALS, SUPPLEMENTS OR MODIFICATIONS TO
THIS AGREEMENT OR TO ANY OTHER DOCUMENTS OR AGREEMENTS RELATING TO THE
TRANSACTIONS CONTEMPLATED HEREBY. IN THE EVENT OF LITIGATION, THIS AGREEMENT MAY
BE FILED AS A WRITTEN CONSENT TO A TRIAL BY THE COURT.
3.7 DESCRIPTIVE HEADINGS; INTERPRETATION. The descriptive headings
------------------------------------
of this Agreement are inserted for convenience only and do not constitute a part
of this Agreement .
3.8 COUNTERPARTS. This Agreement may be executed simultaneously in
------------
two or more counterparts, any one of which need not contain the signatures of
more than one party, but all such counterparts taken together shall constitute
one and the same Agreement.
3.9 AMENDMENTS AND WAIVERS. No modification, amendment or waiver
----------------------
of any provisions of this Agreement shall be effective unless approved in
writing by each of the parties hereto. The failure of any party at any time to
enforce any of the provisions of this Agreement shall in no way be construed as
a waiver of such provisions and will not affect the right of such party to
enforce each and every provision hereof in accordance with its terms.
3.10 SEVERABILITY. Whenever possible, each provision of this
------------
Agreement will be interpreted in such manner as to be effective and valid under
applicable law, but if any provision of this Agreement is held to be prohibited
by or invalid under applicable law, such provision will be ineffective only to
the extent of such prohibition or invalidity, without invalidating the remainder
of this Agreement.
3.11 LARSON'S INVESTMENT REPRESENTATIONS. Larson hereby represents
-----------------------------------
on the date hereof, and any person that acquires all or any portion of the
Options in accordance with the provisions of this Agreement represents with
respect to such person as of the date of such acquisition, that such person is
acquiring the Options for such person's own account with the present intention
of holding the Options and any shares of common stock of CEC acquired pursuant
to the Options for purposes of investment, and that such person has no intention
of selling either the Options or any shares of common stock of CEC acquired
pursuant to the Options in a public distribution d in violation of the federal
securities laws or any applicable state securities laws. Larson hereby
represents on the date hereof, and any person that acquires all or any portion
of the Options in accordance with the provisions of this Agreement represents
with respect to such person as of the date of exercise, that such person (a) has
such
-8-
<PAGE>
knowledge and experience in financial and business matters that such person is
capable of evaluating the merits and risks of such person's investment in the
Options and any shares of common stock of CEC acquired pursuant to the Options;
(b) is able to bear the complete loss of his investment in the Options and any
shares of common stock of CEC acquired pursuant to the Options; (c) has had the
opportunity to ask questions of, and receive answers from, CEC concerning the
terms and conditions of the Options and the common stock of CEC and to obtain
additional information about CEC; (d) is an "accredited investor" within the
meaning of Rule 501 of Regulation D promulgated by the Commission under the
Securities Act; and (e) understands that no assurances can be given that CEC's
business plan, as currently proposed or subsequently modified, will be
effectuated and that none of HECC, HFI or their respective affiliates has any
commitment or obligation to provide additional equity or debt financing, or
other financial accommodations, to CEC or its subsidiaries to effectuate such
business plan or otherwise.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date first written above.
CAREER EDUCATION CORPORATION
By /s/ JOHN M. LARSON
---------------------------
Its President
---------------------------
JOHN M. LARSON
/s/ JOHN M. LARSON
------------------------------------
-9-
<PAGE>
EXHIBIT 10.13
CAREER EDUCATION CORPORATION
AMENDED AND RESTATED STOCKHOLDERS' AGREEMENT
--------------------------------------------
THIS AMENDED AND RESTATED STOCKHOLDERS' AGREEMENT is made as of July 31,
1995 by and among Career Education Corporation, a Delaware corporation (the
"Corporation"), Heller Equity Capital Corporation, a Delaware corporation
("Heller"), John M. Larson ("Larson") and Robert E. Dowdell ("Dowdell"), The
Provident Bank, an Ohio banking corporation ("Provident"), Electra Investment
Trust P.L.C., a corporation organized under the laws of England and Wales, and
its successors and assigns ("EIT"), and Electra Associates, Inc., a Delaware
corporation, and its successors and assigns ("EAI," and together with EIT,
"Electra"). Heller, EIT, EAI, Larson and Dowdell are hereafter collectively
referred to as the "Stockholders."
BACKGROUND
----------
The Corporation was incorporated in the State of Delaware on January
5, 1994 for the purpose of acquiring the operations of post secondary vocational
and trade schools through wholly-owned operating subsidiaries of the
Corporation. The Corporation's current capitalization is as follows:
(1) The Corporation has 5,250 shares of its Class A Voting Common
Stock, $.01 par value (the "Class A Stock"), issued and
outstanding, of which 750 shares are owned by Larson and 4,500
shares are owned by Dowdell.
(2) The Corporation has 5,100 shares of its Class B voting Common
Stock, $.01 par value (the "Class B Stock"), issued and
outstanding, all of which is owned by Heller. The Class B Stock
is convertible into shares of Class A Stock at any time at the
discretion of the holder.
(3) The Corporation has 69,900 shares of its Class C Non-voting
Common Stock, $.01 par value (the "Class C Stock"), issued and
outstanding, all of which is owned by Heller. The Class C Stock
is convertible into shares of Class B Stock at any time at the
discretion of the holder.
(4) The Corporation has authorized 100,000 shares of its Class D Non-
voting Common Stock, $.01 par value (the "Class D Stock") of
which none are issued and outstanding.
(5) The Corporation has authorized 100,000 shares of its Class E Non-
voting Common Stock, $.01 par value, (the "Class E Stock") of
which none are issued and outstanding.
<PAGE>
(6) The Corporation has 7,850 shares of its Preferred Stock, Series
A, $.01 par value (the "Series A Preferred"), issued and
outstanding, of which 7,500 shares are owned by Heller, 300
shares are owned by Dowdell, and 50 shares are owned by Larson.
(7) The Corporation has no shares of its Preferred Stock, Series B,
$.01 par value (the "Series B Preferred"), issued and
outstanding.
(8) The Corporation has 500 shares of its Preferred Stock, Series C,
$.01 par value (the "Series C Preferred"), issued and
outstanding, of which 425 are owned by EIT and 75 are owned by
EAI. In addition, EIT has a Warrant, subject to adjustment in
accordance with the terms thereof, exercisable into 21,492 shares
and EAI has a Warrant, subject to adjustment in accordance with
the terms thereof, (each Warrant, together with any Penalty
Warrants issued to each of EIT and EAI, the "Warrants"),
exercisable into 3,793 shares, of the Corporation's Class D Stock
(such Shares of Class D Stock are hereinafter referred to as the
"Warrant Shares"). For purposes of calculating the number of
Warrant Shares issuable upon exercise of the Warrant at any time
of determination as required pursuant to any provision in this
Agreement, the number of Warrant Shares so issuable shall be
adjusted to reflect the Earned Amount (as defined in the Warrant)
as if fixed and finally determined as of such date.
(9) The Corporation has issued a warrant (the "Provident Warrant") to
Provident, which, subject to adjustment in accordance with the
terms thereof, is exercisable into ____ shares of the
Corporation's Class D Stock (the "Provident Shares").
The parties hereto constitute the record and beneficial owners of all of the
outstanding capital stock of the Corporation as of the date hereof.
The Stockholders desire to provide for the continuity of management of
the Corporation and the orderly perpetuation and disposition of the ownership of
the shares of Class A Stock, Class B Stock, Class C Stock, the Class D Stock and
the Class E Stock and the Series A Preferred, Series B Preferred and Series C
Preferred (collectively, the "Shares") as more fully set forth herein. The
Class A Stock, the Class B Stock, the Class C Stock, the Class D Stock and the
Class E Stock are collectively referred to herein as the "Common Shares" and the
Series A Preferred, Series B Preferred and Series C Preferred are collectively
referred to herein as the "Preferred Shares." The Warrants and the Provident
Warrants, along with any other options, rights or warrants to acquire Common
Shares held by any Stockholder from time to time, are collectively referred to
herein as the "Rights".
Accordingly, the parties hereto agree as follows:
-2-
<PAGE>
ARTICLE I
---------
1.1. Voting Agreements. Until the termination of this Agreement or, if
earlier, ten (10) years from the date hereof: each Stockholder (including any
person or entity purchasing or succeeding, by conversion or otherwise, to any
shares of Class A Stock or Class B Stock or other capital stock with the right
to vote under conditions hereinafter specified) agrees to vote the applicable
Shares held by such Stockholder and shall undertake or cause to be undertaken
any and all actions necessary in whatever capacity whether as a Stockholder or
through membership or representation on the Board of Directors of the
Corporation (the "Board"), so as to carry out the provisions of this Agreement
applicable to the voting of such Shares.
(a) Directors. Except as hereinafter provided, there shall be six (6)
Directors ("Directors") elected to the Corporation's Board as follows: (i)
Larson shall be nominated and elected to be a Director so long as he is the
President of the Corporation and owns not less than ten percent (10%) of
the Class A Stock; (ii) Dowdell shall be nominated and elected to be a
Director so long as he remains a paid consultant to the Corporation or owns
not less than forty percent (40%) of the Class A Stock; (iii) two persons
designated by Heller (the "Heller Directors") shall be nominated and
elected to be Directors so long as Heller and its affiliates continue to
own Shares (such Directors shall initially be Pat Pesch and Todd H.
Steele); (iv) the fifth Director shall be designated by the other Directors
and shall not be affiliated with any of the Stockholders and (v) once the
shares of Series C Preferred are no longer outstanding, for so long as
Electra and its affiliates or designees own at least five percent (5%) of
the issued and outstanding Common Shares, one person designated by Electra
or its designee (the "Electra Director") shall be nominated and elected to
be the sixth director and shall be appointed to serve on the Corporation's
and each Subsidiary's compensation and audit committees. For purposes of
the Corporation's Second Restated Certificate of Incorporation, as amended,
a copy of which is attached hereto as Exhibit A (the "Certificate"), Larson
and Dowdell shall be the Class I Directors, the Heller Directors shall be
the Class II Directors, the fifth Director shall be the Class III Director
and the sixth Director shall be the Class IV Director. In the event Larson
or Dowdell ceases to be a Director as the result of removal, resignation,
death, disability or otherwise, the resulting vacancy shall be filled in
accordance with the Corporation's by-laws without reference to this
Agreement. The affirmative vote of Directors holding not less than five (5)
votes shall be required to approve or disapprove any matter to be voted
upon by the Board.
Immediately upon the delivery of any Conversion Notice (as
defined in the Certificate), each of the Class II Directors shall be
entitled to two and one-half (2.5) votes on all matters to be voted upon by
the Board. In the event that all shares of Class B Stock and Class C Stock
are converted into shares of Class A Stock, the agreements contained in
this Section 1.1 shall expire with respect to the Class I and Class III
Directors only and all Class I and Class III Directors shall immediately
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resign as Directors of the Corporation. All other provisions of this
Section 1.1 shall continue in full force and effect in accordance with the
terms of this Agreement.
(b) Subsidiary Directors. The President of the Corporation shall be
nominated and elected to be the sole Director of each of its currently-owned and
hereafter acquired wholly-owned operating subsidiaries (including, without
limitation, Al Collins Graphic Design School, Ltd., a Delaware corporation, ABS
Acquisition, Ltd., a Delaware corporation, BI Acquisition, Ltd., a Delaware
corporation, and CEC Management, Inc., an Illinois corporation), unless and
until his successor is appointed or elected in accordance with the by-laws of
such subsidiaries; provided, that the Board of Directors shall have the right to
redesignate the number and composition of the board of directors of any of its
wholly-owned operating subsidiaries at any time with the prior written approval
of Heller and Electra. Following the exercise by the holders of the Series C
Preferred of their rights pursuant to Section 6(c) of the Certificate of
Designations attached to and incorporated by reference in the Certificate the
provisions of this Section 1.1(b) shall cease to be effective.
(c) Bylaws. The By-laws of the Corporation in effect as of the date
hereof shall remain in effect following the execution of this Agreement.
(d) Compensation Committee. The Directors have appointed a
Compensation Committee to determine and review the compensation of the executive
officers and employees of the Corporation and to determine and review the
granting of stock options, if any, to the executive officers and employees of
the Corporation. Such committee shall have three (3) members none of whom shall
be, to the extent possible, officers or employees of the Corporation. The
Committee consist of the one (1) Heller Director and one (1) Electra Director
and the fifth Director specified in Section 1.1(a)(iv) above.
(e) Other Matters Subject to Stockholder Vote.
-----------------------------------------
So long as any Warrant remains outstanding and the Voting Amount
(as defined below) is greater than zero, each Stockholder (including any person
or entity purchasing or succeeding, by conversion or otherwise, to any shares of
Class A Stock or Class B Stock or other capital stock with the right to vote on
such matter (the "Voting Stock")), agrees to vote all Shares held by such
Stockholder on all matters submitted to the Stockholders for vote (other than
those covered by subparagraph (a) above) in support of any determination made by
the Requisite Equity Holders pursuant to the provisions of this subparagraph
(e).
(i) For purposes hereof, the term "Equity Holders" shall mean the
holders of Voting Stock and the holders of the Warrants to the extent of the
Voting Amount (as defined below) and teh term "Requisite Equity Holders" shall
mean Equity Holders holding the Requisite
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Amount (as defined below) and the term "Requisite Equity Holders" shall
mean Equity Holders holding the Requisite Amount (as defined below) of
Voting Stock deemed outstanding (assuming for purposes of this Section
1.1(e) only that the Warrants have been exercised for and/or converted into
Voting Stock to the extent of the Voting Amount). "Requisite Amount" shall
mean the number of shares of Voting Stock required to approve any
particular corporate action pursuant to the Certificate, the By-laws or
applicable law. "Voting Amount" shall mean a number of shares of Voting
Stock, after giving effect to the deemed issuance and conversion of Warrant
Shares described above, representing a percentage of the Voting Stock equal
to the lesser of (x) 24.9% of the Voting Stock or (y) the percentage of
outstanding Common Shares represented by the Warrant Shares assuming
exercise of all the Warrants; provided, that clause (x) above shall not be
applicable to any matter where pursuant to the Certificate, the By-laws or
applicable law all Common Shares will constitute Voting Stock as defined
herein; and; provided, further, that in all cases the Voting Amount shall
be reduced on a share for share basis by all shares of Voting Stock
received upon exercise of the Warrant and/or, to the extent applicable, the
conversion of Warrant Shares into Class A Stock in accordance with the
Certificate.
(ii) In the event that a vote of Stockholders is required, by law,
the Corporation's Certificate, the Corporation's bylaws, agreement or
otherwise, in connection with any matter and unless waived in writing by
the Requisite Equity Holders following notice to all Equity Holders, the
Corporation shall send the Equity Holders a written ballot describing the
matter(s) to be voted on not less than ten (10) nor more than sixty (60)
days prior to the date on which such vote is scheduled to be taken, whether
at a meeting or by written consent (the "Scheduled Date"). Each Equity
Holder shall register its vote(s) on said ballot and return said ballot to
the Corporation's Secretary at the Corporation's principal address not less
than five (5) days prior to the Scheduled Date. The Corporation's Secretary
shall then count the votes set forth on the ballots and send the holders of
Voting Stock written notice of the vote of the Requisite Equity Holders
with respect to each matter subject to vote by the holders of Voting Stock
not less than one (1) day prior to the Scheduled Date. The holders of
Voting Stock shall each then vote on the Scheduled Date as designated by
the Requisite Equity Holders.
1.2. Issuance of Additional Shares to Heller. The Stockholders hereby
acknowledge that Heller and certain of its successors or permitted assigns may
purchase additional Common Shares and Preferred Shares from time to time to fund
additional acquisitions or working capital needs of the Corporation. The
Stockholders agree that Heller shall be permitted to purchase and the
Corporation shall offer for sale to Heller investment units consisting of (a)
additional shares of Series A Preferred at a price equal to $1,000.00 per share
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and (b) additional Common Shares (which shall be Class B Stock and/or Class C
Stock as specified by Heller) equal to the Dilution Number (as defined below) at
a price equal to $.10 per Share (the original issuance price of the Common
Shares as of the date hereof) or such other price as may be determined by the
Board and subject to approval by Heller. The "Dilution Number" is the additional
number of Common Shares to be issued to Heller equal to the number of additional
Preferred Shares to be purchased by Heller multiplied by the ratio of the number
of outstanding Common Shares prior to such purchase to the number of outstanding
Preferred Shares prior to such purchase. Heller shall only purchase additional
Shares in the investment units described herein. Notwithstanding anything herein
to the contrary, neither Heller nor its affiliates shall be deemed by their
execution of this Agreement or any other documents related hereto or the
consummation of the transactions contemplated hereby to have committed or
otherwise obligated themselves to make any equity or debt investments in, or
provide any other financial accommodations to, the Corporation or its
subsidiaries beyond those made on the date hereof. Dowdell and Larson shall have
no right to participate in any offering of additional Shares by the Corporation;
provided, that on or after such time as Heller has purchased a number of
Preferred Shares (the "Heller Investment") having an aggregate Liquidation
Value, at the time of their issuance, of $5,000,000.00, Larson and Dowdell shall
be entitled to limited preemptive rights as set forth herein. The Corporation
shall give Larson and Dowdell at least five (5) days prior written notice of any
Heller Investment, which notice shall describe the terms of such Heller
Investment. At such time as the Heller Investment exceeds $5,000,000.00, Dowdell
and Larson shall have the right to purchase for a period of thirty (30) days
(the "Exercise Period") after they receive written notice of an additional
Heller Investment, to purchase upon the same terms and conditions, including
purchase price per Common Share, as offered to Heller, a number of Class A
Shares necessary to permit each of Larson and Dowdell to maintain the same
percentage ownership interest in the Common Shares subsequent to the Heller
Investment as they each maintained prior to such Heller Investment. All of the
foregoing limited preemptive rights granted to Dowdell and Larson shall
terminate with respect to all Shares purchased by Heller on or after such time
as the Heller Investment equals $8,000,000.00 for the first time. Dowdell and
Larson may exercise their rights hereunder by delivery of written notice to the
Corporation and Heller at any time prior to the expiration of the Exercise
Period, and they shall purchase all Common Shares to be purchased hereunder by
the later of ten (10) business days after delivery of such notice or the date
upon which Heller, or any of its Permitted Transferees (as defined below),
purchase Shares pursuant to the Heller Investment. Notwithstanding anything
herein to the contrary, Heller or such Permitted Transferees shall be permitted
to purchase all Shares to be included in the Heller Investment (less the Common
Shares which may be purchased by Larson and Dowdell hereunder) at any time prior
to or during the Exercise Period. To the extent Dowdell or Larson elect not to
exercise each of their respective rights hereunder or waive such rights, Heller
or such Permitted Transferee shall purchase the Common Shares which could have
been purchased by Larson and Dowdell hereunder by the later of (i) three (3)
business days after the waiver or failure of Larson or Dowdell to exercise his
rights hereunder or (ii) concurrent with the purchase of the remaining Shares
included in the Heller Investment. All Shares issued to Larson and Dowdell shall
be shares of Class A Stock unless the common equity securities to be
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issued pursuant to the Heller Investment do not participate equally in dividends
and distributions with the shares of Class A Stock, in which case Larson and
Dowdell shall receive shares of stock of the same class or series as offered to
all participants in the Heller Investment.
1.3. Additional Equity Issuances.
(a) In case at any time or from time to time the Corporation shall
issue or sell the following (collectively hereinafter referred to as the
"Additional Capital Stock"): any shares of its capital stock or issue or
sell options, rights or warrants to subscribe for or purchase shares of its
capital stock (or securities convertible into shares of its capital stock)
("Options"), including but not limited to issuances pursuant to Section 1.2
above, other than (i) shares of Class D Stock to be issued to the holders
of the Warrants upon exercise thereof or pursuant to an adjustment provided
for under Section 5 of the Warrant Certificate and Section 5 of the Penalty
Warrant Certificate issued to each of EIT and EAI, (ii) up to 12,492 Common
Shares (subject to antidilution adjustments in the case of
recapitalizations, recombinations or stock splits) issued upon the exercise
of any stock options granted pursuant to present or future employee benefit
plans or the Corporation, (iii) any Common Shares issued to the holders of
the Provident Warrant upon exercise thereof, and (iv) any Common Shares
issuable upon exercise of any Options which have previously been treated as
Additional Capital Stock for purposes hereof, Electra, Heller and
Provident, respectively, shall have the right to purchase, on the same
terms and conditions and at the same time, such shares of Additional
Capital Stock equal to the percentage of Common Shares then owned by
Electra, Heller or Provident, as applicable; treating, for such purposes,
all Warrants and Provident Warrants as if they had been exercised.
(b) The Corporation shall at least 30 days prior to the consummation
of any issuance or sale for the price per share described in subparagraph
(a) above, deliver notice of such sale or issuance to Electra, Heller and
Provident, which notice shall state the terms and conditions of the
proposed sale or issuance and that such holders shall have the right to
purchase shares of the Additional Capital Stock as provided in subparagraph
(a) above. Electra, Heller and Provident shall have the option to exercise
their respective preemptive rights no later than 15 days prior to the
proposed date of the consummation of such issuance or sale, which exercise
shall be consummated contemporaneously with such issuance or sale. If any
or all of Electra, Provident and/or Heller exercises its preemptive rights
in accordance with this subparagraph (b) and, with respect to Electra,
subparagraph (c) below, the Corporation shall then be entitled to sell or
issue to third parties the balance of the securities initially offered. The
Corporation shall then be entitled for a period of 90 days thereafter to
sell or issue to third parties any or all of the securities initially
offered which were not purchased by Heller, Electra or Provident pursuant
to this Section 1.3 on the terms and conditions and at the price originally
offered.
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(c) For the purposes of this Section 1.3, EIT and EAI shall have the
right to exercise this preemptive right on a pari passu basis or on such
other basis as they shall mutually determine. If EIT or EAI does not
exercise its preemptive rights hereunder (the "Non-Participating Holder"),
the Non-Participating Holder shall offer such shares of Additional Capital
Stock to which it would otherwise be entitled to acquire hereunder (the
"Remaining Shares") to whichever of EIT and EAI has exercised such rights
(the "Exercising Holder"), and the Exercising Holder shall then be
permitted, in accordance with the terms of this Section 1.3, to purchase
the Remaining Shares in addition to the shares of Additional Capital Stock
it would otherwise be entitled to acquire hereunder.
1.4. Stock Option Plan. Within thirty (30) days from the date hereof,
the Stockholders shall vote their Shares or Voting Stock to approve a stock
option plan (the "Plan" to be offered to the executive management of the
Corporation and shall reserve not less than 12,215 shares of Class E Non-voting
Stock for issuance upon the exercise of such options, (subject to antidilution
adjustments in the case of recapitalizations, recombinations or stock splits).
All such stock options to be issued pursuant to the Plan shall be issued
pursuant to stock option agreements in a form acceptable to the Board; provided,
that each such agreement shall require that as a condition to the exercise of
any stock options by any person (an "Option Holder"), such Option Holder must
execute and deliver a Restricted Stock Agreement, in a form approved by the
Corporation, Heller and Electra, evidencing their agreement to be bound by the
terms of this Agreement and providing for certain repurchase rights on behalf of
the Corporation upon termination of such person's employment with the
Corporation under the circumstances specified therein (the "Restricted Stock
Agreement").
ARTICLE II
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2.1. Applicable Definitions. For purposes of this Article II of this
Agreement, the following definitions shall be applicable:
(a) "Cash Inflows" shall equal the sum of all payments of dividends
on the shares of Series C Preferred made to Electra as a holder of the
shares of Series C Preferred, all payments in respect of the redemption of
the shares of Series C Preferred made to Electra as a holder of the shares
of Series C Preferred, and all cash proceeds received by Electra from any
disposition of Covered Securities prior to or at any proposed date of sale
pursuant to an offer under subsection 2.4(c) (net of all selling expenses,
brokerage commissions and other expenses incurred in such sale), but shall
not include the value of any Penalty Warrants issued by the Company to
Electra.
(b) "Cash Outflows" shall mean $5,000,000 (representing the amount
invested by Electra under the Securities Purchase Agreement).
(c) "Cause" with respect to Larson, shall have the meaning set forth
in the Larson Employment Agreement, and with respect to Dowdell shall have
the meaning set forth in the Dowdell Consulting Agreement, respectively.
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(d) "Covered Securities" shall consist of the shares of Series C
Preferred and the Warrants originally issued to Electra under the
Securities Purchase Agreement, any Warrant Shares, and any shares received
in a stock split or similar transaction with respect to the Warrant Shares.
(e) "Disability" shall have the meaning set forth in the Larson
Employment Agreement.
(f) "Dowdell Consulting Agreement" means the Consulting and Non-
Competition Agreement dated January 31, 1994 between the Corporation and
Robert E. Dowdell, as amended on July 31, 1995.
(g) "Fair Market Value" shall mean the fair market value of any
Common Shares as agreed upon by the Corporation and Dowdell or Larson, as
applicable or their respective estates within ten (10) days of the
Corporation's receipt of notice of a Dowdell Termination Event or a Larson
Termination Event pursuant to Section 2.2 hereof; provided, that if such
parties fail to agree upon the fair market value of such Shares within such
ten (10) day period, the Fair Market Value shall be determined as follows:
(i) The Corporation and Dowdell or Larson, as applicable, or
their respective estates, shall each select an independent and
reputable investment banking firm or business appraiser (an
"Appraiser") within five (5) days after the end of such ten (10) day
period. If either party fails to specify an Appraiser, the
determination of the Appraiser properly selected by the other party
shall be binding on the parties hereto.
(ii) The two (2) Appraisers shall have thirty (30) days to
complete their respective appraisals and submit a written
determination of Fair Market Value to the Corporation. If the lower of
the two appraisals is at least ninety percent (90%) of the higher
appraisal, then the Fair Market Value shall be the average of such
appraisals.
(iii) If the lower of the two appraisals is less than ninety
percent (90%) of the higher appraisal, then the two Appraisers shall,
within five (5) days after the submission of the last appraisal to the
Corporation, jointly specify a third Appraiser. Within fifteen (15)
days after its selection, the third Appraiser shall complete an
appraisal and submit a written determination of Fair Market Value to
the Corporation. The median of such three appraisals shall be the Fair
Market Value
The determination of the Appraisers as set forth above shall be final and
binding on all parties thereto. The Corporation shall pay the fees and
expenses of the Appraisers. In making any determination of Fair Market
Value, (i) it shall be assumed that all outstanding stock options, warrants
or similar rights to acquire capital stock issued by
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the Corporation which are then exercisable or which will become exercisable
within twelve (12) months from the date of such determination have been
fully exercised, (ii) any discount which might otherwise be taken for the
fact that the Common Shares represent a minority position on the
Corporation shall be excluded, and (iii) the value of the Common Shares
shall be appropriately discounted to reflect the lack of a public market
for such Common Shares by a percentage reasonably determined.
(h) "Family Member(s)" shall mean the husband, wife, child (whether
natural or adopted), grandchild, parent or brother or sister of an
individual, or a trust (or custodial arrangement), all of the primary
beneficiaries of which are such related individuals, or a corporation, all
of the primary stockholders of which are such individual and such related
individuals; provided, that with respect to all intervivos transfers to
Family Members, the Stockholder shall retain the sole right to vote such
Shares.
(i) "Good Reason" shall have the meaning set forth in the Larson
Employment Agreement.
(j) "IRR" shall mean an internal rate of return (compounded annually)
which, when used to calculate the net present value as of July ___, 1995 of
all Cash Inflows and Cash Outflows, causes such net amount to equal zero.
For purposes of the net present value computation, each Cash Inflow and
each Cash Outflow specified above shall be deemed to have been received or
made on the first day of the month nearest to the actual date of such
payment.
(k) "Larson Employment Agreement" means the Employment and Non-
Competition Agreement dated January 31, 1994 between the Corporation and
John M. Larson, as amended on July 31, 1995.
(l) "Liquidation Value" shall have the meaning set forth in the
Certificate.
(m) "Permitted Transferee" shall have the meaning set forth in
Section 2.6 of this Agreement.
(n) The expression, "sell, transfer or dispose," (and other forms of
such words) as used herein, shall include a sale, transfer or any other act
whereby a Stockholder's rights or ownership are disposed of or in any way
impaired or affected, except as otherwise stated herein, provided, that it
is understood and agreed that no pledge, hypothecation or other encumbrance
of the Shares is permitted hereunder.
2.2. Redemption Upon Termination, Disability or Death of Larson or
Dowdell.
(a) Termination of Larson. Upon the death or Disability of Larson or
the termination of his employment with the Corporation (a "Larson
Termination Event"),
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the Corporation shall have the option for a period of ninety (90) days
after the occurrence of such event to purchase any or all Shares held by
Larson or his estate (including any Shares held by any Family Members on
the date of such repurchase) at a purchase price per Share equal to the
Fair Market Value of such Common Shares and the Liquidation Value of such
Preferred Shares; provided, that if his employment is terminated pursuant
to Section 3.3 or 3.4 of the Larson Employment Agreement, as the result of
the Corporation's refusal to renew the Larson Employment Agreement, or as
the result of Larson's refusal to renew the Larson Employment Agreement for
Good Reason, the Larson Termination Event shall not be deemed to occur
until the expiration of the Non-Competition Period, as defined in the
Larson Employment Agreement. Notwithstanding anything in the foregoing to
the contrary, if such Larson Termination Event results from a termination
of Larson's employment for Cause or if a material violation of any
provision of Section 5 of the Larson Employment Agreement occurs after the
termination of Larson's employment with the Corporation (a "Larson Covenant
Breach"), the purchase price per Share for each Common Share owned by
Larson, his estate or his Family Members shall be equal to the lowest of
the Fair Market Value of such Common Shares and the original purchase price
for such Common Shares as purchased by Larson; and the purchase price per
Share for each Preferred Share owned by Larson, his estate or his Family
Members shall be equal to the lesser of the Liquidation Value of such
Preferred Shares and the Fair Market Value of such Preferred Shares. In the
event the Corporation fails to purchase all of the Shares held by Larson
hereunder in accordance with the previous sentences, Heller and Electra and
each of their respective successors, assigns and Permitted Transferees
shall have the option for an additional period of thirty (30) days to
purchase on a pro rata basis (treating, for such purposes, all Warrants as
if they had been exercised) any and all remaining Shares not purchased by
the Corporation on the same terms and conditions applicable to the
Corporation. Any purchases by Electra shall be allocated among EIT and EAI
on a pro rata basis or on such other basis as they may mutually determine.
To the extent that Heller or Electra does not purchase such number of
Shares to which it would otherwise be entitled (the "Non-Participating
Holder"), the Non-Participating Holder shall offer such shares to which it
would otherwise be entitled to acquire hereunder (the "Remaining Shares")
to the other (the "Exercising Holder"), and the Exercising Holder shall
then be permitted to purchase the Remaining Shares in addition to the
Shares it would otherwise be entitled to acquire hereunder. The closing of
all purchases made hereunder shall be on or prior to the later of one
hundred eighty (180) days after Larson receives written notification of the
applicable Larson Termination Event or Larson Covenant Breach and sixty
(60) days after the completion of any determination of Fair Market Value
with respect to any Common Shares (the "Sale Date"). The purchase price for
all Shares purchased shall be, at the sole discretion of the purchaser,
either (i) made in immediately available funds or (ii) evidenced by a five
(5) year promissory note of the purchaser, secured by a pledge of the
Shares so purchased, bearing interest at the rate of two hundred (200)
basis points above the then applicable five (5)-year treasury note rate,
per annum payable semiannually and with principal
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payments to be made in three equal annual installments beginning on the
third anniversary of the issuance of the note (the "Deferred Payment
Note").
(b) Termination of Dowdell. Upon the death of Dowdell or Dowdell's
voluntary resignation as, or refusal to continue to serve as, a consultant
and Director of the Corporation (a "Dowdell Termination Event"), the
Corporation shall have the option for a period of ninety (90) days after
the occurrence of such Dowdell Termination Event to purchase any or all
Shares held by Dowdell or his estate (including any Shares held by any
Family Members on the date of such repurchase) at a purchase price per
Share equal to the Fair Market Value of such Common Shares and the
Liquidation Value of such Preferred Shares. Upon the termination of the
Dowdell Consulting Agreement for Cause or a material violation by Dowdell
of any provision of Section 5 of the Dowdell Consulting Agreement (a
"Dowdell Covenant Breach"), the purchase price per Share for each Common
Share owned by Dowdell, his estate or his Family Members shall be equal to
the lesser of the Fair Market Value of such Common Shares and the original
purchase price for such Common Shares as purchased by Dowdell; and the
purchase price per share for each Preferred Share owned by Dowdell, his
estate or his Family Members, shall be equal to the lesser of the
Liquidation Value of such Preferred Shares and the Fair Market Value of
such Preferred Shares. In the event the Corporation fails to purchase all
of the Shares held by Dowdell hereunder in accordance with the previous
sentence, Heller and Electra and each of their respective successors,
assigns and Permitted Transferees shall have the option for an additional
period of thirty (30) days to purchase on a pro rata basis (treating, for
such purposes, all Warrants as if they had been exercised, adjusted to
reflect the Earned Amount as if fixed and finally determined as of such
date), any and all remaining Shares not purchased by the Corporation or the
same terms and conditions applicable to the Corporation. Any purchases by
Electra shall be allocated among EIT and EAI on a pro rata basis or on such
other basis as they may mutually determine. To the extent that Heller or
Electra does not purchase such number of Shares to which it would otherwise
be entitled, such Non-Participating Holder shall offer the Remaining Shares
to the Exercising Holder, and the Exercising Holder shall then be permitted
to purchase the Remaining Shares in addition to the Shares it would
otherwise be entitled to acquire hereunder. The closing of all purchases
made hereunder shall be no later than the Sale Date (as defined in Section
2.2(a)) and the purchase price for all Shares purchased shall be, at the
sole discretion of the purchase, either (i) made in immediately available
funds or (ii) evidenced by the Deferred Payment Note (as defined in Section
2.2(a)).
(c) Application to Earn-Up Shares. For purposes of this Section 2.2
and not by way of limitation, all Common Shares acquired by Larson or
Dowdell as described in Section 2.6(b) hereof shall be included within the
Shares held by Larson and Dowdell, as applicable.
2.3. Restrictions on Sale of Shares by Dowdell; Rights of First
Refusal. Dowdell, or any of his successors or permitted assigns, shall be
permitted to sell, transfer or
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dispose of Shares to any person in a transaction (not otherwise permitted by
Section 2.6 below) solely in compliance with this Section 2.3. If Dowdell, or
any of his successors or permitted assigns, shall desire at any time to sell,
transfer or otherwise dispose of all or any part of the Shares held by him, then
the Corporation and each of Heller, Electra and their respective successors,
permitted assigns and any Permitted Transferees of Heller and Electra
(collectively, the "Eligible Stockholders") shall have the first right to
purchase on a pro rata basis (treating, for such purposes, all Warrants as if
they had been exercised), such Shares for the price and in the manner
hereinbelow provided. Any purchases by Electra shall be allocated among EIT and
EAI on a pro rata basis or on such other basis as they may mutually determine.
In the event that Dowdell, or any of his successors or permitted assigns,
("Offeror"), shall receive and intend to accept a bona fide written offer from a
non-affiliated third party with a good business reputation for financial
integrity, who is not directly or indirectly engaged in activities which are
competitive with the Corporation's and its subsidiaries' operations and who is
reasonably acceptable to the Board as a new Stockholder (a "Purchaser") for the
sale, transfer or other disposition of all or any portion of his Shares (the
"Offered Shares"), he shall not sell, transfer or dispose of said Shares without
first giving the Corporation and each of the Eligible Stockholders a written
notice ("Offer") of the offer to purchase or acquire such Offered Shares, which
notice shall fully disclose all material terms of the proposed transaction,
including, but not limited to, the name of the proposed Purchaser, the purchase
price and terms of sale and any information as to the ability of the Purchaser
to perform such offer that the Offeror then possesses (collectively, the
"Offered Terms"). No proposed offer will be deemed to be an Offer for purposes
hereof, and accordingly, no sale of the Offered Shares may be made to a
Purchaser, if such offer or sale would give rise to a default or breach, or
accelerate any payments due, under any contract, lease, loan or other agreement
to which the Corporation is a party, irrespective of the exercise of the options
described in this Section 2.3.
(a) Purchase by the Corporation. For a period (the "Corporation
Option Period") of thirty (30) days after the delivery of the Offer, the
Corporation shall have the sole and exclusive right to purchase all or any
portion of the Offered Shares specified in the Offer upon the Offered
Terms. The Corporation may elect by written notice to the Stockholders to
waive its right of first refusal. Immediately upon the expiration of the
Corporation Option Period, or upon the waiver of such right, the
Corporation shall give to each of the Eligible Stockholders written notice
stating the Offered Terms for the Offered Shares specified in the Offer and
the number and amount of Offered Shares, if any, for which the Corporation
has not exercised its option under this subsection (a). To the extent
practicable, the Corporation shall not purchase fewer Shares than the
number of Shares, that when aggregated with all other concurrent sales by
the Offeror, is necessary to prevent such purchase by the Corporation from
being deemed to be a dividend pursuant to Section 302 of the Internal
Revenue Code of 1986, as amended.
(b) Purchase by Eligible Stockholders.
---------------------------------
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(i) If within the Corporation Option Period the Corporation does
not exercise the option provided in subsection (a) above for all of
the Offered Shares or waives such option as to any portion of the
Offered Shares, then for a period (the "Initial Option Period") of
fifteen (15) days commencing upon expiration of the Corporation Option
Period, each Eligible Stockholder shall have the option to purchase on
the Offered Terms its pro rata share (treating, for such purposes, all
Warrants as if they had been exercised) of the Offered Shares that the
Corporation did not elect to purchase.
(ii) In the event that any Eligible Stockholder fails to exercise
in full its option to purchase its pro rata share of the Offered
Shares within the Initial Option Period, the Corporation shall give to
each Eligible Stockholder who has exercised such rights in full
written notice of such failure within five (5) days after expiration
of the Initial Option Period stating the number and amount of Offered
Shares (the "Remaining Shares") which have not been accepted for
purchase under subsection (b)(i) above. Each such Eligible Stockholder
shall have an additional period of three (3) business days (the "Final
Option Period") from the date of giving of such notice in which to
exercise its option to purchase all or a specified portion of the
Remaining Shares at the Offered Terms. In the event that Eligible
Stockholders give notices under this subsection (b)(ii) for the
purchase of an aggregate quantity of Shares in excess of the Remaining
Shares available for purchase, then the Remaining Shares shall be
allocated pro rata among the Eligible Stockholders giving such notice
on the basis of their relative percentage ownership of Shares,
provided, that if any Eligible Stockholder has requested to purchase
less than its pro rata share of the Remaining Shares, then any
Remaining Shares which remain unallocated as a result of such
proration shall be allocated among the Eligible Stockholders desiring
to purchase more than their pro rata share in proportion to the number
of Shares specified in their respective notices until, to the extent
possible, the options on all of the Remaining Shares are exercised.
(c) Sale to Purchaser. After the expiration of the Corporation
Option Period, the Initial Option Period and the Final Option Period, if
the Corporation and Eligible Stockholders have not exercised their
respective options to purchase all of the Offered Shares, then within a
period ending sixty (60) days after the expiration of the Final Option
Period, the Offeror may sell or otherwise dispose of all of the Offered
Shares, but only in strict accordance with the Offered Terms.
(d) Exercise of Option. Any option granted under this Section 2.3
may be exercised by notice in writing to the Offeror and to the Corporation
stating that such
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<PAGE>
option is exercised, and also stating the specific number of Shares to
which the exercise is applicable.
(e) Delivery of Shares. In the event that the options under this
Section 2.3 are exercised as to all of the Offered Shares, delivery of the
certificate or certificates evidencing the Offered Shares involved,
properly endorsed, shall be made by the Offeror against payment therefor
within thirty (30) days after the expiration of the Final Option Period, or
after the last date on which any of such options to purchase such Offered
Shares have been exercised, at the principal office of the Corporation,
unless a different time or place is agreed upon by the parties to such
transaction, and the purchase price with respect to such option shall be
paid in accordance with the Offered Terms.
(f) Transfer of Option. Notwithstanding anything hereinabove to the
contrary, the Eligible Stockholders may, at any time, elect to transfer all
or a portion of their option rights to any Permitted Transferee in
accordance with Section 2.6.
(g) Reinstatement. Any Shares purchased pursuant to this Section 2.3
shall remain subject to this Agreement. If all the Offered Shares are not
sold either pursuant to the Offer or the options granted hereunder within
sixty (60) days after the Final Option Period, the provisions of this
Section 2.3 shall remain in full force as to subsequent offers and sales
for the Offered Shares. During such sixty (60)-day period, the Offeror
shall be permitted to transfer the Offered Shares only pursuant to the
Offered Terms or the options granted hereunder. Any such Purchaser of said
Shares shall hold same subject to the terms and provisions of this
Agreement, including, without limitation, the foregoing rights of first
refusal. At the closing of any sale of the Offered Shares to the Purchaser,
the Purchaser shall execute such document as the Corporation and Heller
shall reasonably request agreeing to be bound by the terms of this
Agreement.
2.4. Co-Sale.
-------
(a) (i) In the event that Heller shall have received and intends
to accept an offer from a Purchaser to purchase more than fifty
percent (50%) of the Common Shares owned by Heller and its successors
and permitted assigns at the time of such offer, Heller shall provide
to all Stockholders a notice containing the information described in
Section 2.3 (the "Heller Notice"), and, any other Stockholder or
Provident holding Common Shares or Rights (a "Holder") may elect to
participate in the contemplated transfer to the Purchaser by
delivering written notice to Heller within thirty (30) days after
receipt by said Holder (the "Co-Sale Election Period"). If any such
Holder elects to participate in the contemplated transfer (a
"Participating Holder"), Heller and each Participating Holder shall be
entitled to participate in the contemplated
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<PAGE>
transfer pro rata based on the relative ownership of Common Shares
(treating, for such purposes, all Warrants as if they had been
exercised) among Heller and all Participating Holders. The purchase by
the Purchaser of the Common Shares of Participating Holders and Heller
shall be upon the terms set forth in the Heller Notice. If Electra
and/or Provident elects to participate in any sale pursuant to this
Section 2.4, Electra shall, to the extent required by the Purchaser
thereof, exercise the Warrants or Provident Warrants, as applicable,
for sufficient number of Warrant Shares or Provident Shares, as
applicable to participate in such sale.
(ii) In the event that Heller shall have received and intends to
accept an offer from a Purchaser to purchase any of the Common Shares
up to fifty (50%) percent of such Common Shares (for a purchase
greater than fifty (50%) percent, clause (i) above shall apply), owned
by Heller and its successors and permitted assigns at the time of the
offer, Heller shall provide to Electra and Provident the Heller Notice
and Electra or Provident may elect to participate in the contemplated
transfer to the Purchaser by delivering written notice to Heller
within the Co-Sale Election Period. If either Electra or Provident
elects to participate in the contemplated transfer (hereinafter, for
purposes of subsection 2.6(b) below, Electra and/or Provident, as
applicable, shall be considered a "Participating Holder"), Electra
and/or Provident, as applicable, shall be entitled to participate in
the contemplated transfer pro rata (treating, for such purposes, all
Warrants and Provident Warrants, as applicable, as if they had been
exercised) with Heller. The purchase by the Purchaser of the Warrant
Shares of Electra, the Provident Shares of Provident and the Common
Shares of Heller shall be upon the terms set forth in the Heller
Notice. If Electra and/or Provident elects to participate in any sale
pursuant to this Section 2.4, Electra and/or Provident shall, to the
extent required by the Purchaser thereof, exercise the Warrants or
Provident Warrants, as applicable, for sufficient number of Warrant
Shares or Provident Shares, as applicable, to participate in such
sale.
(b) Heller shall use its best efforts to obtain the agreement of the
Purchaser to the inclusion of the Common Shares owned by the Participating
Holders in lieu of a portion of Heller's Common Shares in the proposed
sale; provided, that if the Purchaser declines to allow the participation
of the Participating Holders in such sale, Heller may proceed with such
transfer of Common Shares; provided, that Heller offers to purchase Shares
from such Participating Holders on the same terms and in the same
proportions as would have been applicable if such Shares were sold to the
Purchaser.
(c) Notwithstanding the terms of Section 2.3 or subsection 2.4(a), if
the terms of any bona fide offer are such that an offer by any non-
affiliated third party (i) is
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made to all holders of outstanding Common Shares and Rights for all of
their Common Shares and Rights and makes provision for the purchase or
redemption of all Preferred Shares outstanding and Heller elects to sell
all of the Common Shares owned by it; (ii) provides for the purchase of all
or substantially all of the assets of the Corporation; or (iii)
contemplates the merger of the Corporation with and into any other
corporation in which the Holders would receive cash and/or securities of
such other corporation; provided, however, that with respect to any actions
contemplated by clauses (i), (ii) or (iii), such actions would result in
Electra realizing on a cumulative basis an IRR of at least twenty percent
(20%) to the date of the proposed closing date of such offer (in addition
to the consideration to be received by Electra in such transaction with
respect to securities of the Corporation it may own other than the Shares
of Series C Preferred Stock and the Warrants issued under the Securities
Purchase Agreement), then if the holders of a majority of the outstanding
Common Shares (voting as a single class) desire to accept such offer, all
of the Holders shall be deemed by virtue of their being parties to this
Agreement to have (x) accepted such offer and they shall sell the Common
Shares (and, to the extent applicable, Preferred Shares or Rights) held by
them to the Purchaser making such offer on the terms contained in such
offer and (y) agreed to vote all Shares held by them, regardless of class
or series, to approve such transactions and to take all other actions
necessary to permit the consummation of such transactions.
2.5. Involuntary Transfers by Bankrupt Stockholders. In the event
that the Shares of any Stockholder shall be attached or taken in execution, or
in the event a Stockholder shall be adjudicated a bankrupt or makes an
assignment for the benefit of creditors or its Shares are taken by reason of
garnishment or other charging order (hereinafter for convenience called a
"Bankrupt Stockholder"), then the successors in interest to the Bankrupt
Stockholder shall succeed to all of the rights of the Bankrupt Stockholder
hereunder and shall be bound by all of the obligations of and restrictions upon
a Stockholder under this Agreement, including, without limitation, the rights of
first refusal of the Corporation and the Eligible Stockholders under Section
2.3, provided, however, if any such execution, assignment or involuntary
adjudication of bankruptcy or charging order is not vacated, reversed or
otherwise revoked within thirty (30) days after such action is taken, then the
Corporation and the other Stockholders shall have the successive options to
purchase all of the Shares of the Bankrupt Stockholder in the same manner and
within the same time period (measured from thirty (30) days and after written
notice of any such involuntary transfer is received by the Corporation and the
other Stockholders) as provided above in Section 2.3, except (a) the purchase
price for the Common Shares of the Bankrupt Stockholder shall be equal to the
Fair Market Value of such Common Shares and the purchase price for the Preferred
Shares owned by the Bankrupt Stockholder shall be equal to the Liquidation Value
of such Preferred Shares, and (b) the purchase price shall be payable, subject
to Section 2.8, by a Deferred Payment Note; provided that such note shall bear
interest at the applicable federal rate as determined by the Internal Revenue
Service pursuant to the Internal Revenue Code of 1986, as amended, for notes of
similar duration at the date of purchase.
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<PAGE>
2.6. Permitted Transfers. A Holder may not sell, transfer or
dispose of any Shares or Rights except as expressly permitted by this Article
II; provided, that nothing herein shall prevent any Shares from being sold,
transferred or otherwise disposed of to the following persons or entities
("Permitted Transferees"):
(a) In the case of any individual Holder, to any Family Member
thereof whether pursuant to an intervivos gift or pursuant to the laws of
descent or to any corporation, partnership, trust or other entity which is
owned solely by such individual Holder and his Family Members; and
distribution or in the case of Heller and Electra, to any officer, director
or stockholder thereof, any "associate of a licensee," as defined in 13 CFR
107.3, or any entity controlled by, controlling or under common control
with Heller, Provident or Electra; provided, that said donee or transferee
executes and delivers to the Corporation for the benefit of the Corporation
and the other Stockholders, concurrently with the acceptance of such gift
or transfer, a written instrument, signifying his, her or its consent to be
bound by the terms of this Agreement and any amendments hereto and to the
assumption of all of the terms and provisions of this Agreement and any
amendments hereto and provided further, that, if required by the
Corporation, such transferor provides the Corporation with an opinion of
securities counsel acceptable to the Corporation that such transfer is
exempt from registration under the Securities Act of 1933, as amended, and
applicable state securities laws;
(b) By Heller, Electra or Provident to Dowdell or Larson;
(c) In the case of the Shares or Rights held by Heller or Provident
to any person if such transfer is ordered or required by any governmental
body or agency with jurisdiction over Heller or Provident, as applicable,
or their respective corporate affiliates or determined by Heller or
Provident, as applicable, to be necessary in order to comply with any laws
or regulations applicable to it or its corporate affiliates;
(d) In the case of the Shares or Rights held by Electra, to Electra
Fleming Equity Partners or any Affiliate (as defined in the Securities
Purchase Agreement) of Electra;
(e) In the case of the Provident Warrant, to any assignee of all of
Provident's rights pursuant to the Credit Agreement, dated July 31, 1995,
between Provident and the Corporation to the extent permitted thereby; and
(f) In the case of Shares or Rights held by Heller, Electra or
Provident, to any person if such transfer does not result in a violation of
Section 2.4(a), in the case of Electra, Section 2.9(b) or, in the case of
Provident, Section 2.10(b).
2.7. Assumption by Successors. It is expressly agreed that any
Person which shall acquire, consistent with Article II, all or any part of the
Shares or Rights in an arm's length transaction and for value or by reason of
any permitted transfer or successorship (and including the transferee of a
Bankrupt Stockholder for the purposes hereof) shall succeed to all of the
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rights (except as otherwise hereinabove provided) and shall be bound by all of
the obligations of and restrictions upon the transferring Holder under this
Agreement. Contemporaneously with any such transfer or succession, the
transferee or successor shall expressly assume in writing, all of the
obligations of a Holder under this Agreement and shall execute and deliver to
the Corporation for the benefit of the Corporation and the other Holders such
document as the Corporation and Heller shall reasonably request agreeing to be
bound by the terms of this Agreement.
2.8. Limitation on Purchases by the Corporation. Notwithstanding any
other provision of this Agreement, the Corporation shall not have the right or
the obligation to purchase any Shares except out of funds legally available
therefor. If, at the time the Corporation desires to purchase Shares pursuant to
this Agreement, its surplus is legally insufficient for that purpose, then,
subject to compliance with applicable contractual obligations or restrictions,
if any, the Corporation may borrow the funds necessary to complete the purchase
and/or the entire available surplus of the Corporation may be applied to the
purchase and the Corporation and the Stockholders agree promptly to take all
such action as may be permitted by law and applicable contractual obligations or
restrictions, if any, to arrange for such borrowing and/or to reduce the capital
of the Corporation or to revalue its assets so as to increase its surplus to the
extent necessary to permit the Corporation to purchase all of the Shares it
desires to purchase.
2.9. Right of First Offer-Electra.
----------------------------
(a) If Electra desires to sell or otherwise transfer (except to
Permitted Transferees under Section 2.6(a), (b) and (d) hereof) (the
"Proposed Disposition") any of its shares of Series C Preferred, its Rights
or any of its Warrant Shares or any other shares of the Corporation's
capital stock which Electra may acquire from time to time (the "Disposition
Securities"), whether or not to a then-identified third party (the "Electra
Purchaser"), Electra shall notify Heller and the Corporation of such desire
(the "Disposition Notice"). Electra agrees that for a period of thirty (30)
days from delivery of the Disposition Notice (the "Discussion Period") to
Heller that it will engage in good faith negotiations with Heller
concerning the terms of such Proposed Disposition. If Electra and Heller
are unable to reach a mutually satisfactory arrangement with respect to the
Disposition Securities, Electra shall then be free for a period of six (6)
months thereafter to so proceed with the Proposed Disposition regardless of
the terms thereof and without the need to re-offer the Disposition
Securities to Heller. If Electra does not conclude such a sale within such
six (6) month period, then Electra shall be required to comply with this
Section 2.9. Notwithstanding the foregoing, if Electra receives an
unsolicited bona fide written offer during the Discussion Period to
purchase part or all of its Securities, it shall not be required to comply
with this Section 2.9 except for subparagraph (b) below and shall be
permitted to effect the Proposed Disposition unless prohibited pursuant to
said subparagraph (b).
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<PAGE>
(b) Electra shall not complete the Proposed Disposition (unless the
Proposed Disposition is to a Permittee Transferee under Section 2.6(a), (b)
and (d) hereof in which case this subparagraph (b) shall not apply) if the
Corporation, by a good faith determination of the Board of Directors of the
Corporation, notifies Electra in writing, within ten (10) days of the later
of receipt of the Disposition Notice and receipt of written notice
disclosing the identity of the Electra Purchaser that the Electra Purchaser
is or is an Affiliate (as defined in the Securities Purchase Agreement) of
a competitor of the Corporation or that, based upon a legal opinion of
counsel to the Corporation with respect to federal and/or state educational
regulatory affairs delivered to the Company and Electra, the consummation
of the Proposed Disposition to the particular Electra Purchaser will have a
materially adverse impact on the ability of the Corporation or any of its
Subsidiaries to remain eligible for Title IV funding or the maintenance of
accreditation by Corporation or any of its Subsidiaries with any
Accrediting Body (as defined on the Securities Purchase Agreement);
provided, that notwithstanding the foregoing, Electra shall not complete a
proposed disposition of the Series C Preferred without the consent of the
Corporation, which consent shall not be unreasonably withheld.
(c) The provisions of this Section 2.9 shall not apply from and after
the occurrence of a Preferred Stock Failure Event, or, once the shares of
Series C Preferred Stock are no longer outstanding, any material breach of
any term or provision contained in the Securities Purchase Agreement which
survives pursuant to the terms thereof.
2.10. Right of First Offer-Provident.
------------------------------
(a) If Provident desires to sell or otherwise transfer (except to
Permitted Transferees under Section 2.6(a), (b) and (c) hereof) (the
"Proposed Disposition") any of its Provident Shares, its Rights or any
other shares of the Corporation's capital stock which Provident may acquire
from time to time (the "Disposition Securities"), whether or not to a then-
identified third party (the "Provident Purchaser"), Provident shall notify
Heller, Electra and the Corporation of such desire (the "Disposition
Notice"). Provident agrees that for a period of thirty (30) days from
delivery of the Disposition Notice (the "Discussion Period") to Heller that
it will engage in good faith negotiations with Heller and Electra
concerning the terms of such Proposed Disposition. If Provident, Heller
and/or Electra are unable to reach a mutually satisfactory arrangement with
respect to the Disposition Securities, Provident shall then be free for a
period of six (6) months thereafter to so proceed with the Proposed
Disposition regardless of the terms thereof and without the need to re-
offer the Disposition Securities to Heller. If Provident does not conclude
such a sale within such six (6) month period, then Provident shall be
required to comply with this Section 2.10. Notwithstanding the foregoing,
if Provident receives an unsolicited bona fide written offer during the
Discussion Period to purchase part or all of its Securities, it shall not
be required to comply with this Section 2.10 except for subparagraph (b)
below and shall be permitted to effect the Proposed Disposition unless
prohibited pursuant to said subparagraph (b).
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Heller and Electra agree that in the event either enters into an agreement
to purchase the Disposition Securities, such party shall notify the other
of such agreement and offer to such other party the opportunity to
participate in such purchase. If both Heller and Electra desire to
participate in a purchase of the Disposition Securities they shall do so on
a pro rata basis based upon their respective ownership of the Common Shares
on a fully diluted basis.
(b) Provident shall not complete the Proposed Disposition (unless the
Proposed Disposition is to a Permittee Transferee under Section 2.6(a) and
(b) hereof in which case this subparagraph (b) shall not apply) if the
Corporation, by a good faith determination of the Board of Directors of the
Corporation, notifies Provident in writing, within ten (10) days of the
later of receipt of the Disposition Notice and receipt of written notice
disclosing the identity of the Provident Purchaser that the Provident
Purchaser is or is an Affiliate (as defined in the Securities Purchase
Agreement) of a competitor of the Corporation or that, based upon a legal
opinion of counsel to the Corporation with respect to federal and/or state
educational regulatory affairs delivered to the Company and Provident, the
consummation of the Proposed Disposition to the particular Provident
Purchaser will have a materially adverse impact on the ability of the
Corporation or any of its Subsidiaries to remain eligible for Title IV
funding or the maintenance of accreditation by Corporation or any of its
Subsidiaries with any Accrediting Body (as defined on the Securities
Purchase Agreement).
2.11. Potential PTP Action. In the event of the commencement of any
Potential PTP Action (as defined in the Dowdell Consulting Agreement), the
Corporation shall have the right, exercisable by written notice given to
Dowdell, to require that Dowdell's rights to take any of the following action
shall be temporarily suspended, (a) the right to attend any meetings of the
Board or otherwise participate or act as a Director, (b) the right to vote his
Shares or otherwise participate in any meetings of the Stockholders, (c) the
right to make any sale, transfer or disposition of his Shares or Rights or
purchase any additional Shares or Rights, whether pursuant to options or
otherwise, and (d) any other right to participate in any manner in the
management, operations or finances of the Corporation.
ARTICLE III
-----------
3.1. Certain Affiliated Transactions. Subject to approval by the
Board of Directors and the provisions of the Securities Purchase Agreement, each
of the Stockholders hereby acknowledges that Heller and certain of its
affiliates (collectively, the "Heller Entities") are authorized and may from
time to time charge the Corporation and its subsidiaries certain fees and
require the reimbursement of certain expenses relating to (a) the consummation
of the acquisition of certain subsidiaries and operations of the Corporation and
(b) ongoing consulting, advisory or related services provided by the Heller
Entities.
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ARTICLE IV
----------
4.1. Term of this Agreement. This Agreement shall be effective as of
the date hereof and shall continue in effect until:
(a) a written agreement to terminate is executed by the Corporation
and Stockholders owning in excess of sixty percent (60%) of each class of
the outstanding Common Shares (voting separately as a class);
(b) the substantial permanent cessation of the Corporation's
business;
(c) the dissolution of the Corporation or the entering of an order
against the Corporation for reorganization or liquidation under the United
States Bankruptcy Code, or the assignment of substantially all of its
assets for the benefit of creditors; or
(d) the consummation of an IPO as defined in the Certificate;
provided, however, that Electra shall continue to have the right to designate a
Director of the Corporation and such Director shall continue to have the right
to serve on the Corporation's and each Subsidiary's compensation and audit
committees for so long as Electra owns at least five (5%) percent of the issued
and outstanding Common Shares, or, if earlier, ten (10) years from the date
hereof.
In addition, each holder of Class B Stock, Class C Stock, Class D
Stock and Class E Stock hereby agrees that upon the occurrence of any event
described in subparagraph (d) above, such holder shall convert all shares of
Class B Stock, Class C Stock, Class D Stock and Class E Stock into shares of
Class A Stock in accordance with the terms of the Certificate.
ARTICLE V
---------
5.1. Legend on Share Certificates. All certificates representing the
Shares shall also have imprinted thereon a legend (in addition to or
incorporating any securities law legend) substantially to the following effect:
"The sale, transfer or other disposition or pledge or other encumbrance of
Shares represented by this Certificate is subject to an Amended and
Restated Stockholders' Agreement dated as of July 31, 1995, among Career
Education Corporation, a Delaware corporation (the "Corporation"), and
certain of the Stockholders of the Corporation, including certain options
to purchase or sell the Shares represented by this Certificate. A copy of
said Agreement is on file in the office of the Secretary of the Corporation
and may be reviewed by application thereto. Each holder hereof shall be
bound by all provisions of said Agreement."
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5.2. Amendments. This Agreement may be amended or altered in any of
its provisions by the agreement of the Corporation and Stockholders owning in
excess of sixty percent (60%) of each class of the outstanding Common Shares
(voting separately as a class), and any such amendment or alteration shall
become effective upon its being reduced to writing and executed by said parties;
provided, that such amendment does not adversely affect any Holder not
consenting thereto.
5.3. Notices. Notices, directions, consents and all other
communications required or permitted hereunder shall be in writing and shall be
deemed received and become effective upon personal delivery or by telecopy or
the day after deposit with a reputable overnight courier to the several parties
at the addresses specified below (or to any address which is changed after
similar notice in writing).
Larson: John M. Larson
36 Lakeside Drive
South Barrignton, Illinois 60010
Dowdell: Robert E. Dowdell
1951 Calle Roja
Santa Ana, California 92705
In each case with a copy to: Quinn, Kully & Morrow
520 South Grand Avenue
Los Angeles, California 90071
Attention: Russel Kully, Esq.
Heller: Heller Equity Capital Corporation
500 West Monroe Street
16th Floor
Chicago, Illinois 60661
Attention: Todd H. Steele
with copies to: Heller Equity Capital Corporation
500 West Monroe Street
16th Floor
Chicago, Illinois 60661
Attention: Charles P. Brissman, Esq.
Goldberg, Kohn, Bell, Black,
Rosenbloom & Moritz, Ltd.
55 East Monroe Street
Suite 3700
Chicago, Illinois 60603
Attention: Dennis B. Black, Esq.
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Corporation: Career Education Corporation
2300 N. Barrignton, Suite 400
Hoffman Estates, Illinois 60195
Attention: President
EIT and EAI: Electra Investment Trust P.L.C.
65 Kingsway
London, England WC2B 6QT
Attention: Mr. Philip Dyke
with copies to: Electra, Inc.
70 E. 55th Street
New York, New York 10022
Attention: Ms. Diane M. Smith
Senior Vice President
Provident: The Provident Bank
One East Fourth Street
Cincinnati, Ohio 45202
Attention: Eric L. Jeffries
with copies to: Keating, Muething & Klekamp
1800 Provident Tower
One East Fourth Street
Attention: J. David Rosenberg, Esq.
5.4. General.
(a) Governing Law. This Agreement shall be subject to and governed
by the laws of the State of Delaware.
(b) Superseding Agreement. This Agreement shall supersede, revoke
and nullify all and any agreements bearing prior date by or between the
Corporation and the Stockholders, or any of them, relating to or
restricting the Stockholders on disposition, whether voluntary or
involuntary, of all or any of the Shares. All such agreements, and all
promises, rights, duties and obligations established pursuant thereto are
hereby rendered void.
(c) Counterparts. This Agreement may be executed in several
counterparts (including by way of separate signature pages, which may be
attached hereto) by one or more of the parties, each of which shall be
deemed an original but all of said counterparts (and signature pages) shall
be deemed to constitute or be part of one and the same instrument.
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(d) Severability. Should any particular provisions of this Agreement
be adjudicated to be invalid or unenforceable such provision shall be
deemed deleted and the remainder of the Agreement, nevertheless, remain
unaffected and fully enforceable; further, to the extent any provision
herewith is deemed unenforceable by virtue of its scope but may be made
enforceable by limitation thereof, the parties hereto agree the same shall,
nevertheless, be enforceable to the fullest extent possible under the laws
and public policies applied in the jurisdiction in which enforcement or
interpretation is sought.
(e) Ratification. This Agreement and all of the terms and provisions
hereof shall be affirmed and approved by the Board.
(f) Further Assurances. Upon request of the Corporation or any party
hereto, all parties hereto agree to promptly execute and deliver all such
other instruments and take all such other actions or any party hereto may
reasonably request from time to time in order to effectuate and carry out
the purposes, privileges, restrictions, rights and duties of the parties
and other provisions of this Agreement.
(g) Headings. The headings or other subdivision in this Agreement
are intended solely for convenience of reference and shall be given no
effect in the construction or interpretation of this Agreement.
(h) Specific Performance. Each party's obligations under this
Agreement are unique. The acquisition of Shares by a party entitled to
purchase Shares under this Agreement is a unique prospect for the
purchasing party. If any party should default in any of his or her
obligations under this Agreement, the parties each acknowledge that it
would be impracticable to measure the resulting damages and that it may not
be possible to adequately compensate the injured party by monetary damages.
Accordingly, without prejudice to his right to seek and recover monetary
damages, each non-defaulting party shall be entitled to sue in equity for
specific performance of this Agreement, and each party hereby expressly
waives the defense that a remedy in damages would be adequate. Each party
further acknowledges that any consideration to be paid for Shares by the
Corporation under this Agreement is fair and adequate.
(i) Consent to Jurisdiction and Service of Process. THE CORPORATION
AND EACH OF THE STOCKHOLDERS HEREBY CONSENTS TO THE JURISDICTION OF ANY
STATE OR FEDERAL COURT LOCATED WITHIN THE COUNTY OF COOK, STATE OF ILLINOIS
AND IRREVOCABLY AGREES THAT ALL ACTIONS OR PROCEEDINGS ARISING OUT OF OR
RELATING TO THIS AGREEMENT OR THE OTHER RELATED DOCUMENTS SHALL BE
LITIGATED IN SUCH COURTS. EACH PARTY HERETO ACCEPTS FOR ITSELF AND HIMSELF,
GENERALLY AND UNCONDITIONALLY, THE NONEXCLUSIVE JURISDICTION OF THE
AFORESAID COURTS AND WAIVES ANY DEFENSE OF FORUM NON CONVENIENS, AND
IRREVOCABLY
-25-
<PAGE>
AGREES TO BE BOUND BY ANY JUDGMENT RENDERED THEREBY IN CONNECTION WITH THIS
AGREEMENT. LARSON AND DOWDELL HEREBY DESIGNATE AND APPOINT CT CORPORATION
SYSTEM AND SUCH OTHER PERSONS AS MAY HEREINAFTER BE SELECTED BY THE
CORPORATION WHICH IRREVOCABLY AGREE IN WRITING TO SO SERVE AS AGENT TO
RECEIVE ON SUCH PARTY'S BEHALF SERVICE OF ALL PROCESS IN ANY PROCEEDINGS IN
ANY SUCH COURT, SUCH SERVICE BEING HEREBY ACKNOWLEDGED BY EACH PARTY TO BE
EFFECTIVE AND BINDING SERVICE IN EVERY RESPECT. A COPY OF ANY SUCH PROCESS
SO SERVED SHALL BE MAILED BY REGISTERED MAIL TO EACH PARTY AS PROVIDED
HEREIN, EXCEPT THAT UNLESS OTHERWISE PROVIDED BY APPLICABLE LAW, ANY
FAILURE TO MAIL SUCH COPY SHALL NOT AFFECT THE VALIDITY OF SERVICE OF
PROCESS. IF ANY AGENT APPOINTED BY A PARTY REFUSES TO ACCEPT SERVICE, SUCH
PARTY HEREBY AGREES THAT SERVICE UPON IT BY MAIL SHALL CONSTITUTE
SUFFICIENT NOTICE. NOTHING HEREIN SHALL AFFECT THE RIGHT TO SERVE PROCESS
IN ANY OTHER MANNER PERMITTED BY LAW OR SHALL LIMIT THE RIGHT OF THE
CORPORATION TO BRING PROCEEDINGS AGAINST LARSON OR DOWDELL IN ANY OTHER
COURT HAVING JURISDICTION THEREOVER.
(j) Waiver of Jury Trial. THE CORPORATION AND EACH OF THE
STOCKHOLDERS HEREBY WAIVE THEIR RESPECTIVE RIGHTS TO A JURY TRIAL OF ANY
CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF THIS AGREEMENT OR ANY
DEALINGS BETWEEN THEM RELATING TO THE SUBJECT MATTER OF THIS TRANSACTION
AND THE RELATIONSHIP THAT IS BEING ESTABLISHED. THE CORPORATION AND EACH OF
THE STOCKHOLDERS ALSO WAIVE ANY BOND OR SURETY OR SECURITY UPON SUCH BOND
WHICH MIGHT, BUT FOR THIS WAIVER, BE REQUIRED OF THE OTHER PARTIES. THE
SCOPE OF THIS WAIVER IS INTENDED TO BE ALL-ENCOMPASSING OF ANY AND ALL
DISPUTES THAT MAY BE FILED IN ANY COURT AND THAT RELATE TO THE SUBJECT
MATTER OF THIS TRANSACTION, INCLUDING WITHOUT LIMITATION, CONTRACT CLAIMS,
TORT CLAIMS, BREACH OF DUTY CLAIMS, AND ALL OTHER COMMON LAW AND STATUTORY
CLAIMS. THE CORPORATION AND EACH OF THE STOCKHOLDERS ACKNOWLEDGE THAT THIS
WAIVER IS A MATERIAL INDUCEMENT TO ENTER INTO A BUSINESS RELATIONSHIP, THAT
EACH HAS ALREADY RELIED ON THE WAIVER IN ENTERING INTO THIS AGREEMENT AND
THAT EACH WILL CONTINUE TO RELY ON THE WAIVER IN THEIR RELATED FUTURE
DEALINGS. THE CORPORATION AND EACH OF THE STOCKHOLDERS FURTHER WARRANT AND
REPRESENT THAT EACH HAS REVIEWED THIS WAIVER WITH ITS LEGAL COUNSEL, AND
THAT EACH KNOWINGLY AND VOLUNTARILY
-26-
<PAGE>
WAIVES ITS JURY TRIAL RIGHTS FOLLOWING CONSULTATION WITH LEGAL COUNSEL.
THIS WAIVER IS IRREVOCABLE, MEANING THAT IT MAY NOT BE MODIFIED EITHER
ORALLY OR IN WRITING, AND THE WAIVER SHALL APPLY TO ANY SUBSEQUENT
AMENDMENTS, RENEWALS, SUPPLEMENTS OR MODIFICATIONS TO THIS AGREEMENT OR TO
ANY OTHER DOCUMENTS OR MODIFICATIONS TO THIS AGREEMENT OR TO ANY OTHER
DOCUMENTS OR AGREEMENTS RELATING TO THE TRANSACTION CONTEMPLATED HEREBY. IN
THE EVENT OF LITIGATION, THIS AGREEMENT MAY BE FILED AS A WRITTEN CONSENT
TO A TRIAL BY THE COURT.
IN WITNESS WHEREOF, the undersigned have set their hands and seals as
of the date first above written.
CAREER EDUCATION CORPORATION, a
Delaware corporation
By /s/ JOHN M. LARSON
-------------------------------
John M. Larson
Its President
HELLER EQUITY CAPITAL CORPORATION,
a Delaware corporation
By /s/ TODD STEELE
------------------------------------
Its Vice President
/s/ JOHN M. LARSON
------------------------------------
John M. Larson
/s/ ROBERT E. DOWDELL
------------------------------------
Robert E. Dowdell
ELECTRA INVESTMENT TRUST P.L.C., a
corporation organized under the laws
of England and Wales
By /s/ HUGH M. MUMFORD
-------------------------------
-27-
<PAGE>
Its Director
---------------------------------
ELECTRA ASSOCIATES, INC., a Delaware
corporation
By /s/ R.J. LEWIS
---------------------------------
Its Director
---------------------------------
-28-
<PAGE>
Signature page continued.
The undersigned hereby executes this Agreement solely for purposes of
evidencing its agreement to be bound by or subject to Sections 1.3, 2.4, 2.6,
2.7, 2.8, 2.10 and 4.1, and Article V of this Agreement and shall not be deemed
to be a party to this Agreement for any other purposes.
PROVIDENT BANK, an Ohio banking corporation
By /s/ KEVIN WARD
---------------------------------------
Its Vice President
---------------------------------------
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<PAGE>
FIRST AMENDMENT TO CAREER EDUCATION CORPORATION
AMENDED AND RESTATED STOCKHOLDERS' AGREEMENT
THIS FIRST AMENDMENT TO CAREER EDUCATION CORPORATION AMENDED AND
RESTATED STOCKHOLDERS' AGREEMENT (this "First Amendment") is made as of February
28, 1997 by and among Career Education Corporation, a Delaware corporation (the
"Corporation"), Heller Equity Capital Corporation, a Delaware corporation
("Heller"), John M. Larson ("Larson"), Robert E. Dowdell ("Dowdell"), Wallace O.
Laub and Constance L. Laub (the "Laubs"), William A. Klettke ("Klettke"), The
Provident Bank, an Ohio banking corporation ("Provident"), Electra Investment
Trust P.L.C., a corporation organized under the laws of England and Wales, and
its successors and assigns ("EIT"), and Electra Associates, Inc., a Delaware
corporation, and its successors and assigns ("EAI," and together with EIT,
"Electra"). Heller, EIT, EAI, Larson, Dowdell, the Laubs and Klettke are
hereafter collectively referred to as the "Stockholders." Capitalized terms not
otherwise defined herein shall have the respective meanings ascribed to such
terms in the Stockholders' Agreement (defined below).
WITNESSETH:
WHEREAS, the Corporation, the Stockholders and Provident are parties
to that certain Career Education Corporation Amended and restated Stockholders'
Agreement dated as of July 31, 1995 (the "Stockholders' Agreement");
WHEREAS, the Stockholders are the holders of all of the issued and
outstanding capital stock and options to acquire capital stock of the
Corporation (other than certain warrants held by Provident and certain options
issued to employees of the Corporation pursuant to its 1995 Stock Option Plan
dated August 23, 1995 (as amended, the "Management Option Plan");
WHEREAS, pursuant to that certain Securities Purchase Agreement (the
"Securities Purchase Agreement") of even date herewith among the Corporation and
the Stockholders other than EAI (such Stockholders sometimes being referred to
herein as the "Purchasers"), the Purchasers have agreed to provide additional
equity financing to the Corporation in the amount of up to Seven Million Five
Hundred Thousand Dollars ($7,500,000) in exchange for up to 7,500 shares of the
Corporation's Series D Redeemable Preferred Stock, with a stated value of One
Thousand Dollars ($1,000) per share, together with certain warrants to purchase
the Corporation's Class E Non-Voting Common Stock, on the terms and subject to
the conditions set forth in the Securities Purchase Agreement; and
<PAGE>
WHEREAS, in connection with the transactions contemplated by the
Securities Purchase Agreement, the parties hereto now wish to make certain
amendments to the Stockholders' Agreement.
NOW, THEREFORE, in consideration of the mutual promises and covenants
herein contained, and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties, intending to be
bound, hereby agree as follows:
1. Definition of Shares and Preferred Shares. All references in the
Stockholders' Agreement to "Shares" and/or "Preferred Shares" shall be deemed to
include (in addition to the Corporation's Class A Stock, Class B Stock, Class C
Stock, Class D Stock, Class E Stock, Series A Preferred, Series B Preferred, and
Series C Preferred), the Corporation's Series D Preferred Stock, $.01 par value
(the "Series D Preferred"), of which 2,000 shares have been issued as of the
date hereof and of which up to an additional 5,500 shares may be issued in the
future pursuant to the Securities Purchase Agreement.
2. Additional Warrants. Pursuant to the Securities Purchase
Agreement, the Corporation has agreed to issue warrants (the "Additional
Warrants") to purchase up to 8,924 shares of the Corporation's Class E Stock, of
which 2,380 Additional Warrants have been issued as of the date hereof and of
which up to an additional 6,544 Additional Warrants may be issued in the future.
With respect to such Additional Warrants, the Stockholders hereby agree as
follows:
(a) All references in the Stockholders' Agreement, as amended by this
First Amendment, to the term "Additional Warrants" shall refer to the Additional
Warrants (as defined herein). All references in the Stockholders' Agreement, as
amended by this First Amendment, to the term "Additional Warrant Shares" shall
mean the shares of Class E Stock to be issued upon exercise of the Additional
Warrants.
(b) All references in the Stockholders' Agreement to "Rights" shall be
deemed to include the Additional Warrants.
(c) Section 1.3(a) of the Stockholders' Agreement is hereby amended
and restated in its entirety as follows:
(a) In case at any time or from time to time the Corporation shall
issue or sell the following (collectively hereinafter referred to as the
"Additional Capital Stock"): any shares of its capital stock or issue or
sell options, rights or warrants to subscribe for or purchase shares of its
capital stock (or securities convertible into shares of its capital stock)
("Options"), including but not limited to issuances pursuant to Section 1.2
above, other than (i) shares of Class D Stock to be issued to the holders
of the Warrants upon exercise thereof or pursuant to an adjustment provided
for under Section 5 of the Warrant Certificate and Section 5 of the Penalty
Warrant Certificate issued to each of EIT and EAI, (ii) up to 13,400 Common
Shares (subject to
-2-
<PAGE>
antidilution adjustments in the case of recapitalizations, recombinations
or stock splits) issued upon the exercise of any stock options granted
pursuant to present or future employee benefit plans or the Corporation,
(iii) any Common Shares issued to the holders of the Provident Warrant upon
exercise thereof, (iv) shares of Class E Stock to be issued to the holders
of the Additional Warrants upon exercise thereof or pursuant to an
adjustment provided for under Section 5 of each of the Warrant Certificates
evidencing such Additional Warrants, and (v) any Common Shares issuable
upon exercise of any Options which have previously been treated as
Additional Capital Stock for purposes hereof, Electra, Heller and
Provident, respectively, shall have the right to purchase, on the same
terms and conditions and at the same time, such shares of Additional
Capital Stock equal to the percentage of Common Shares then owned by
Electra, Heller or Provident, as applicable; treating, for such purposes,
all Warrants, Provident Warrants and Additional Warrants as if they had
been exercised.
(d) Section 2.4(a) of the Stockholders' Agreement is hereby amended
and restated in its entirety as follows:
(a) (i) In the event that Heller shall have received and intends to
accept an offer from a Purchaser to purchase more than fifty percent (50%)
of the Common Shares owned by Heller and its successors and permitted
assigns at the time of such offer, Heller shall provide to all Stockholders
and Provident a notice containing the information described in Section 2.3
(the "Heller Notice"), and, any other Stockholder or Provident holding
Common Shares or Rights (a "Holder") may elect to participate in the
contemplated transfer to the Purchaser by delivering written notice to
Heller within thirty (30) days after receipt by said Holder (the "Co-Sale
Election Period"). If any such Holder elects to participate in the
contemplated transfer (a "Participating Holder"), Heller and each
Participating Holder shall be entitled to participate in the contemplated
transfer pro rata based on the relative ownership of Common Shares
(treating, for such purposes, all Warrants, the Provident Warrant and all
Additional Warrants, as if they had been exercised) among Heller and all
Participating Holders. The purchase by the Purchaser of the Common Shares
of the Participating Holders and Heller shall be upon the terms set forth
in the Heller Notice. If Electra and/or Provident elects to participate in
any sale pursuant to this Section 2.4(a)(i), Electra and/or Provident
shall, to the extent required by the Purchaser thereof, exercise the
Warrants or Provident Warrants, as applicable, for sufficient number of
Warrant Shares or Provident Shares, as applicable to participate in such
sale. If any Holder elects to participate in any sale pursuant to this
Section 2.4(a)(i), such Holder shall, to the extent required by the
Purchaser thereof, exercise its Additional Warrants for a sufficient number
of Additional Warrant Shares to participate in such sale.
-3-
<PAGE>
(ii) In the event that Heller shall have received and intends to
accept an offer from a Purchaser to purchase any of the Common Shares up to
fifty (50%) percent of such Common Shares (for a purchase greater than
fifty (50%) percent, clause (i) above shall apply), owned by Heller and its
successors and permitted assigns at the time of the offer, Heller shall
provide to Electra and Provident the Heller Notice, and Electra or
Provident may elect to participate in the contemplated transfer to the
Purchaser by delivering written notice to Heller within the Co-Sale
Election Period. If either Electra or Provident elects to participate in
the contemplated transfer (hereinafter, for purposes of subsection 2.4(b)
below, Electra and/or Provident, as applicable, shall be considered a
"Participating Holder"), Electra and/or Provident, as applicable, shall be
entitled to participate in the contemplated transfer pro rata (treating,
for such purposes, all Warrants, Provident Warrants and all Additional
Warrants, as applicable, as if they had been exercised) with Heller. The
purchase by the Purchaser of the Warrant Shares and Additional Warrant
Shares of Electra, the Provident Shares and Additional Warrant Shares of
Provident and the Common Shares and Additional Warrant Shares of Heller
shall be upon the terms set forth in the Heller Notice. Furthermore, if
Electra and/or Provident elects to participate in any sale pursuant to this
Section 2.4(a)(ii), Electra and/or Provident shall, to the extent required
by the Purchaser thereof, exercise the Warrants, Provident Warrants and/or
Additional Warrants, as applicable, for sufficient number of Warrant
Shares, Provident Shares and/or Additional Warrant Shares, as applicable,
to participate in such sale.
3. Waivers.
(a) Issuances of Additional Shares to Heller. Notwithstanding the
provisions of Section 1.2 of the Stockholders' Agreement, the Stockholders and
Provident hereby agree that Heller shall be permitted to purchase and the
Corporation shall offer for sale to Heller investment units consisting of Series
D Preferred and Additional Warrants in accordance with the Securities Purchase
Agreement. Furthermore, Larson, Dowdell, the Laubs and Klettke hereby (i) waive
all presently existing and future rights granted to them pursuant to Section 1.2
of the Stockholders Agreement with respect to any Heller Investment between
$5,000,000 and $8,000,000, (ii) acknowledge and agree that as a result of the
consummation of the Initial Investment (as defined in Securities Purchase
Agreement), the Heller Investment is now in excess of $8,000,000, and (iii)
therefore, all rights of Larson, Dowdell, the Laubs and Klettke to purchase
additional Shares (beyond those previously purchased, if any) pursuant to
Section 1.2 of the Stockholders' Agreement are now expired and terminated.
(b) Additional Equity Issuances. Each of Heller, Electra and
Provident hereby acknowledges and agrees that the Additional Capital Stock
purchased or to be purchased pursuant to the Securities Purchase Agreement by
each of such parties is in
-4-
<PAGE>
proportion to the percentage of Common Shares now owned by each of Heller,
Electra and Provident, respectively, and hereby waives its preemptive rights
under Section 1.3 of the Stockholders' Agreement with respect to all
transactions contemplated by the Securities Purchase Agreement.
(c) Electra Securities Purchase Agreement and Warrants. Except as
otherwise specifically provided in the Securities Purchase Agreement or the
Securities (as defined in the Securities Purchase Agreement) issued pursuant
thereto, each of EIT and EAI hereby waives all of its rights to purchase or
otherwise receive Additional Capital Stock as a result of the transactions
contemplated by the Securities Purchase Agreement, including without limitation
all rights granted pursuant to (i) that certain Securities Purchase Agreement
dated July 31, 1995 between Electra and the Corporation, (ii) the Warrants; and
(iii) Series C Preferred Stock Rights granted pursuant to Exhibit A to the
Restated Certificate of Incorporation of Career Education Corporation, as
amended.
(d) Provident Warrant. Provident hereby waives all of its rights to
purchase or otherwise receive Additional Capital Stock as a result of the
transactions contemplated by the Securities Purchase Agreement, other than those
rights provided in the Provident Warrant. Furthermore, Provident and the
Corporation hereby agree that, notwithstanding any provision of the Provident
Warrant to the contrary, for each Share of Class D Stock to which Provident is
or may become entitled to pursuant to the Provident Warrant as a result of the
transactions contemplated by the Securities Purchase Agreement, the Corporation
shall issue to Provident, and Provident shall accept, in exchange therefor, one
Share of Class E Stock. In addition, Provident and the Corporation hereby agree
that, assuming the issuance of all 8,924 Additional Warrants contemplated by the
Securities Purchase Agreement, the Additional Capital Stock which Provident will
be entitled to receive upon exercise of the Provident Warrant as a result of the
issuance of such Additional Warrants is four hundred ninety (490) Shares of
Class E Stock, which number of Shares will be reduced pro rata in the event any
lesser number of Additional Warrants had been issued at the time of exercise of
the Provident Warrant.
4. Issuance of Securities to the Klettke IRA. The Company and
Klettke hereby agree and acknowledge that certain Shares and Rights of which
Klettke is the beneficial owner have been and/or may be issued to First Chicago,
Custodian, William A. Klettke IRA (the "Klettke IRA"). Klettke hereby represents
and warrants that he is the sole beneficiary of the Klettke IRA with power of
direction, and agrees that, in the event of the issuance of any Shares and/or
Rights to the Klettke IRA, he will cause the Klettke IRA to be bound by the
terms of the Stockholders Agreement, as amended hereby, the Securities Purchase
Agreement and all other agreements governing the rights of the Corporation's
stockholders to which Klettke is a party. Furthermore, Klettke hereby agrees to
execute and deliver, or to cause the Klettke IRA to execute and deliver, such
other documents as the Company may reasonably require in connection with any
issuance of such Shares and/or Rights to the Klettke IRA and Klettke's
beneficial ownership thereof.
-5-
<PAGE>
5. Ratification of Prior Issuance of Shares to Klettke IRA. Each of
the Stockholders (other than Klettke) and Provident hereby ratifies, confirms
and approves the prior issuance to the Klettke IRA of 824 Shares of Class E
Stock and 70 Shares of Series A Preferred, and hereby acknowledges its, his or
her consent to such issuance and its, his or her waiver of all rights to
purchase or otherwise receive Additional Capital Stock as a result of such
issuance, including without limitation all rights granted pursuant to the
agreements and other documents described in Section 3 of this First Amendment.
6. References to the Stockholders' Agreement. All references to
"this Agreement" or similar language in the Stockholders' Agreement shall be
deemed to refer to the Stockholders' Agreement as amended by this First
Amendment.
7. Stockholders' Agreement. Except as modified by this First
Amendment, the Stockholders' Agreement shall remain in full force and effect,
and is hereby ratified and confirmed.
[SIGNATURE PAGE FOLLOWS]
-6-
<PAGE>
IN WITNESS WHEREOF, the undersigned have set their hands and seals as
of the date first above written.
CAREER EDUCATION CORPORATION, a
Delaware corporation
By: /s/ JOHN M. LARSON
--------------------------------
John M. Larson
Its President
HELLER EQUITY CAPITAL CORPORATION, a
Delaware corporation
By: /s/ RENEE REMPE
--------------------------------
Its Vice President
/s/ JOHN M. LARSON
--------------------------------
John M. Larson
/s/ ROBERT E. DOWDELL
--------------------------------
Robert E. Dowdell
/s/ WALLACE O. LAUB
--------------------------------
Wallace O. Laub
/s/ CONSTANCE L. LAUB
--------------------------------
Constance L. Laub
/s/ WILLIAM KLETTKE
--------------------------------
William Klettke
ELECTRA INVESTMENT TRUST P.L.C., a
corporation organized under the laws
of England and Wales
By: /s/ HUGH M. MUMFORD
-------------------------------
Its: Director
-------------------------------
ELECTRA ASSOCIATES, INC., a Delaware
corporation
By: R.J. LEWIS
------------------------------
Its: Director
------------------------------
<PAGE>
The undersigned hereby executes this Agreement solely for purposes of
evidencing its agreement to be bound or subject to this First Amendment to the
extent applicable to Sections 1.3, 2.4, 2.6, 2.7, 2.8, 2.10 and 4.1, and Article
V of the Stockholders Agreement or its rights under the Provident Warrant, and
shall not be deemed to be a party to this First Amendment for other purposes.
PROVIDENT BANK, an Ohio banking corporation
By: /s/ KEVIN WARD
----------------------------------
Its: Vice President
---------------------------------
<PAGE>
SECOND AMENDMENT TO CAREER EDUCATION CORPORATION
AMENDED AND RESTATED STOCKHOLDERS' AGREEMENT
THIS SECOND AMENDMENT TO CAREER EDUCATION CORPORATION AMENDED AND
RESTATED STOCKHOLDERS' AGREEMENT (this "Second Amendment") is made as of May 30,
1997 by and among Career Education Corporation, a Delaware corporation (the
"Corporation"), Heller Equity Capital Corporation, a Delaware corporation
("Heller"), John M. Larson ("Larson"), Robert E. Dowdell ("Dowdell"), Wallace O.
Laub and Constance L. Laub (the "Laubs"), William A. Klettke ("Klettke"), The
Provident Bank, an Ohio banking corporation ("Provident"), Electra Investment
Trust P.L.C., a corporation organized under the laws of England and Wales, and
its successors and assigns ("EIT"), and Electra Associates, Inc., a Delaware
corporation, and its successors and assigns ("EAI," and together with EIT,
"Electra"). Heller, EIT, EAI, Larson, Dowdell, the Laubs and Klettke are
hereafter collectively referred to as the "Stockholders." Capitalized terms not
otherwise defined herein shall have the respective meanings ascribed to such
terms in the Stockholders' Agreement (defined below).
WITNESSETH:
WHEREAS, the Corporation, the Stockholders and Provident are parties
to that certain Career Education Corporation Amended and Restated Stockholders'
Agreement dated as of July 31, 1995, as amended by that certain First Amendment
to Career Education Corporation Amended and Restated Stockholders' Agreement
dated as of February 28, 1997 (the "Stockholders' Agreement");
WHEREAS, the Stockholders are the holders of all of the issued and
outstanding capital stock and options to acquire capital stock of the
Corporation (other than certain warrants held by Provident and certain options
issued to employees of the Corporation pursuant to its 1995 Stock Option Plan
dated August 23, 1995 (as amended, the "Management Option Plan");
WHEREAS, pursuant to that certain Securities Purchase Agreement (the
"Securities Purchase Agreement") of even date herewith among the Corporation and
certain of the Stockholders (such Stockholders sometimes being referred to
herein as the "Purchasers"), the Purchasers have agreed to provide additional
equity financing to the Corporation in the amount of up to Fifteen Million
Dollars ($15,000,000) in exchange for up to 15,000 shares of the Corporation's
Series D Redeemable Preferred Stock, with a stated value of One Thousand Dollars
($1,000) per share, together with certain Warrants to purchase the Corporation's
Class E Non-Voting Common Stock, on the terms and subject to the conditions set
forth in the Securities Purchase Agreement; and
<PAGE>
WHEREAS, in connection with the transactions contemplated by the
Securities Purchase Agreement, the parties hereto now wish to make certain
amendments to the Stockholders' Agreement.
NOW, THEREFORE, in consideration of the mutual promises and covenants
herein contained, and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties, intending to be
bound, hereby agree as follows:
1. Definition of Shares and Preferred Shares. All references in the
Stockholders' Agreement to "Shares" and/or "Preferred Shares" shall be deemed to
include (in addition to the Corporation's Class A Stock, Class B Stock, Class C
Stock, Class D Stock, Class E Stock, Series A Preferred, Series B Preferred, and
Series C Preferred), the Corporation's Series D Preferred Stock, $.01 par value
(the "Series D Preferred"), of which 7,500 shares have been issued as of the
date hereof and of which up to an additional 15,000 shares are being or may be
issued in the future pursuant to the Securities Purchase Agreement.
2. Additional Warrants. Pursuant to the Securities Purchase
Agreement, the Corporation has agreed to issue warrants (the "Additional
Warrants") to purchase up to 36,186 shares of the Corporation's Class E Stock,
which are being or may be issued in the future pursuant to the Securities
Purchase Agreement. With respect to such Additional Warrants, the Stockholders
hereby agree as follows:
(a) All references in the Stockholders' Agreement, as amended by this
Second Amendment, to the term "Additional Warrants" shall refer to the
Additional Warrants (as defined herein). All references in the Stockholders'
Agreement, as amended by this Second Amendment, to the term "Additional Warrant
Shares" shall mean the shares of Class E Stock to be issued upon exercise of the
Additional Warrants.
(b) All references in the Stockholders' Agreement to "Rights" shall be
deemed to include the Additional Warrants.
3. Waivers.
(a) Issuances of Additional Shares to Heller. Notwithstanding the
provisions of Section 1.2 of the Stockholders' Agreement, the Stockholders and
Provident hereby agree that Heller shall be permitted to purchase and the
Corporation shall offer for sale to Heller investment units consisting of Series
D Preferred and Additional Warrants in accordance with the Securities Purchase
Agreement.
(b) Additional Equity Issuances. Each of Heller, Electra and
Provident hereby acknowledges and agrees that the Additional Capital Stock
purchased or to be purchased pursuant to the Securities Purchase Agreement by
each of such parties is in proportion to the percentage of Common Shares now
owned by each of Heller, Electra and Provident, respectively, and hereby waives
its preemptive rights under Section 1.3 of the
-2-
<PAGE>
Stockholders' Agreement with respect to all transactions contemplated by the
Securities Purchase Agreement.
(c) Electra Securities Purchase Agreement and Warrants. Except as
otherwise specifically provided in the Securities Purchase Agreement or the
Securities (as defined in the Securities Purchase Agreement) issued pursuant
thereto, each of EIT and EAI hereby waives all of its rights to purchase or
otherwise receive Additional Capital Stock as a result of the transactions
contemplated by the Securities Purchase Agreement, including without limitation
all rights granted pursuant to (i) that certain Securities Purchase Agreement
dated July 31, 1995 between Electra and the Corporation, (ii) the Warrants; and
(iii) Series C Preferred Stock Rights granted pursuant to Exhibit A to the
Restated Certificate of Incorporation of Career Education Corporation, as
amended.
(d) Provident Warrant. Provident hereby waives all of its rights to
purchase or otherwise receive Additional Capital Stock as a result of the
transactions contemplated by the Securities Purchase Agreement, other than those
rights provided in the Provident Warrant. Furthermore, Provident and the
Corporation hereby agree that, notwithstanding any provision of the Provident
Warrant to the contrary, for each Share of Class D Stock to which Provident is
or may become entitled to pursuant to the Provident Warrant as a result of the
transactions contemplated by the Securities Purchase Agreement, the Corporation
shall issue to Provident, and Provident shall accept, in exchange therefor, one
Share of Class E Stock. In addition, Provident and the Corporation hereby agree
that, assuming the issuance of all 36,186 Additional Warrants contemplated by
the Securities Purchase Agreement, the Additional Capital Stock which Provident
will be entitled to receive upon exercise of the Provident Warrant as a result
of the issuance of such Additional Warrants is Eight Hundred Twenty-Five (825)
Shares of Class E Stock, which number of Shares will be reduced pro rata in the
event any lesser number of Additional Warrants had been issued at the time of
exercise of the Provident Warrant.
4. Issuance of Securities to the Klettke IRA. The Company and
Klettke hereby agree and acknowledge that certain Shares and Rights of which
Klettke is the beneficial owner have been and/or may be issued to First Chicago,
Custodian, William A. Klettke IRA (the "Klettke IRA"). Klettke hereby represents
and warrants that he is the sole beneficiary of the Klettke IRA with power of
direction, and agrees that, in the event of the issuance of any Shares and/or
Rights to the Klettke IRA, he will cause the Klettke IRA to be bound by the
terms of the Stockholders Agreement, as amended hereby, the Securities Purchase
Agreement and all other agreements governing the rights of the Corporation's
stockholders to which Klettke is a party. Furthermore, Klettke hereby agrees to
execute and deliver, or to cause the Klettke IRA to execute and deliver, such
other documents as the Company may reasonably require in connection with any
issuance of such Shares and/or Rights to the Klettke IRA and Klettke's
beneficial ownership thereof.
-3-
<PAGE>
5. References to the Stockholders' Agreement. All references to
"this Agreement" or similar language in the Stockholders' Agreement shall be
deemed to refer to the Stockholders' Agreement as amended by this Second
Amendment.
6. Stockholders' Agreement. Except as modified by this Second
Amendment, the Stockholders' Agreement shall remain in full force and effect,
and is hereby ratified and confirmed.
[SIGNATURE PAGE FOLLOWS]
-4-
<PAGE>
IN WITNESS WHEREOF, the undersigned have set their hands and seals as
of the date first above written.
CAREER EDUCATION CORPORATION, a
Delaware corporation
By /s/ JOHN M. LARSON
-------------------------------
John M. Larson
Its President
HELLER EQUITY CAPITAL CORPORATION, a
Delaware corporation
By /s/ RENEE REMPE
-------------------------------
Its Vice President
/s/ JOHN M. LARSON
-------------------------------
John M. Larson
/s/ ROBERT E. DOWDELL
-------------------------------
Robert E. Dowdell
/s/ WALLACE O. LAUB
-------------------------------
Wallace O. Laub
/s/ CONSTANCE L. LAUB
-------------------------------
Constance L. Laub
/s/ WILLIAM KLETTKE
-------------------------------
William Klettke
ELECTRA INVESTMENT TRUST P.L.C., a
corporation organized under the laws
of England and Wales
By A.M. VINTON
-------------------------------
Its Authorized Signatory
------------------------------
ELECTRA ASSOCIATES, INC., a Delaware
corporation
By R.J. LEWIS
-------------------------------
Its
------------------------------
<PAGE>
The undersigned hereby executes this Agreement solely for purposes of
evidencing its agreement to be bound or subject to this Second Amendment to the
extent applicable to Sections 1.3, 2.4, 2.6, 2.7, 2.8, 2.10 and 4.1, and Article
V of the Stockholders Agreement or its rights under the Provident Warrant, and
shall not be deemed to be a party to this Second Amendment for other purposes.
PROVIDENT BANK, an Ohio banking corporation
[PROVIDENT DID NOT SIGN]
By_________________________________________
Its________________________________________
<PAGE>
EXHIBIT 10.15
WARRANT AGREEMENT
THIS WARRANT AGREEMENT ("Agreement") is made and entered into as of July
31, 1995, by and between CAREER EDUCATION CORPORATION, a Delaware corporation
(the "Company"), and THE PROVIDENT BANK, an Ohio banking corporation ("Holder"
and sometimes referred to as the "Initial Holder").
WHEREAS, the Initial Holder, Company, certain subsidiaries of Company, and
various lenders and other financial institutions as described therein are
parties to a certain Credit Agreement dated as of even date herewith, as the
same may be amended or supplemented from time to time (the "Credit Agreement");
and
WHEREAS, as a condition to the obligations of the Initial Holder under the
Credit Agreement, the Company is required to (a) enter into this Agreement, and
(b) issue to the Initial Holder stock purchase warrants to purchase certain
shares of Common Stock (as defined below) upon an exercise of said warrants at
the price and upon the terms and conditions specified herein and therein (said
warrants and all warrants subsequently issued by the Company to the Initial
Holder, its successors and assigns including any Holder (as defined below),
pursuant hereto or pursuant to any of said warrants, whether upon transfer,
exchange or replacement thereof or otherwise, being hereinafter referred to
collectively as the "Warrants", and each individually as a "Warrant");
NOW, THEREFORE, the parties hereto agree as follows:
1. CERTAIN DEFINITIONS.
In addition to terms defined elsewhere in this Agreement, the
following terms shall have the following respective meanings:
"Applicable Holders" shall mean in the case of a registration pursuant to
Section 6.1 hereof, those Holders requesting inclusion of Warrant Stock in such
registration and whose Warrant Stock will be included in such registration.
"Appraised Value" shall mean a price per share equal to the greater of (i)
the common stock book value of the Company, as of the end of the most recently
completed fiscal quarter and as reflected on the balance sheet of the Company as
of such date, plus the aggregate amount of proceeds to be received by the
Company upon the exercise, conversion and/or exchange of all warrants, options
and convertible securities of the Company or other rights to acquire equity of
the Company whose exercise price is less than the fair market value of the
Common Stock and which are then
<PAGE>
-2-
exercisable or which will become exercisable within twelve (12) months from the
date of such determination (the "Exercisable Convertible Securities"), divided
by the total number of shares of Common Stock then outstanding on the date of
calculation (assuming the conversion, exercise or exchange of all Exercisable
Convertible Securities), all determined in accordance with generally accepted
accounting principles (GAAP) in the United States applied on a basis consistent
with prior years, and (B) the "Fair Market Value Per Share" as determined in
good faith by the Board of Directors of the Company; provided, however, that if
the holders of 51% of the Warrants shall not be reasonably satisfied with the
determination of the Board of Directors of the Company, the Fair Market Value
Per Share shall be determined in accordance with the following procedures:
first, by an investment banking firm selected by holders of 51% of the Warrants
which are subject to such Put, which determination shall be made within thirty
(30) days after the delivery of the notice of the exercise of the Put, second,
if such determination shall not be satisfactory to the Company, as evidenced by
a written objection by the Company delivered to the holders of the Warrants
subject to such Put within two weeks of receipt by the Company of such
determination, the Company shall be entitled to select an investment banking
firm which shall make its own determination within thirty (30) days of its
appointment, and if such determination shall differ by less than 10% from the
determination of the investment banking firm selected by the Company, the Fair
Market Value Per Share shall be the average of such determinations and third, if
such determinations shall differ by 10% or more, such investment banking firms
shall appoint a third investment banking firm which shall make its own
determination within two weeks of its appointment, which determination shall be
binding upon the Company and the holders of the Warrants subject to the put. Any
and all determinations required to be made by an investment banking firm
pursuant to this definition shall be performed by an investment banking firm
experienced in the conduct of corporate valuations and shall be based upon the
fair market value of 100% of the Company on a consolidated basis if sold as a
going concern, without giving effect to any discount for lack of liquidity of
the shares of Common Stock or to any restrictions upon the conversion of any
shares of nonvoting common stock into voting common stock, or to any or to the
fact that the shares of Common Stock issuable upon exercise of the Warrants
being put to the Company represent a minority equity interest in the Company, or
to any discount relating to, or reclassification because of, the right of any
stockholder, Series C Preferred Stock holder or warrant holder of the Company to
sell its shares of Common Stock, Series C Preferred Stock or warrants to the
Company, including pursuant to this Put. In addition, in making such
determination, the investment banking firm shall assume the conversion, exercise
or exchange of all Exercisable Convertible Securities and shall take into
account the valuations associated with companies engaged in businesses and with
capital structures similar to the Company and such other matters as are relevant
to the valuation of the Company.
Notwithstanding anything herein to the contrary, in determining Fair
Market Value Per Share under this definition, (i) any adverse changes in GAAP
from the date of original issuance of this Warrant Agreement shall be
disregarded such that any computations shall be made as if the
<PAGE>
-3-
GAAP change had not been implemented, and (ii) any dividends paid or redemptions
or repurchases of any of the securities of the Company (other than the Series C
Preferred Stock) by the Company within one year of the exercise of the put shall
be disregarded and any amounts distributed shall be treated as if such amounts
had been retained by the Company. All costs of such determinations shall be
borne by the Company.
"Capital Transaction" shall mean any transaction whereby the Company is
merged with or into or consolidated with another person or entity and,
immediately after giving effect to such merger or consolidation, less than 50%
of the total voting power of the outstanding voting stock of the surviving or
resulting person is then beneficially owned in the aggregate by the stockholders
of the Company immediately prior to such merger or consolidation.
"Certificate of Applicable Holders" shall mean in the case of a
registration pursuant to Section 6.1 hereof, a resolution signed by the Holders
of a majority of the Warrant Stock that will be or were included in such
registration.
"Commission" shall mean the United States Securities and Exchange
Commission and any successor federal agency having similar powers.
"Common Stock" shall mean all series of the common stock of the Company,
par value $0.01 per share.
"Company Documents" shall mean this Agreement and the Warrants, as any of
the same may be amended, modified, supplemented or restated from time to time.
"Consolidated" means, with respect to any accounting matter, such matter or
amount computed on a consolidated basis for Borrower and any Subsidiaries in
accordance with GAAP.
"Convertible Securities" shall mean any evidence of indebtedness, shares of
stock or other securities which are directly or indirectly convertible into or
exchangeable for, with or without payment of additional consideration, shares of
Stock, either immediately or upon the arrival of a specified date or the
happening of a specified event.
"EBITDA" shall have the meaning set forth in the Credit Agreement, provided
that in the event that the Credit Agreement is no longer in effect, the term
EBITDA shall have the last meaning attributable to it during the effectiveness
of the Credit Agreement.
<PAGE>
-4-
"Electra Warrant" shall mean the warrants and warrant certificates of the
Company issued to Electra Investment Trust P.L.C. and Electra Associates, Inc.,
pursuant to a Securities Purchase Agreement dated as of July 31, 1995.
"Entity Value" shall mean the greatest of (a) the fair market value of the
Company or any successor thereto as established as of any Capital Transaction,
(b) the Formula Value, or (c) the Appraised Value.
"Exercise Price" of a share of Stock issuable upon the exercise of a
Warrant shall mean $0.01.
"Formula Value" shall mean the value of the Company as established by the
following formula: 5 x EBITDA for EBITDA of up to $4,500,000 and 4 x EBITDA for
EBITDA in excess of $4,500,000 for the trailing four fiscal quarters of the
Company as determined by reference to the most recently available unaudited
income statement of the Company (or the audited financial statements in the case
of quarters constituting the fiscal year), prepared in accordance with GAAP for
the period ended as of the last day of the month ending immediately prior to the
date the Formula Value is being determined, less funded debt and redeemable
preferred stock of the Company, other than Preferred Stock, Series A and
Preferred Stock, Series B, on any day of calculation, plus cash on any day of
calculation held by the Company.
"GAAP" shall mean generally accepted accounting principles in the United
States at the time in effect.
"Holder" and "Holders" shall mean the Initial Holder and its registered
successors and assigns of the Warrants and of the Stock exchanged for the
Warrants pursuant to this Agreement.
"IPO" shall mean (i) the time at which the Company becomes a registered
public company under the Securities Exchange Act of 1934, as amended (the
"Exchange Act") subject to the reporting requirements of Section 13 or 15(d) of
the Exchange Act, or (ii) the first time at which an offering, whether primary
or secondary, of Common Stock or options, warrants or other securities
convertible into or exchangeable or exercisable for Common Stock, is registered
pursuant to an effective registration statement (other than a registration
statement on Form S-4 or Form S-8 or any successor forms thereto) filed by the
Company under the Securities Act of 1933, as amended, or (iii) the merger of the
Company into a corporation or other entity which at the time of such merger is
required to file reports, proxy statements and other information with the
Securities and Exchange Commission pursuant to Section 13(a), 13(c), 14 or 15(d)
of the Exchange Act. An IPO will be deemed to be consummated (i) on the date
such registration is declared effective by the Securities and Exchange
Commission and (ii) in the case of a merger, upon the effectiveness of the
merger.
<PAGE>
-5-
"Law" shall mean any law (including common law), constitution, statute,
treaty, regulation, rule, ordinance, order, injunction, writ, decree or award of
any Official Body.
"Lien" means any lien, mortgage, pledge, security interest, charge or other
encumbrance of any kind including any conditional sale or other title retention
agreement, any lease in the nature thereof, and any agreement to give any
security interest.
"Official Body" shall mean any governmental or political subdivision or any
agency, authority, bureau, central bank, commission, department or
instrumentality of either, or any court, tribunal, grand jury or arbitrator, in
each case whether foreign or domestic.
"Outstanding Common Stock" shall mean the total number of outstanding
shares of Common Stock of the Company on a fully diluted basis, including,
without limitation, all shares of Class A Common Stock, Class B Common Stock,
Class C Common Stock and Class D Common Stock and all shares which may be issued
pursuant to all outstanding Convertible Securities, the Warrants, warrants,
options or agreements of any nature.
"Person" shall include an individual, a company, a corporation, an
association, a partnership, a joint venture, an unincorporated trade or business
enterprise, a trust, an estate, or other legal entity or a government (national,
regional or local), court, arbitrator or any agency, instrumentality or official
of the foregoing.
"Public Offering" shall mean any underwritten public offering of the Common
Stock.
"Purchase Price" shall have the meaning attributed to it in Section 5.3.
"Put Exercise Date" shall mean any of the following (a) July 31, 2001, (b)
the date of prepayment or repayment in full of the Loans, (c) the date of
declaration of the acceleration of the Loans or (d) the date of any Capital
Transaction.
The terms "register," "registered" and "registration" refer to a
registration effected by preparing and filing a registration statement in
compliance with the Securities Act of 1933, as amended (the "Securities Act"),
and the declaration or ordering of the effectiveness of such registration
statement.
"Stock" shall mean (i) all classes and categories of the capital stock of
the Company whether then issued or issuable, including without limitation, any
shares of Common Stock and (ii) any shares of Common Stock issued or issuable
with respect to the Common Stock by way of a stock
<PAGE>
-6-
dividend or stock split or in connection with a combination of shares,
recapitalization, merger, consolidation or other reorganization.
"Stockholders Agreement" means that certain Amended and Restated
Stockholders' Agreement dated as of July 31, 1995 to which the Company is a
party, as the same may be amended or restated from time to time.
"Subsidiary" means, as to Company, a corporation, partnership or other
entity of which shares of stock or other ownership interests having ordinary
voting power (other than stock or such other ownership interests having such
power only by reason of the happening of a contingency) to elect a majority of
the board of directors or other managers of such corporation, partnership or
other entity are at the time owned, or the management of which is otherwise
controlled, directly or indirectly through one or more intermediaries, or both,
by Company.
"Warrant Stock" shall mean Common Stock issuable upon exercise of a Warrant
in accordance with its terms and any capital stock or other securities into
which or for which such Common Stock shall have been converted or exchanged
pursuant to any recapitalization, reorganization or merger of the Company.
2. WARRANT PURCHASE; ANTIDILUTION.
2.1 Warrant Purchase. Contemporaneously with the execution of this
Agreement, the Company shall issue to the Initial Holder Warrants in the form
attached hereto as Exhibit A, evidencing the Initial Holder's right to purchase
2,199 shares of Class D Common Stock at the Exercise Price per share.
2.2 No Voting Rights. Except as set forth herein, this Agreement
shall not entitle any Holder to any voting rights or other rights as a
shareholder of the Company, and no dividend or interest shall be payable or
accrued in respect of the Warrant or this Agreement or the interest represented
hereby or the shares of Warrant Stock which may be purchased hereunder until and
unless, and except to the extent that, a Holder has duly exercised its rights
under any Warrant issued to such Holder or its predecessor in interest upon such
exercise and tender of the Exercise Price. The Company shall thereupon treat
such Holder (or its designee) as the record owner of the shares of Warrant Stock
obtained by such exercise for voting and all other purposes.
2.3 Good Faith by Company. The Company will not, by amendment to its
Certificate of Incorporation or through any reorganization, reclassification,
consolidation, merger, sale of assets, dissolution, issue or sale of securities
or other action, avoid or seek to avoid the
<PAGE>
-7-
observance or performance of any of the terms of this Agreement, but will at all
times in good faith carry out all such terms and take all such action as may be
necessary or appropriate to protect the rights of the Holders hereunder.
2.4 Term. This Agreement shall terminate ten (10) years from the
date hereof.
3. REPRESENTATIONS AND WARRANTIES OF HOLDERS.
3.1 The Initial Holder hereby represents and warrants to the Company
as set forth in this Section 3.1 and each Holder other than the Initial Holder
shall, upon its acquisition of a Warrant, be deemed to represent and warrant to
the Company (severally and not jointly) as set forth in this Section 3.1. In
addition, the representations and warranties set forth in this Section 3.1 shall
be deemed to be remade by a Holder from time to time to the Company as of the
date a Warrant is exercised by such Holder.
(a) Authorization.
(i) Authorization and Compliance With Law. The execution and
delivery of this Agreement by the Holder, and any exercise or exchange of
such Holder's Warrant pursuant to the terms hereof or thereof, have been
duly authorized by all necessary action, corporate and otherwise, on the
part of the Holder. The entry into this Agreement by the Holder, the
acquisition and ownership of the Warrant issued to such Holder and the
exercise or exchange of such Warrant pursuant to the terms hereof and
thereof do not and will not violate any Law applicable to such Holder.
(ii) Approvals. No authorization, consent, approval, license or
filing with any third party or any Official Body is or will be necessary
for the valid execution, delivery or performance of this Agreement by the
Holder, the acquisition and ownership of the Warrant issued to the Holder
or the exercise or exchange of such Warrant pursuant to the terms hereof or
thereof.
(b) Investment Representations.
(i) No Distributive Intent; Restricted Securities. The Holder is
acquiring the Warrant issued to it and, if applicable, the Warrant Stock
(all of which shall be collectively referred to in this Section 3 as the
"Securities" and singly, by type, as a "Security") for its own account with
no present intention of reselling or otherwise
<PAGE>
-8-
distributing any such Security or participating in a distribution of such
Securities in violation of the Securities Act, or any applicable state
securities laws. The Holder acknowledges that it has been advised and is
aware that (A) the Company is relying upon an exemption from registration
under the Securities Act and applicable state securities laws predicated
upon such Holder's representations and warranties contained in this Section
3.1 in connection with the issuance of such Securities pursuant to this
Agreement, and (B) such Securities in the hands of the Holder will be
"restricted securities" within the meaning of Rule 144 promulgated by the
Commission pursuant to the Securities Act and, unless and until registered
under the Securities Act, will be subject to limitations on resale
(including, among others, limitations on the amount of securities that can
be resold and the timing and manner of resale) set forth in Rule 144 or in
administrative interpretations of the Securities Act by the Commission or
in other rules and regulations promulgated thereunder by the Commission, in
effect at the time of the proposed sale or other disposition of the
Securities.
(ii) Compliance with Law Upon Transfer. To the extent that the
Holder is entitled to transfer or pledge any of the Securities, the Holder
will not transfer or pledge any of such Securities in violation of the
Securities Act or any other applicable Laws, and in the event the Holder
pledges or transfers any of such Securities it will advise the pledgee or
transferee of the transfer restrictions imposed on such Securities.
(iii) No Commission. No outside parties have participated with
respect to the negotiation of this transaction on behalf of the Holder, and
the Holder shall indemnify and hold the Company harmless with respect to
any claim for any broker's or finder's fees or commissions with respect to
the transactions contemplated hereby by anyone found to have been acting on
behalf of the Holder with the Holder's consent.
(iv) Legends. The Holder consents to the endorsement on each
certificate representing the Securities of the legends described in Section
3.2(b) indicating that the Securities are not registered, except as and
when such Securities may be registered pursuant to the terms hereof.
(c) Execution and Binding Effect. This Agreement has been duly and
validly executed and delivered by such Holder and constitutes legal, valid
and binding obligations of such Holder, enforceable against such Holder in
accordance with its terms.
<PAGE>
-9-
4. REPRESENTATIONS AND WARRANTIES OF THE COMPANY.
The Company hereby represents and warrants to the Initial Holder and
any other Holder of a Warrant that:
(a) The Company has the requisite corporate power and authority to (i)
own and hold its properties and to carry on its business as now conducted and as
proposed to be conducted, (ii) execute and deliver this Agreement and the
Warrants, (iii) issue, sell and deliver the Securities and the shares of Common
Stock issuable upon exercise of the Warrants (the "Warrant Shares"); and (iv)
carry out and perform the provisions of this Agreement and the Warrants.
(b) The (i) execution and delivery by the Company of this Agreement
and the Warrants, (ii) performance of all obligations of the Company hereunder
and thereunder, (iii) issuance, sale and delivery of the Securities and (iv)
issuance and delivery of the Warrant Stock, have been duly authorized by all
requisite corporate action on the part of the Company, its officers, directors
and stockholders, and have not and will not violate any provision of applicable
law (except that no representation shall be deemed to be made with respect to
the compliance with any regulations of the Department of Education in relating
to Title IV of the Higher Education Act or with the Bank Holding Company Act, in
connection with the conversion of any Warrant Stock into other Common Stock),
any order of any court or other agency of government, the Articles of
Incorporation of the Company, as amended or supplemented (the "Charter"), or the
By-Laws of the Company, as amended (the "By-Laws"), or any provision of any
indenture, agreement or other instrument to which the Company, or any of its
respective properties or assets is bound, or conflict with, result in a breach
of or constitute (with due notice or lapse of time or both) a default under any
such indenture, agreement or other instrument, or result in the creation or
imposition of any Lien, upon any of the properties or assets of the Company.
(c) The Warrant Stock, when issued, sold and delivered in accordance
with the terms of this Agreement for the consideration herein expressed, will be
duly and validly issued, fully paid and nonassessable shares of Common Stock,
with no personal liability attaching to the ownership thereof and will be free
and clear of all Liens imposed by or through the Company, except as set forth
herein. The Warrants, when issued, sold and delivered in accordance with the
terms of this Agreement for the consideration herein expressed, will be duly and
validly issued, free and clear of all Liens imposed by or through the Company,
except as herein provided. The Warrant Stock has been duly and validly reserved
for issuance. Neither the issuance, sale or delivery of the Securities, nor the
issuance or delivery of the Warrant Stock are subject to any preemptive right of
stockholders of the Company or any subsidiary thereof or to any right of first
refusal or other right in favor of any person, except as herein provided.
<PAGE>
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(d) This Agreement and the Warrants have been duly executed and
delivered by the Company and, assuming the execution and delivery of such
agreements by the Initial Holder, constitute the legal valid and binding
obligations of the Company, enforceable in accordance with their terms, except
as their enforceability may be limited by applicable bankruptcy, insolvency,
reorganization, or other laws affecting the enforcement of creditors' rights
generally, or by general equitable principles.
(e) Subject to the accuracy of the representations and warranties of
the Initial Holder set forth in Section 3.1 hereof, no registration or filing
with, or consent or approval of or other action by, any Federal, state or other
governmental agency or instrumentality is or will be necessary for (a) the valid
execution, delivery and performance by the Company of this Agreement and the
Warrants, (b) the issuance, sale and delivery of the Securities, and (c) upon
conversion and exercise thereof, respectively, the issuance and delivery of the
Warrant Stock, other than filings pursuant to Federal and state securities laws
(all of which filings have been or, with respect to those filings which may be
duly made after the Closing will be, made by or on behalf of the Company) in
connection with the sale of the Securities and the Warrant Stock.
5. CERTAIN RIGHTS WITH RESPECT TO WARRANTS AND WARRANT STOCK.
5.1 Put Rights. On or at any time after a Put Exercise Date, the
Holders of at least 51% of the Warrant Stock shall have the right to "put" to
the Company all or any part of its Warrant or the Warrant Stock obtained or
obtainable by the Holder through the exercise of its Warrants on two occasions.
The Company shall, within ten (10) days following the later of receipt of a
written notice that the Holder intends to exercise its put rights hereunder or
the date the parties reach agreement on the Purchase Price (but in no event
later than ninety (90) days after the date of such notice), purchase the
Warrants (or portion thereof) or the Warrant Stock being sold by the Holder for
the Purchase Price calculated in accordance with Section 5.3. Notwithstanding
the foregoing, all of the Holder's Put Rights shall expire on the earliest to
occur of (X) the consummation of an IPO or (Y) July 31, 2005.
5.2 Call Rights. On or at any time after one year following the Put
Exercise Date, the Company shall have the right to require the Holder to sell to
the Company all or any part of its Warrant or the Warrant Stock obtained or
obtainable by the Holder through the exercise of its Warrants. The Company shall
give to the Holder a written notice that the Company intends to exercise its
call rights hereunder which notice shall specify the Purchase Price for the
Warrants or Warrant Stock, calculated in accordance with Section 5.3.
<PAGE>
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5.3 Purchase Price. Upon exercise of the put rights set forth in
Section 5.1, the purchase price ("Purchase Price") (a) for each share of Warrant
Stock being put shall equal the Entity Value of the Company as defined herein
divided by the total number of shares of Outstanding Common Stock, and (b) for
each Warrant being put shall equal the price per share determined pursuant to
clause (a) above multiplied by the number of shares of Warrant Stock which such
Warrant entitles the Holder thereof to purchase, in each case net of the
Exercise Price therefor.
5.4 Default. If the Company shall, for any reason fail to pay in
full the Purchase Price (or portion thereof) pursuant to Sections 5.1 and 5.3
when such amount is due and payable in accordance with Section 5.1 (the "Due
Date"), the Company shall pay to such Holder, on demand, in immediately
available funds, an amount equal to the sum of (i) the unpaid amount of the
Purchase Price due to such Holder on the Due Date (the "Unpaid Portion") plus
(ii) interest on such Unpaid Portion from the Due Date, computed on a daily
basis and on the basis of a 360-day year, through the date upon which demand is
made pursuant to this Section (the "Demand Date"), at a rate per annum equal to
the greater of Prime plus Four Percent (4%) and Twelve Percent (12%) per annum.
Until such time as the Purchase Price for each unrepurchased share of Warrant
Stock has been paid in full in cash, the Holder of such unrepurchased Warrant
Stock shall be entitled to retain legal and beneficial ownership of such
unrepurchased Stock and to exercise all rights with respect to such
unrepurchased Warrant Stock under this Agreement. In the event of such a
default, Holder shall have the right to any remedy now or hereafter existing at
law or in equity or by statute or otherwise to enforce its right to payment
hereunder.
6. REGISTRATION RIGHTS.
6.1 Registrations.
(a) If at any time prior to the Expiration Date, the Company shall
propose to file a Registration Statement for the purpose of a primary or
secondary offering for itself or any securityholder of the Company (the
"Initiating Securityholder") under the Act, including the Company's Initial
Public Offering, on Form S-1, S-2 or S-3 or any equivalent general form or any
other Company offering for registration of Common Stock under the Act with
respect to a public offering of Common Stock, the Company shall as promptly as
practicable, but in no event later than thirty (30) days prior to the proposed
filing date, give notice of such intention to each Holder and upon the request
in writing of any such Holder within fifteen (15) days after receipt of any such
notice (which request shall specify the Warrants or Warrant Stock intended to be
sold or disposed of by such Holder), the Company will include in such
Registration Statement all such Warrants or Warrant Stock specified in such
request to be so registered. In the event such Registration Statement shall be
filed for the purpose of complying with any demand registration requirement of
the shares of stock represented by or issued pursuant to the Electra Warrant
("Electra Stock"), the Warrant
<PAGE>
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Stock shall be the first shares to be included in such Registration (after the
inclusion of the Electra Stock) or if underwriters restrict or reduce the number
of shares subject to such Registration Statement, the Warrant Stock shall be the
last shares removed to effect such reduction prior to any reduction in the
number of shares of Electra Stock subject to such Registration Statement.
(b) Any request for registration shall specify the number of shares of
Warrant Stock as to which such request relates, express the Applicable Holders'
present intention to offer such Warrant Stock for distribution and contain an
undertaking to provide all such information and materials and take all such
actions and execute all such documents as may be required in order to permit the
Company to comply with all applicable requirements of the Commission, to obtain
acceleration of the effective date of the Registration Statement and to enter
into satisfactory underwriting arrangements, if the distribution of Warrant
Stock is to be underwritten. Any request shall designate an Authorized Holder
and such Authorized Holder's address for the purpose of delivering notices under
the Agreement to the Applicable Holders.
6.2 Costs, Expenses and Qualifications of Registration.
(a) The Company shall bear the entire cost and expense of any
registration made pursuant to Section 6.1 of this Agreement, including, without
limitation, all registration and filing fees, printing expenses, the fees and
expenses of the Company's counsel and its independent accountants and all other
out-of-pocket expenses of the Company incident to the preparation, printing and
filing under the Act of the Registration Statement and all amendments and
supplements thereto, the cost of furnishing copies of each preliminary
prospectus, each final prospectus and each amendment or supplement thereto to
underwriters, brokers and dealers and other purchasers of the securities so
registered, the fees and expenses of one firm of legal counsel and one firm of
accountants to represent all Holders in connection with such Registration
Statement and the costs and expenses incurred in connection with the
qualification of the securities so registered under "blue sky" or other state
securities laws (all such expenses are herein called "Registration Expenses"),
provided, however, each Holder participating in any registration hereunder shall
pay the underwriter's discount with respect to any Warrant Stock included in
such registration.
(b) If the Warrants or any Warrant Stock issued or issuable pursuant
hereto require registration or qualification with or approval of any United
States or governmental official or authority in addition to registration under
the Securities Act before the Warrants or such Warrant Stock may be sold, the
Company will take all requisite action in connection with such registration and
will use its best efforts to cause any such shares and/or such Warrants to be
duly registered or approved as may be required; provided, however, that it shall
not be required to give a general consent to service of process or to qualify as
a foreign corporation or subject itself to taxation as doing business in any
such state.
<PAGE>
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6.3 Indemnification.
(a) Indemnity to the Holders. The Company will indemnify the
Applicable Holders and each underwriter of the Common Stock against all claims,
losses, damages, liabilities and expenses resulting from any untrue statement or
alleged untrue statement of a material fact contained in a prospectus or in any
related Registration Statement, notification or similar filing under securities
laws of any jurisdiction or from any omission or alleged omission to state
therein a material fact required to be stated therein or necessary to make the
statements therein not misleading, except insofar as the same may have been
based upon information furnished in writing to the Company by any Holder or any
underwriter expressly for use therein and used in accordance with such writing.
(b) Indemnity to the Company. The Applicable Holders, severally and
not jointly, by having their Warrant Stock included in a registration pursuant
to Section 6.1 hereof, agree to furnish to the Company such information
concerning them as may be requested by the Company and which is necessary in
connection with any registration or qualification of the Warrant Stock and to
indemnify the Company against all claims, losses, damages, liabilities and
expenses resulting from any untrue statement or alleged untrue statement of a
material fact contained in such information and the utilization of any such
information furnished in writing to the Company expressly for use therein and
used in accordance with such writing.
(c) Indemnification Procedures. If any action is brought or any claim
is made against any party indemnified pursuant to this Section 6.3 in respect of
which indemnity may be sought against the indemnitor pursuant to this Section
6.3, such party shall promptly notify the indemnitor in writing of the
institution of such action or the making of such claim and the indemnitor shall
assume the defense of such action or claim, including the employment of counsel
and payment of expenses. Such party shall have the right to employ its or their
own counsel in any such case, but the fees and expenses of such counsel shall be
at the expense of such party unless the employment of such counsel shall have
been authorized in writing by the indemnitor by a resolution of the Board of
Directors of the Company or by a Certificate of Applicable Holders, whichever
the case may be, in connection with the defense of such action or claim or such
indemnified party or the parties shall have reasonably concluded that there are
defenses available to it or them which are in conflict with those available to
the indemnitor (in which case the indemnitor shall not have the right to
interpose such conflicting defense but otherwise shall retain control of such
action or claim on behalf of the indemnified party or parties), in any of which
events the reasonable fees and expenses of not more than one additional counsel
for the indemnified parties shall be borne by the indemnitor. Except as
expressly provided above, in the event that the indemnitor shall not previously
have assumed the defense of any such action or claim, at such time as the
indemnitor does not assume the defense of such action or claim, the indemnitor
shall thereafter be liable to any person indemnified pursuant to
<PAGE>
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this Agreement for any reasonable legal or other expenses subsequently incurred
by such person in investigating, preparing or defending against such action or
claim. Anything in this paragraph to the contrary notwithstanding, the
indemnitor shall not be liable for any settlement of any such claim or action
effected without its written consent.
6.4 RULE 144.
At all times following completion by the Company of its Initial Public
Offering, the Company shall take such action as any holder of Warrant Stock may
reasonably request, all to the extent required from time to time to enable such
Holder to sell shares of its Warrant Stock without registration under the Act
pursuant to and in accordance with (x) Rule 144 or Rule 144A under the Act, as
either of such Rules may be amended from time to time, or (y) any similar rule
or regulation hereafter adopted by the Commission. Upon the request of any
Holder, the Company will deliver to such Holder a written statement as to
whether it has complied with such requirements.
7. AMENDMENTS AND WAIVERS.
This Agreement may be amended, and the Company may take any action
herein prohibited or omit to perform any act herein required to be performed by
it, only if Company shall have obtained the advance written consent of the
Holders holding Warrants exercisable for 51% or more of the Warrant Stock
issuable upon exercise of outstanding Warrants at such time.
8. NOTICES.
Notices and other communications under this Agreement shall be in
writing and shall be either hand delivered, or sent by first-class certified
mail, postage prepaid, or sent by telex, nationally-recognized overnight
courier, telecopier or facsimile transmission addressed as follows:
(a) to any Holder of Warrant Stock or Warrants at the address shown on
the Stock or Warrant transfer books of the Company unless such Holder has
advised the Company in writing of a different address as to which notices shall
be sent under this Agreement; and
(b) if to Company at 400 Barrington Pointe, 2300 North Barrington
Road, Hoffman Estates, Illinois, 60195 or to such other address as Company shall
have furnished to the Holder at the time outstanding.
<PAGE>
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9. MISCELLANEOUS.
This Agreement shall be binding upon and inure to the benefit of and
be enforceable by the respective successors and assigns of the parties hereto,
whether so expressed or not, and, in particular, shall inure to the benefit of
and be enforceable by any Holder or Holders except that any transfer of the
rights of a Holder hereunder or of the Warrant Stock shall not be effective
unless made in compliance with the Stockholders Agreement. This Agreement and
the Company Documents embody the entire agreement and understanding between the
Company and the other parties hereto with respect to the subject matter hereof
and supersede all prior agreements and understandings relating to the subject
matter hereof. THIS AGREEMENT SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH
AND GOVERNED BY THE LAWS OF THE STATE OF DELAWARE. The headings in this
Agreement are for purposes of reference only and shall not limit or otherwise
affect the meaning hereof. This Agreement may be executed in any number of
counterparts, each of which shall be an original but all of which together shall
constitute one instrument.
IN WITNESS WHEREOF, the parties have caused this Agreement to be executed
and delivered by their respective officers thereunto duly authorized as of the
date first above written.
ATTEST: CAREER EDUCATION CORPORATION
/s/ JAKOB P. GRUVER By /s/ JOHN M. LARSON, President
------------------------------ --------------------------------
ATTEST: THE PROVIDENT BANK
/s/ JANET SHEPPARD By /s/ ERIC JEFFRIES
------------------------------ ----------------------------------
<PAGE>
THE WARRANTS AND ANY SHARES ACQUIRED UPON THE EXERCISE HEREOF HAVE NOT
BEEN REGISTERED UNDER THE SECUR TIES ACT OF 1933, AS AMENDED, OR THE
SECURITIES LAWS OF ANY STATE OR OTHER JURISDICTION. THESE WARRANTS AND SUCH
SHARES ARE SUBJECT TO RESTRICTIONS ON TRANSFER ABILITY AND RESALE AND MAY
NOT BE TRANSFERRED OR RESOLD EXCEPT AS PERMITTED UNDER SAID ACT AND SUCH
LAWS PURSUANT TO REGISTRATION OR EXEMPTION THEREFROM. INVESTORS SHOULD BE
AWARE THAT THEY WILL BE REQUIRED TO BEAR THE FINANCIAL RISK OF THIS
INVESTMENT FOR AN INDEFINITE PERIOD OF TIME. THESE WARRANTS AND SUCH SHARES
HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE
COMMISSION, ANY STATE SECURITIES COMMISSION OR OTHER REGULATORY AUTHORITY.
ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
THESE WARRANTS AND ANY SHARES ACQUIRED UPON THE EXERCISE HEREOF ARE
SUBJECT TO RESTRICTIONS ON TRANSFER AND MAY NOT BE SOLD, EXCHANGED,
TRANSFERRED, PLEDGED, HYPOTHECATED OR OTHERWISE DISPOSED OF EXCEPT IN
ACCORDANCE WITH AND SUBJECT TO ALL THE TERMS AND CONDITIONS OF A CERTAIN
AMENDED AND RESTATED STOCKHOLDERS AGREEMENT, DATED AS OF JULY __, 1995,
AMONG THE COMPANY AND ITS STOCKHOLDERS, A COPY OF WHICH THE COMPANY WILL
FURNISH TO THE HOLDER OF THESE WARRANTS UPON REQUEST AND WITHOUT CHARGE.
Warrant Certificate No. 2 Warrants for 2199 Shares
of Class D Common Stock
Original Issue Date: July 31, 1995 Exercise Price: $0.01 Per Share
WARRANT TO PURCHASE CLASS D COMMON STOCK
OF
CAREER EDUCATION CORPORATION
This certifies that THE PROVIDENT BANK, an Ohio banking corporation, or its
registered assigns ("Holder"), is entitled, subject to the terms set forth
below, at any time on or after the date hereof and for a period of ten (10)
years thereafter to purchase from CAREER
<PAGE>
-2-
EDUCATION CORPORATION (the "Company"), a Delaware corporation, up to Two
Thousand One Hundred Ninety-Nine (2,199) fully paid and non-assessable shares of
the Company's Class D Common Stock ("Common Stock") upon surrender hereof, at
the principal office of the Company, with the subscription form annexed hereto
duly executed, and simultaneous payment therefor, at the purchase price per
share set forth above (the "Exercise Price"). The number and character of such
shares of Common Stock are subject to adjustment as provided herein. For
purposes of this Warrant, all capitalized terms used herein and not otherwise
defined in this Warrant shall have the meanings assigned to them in the Warrant
Agreement (as defined below).
1. The Warrants. This Warrant is issued to Holder in connection with a
certain Warrant Agreement dated as of July 31, 1995, between the Company and The
Provident Bank (the "Warrant Agreement"). The term "Warrants" as used herein
shall include all Warrants issued in connection with the Warrant Agreement and
also any warrants delivered in substitution or exchange therefor as provided
herein. This Warrant does not entitle the Holder to any rights as a stockholder
of the Company except as set forth herein or in the Warrant Agreement.
2. Exercise.
2.1 Full Exercise. Subject to compliance with the provisions hereof,
this Warrant may be exercised by the Holder, in whole or in part, during the
period of exercise specified above, at any time or from time to time, on any
business day, by surrendering the Warrant at the principal office of the
Company, 400 Barrington Pointe, 2300 North Barrington Road, Hoffman Estates,
Illinois, 60195 with the form of Election to Exercise in substantially the form
of Exhibit A, together with payment of the sum obtained by multiplying (a) the
number of shares of Common Stock for which the Warrant is being exercised; by
(b) the Exercise Price.
2.2 Partial Exercise. This Warrant may be exercised for less than
the full number of shares of Common Stock or any fraction thereof called for
hereby, during the period of exercise specified above, at any time or from time
to time, in the manner set forth in Section 2.1. Upon any partial exercise, the
number of shares receivable upon the exercise of this Warrant as a whole, and
the sum payable upon the exercise of this Warrant as a whole, shall be
proportionately reduced. Upon such partial exercise, this Warrant shall be
surrendered and a new Warrant of like tenor and date for the purchase of the
number of such shares not purchased upon such exercise shall be issued by the
Company to the registered Holder hereof within ten (10) days after such
exercise. A Warrant shall be deemed to have been exercised immediately prior to
the close of business on the date of its surrender for exercise as provided
above, and the person entitled to receive the shares of Common Stock issuable
upon such exercise shall be treated for all purposes as the Holder of such
shares of record as of the close of business on such date. As soon as
practicable on or after such date, but in any event within ten (10) days after
payment of the Exercise Price pursuant to this Section 2, the Company shall
issue and deliver to the person
<PAGE>
-3-
or persons entitled to receive the same a certificate or certificates for the
number of full shares of Common Stock issuable upon such exercise, together with
cash, in lieu of any fraction of a share, equal to such fraction of the then
current Market Price (as defined below) of one (1) full share.
2.3 Net Issue Exercise. Notwithstanding any provisions herein to the
contrary, in lieu of exercising this Warrant for cash, the Holder may elect to
receive Warrant Stock equal to the value (as determined below) of this Warrant
(or the portion thereof being exercised) by surrender of this Warrant at the
principal office of the Company, together with the form of Election to Exercise
attached hereto fully executed, in which event the Company shall issue to the
Holder that number of Shares of Warrant Stock computed using the following
formula:
X = Y x (A-B) / A
Where Y = the aggregate number of Shares of Warrant Stock purchasable
under this Warrant or, if only a portion of this Warrant is
being exercised, the number of Shares of Warrant Stock for which
this Warrant is being exercised (at the date of such
calculation)
A = Market Price of one Share of Common Stock (at the date of
such calculation)
B = Exercise Price (as adjusted to the date of such
calculation).
For the purposes of this Section 2.3, "Market Price" shall mean, if the
Warrant Stock is traded on a national securities exchange, the Nasdaq National
Market or the over-the-counter market, the last reported price on the date of
valuation at which the Warrant Stock has traded on the Nasdaq National Market or
the average of the bid and asked prices on the over-the-counter market on the
date of valuation or, if no sale took place on such date, the last date on which
a sale took place. If the Warrant Stock is not so traded, "Market Price" shall
be the Purchase Price determined pursuant to Section 5.3 of the Warrant
Agreement.
3. Payment of Taxes. All shares of Common Stock issued upon the exercise
of a Warrant shall be validly issued, fully paid and non-assessable and free of
any security interest or other adverse claims or encumbrances (except those
created by the Holder) and free of claims of pre-emptive rights. The Company
shall pay all issuance taxes and similar governmental charges that may be
imposed in respect of the issue or delivery thereof, but in no event shall the
Company pay a tax on or measured by the net income or gain attributed to such
exercise. The Company shall not be required, however, to pay any tax or other
charge imposed in connection with any transfer of a Warrant or any transfer
involved in the issue of any certificate for shares of Common Stock in any name
other than that of the registered Holder of the Warrant surrendered in
<PAGE>
-4-
connection with the purchase of such shares, and in such case the Company shall
not be required to issue or deliver any stock certificate until such tax or
other charge has been paid or it has been established to the Company's
reasonable satisfaction that no tax or other charge is due.
4. Unregistered Securities. The Holder acknowledges that, (i) neither
the Warrant nor the shares of Common Stock issuable upon exercise thereof have
been registered under the Securities Act or the securities laws of any state or
other jurisdiction, (ii) the securities are subject to restrictions on
transferability and resale and may not be transferred or resold except as
permitted under said Act and such laws pursuant to registration or exemption
therefrom and (iii) the Holder will therefore be required to bear the financial
risk of this investment for an indefinite period of time. The Holder also
acknowledges that appropriate legends reflecting the status of the Warrants and
the shares of Common Stock issuable upon exercise thereof under federal and
state securities laws may be placed on the face of the Warrant certificates at
the time of their transfer and delivery to the Holder hereof or upon
Certificates representing shares of Common Stock at the time of their issuance
to the Holder upon exercise of the Warrant. The transfer of this Warrant and
the shares of Common Stock issuable upon exercise of this Warrant is subject to
the terms of this Warrant and the terms and provisions of the Warrant Agreement.
5. Exchanges. This Warrant is exchangeable, upon the surrender hereof by
the Holder at the principal office of the Company together with the form of
transfer authorization attached hereto as Exhibit B duly executed, for new
Warrants in such denominations as the Holder shall designate, of like tenor and
date representing in the aggregate the right to subscribe for and purchase the
number of shares of Warrant Stock issuable hereunder.
6. Adjustments.
6.1 Adjustments for Issue or Sale of Common Stock at Less Than
Purchase Price. If the Company shall issue or sell shares of its Common Stock
(other than those excepted by Section 6.1(k)) for a consideration per share less
than the greater of $104.59 (as adjusted by application of the adjustment
provisions in this Section 6) or the Appraised Value (the "Purchase Price"),
then and in each such case the holder of this Warrant, upon the exercise hereof
as provided in Section 2, shall be entitled to receive, in lieu of the shares of
Common Stock theretofore receivable upon the exercise of this Warrant, a number
of shares of Common Stock determined by (a) dividing the Purchase Price by an
Adjusted Purchase Price to be computed as provided below in this Section 6.1,
and (b) multiplying the resulting quotient by the number of shares of Common
Stock called for on the face of this Warrant. Such "Adjusted Purchase Price"
shall be computed (to the nearest cent, a half cent or more being considered a
full cent) by dividing:
<PAGE>
-5-
(A) the sum of (x) the result obtained by multiplying the number of
shares of Common Stock of the Company outstanding immediately prior to such
issue or sale by the Purchase Price (or, if an Adjusted Purchase Price
shall be in effect by reason of a previous adjustment under this Section
6.1, by such Adjusted Purchase Price), and (y) the aggregate consideration,
if any received by the Company upon such issue or sale; by
(B) the number of shares of Common Stock of the Company outstanding
immediately after such issue or sale.
No adjustment of the Purchase Price, or Adjusted Purchase Price if in effect,
however, shall be made in an amount less than $.01 per share, but any such
lesser adjustment shall be carried forward and shall be made at the time and
together with the next subsequent adjustment which together with any adjustments
as so carried forward shall amount to $.01 per share or more. For the purpose of
this Section 6.1, the following paragraphs 6.1(a) to 6.1(k) shall be applicable;
(a) Dividends in Common Stock. If the Company shall declare any
dividend or order any other distribution, upon any stock of the Company of
any class payable in Common Stock, such declaration or distribution shall
be deemed to be an issue and sale (as of the record date), without
consideration, of such Common Stock.
(b) Other Distributions. In case at any time or from time to time the
Company shall take a record of the holders of its Common Stock for the
purpose of entitling them to receive any dividend or other distribution
(collectively, a "Distribution") of:
(i) cash,
(ii) any evidences of its indebtedness (other than any stock or
other securities directly or indirectly convertible into or exchangeable
for Common Stock (any such stock or other securities being hereinafter
called "Convertible Securities")), any shares of its Capital Stock (other
than additional shares of Common Stock or Convertible Securities) or any
other securities or property of any nature whatsoever (other than cash), or
(iii) any options or warrants or other rights to subscribe for or
purchase any of the following: any evidences of its indebtedness (other
than Convertible Securities), any shares of its capital stock (other than
additional shares of Common Stock or Convertible Securities) or any other
securities or property of any nature whatsoever, then the holder or holders
of Warrants shall be entitled to receive upon the exercise thereof (or upon
exercise of the Put pursuant to 5.1 of the Warrant Agreement) at any time
on or
<PAGE>
-6-
after the taking of such record the number of shares of Common Stock to be
received upon exercise of such Warrants determined as stated herein and, in
addition and without further payment, the cash (including interest at a
rate equal to the T-bill rate in effect from time to time) from the date
such cash was paid to the other stockholders through the date of payment to
the holders of the Warrants, stock, securities, other property, options,
warrants and/or other rights to which such holder or holders would have
been entitled by way of the Distribution and subsequent dividends and
distributions if such holder or holders (x) had exercised such Warrants
immediately prior to such Distribution, and (y) had retained the
Distribution in respect of the Common Stock and all subsequent dividends
and distributions of any nature whatsoever in respect of any stock or
securities paid as dividends and distributions and originating directly or
indirectly from such Common Stock. A reclassification of the Common Stock
into shares of Common Stock and shares of any other class of stock shall be
deemed a distribution by the Company to the holders of its Common Stock of
such shares of such other class of stock within the meaning of this
paragraph 6.1(b) and, if the outstanding shares of Common Stock shall be
changed into a larger or smaller number of shares of Common Stock as a part
of such reclassification, such event shall be deemed a subdivision or
combination, as the case may be, of the outstanding shares of Common Stock
within the meaning of paragraph 6.1(a).
(c) Issuance or Sale of Convertible Securities. If the Company shall
issue or sell any Convertible Securities, there shall be determined the
price per share for which Common Stock is issuable upon the conversion or
exchange thereof, such determination to be made by dividing (i) the total
amount received or receivable by the Company as consideration for the issue
or sale of such Convertible Securities, plus the minimum aggregate amount
of additional consideration, if any, payable to the Company upon the
conversion or exchange thereof by (ii) the maximum number of shares of
Common Stock of the Company issuable upon conversion or exchange of all of
such Convertible Securities; and such issue or sale shall be deemed to be
an issue or sale for cash (as of the date of issue or sale of such
Convertible Securities) of such maximum number of shares of Common Stock at
the price per share so determined.
If such Convertible Securities shall by their terms provide for an
increase or increases, with the passage of time, in the amount of
additional consideration, if any, payable to the Company, or in the rate of
exchange, upon the conversion or exchange thereof, the Adjusted Purchase
Price shall, forthwith upon any such increase becoming effective, be
readjusted (but to no greater extent than originally adjusted) to reflect
the same.
If any rights of conversion or exchange evidenced by such Convertible
Securities shall expire without having been exercised, the Adjusted
Purchase Price shall forthwith be
<PAGE>
-7-
readjusted to be the Adjusted Purchase Price which would have been in
effect had an adjustment been made on the basis that the only shares of
Common Stock actually issued or sold were those issued upon the conversion
or exchange of such Convertible Securities, and that they were issued or
sold for the consideration actually received by the Company upon such
conversion or exchange, plus the consideration, if any, actually received
by the Company for the issue or sale of each of the Convertible Securities
as were actually converted or exchanged.
The provisions of this subsection shall not apply to any issuance of
additional shares of Common Stock for which an adjustment is provided
pursuant to this subsection.
(d) Grant of Rights, Warrants or Options for Common Stock. If the
Company shall grant any rights, warrants or options to subscribe for,
purchase or otherwise acquire Common Stock (other than those excepted by
Section 6.1(k)), there shall be determined the minimum price per share for
which Common Stock is issuable upon the exercise of such rights, warrant or
options, such determination to be made by dividing (i) the total amount, if
any, received or receivable by the Company as consideration for the
granting of such rights, warrants or options, plus the minimum aggregate
amount of additional consideration payable to the Company upon the exercise
of such rights, warrants or options, by (ii) the maximum number of shares
of Common Stock of the Company issuable upon the exercise of such rights,
warrant or options; and such grant shall be deemed to be an issue or sale
for cash (as of the date of the granting of such rights, warrants or
options) of such maximum number of shares of Common Stock at the price per
share so determined.
If such rights, warrants or options shall by their terms provide for
an increase or increases, with the passage of time, in the amount of
additional consideration payable to the Company upon the exercise thereof,
the Adjusted Purchase Price shall, forthwith upon any such increase
becoming effective, be readjusted (but to no greater extent than originally
adjusted) to reflect the same.
If any such rights, warrants or options shall expire without having
been exercised, the Adjusted Purchase Price shall forthwith be readjusted
to the Adjusted Purchase Price which would have been in effect had an
adjustment been made on the basis that the only shares of Common Stock so
issued or sold were those actually issued or sold upon the exercise of such
rights, warrants or options and that they were issued or sold for the
consideration actually received by the Company upon such exercise, plus the
consideration, if any, actually received by the Company for the granting of
all such rights, warrants or options.
<PAGE>
-8-
The provisions of this subsection shall not apply to any issuance of
additional shares of Common Stock for which an adjustment is provided
pursuant to this subsection.
(e) Grant of Rights, Warrants or Options for Convertible Securities.
If the Company shall grant any rights, warrants or options to subscribe
for, purchase or otherwise acquire Convertible Securities, such Convertible
Securities shall be deemed, for the purpose of Section 6.1(c), to have been
issued and sold (as of the actual date of issue or sale of such Convertible
Securities) for the total amount received or receivable by the Company as
consideration for the granting of such rights, warrants or options plus the
minimum aggregate amount of additional consideration, if any, payable to
the Company upon the exercise of such rights, warrants or options.
If such rights, warrants or options shall by their terms provide for
an increase or increases, with the passage of time, in the amount of
additional consideration payable to the Company upon the exercise thereof,
the Adjusted Purchase Price shall, forthwith upon any such increase
becoming effective, be readjusted (but to no greater extent than originally
adjusted) to reflect the same.
If any such rights, warrants or options shall expire without having
been exercised, the Adjusted Purchase Price shall forthwith be readjusted
to be the Adjusted Purchase Price which would have been in effect had an
adjustment been made upon the basis that the only Convertible Securities so
issued or sold were those issued or sold upon the exercise of such rights,
warrants or options and that they were issued or sold for the consideration
actually received by the Company for the granting of such rights, warrants
or options actually exercised.
The provisions of this subsection shall not apply to any issuance of
additional shares of Common Stock for which an adjustment is provided
pursuant to this subsection.
(f) Dilution in Case of Other Stock or Securities. In case any shares
of stock or other securities, other than Common Stock of the Company, shall
at the time be receivable upon the exercise of this Warrant, and in case
any additional shares of such stock or any additional such securities (or
any stock or other securities convertible into or exchangeable for any such
stock or securities) shall be issued or sold for a consideration per share
which is below the Purchase Price, then and in each such case the Adjusted
Purchase Price and the number of shares of Warrant Stock shall forthwith be
adjusted, substantially in the manner provided for above in this Section
6.1.
(g) Expenses Deducted. Upon any issuance or sale for cash of any
shares of Common Stock or Convertible Securities or any rights or options
to subscribe for,
<PAGE>
-9-
purchase or otherwise acquire any Common Stock or Convertible Securities,
the consideration received therefor shall be deemed to be the net amount
received by the Company thereof, after deducting all underwriting
commissions paid by the Company in connection with such issue or sale.
(h) Determination of Consideration. Upon any issuance or sale for a
consideration other than cash, or a consideration part of which is other
than cash, of any shares of Common Stock or Convertible Securities or any
rights or options to subscribe for, purchase or otherwise acquire any
Common Stock or Convertible Securities, the amount of the consideration
other than cash received by the Company shall be deemed to be the fair
value of such consideration as determined in good faith by the Board of
Directors of the Company. In case any Common Stock or Convertible
Securities or any rights or options to subscribe for, purchase or otherwise
acquire any Common Stock or Convertible Securities shall be issued or sold
together with other stock or securities or other assets of the Company for
a consideration which covers both, the consideration for the issue or sale
of such Common Stock or Convertible Securities or such rights or options
shall be deemed to be the portion of such consideration allocated thereto
in good faith by the Board of Directors of the Company. In the event that
warrants or rights are sold together with Permitted Preferred (as defined
in the Electra Warrant) to the extent that no adjustment is required to be
made to the shares purchasable upon exercise of the Electra Warrant as a
result of the issuance of such warrants or rights as set forth in the
Electra Warrant, no adjustments shall be required hereunder.
(i) Record Date Deemed Issue Date. In case the Company shall take a
record of the holders of shares of its stock of any class for the purpose
of entitling them (i) to receive a dividend or a distribution payable in
Common Stock or in Convertible Securities, or (ii) to subscribe for,
purchase or otherwise acquire Common Stock of Convertible Securities, then
such record date shall be deemed to be the date of the issue or sale of the
Common Stock issued or sold or deemed to have been issued or sold upon the
declaration of such dividend or the making of such other distribution, or
the date of the granting of such rights or subscription, purchase of other
acquisition, as the case may be.
(j) Shares Considered Outstanding. The number of shares of Common
Stock outstanding at any given time shall not include shares (A) issuable
in respect to scrip certificates issued in lieu of fractions of shares of
Common Stock, or (B) held in the treasury of the Company or by subsidiaries
of the Company.
(k) Duration of Adjustment Purchase Price. Following each computation
or readjustment of an Adjusted Purchase Price as provided in this Section
6.1, the new
<PAGE>
-10-
Adjusted Purchase Price shall remain in effect until a further computation
or readjustment thereof is required by this Section 6.1.
(l) Excepted Issues and Sales. No adjustments pursuant to this
Section 6.1 shall be made in respect of the issuance of shares of Common
Stock upon exercise of Warrants issued pursuant to the Agreement or upon
exercise of the Electra Warrants. The number of shares of Common Stock
referred to in this subparagraph shall be proportionately adjusted to
reflect any reclassification, subdivision or combination of Common Stock or
any distribution or dividends on the Common Stock payable in Common Stock.
6.2 Reorganization, Consolidation, Merger. In case of any
reorganization of the Company (or any other corporation the stock or other
securities of which are at the time receivable on the exercise of this Warrant),
or in case the Company (or any such other corporation) shall consolidate with or
merge into another corporation or convey all or substantially all of its assets
to another corporation, then and in each such case the holder of this Warrant,
upon the exercise hereof as provided in Section 2, at any time after the
consummation of such reorganization, consolidation, merger or conveyance, shall
be entitled to receive, in lieu of the stock or other securities and property
receivable upon the exercise of this Warrant prior to such consummation, the
stock or other securities or property to which such holder would have been
entitled upon such consummation if such holder had exercised this Warrant
immediately prior thereto, all subject to further adjustment as provided in this
Section 6. In each such case the terms of this Warrant shall be applicable to
the shares of stock or other securities or property receivable upon the exercise
of this Warrant after such consummation.
6.3 Other Adjustments. In case at any time conditions arise by
reason of action taken by the Company which, in the opinion of its Board of
Directors or in the opinion of the holders of Warrants representing a majority
of the shares of Common Stock issuable upon exercise of such Warrants, are not
adequately covered by the other provisions of this Section 6 and which might
materially and adversely affect the exercise rights of the holders of the
Warrants, then the Board of Directors of the Company shall appoint a firm of
independent certified public accountants of recognized national standing (other
than the accountants then auditing the books of the Company) to determine the
adjustment, if any, on a basis consistent with the standards established in the
other provisions of this Section 6, necessary with respect to the Exercise Price
or adjusted Exercise Price, as so to preserve, without dilution, the exercise
rights of the holders of the Warrants. Upon receipt of such opinion, the Board
of Directors of the Company shall forthwith make the adjustments described in
such report.
6.4 No Dilution or Impairment. The Company will not, by amendment or
restatement of its certificate of incorporation or by-laws or through
reorganization, consolidation,
<PAGE>
-11-
merger, dissolution, issue or sale of securities, sale of assets or any other
voluntary action, avoid or seek to avoid the observance or performance of any of
the terms of the Warrants, but will at all times in good faith assist in the
carrying out of all such terms and in the taking of all such actions as may be
necessary or appropriate in order to protect the rights of the holders of the
Warrants herein and in the Warrant Agreement. Without limiting the generality of
the foregoing, the Company shall take all such action as may be necessary or
appropriate in order that the Company may validly and legally issue fully paid
and non-assessable shares upon the exercise of all Warrants at the time
outstanding.
6.5 Accountants' Certificate as to Adjustments. In each case of an
adjustment in the shares of Common Stock or other stock, securities or property
receivable on the exercise of the Warrants, the Company at its expense shall
cause a firm of independent certified public accountants of recognized standing
selected by the Company (who may be the accountants then auditing the books of
the Company) to compute such adjustment in accordance with the terms of the
Warrants and prepare a certificate setting forth such adjustment and showing in
detail the facts upon which such adjustment is based, including a statement of:
(a) the consideration received or to be received by the Company for any
additional shares of Warrant Stock issued or sold or deemed to have been sold;
and (b) the number of shares of Warrant Stock outstanding or deemed to be
outstanding. The Company will forthwith mail a copy of each certificate to each
Holder of a Warrant at the time outstanding.
6.6 Notices of Record Date. If and when the Company shall establish
a record date for the holders of its Stock (or such other securities at the time
receivable upon the exercise of the Warrant) for the purpose:
(a) of determining the holders entitled to receive any dividend
or other distribution, or any right to subscribe for or purchase any shares of
stock of any class or any securities, or to receive any other right; or
(b) of any capital reorganization of the Company, any
reclassification of the capital stock of the Company, any consolidation or
merger of the Company with or into another corporation; or
(c) of any voluntary dissolution, liquidation or winding-up of
the Company; then, and in each such case, the Company will mail or cause to be
mailed, to each holder of a Warrant at the time outstanding a notice specifying,
as the case may be, the record date established with respect to such dividend,
distribution, voting or other right, and stating the amount and character of
such dividend, distribution, voting or other right, or the date on which such
<PAGE>
-12-
reorganization, reclassification, consolidation, merger, conveyance,
dissolution, liquidation or winding-up is to take place, and the time, if any,
to be fixed as of which the holders of record of Stock (or such other securities
at the time receivable upon the exercise of the Warrants) shall be entitled to
vote upon or exchange their shares of Stock (or such other securities) for
securities or other property deliverable upon such reorganization,
reclassification, consolidation, merger, conveyance, dissolution, liquidation or
winding-up. Such notice shall be mailed at least thirty (30) days prior to the
date therein specified. The rights to notice provided in this Section 6.6 are in
addition to the rights provided elsewhere herein or in the Warrant Agreement.
7. Loss or Mutilation. Upon receipt by the Company of evidence
satisfactory to it in the exercise of reasonable discretion, of the ownership of
and the loss, theft, destruction or mutilation of any Warrant and, in the case
of loss, theft or destruction, of indemnity satisfactory to it in the exercise
of reasonable discretion, and, in the case of mutilation, upon surrender and
cancellation thereof, the Company will execute and deliver in lieu thereof a new
Warrant of like tenor.
8. Reservation of Common Stock. The Company shall at all times reserve
and keep available for issue upon the exercise of Warrants such number of its
authorized but unissued shares of Common Stock as will be sufficient to permit
the exercise in full of all outstanding Warrants and the issuance of all shares
of Warrant Stock.
9. Definitions. For purposes of this Warrant the terms capitalized
herein have the meanings set forth below.
"Generally Accepted Accounting Principles" shall mean accounting
principles which are (i) consistent with the principles promulgated or
adopted for the United States by the Financial Accounting Standards Board
and its predecessors in effect from time to time, (ii) applied on a basis
consistent with prior periods, and (iii) such that a certified public
account would, insofar as the use of accounting principles is pertinent, be
in a position to deliver an unqualified opinion as to financial statements
in which such principles have been properly applied.
"Securities Act" shall mean the Securities Act of 1933, as
amended, or any successor federal statute, and the rules and regulations of
the Commission thereunder, all as the same shall be in effect at the time.
"Warrant Stock" shall mean Common Stock issuable upon exercise of
this Warrant in accordance with its terms and any capital stock or other
securities into which or for which such Common Stock shall have been
converted or exchanged pursuant to any recapitalization, reorganization or
merger of the Company.
<PAGE>
-13-
10. Warrant Agreement. The terms of the Warrant Agreement are
incorporated by reference in this Warrant as fully as if the same were set forth
herein, shall be considered an integral part of this Warrant and shall entitle
the parties hereto to all rights and benefits accruing thereunder.
11. Information. The Company shall furnish each Holder of Warrants with
copies of all reports, proxy statements, and similar materials that it furnishes
to Holders of its Stock. In addition, it shall furnish to each such Holder of
Warrants copies of all reports filed by it with the Securities and Exchange
Commission.
12. Notices. All notices and other communications under this Warrant
shall be in writing and shall be delivered as provided in the Warrant Agreement.
13. Change, Waiver. Neither this Warrant nor any term hereof may be
changed, waived, discharged or terminated orally but only by an instrument in
writing signed by the party against which enforcement by the change, waiver,
discharge or termination is sought.
14. Headings. The headings in this Warrant are for purposes of
convenience of reference only and shall not be deemed to constitute a part
hereof.
15. Law Governing. This Warrant is delivered in the State of Delaware
and shall be construed and enforced in accordance with and governed by the
internal substantive laws of such State.
July 31, 1995 CAREER EDUCATION
CORPORATION
BY: /s/ JOHN M. LARSON, President
-----------------------------------------
<PAGE>
EXHIBIT A
[Subscription Form to Be Executed Upon Exercise of Warrant]
The undersigned registered Holder or assignee of such registered Holder of
the within Warrant, hereby (1) subscribes for _______________ shares which the
undersigned is entitled to purchase under the terms of the within Warrant, (2)
makes payment of the Exercise Price called for by the within Warrant, and (3)
directs that the shares issuable upon exercise of said Warrant be issued as
follows:
___________________________________________
(Name)
___________________________________________
(Address)
Signature:__________________________________
Dated:__________________________, 199_
<PAGE>
EXHIBIT B
[ASSIGNMENT]
(To be executed by the registered Holder
to enact a transfer of the within Warrant)
FOR VALUE RECEIVED, ______________________________ hereby sells, assigns,
and transfers unto ______________________________ of __________________________,
the right to purchase shares evidenced by the within Warrant, and does hereby
irrevocably constitute and appoint ______________________________ to transfer
such right on the books of the Company, with full power of substitution.
Dated:_______________, 199_
_________________________________________
Signature
WITNESS:
- ------------------------------
<PAGE>
EXHIBIT 10.16
================================================================================
-------------------------------
SECURITIES PURCHASE AGREEMENT
-------------------------------
Series C Redeemable Preferred Stock
($5,000,000)
and
Warrants to Purchase Common Stock
(Exercisable for 25,285 Aggregate Shares,
$.01 per share Exercise Price)
Dated as of July 31, 1995
================================================================================
<PAGE>
TABLE OF CONTENTS
(Not Part of the Agreement)
<TABLE>
<CAPTION>
Page
----
<S> <C>
1. AUTHORIZATION OF FINANCING 2
--------------------------
2. PURCHASE AND SALE OF SECURITIES 2
-------------------------------
3. CLOSING OF SALE OF SECURITIES 3
-----------------------------
4. CONDITIONS OF CLOSING 3
---------------------
4.1 CLOSINGS UNDER THE PURCHASE AGREEMENT 3
-------------------------------------
4.2 CLOSINGS UNDER THE SENIOR LOAN DOCUMENTS 4
----------------------------------------
4.3 OPINION OF COUNSEL 4
------------------
4.4 REPRESENTATIONS AND WARRANTIES; NO PREFERRED STOCK
--------------------------------------------------
FAILURE EVENT 4
-------------
4.5 PURCHASE PERMITTED BY APPLICABLE LAWS 4
-------------------------------------
4.6 NO ADVERSE LEGISLATION, ACTION OR DECISION 4
------------------------------------------
4.7 APPROVALS AND CONSENTS 5
----------------------
4.8 PROCEEDINGS 5
-----------
4.9 FINANCING FEE 5
-------------
4.10 LEGAL FEES 5
----------
4.11 NO MATERIAL ADVERSE CHANGE 6
--------------------------
4.12 SERIES C PREFERRED STOCK AND WARRANT CERTIFICATES 6
-------------------------------------------------
4.13 STOCKHOLDERS AGREEMENT 6
----------------------
4.14 REGISTRATION RIGHTS AGREEMENT 6
-----------------------------
4.15 GUARANTY AGREEMENT 6
------------------
4.16 CERTIFICATE OF DESIGNATIONS 6
---------------------------
4.17 FINANCIAL INFORMATION 6
---------------------
4.18 BOARD OF DIRECTORS APPROVAL 6
---------------------------
4.19 DUE DILIGENCE INVESTIGATION 7
---------------------------
</TABLE>
i
<PAGE>
TABLE OF CONTENTS
(Not Part of the Agreement)
<TABLE>
<CAPTION>
Page
----
<S> <C>
4.20 COMPLIANCE CERTIFICATE 7
----------------------
4.21 SECRETARY'S CERTIFICATES; GOOD STANDING 7
---------------------------------------
4.22 PROCESS AGENT CONSENT LETTER 7
----------------------------
4.23 ADDITIONAL INFORMATION 8
----------------------
5. AFFIRMATIVE COVENANTS 8
---------------------
5.1 FINANCIAL STATEMENTS AND OTHER REPORTS 8
--------------------------------------
5.2 INSPECTION OF PROPERTY 13
----------------------
5.3 MAINTENANCE OF PROPERTIES; INSURANCE 13
------------------------------------
5.4 EXISTENCE, ETC 14
--------------
5.5 PAYMENT OF TAXES AND CLAIMS 14
---------------------------
5.6 COMPLIANCE WITH LAWS, ETC. 14
--------------------------
5.7 ADDITIONAL FEES 15
---------------
5.8 USE OF PROCEEDS 15
---------------
5.9 ACCOUNTANTS 15
-----------
5.10 FURTHER ASSURANCES 16
------------------
5.11 ACCOUNTS AND RECORDS 16
--------------------
5.12 RESERVATION OF SHARES 16
---------------------
6. NEGATIVE COVENANTS 16
------------------
6.1 LIMITATION ON DEBT 16
------------------
6.2 LIMITATION ON RESTRICTED PAYMENTS 16
---------------------------------
6.3 LIMITATION ON INVESTMENTS 16
-------------------------
6.4 TRANSACTIONS WITH AFFILIATES 17
----------------------------
6.5 MERGER, CONSOLIDATION, SALE OR TRANSFER OF ASSETS 17
-------------------------------------------------
6.6 SALES OF ASSETS 18
---------------
6.7 ANNUAL BUDGET 18
-------------
6.8 CERTAIN CONTRACTS 19
-----------------
</TABLE>
ii
<PAGE>
TABLE OF CONTENTS
(Not Part of the Agreement)
<TABLE>
<CAPTION>
Page
----
<S> <C>
6.9 NO NEW SUBSIDIARIES; NO AMENDMENT OF CERTAIN
--------------------------------------------
DOCUMENTS 20
---------
6.10 CHANGE IN BUSINESS 20
------------------
6.11 EXECUTIVE OFFICERS 21
------------------
6.12 WITHHOLDING TAXES 21
-----------------
6.13 NO PLEDGE OF SHARES 22
-------------------
6.14 CHANGE IN CONTROL 22
-----------------
6.15 SALE OF EQUITY SECURITIES 22
-------------------------
6.16 FISCAL YEAR; CHANGE IN ACCOUNTING PRACTICES 23
-------------------------------------------
7. PREFERRED STOCK FAILURE EVENTS 23
------------------------------
7.1 PREFERRED STOCK FAILURE EVENTS 23
------------------------------
7.2 OTHER REMEDIES 27
--------------
8. REPRESENTATIONS, COVENANTS AND WARRANTIES 28
-----------------------------------------
8.1 ORGANIZATION; AUTHORITY 28
-----------------------
8.2 AUTHORIZATION 28
-------------
8.3 CAPITAL STOCK AND RELATED MATTERS 29
---------------------------------
8.4 LITIGATION 31
----------
8.5 COMPLIANCE 31
----------
8.6 OFFERING 32
--------
8.7 ERISA AND LABOR RELATIONS 32
-------------------------
8.8 FINANCIAL STATEMENTS; MATERIAL FACTS 37
------------------------------------
8.9 OUTSTANDING DEBT 38
----------------
8.10 TAXES 38
-----
8.11 CONFLICTING AGREEMENTS 39
----------------------
8.12 POLLUTION AND OTHER REGULATIONS 39
-------------------------------
</TABLE>
iii
<PAGE>
TABLE OF CONTENTS
(Not Part of the Agreement)
<TABLE>
<CAPTION>
Page
----
<S> <C>
8.13 CERTAIN ACTS 40
------------
8.14 GOVERNMENTAL PERMITS, CONSENTS, ETC 40
-----------------------------------
8.15 FEES AND COMMISSIONS 41
--------------------
8.16 INTELLECTUAL PROPERTY 41
---------------------
8.17 ABSENCE OF CERTAIN CHANGES 42
--------------------------
8.18 LEASES 42
------
8.19 PURCHASE AGREEMENT 42
------------------
8.20 INSURANCE 43
---------
8.21 RESERVATION OF SHARES 43
---------------------
8.22 TITLE TO PROPERTIES 43
-------------------
8.23 CONTRACTS AND AGREEMENTS 44
------------------------
8.24 RECRUITMENT; ADMISSIONS PROCEDURES; ATTENDANCE;
-----------------------------------------------
REPORTS 45
-------
8.25 COHORT DEFAULT RATE 46
-------------------
8.26 RECEIVABLES 46
-----------
8.27 WORKING CAPITAL AT THE DATE OF THIS AGREEMENT 46
---------------------------------------------
9. REPRESENTATIONS OF ELECTRA 47
--------------------------
9.1 PURCHASE OF SECURITIES 47
----------------------
9.2 INCORPORATION; AUTHORIZATION 47
----------------------------
9.3 NO CONFLICTS 47
------------
</TABLE>
iv
<PAGE>
TABLE OF CONTENTS
(Not Part of the Agreement)
<TABLE>
<CAPTION>
Page
----
<S> <C>
9.4 NO BROKERS' FEES 48
----------------
10. DEFINITIONS 48
-----------
11. MISCELLANEOUS 64
-------------
11.1 PAYMENTS 64
--------
11.2 EXPENSES; INDEMNITY 65
-------------------
11.3 CONSENT TO AMENDMENTS; SUBORDINATION 66
------------------------------------
11.4 PERSONS DEEMED OWNERS 67
---------------------
11.5 SURVIVAL OF REPRESENTATIONS AND WARRANTIES; ENTIRE
--------------------------------------------------
AGREEMENT 67
---------
11.6 SUCCESSORS AND ASSIGNS 68
----------------------
11.7 NOTICES 68
-------
11.8 DESCRIPTIVE HEADINGS, ETC. 68
--------------------------
11.9 GOVERNING LAW; CHOICE OF FORUM 68
------------------------------
11.10 WAIVER OF JURY TRIAL 69
--------------------
</TABLE>
v
<PAGE>
SCHEDULES:
- ---------
Schedule 1 Investors
Schedule 4.11 Material Adverse Change
Schedule 6.1 Existing Debt
Schedule 6.4 Transactions with Affiliates
Schedule 8.1 Jurisdictions Where Qualified; Subsidiaries
Schedule 8.2 Authorization
Schedule 8.3 Capitalization
Schedule 8.4 Litigation
Schedule 8.5 Compliance
Schedule 8.7 ERISA and Labor Relations
Schedule 8.11 Conflicting Agreements
Schedule 8.12 Pollution and Other Regulations
Schedule 8.14 Governmental Permits
Schedule 8.16 Licenses and Options
Schedule 8.18 Leases
Schedule 8.19 Amendments to the Purchase Agreement
Schedule 8.20 Insurance
Schedule 8.22 Real Property
Schedule 8.23 Contracts
Schedule 8.24 Recruitment; Admissions Procedures; Attendance; Reports
Schedule 8.25 Cohort Default Rate
Schedule 10.1 Existing Liens
EXHIBITS:
- --------
Exhibit 1A Form of Certificate of Designations
Exhibit 1B Form of Warrant Certificate
Exhibit 4.1 Purchase Agreement
Exhibit 4.3 Form of Opinion of the Company's Counsel
Exhibit 4.13 Form of Stockholders Agreement
Exhibit 4.14 Form of Registration Rights Agreement
Exhibit 4.15 Form of Guaranty Agreement
Exhibit 7.1 Form of Penalty Warrant Certificate
vi
<PAGE>
SECURITIES PURCHASE AGREEMENT
THIS SECURITIES PURCHASE AGREEMENT, dated as of July 31, 1995, by and
among CAREER EDUCATION CORPORATION, a Delaware corporation (the "Company"),
-------
ELECTRA INVESTMENT TRUST P.L.C. ("EIT"), ELECTRA ASSOCIATES, INC. ("EAI", and
--- ---
together with EIT, "Electra").
-------
W I T N E S S E T H:
- - - - - - - - - -
WHEREAS, the Company has entered into an Asset Purchase Agreement,
dated as of April 14, 1994, as amended on April 24, 1995, May 5, 1995, May 12,
1995, May 26, 1995, June 15, 1995, June 27, 1995, July 12, 1995 and July 28,
1995 (the "Purchase Agreement"), with National Education Centers, Inc., a
------------------
California corporation ("NEC, Inc."), and National Education Corporation, a
Delaware corporation and sole stockholder of NEC, Inc. ("NEC"), pursuant to
which, among other things, the Company will be acquiring substantially all of
the assets of NEC, Inc. relating to Brown Institute and Allentown Business
School (collectively, the "NEC Schools"), and the Company will assume from NEC,
Inc. certain of NEC, Inc.'s liabilities pertaining to the NEC Schools (the
"Acquisition"); and
- ------------
WHEREAS, the Company has requested that Electra extend certain
financial accommodations to the Company in connection with the financing of the
Acquisition and certain of the working capital needs of the Company; and
WHEREAS, the Company desires, upon the terms and conditions
hereinafter provided, to sell the Series C Preferred Stock and the Warrants (as
each is hereinafter defined, and collectively, the "Securities") to Electra; and
----------
WHEREAS, Electra desires, upon the terms and conditions hereinafter
provided, to purchase from the Company the Series C Preferred Stock and the
Warrants;
1
<PAGE>
NOW, THEREFORE, in consideration of the mutual promises and covenants
herein contained and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties, intending to be
bound, hereby agree as follows:
Certain terms used in this Agreement are defined in Section 10 hereof.
Unless otherwise indicated, references to statutes are to statutes of the United
States of America. Accounting terms used herein shall be construed in accordance
with GAAP. In addition, unless the contrary intention appears, terms and
expressions having a defined or generally accepted meaning under the securities
laws of the United States shall have the same meaning in this Agreement.
1. AUTHORIZATION OF FINANCING.
--------------------------
In order to provide funds for, among other things, the Acquisition, the
Company has authorized the issuance, sale and delivery of (i) 500 shares of its
Series C Redeemable Preferred Stock, par value $.01 per share, with a stated
value of $10,000 per share (the "Series C Preferred Stock"), which series has
------------------------
the rights, restrictions, privileges and preferences as set forth in the
Certificate of Designations for the Series C Preferred Stock of the Company,
substantially in the form of Exhibit 1A attached hereto (the "Certificate of
---------- --------------
Designations"), and (ii) the warrants (together with any such Penalty Warrants
- ------------
(as hereinafter defined) that may be issued to the holders of the Series C
Preferred Stock from time to time pursuant to Section 7.1 hereof, collectively,
the "Warrants" and each individually, a "Warrant") to purchase a maximum
-------- -------
aggregate, without giving effect to the issuance of any Penalty Warrants which
may be issued from time to time, of 23.0%, subject to certain adjustments, of
the outstanding shares of Common Stock of the Company, on a fully diluted basis,
at an exercise price of $.01 per share, evidenced by one or more warrant
certificates (the "Warrant Certificates") to be substantially in the form of
--------------------
Exhibit 1B attached hereto.
- ----------
2. PURCHASE AND SALE OF SECURITIES.
-------------------------------
2
<PAGE>
The Company hereby agrees to issue and sell to each Electra entity and each
Electra entity, severally and not jointly, agrees, subject to the terms and
conditions herein set forth and in reliance upon the representations, warranties
and agreements of the Company herein contained, to purchase at the Closing from
the Company (i) the aggregate number of shares of Series C Preferred Stock set
forth opposite the Electra entity's name in Schedule 1 attached hereto for the
----------
purchase price set forth opposite the Electra entity's name and registered in
the Electra entity's name or that of the Electra entity's nominee, as the
Electra entity shall request, and (ii) the aggregate number of Warrants, set
forth opposite the Electra entity's name in Schedule 1 attached hereto, in the
----------
form of one or more Warrant Certificates, registered in the Electra entity's
name or that of the Electra entity's nominee, as the Electra entity shall
request.
3. CLOSING OF SALE OF SECURITIES.
-----------------------------
The purchase and delivery of the Securities shall take place at the offices
of Pryor, Cashman, Sherman & Flynn, 410 Park Avenue, New York, New York 10022
(the "Closing") to be held simultaneously with the execution and delivery of
-------
this Agreement, or at such other place or on such other date as Electra and the
Company may agree upon, but in no event later than August 31, 1995 (the "Closing
-------
Date"). At the Closing, the Company will deliver one or more certificates
- ----
evidencing the Series C Preferred Stock and one or more certificates evidencing
the Warrants to each of the appropriate Electra entities, against payment of the
purchase price therefor by transfer of immediately available funds to such bank
or other financial institution as the Company may direct in writing, for credit
to the Company's account, and the Company shall pay a non-refundable financing
fee to EI of $100,000 (the "Financing Fee"). If at the Closing, the Company
-------------
shall fail to tender to Electra any of the Securities or to EI the Financing Fee
provided for above in this Section 3, or any of the conditions specified in
Section 4 hereof shall not have been satisfied or waived by Electra, Electra
shall, at its election, be relieved of all further obligations under this
Agreement, without thereby waiving any other rights its may have by reason of
such failure or such non-fulfillment.
3
<PAGE>
4. CONDITIONS OF CLOSING.
---------------------
Electra's obligation to purchase and pay for the Securities is subject to
the satisfaction prior to or at the Closing of each of the following conditions:
4.1 CLOSINGS UNDER THE PURCHASE AGREEMENT. The transactions
-------------------------------------
contemplated under the Purchase Agreement, in the form of Exhibit 4.1 hereto,
-----------
shall close simultaneously with the transactions contemplated herein, without
any material terms or conditions therein being waived by the Company, unless the
Company has the prior written consent to such waiver by Electra. The Company
shall have provided to Electra an Officer's Certificate setting forth the status
of all consents, approvals and authorizations from the DOE or any Accrediting
Body required in connection with the consummation of the transactions
contemplated under the Purchase Agreement, stating that all such consents,
approvals and authorizations which have not been obtained prior to the Closing
shall be obtained within 180 days following the Closing, and shall contain a
certification that the Company has no reason to believe that any such consents,
approvals or authorizations will not be obtained within such time period.
4.2 CLOSINGS UNDER THE SENIOR LOAN DOCUMENTS. The Senior Loan
----------------------------------------
Documents shall have been entered into simultaneously with the transactions
contemplated herein and in the Purchase Agreement and the Company shall have
satisfied all of the conditions in the Senior Loan Document to allow it to
borrow at the Closing of up to $6,500,000 from the reducing revolving credit
facility. In addition, the Company shall have a minimum unused availability
under the reducing revolving credit facility of $1,500,000.
4.3 OPINION OF COUNSEL. Electra shall have received from Goldberg,
------------------
Kohn, Bell, Black, Rosenbloom & Moritz, Ltd., special counsel to the Company, an
opinion substantially in the form set forth in Exhibit 4.3, addressed to
-----------
Electra, dated the Closing Date and otherwise reasonably satisfactory in form
and substance to Electra.
4
<PAGE>
4.4 REPRESENTATIONS AND WARRANTIES; NO PREFERRED STOCK FAILURE EVENT.
----------------------------------------------------------------
The representations and warranties of the Company contained in this Agreement,
the other Transaction Documents and those otherwise made in any writing by the
Company, furnished in connection with or pursuant to this Agreement and the
other Transaction Documents or in connection with the transactions contemplated
hereby or thereby, shall be true and correct when made and at the time of the
Closing as though made at such time, and the Company shall have performed or
complied with the covenants, conditions and agreements contained in this
Agreement and the other Transaction Documents required to be performed and
complied with by the Company at or prior to the Closing, other than covenants,
conditions and agreements contained in the Third Party Documents which have been
waived by the parties thereto and disclosed to Electra on or prior to the
Closing; and there shall exist at the time of the Closing and after giving
effect to such transactions no Preferred Stock Failure Event or Preferred Stock
Failure.
4.5 PURCHASE PERMITTED BY APPLICABLE LAWS. The purchase of and
-------------------------------------
payment for the Securities shall not violate any applicable law or governmental
regulation (including, without limitation, Section 5 of the Securities Act) and
shall not subject Electra to any tax, penalty, liability or other onerous
condition under or pursuant to any applicable law or governmental regulation or
order. Electra shall have received such certificates or other evidence as they
may reasonably request to establish compliance with the conditions set forth in
this Section 4.5.
4.6 NO ADVERSE LEGISLATION, ACTION OR DECISION. After the date
------------------------------------------
hereof, no legislation, order, rule, ruling or regulation shall have been
enacted or made by or on behalf of any governmental body, department or agency,
nor shall have any legislation been introduced and favorably reported for
passage to either House of Congress by any committee of either such House to
which such legislation has been referred for consideration or any state
legislature in any jurisdiction in which the Schools operate or by any committee
of such legislature to which such legislation has been referred for
consideration, nor shall any
5
<PAGE>
decision of any court of competent jurisdiction within the United States have
been rendered which, in Electra's judgment, would have a Material Adverse
Effect. There shall be no action, suit, investigation, or proceeding pending, or
to the Company's knowledge, threatened, against or affecting the Company or any
of its Subsidiaries, the Company's or such Subsidiaries' properties or rights,
or any of the Company's or such Subsidiaries' Affiliates, officers or directors,
before any court, arbitrator or administrative or governmental body which (i)
seeks to restrain, enjoin, prevent the consummation of or otherwise affect the
transactions contemplated by this Agreement or the other Transaction Documents
or (ii) questions the validity or legality of any such transactions or seeks to
recover damages or to obtain other relief in connection with any such
transactions, and, to the Company's knowledge, there shall be no valid basis for
any such action, proceeding or investigation.
4.7 APPROVALS AND CONSENTS. The Company shall have duly received all
----------------------
authorizations, waivers, consents, approvals, licenses, franchises, permits and
certificates (collectively, "Consents") by or of all federal, state and local
--------
governmental authorities and all material Consents by or of all other Persons
necessary or advisable for the issuance of the Securities, and all thereof shall
be in full force and effect at the time of Closing.
4.8 PROCEEDINGS. All proceedings taken or to be taken in connection
-----------
with the transactions contemplated hereby and in the other Transaction
Documents, and all documents incident thereto, shall be reasonably satisfactory
in form and substance to Electra, and Electra shall have received all such
counterpart originals or certified or other copies of such documents as it may
request.
4.9 FINANCING FEE. EI shall have received payment in full of the
-------------
Financing Fee set forth in Section 3 hereof.
4.10 LEGAL FEES. Pryor, Cashman, Sherman & Flynn, special counsel to
----------
Electra, shall have received payment of its fees and expenses referred to in
Section 11.2 hereof.
6
<PAGE>
4.11 NO MATERIAL ADVERSE CHANGE. Except as specifically set forth on
--------------------------
Schedule 4.11, since December 31, 1994, there shall have been no Material
Adverse Change in the Company or any of the Schools.
4.12 SERIES C PREFERRED STOCK AND WARRANT CERTIFICATES. The Company
-------------------------------------------------
shall have delivered to Electra one or more Series C Preferred Stock and Warrant
certificates, each representing the number of shares of Series C Preferred Stock
or Warrants being purchased from the Company by each Electra entity as set forth
on Schedule 1 hereto.
----------
4.13 STOCKHOLDERS AGREEMENT. The Stockholders Agreement, in the
----------------------
form of Exhibit 4.13 hereto (the "Stockholders Agreement"), shall be executed
------------ ----------------------
and delivered to Electra contemporaneously with the transactions contemplated
herein.
4.14 REGISTRATION RIGHTS AGREEMENT. The Registration Rights
-----------------------------
Agreement, in the form of Exhibit 4.14 hereto (the "Registration Rights
------------ -------------------
Agreement"), shall be executed and delivered to Electra contemporaneously with
- ---------
the transactions contemplated herein.
4.15 GUARANTY AGREEMENT. The Guaranty Agreement, in the form of
------------------
Exhibit 4.15 hereto (the "Guaranty Agreement"), shall be executed and delivered
- ------------ ------------------
to Electra contemporaneously with the transactions contemplated herein.
4.16 CERTIFICATE OF DESIGNATIONS. The Certificate of Designations
---------------------------
for the Series C Preferred Stock shall be executed and duly filed with the
Delaware Secretary of State.
4.17 FINANCIAL INFORMATION. The Company shall have delivered to
---------------------
Electra, to the extent available, the monthly consolidated profit and loss
statements and balance sheets for the Company and its Subsidiaries and for the
NEC Schools since December 31, 1994 for all monthly periods ending prior to the
Closing Date, which financial information shall not represent a Material Adverse
Change in the Company. The Company shall have delivered to Electra its best
reasonable estimate of a consolidated pro forma opening balance sheet of the
Company and
7
<PAGE>
its Subsidiaries, as of the Closing Date, giving effect to the Acquisition and
the transactions contemplated by this Agreement and the other Transaction
Documents, in form and substance satisfactory to Electra. The Company shall have
delivered to Electra copies of the audited financial statements for each of the
NEC Schools for the years ended December 31, 1993 and 1994.
4.18 BOARD OF DIRECTORS APPROVAL. The approval of the Board of
---------------------------
Directors of each Electra entity approving the terms and conditions of this
Agreement and the other Transaction Documents to which they are a party and all
of the transactions contemplated hereby and thereby shall have been obtained.
4.19 DUE DILIGENCE INVESTIGATION. Electra and its special counsel
---------------------------
shall have completed their business and legal due diligence investigation to
their satisfaction. Electra shall not have discovered any fact which in its
reasonable determination would make the consummation of the transactions
contemplated by this Agreement or the other Transaction Documents not in its
best interest.
4.20 COMPLIANCE CERTIFICATE. Electra shall have received an
----------------------
Officers' Certificate, dated the Closing Date, certifying that the conditions
specified in Article 4 required to be fulfilled on the Closing Date (other than
actions required to be taken by Electra) have been fulfilled.
4.21 SECRETARY'S CERTIFICATES; GOOD STANDING. The Company shall
---------------------------------------
have delivered to Electra (i) a certificate of its corporate secretary or
assistant secretary as to (I) resolutions of its Board of Directors or
shareholders action, as required, approving and authorizing the execution,
delivery and performance of each of the Transaction Documents to which it is a
party and authorizing the issuance and delivery of Series C Preferred Stock and
the Warrants, as being in full force and effect without modification,
supplementation or amendment and (II) as to its Certificate of Incorporation
(including, without limitation, the Certificate of
8
<PAGE>
Designations) and the By-laws and all amendments to date as being in full force
and effect, with true, correct and complete copies of such resolutions,
Certificates of Incorporation (including, without limitation, the Certificate of
Designations) and By-laws attached thereto, (ii) an incumbency certificate of
its officers executing this Agreement and the other Transaction Documents to
which it is a party and (iii) a certificate of subsistence and/or good standing
of the Company and each Subsidiary, dated as of a recent date prior to the
Closing, issued by the Secretary of State of Delaware and of each other state in
which the Company and such Subsidiary is qualified to do business.
4.22 PROCESS AGENT CONSENT LETTER. On or prior to the Closing Date,
----------------------------
Electra shall have received a letter from CT Corporation System located at 1633
Broadway, New York, New York 10019, indicating its consent to its appointment by
the Company as its agent to receive service of process as specified in Section
11.9 hereof.
4.23 ADDITIONAL INFORMATION. The Company shall have executed and/or
----------------------
delivered such other information and documentation as Electra and its special
counsel shall request. Electra shall have received such other documents and
opinions, in form and substance satisfactory to Electra, and its special
counsel, relating to matters incident to the Acquisition and the transactions
contemplated by the Transaction Documents.
5. AFFIRMATIVE COVENANTS.
---------------------
The Company hereby covenants that from and after the date of this Agreement
through the Closing and thereafter so long as any Securities remain outstanding,
as follows; provided, however, that upon the redemption in full of all of the
-------- -------
shares of Series C Preferred Stock, Sections 5.7 through 5.9 shall no longer be
applicable:
5.1 FINANCIAL STATEMENTS AND OTHER REPORTS. The Company covenants
--------------------------------------
that it will deliver, or cause to be delivered, to each of the Significant
Holders:
(i) as soon as practicable and in any event at least 30 days
prior to the commencement of each fiscal year of the Company, the Company's
preliminary annual operating budget and the capital budget, including
consolidated and
9
<PAGE>
consolidating statements of budgeted cash flow and income of the Company
and its Subsidiaries for each month in such fiscal year, all in reasonable
detail, and as soon as practicable and in any event no later than 30 days
following the commencement of each fiscal year of the Company, the
Company's final annual operating budget and the capital budget;
(ii) as soon as practicable and in any event within 30 days
after the end of each fiscal month of the Company (other than the last
month of each fiscal quarter), consolidated and consolidating statements of
income and cash flow of the Company and its Subsidiaries for such month and
for the period from the beginning of the current fiscal year to the end of
such month and consolidated and consolidating balance sheets of the Company
and its Subsidiaries as at the end of such month, and (a) setting forth in
each case, in comparative form, figures relating to figures for the
corresponding months in the annual budget (including, without limitation,
the initial annual budget prepared on or prior to the Closing on a pro
forma basis giving effect to the consummation of the Acquisition), all in
reasonable detail, and (b) in comparative form, figures for the
corresponding months in the preceding fiscal year, all in reasonable
detail;
(iii) as soon as practicable and in any event within 45 days
after the end of each fiscal quarter of the Company, consolidated and
consolidating statements of income and cash flow of the Company and its
Subsidiaries for such quarter and for the period from the current fiscal
year to the end of such quarter and consolidated and consolidating balance
sheets of the Company and its Subsidiaries as at the end of such quarter,
and (a) setting forth, in comparative form, figures for the corresponding
quarter in the annual budget (including, without limitation, the initial
annual budget prepared on or prior to the Closing on a pro forma basis
giving effect to the consummation of the Acquisition), all in reasonable
detail, and (b) setting forth, in comparative form, figures for the
corresponding quarter in the preceding fiscal year, all in reasonable
detail, and (I) if
10
<PAGE>
requested by the Significant Holders in connection with the determination
of the Earned Amount (as defined in the Warrant), reviewed by Arthur
Andersen or another independent accounting firm of nationally recognized
standing and (II) certified by the chief financial officer of the Company
as being a true and correct reflection in all material respects of the
financial condition and results of operation of the Company and its
Subsidiaries on a consolidated and consolidating basis (determined in
accordance with GAAP), subject to changes resulting from year-end
adjustments and except as otherwise noted therein;
(iv) as soon as practicable and in any event within 120 days
after the end of each fiscal year, audited consolidated and consolidating
statements of income and cash flow of the Company and its Subsidiaries for
such year, and audited consolidated and consolidating balance sheets of the
Company and its Subsidiaries as at the end of such year, and setting forth,
in each case, in comparative form, corresponding figures from the
preceding fiscal year, and corresponding figures for such year from the
annual budget ( including, without limitation, the initial annual budget
prepared on or prior to the Closing on a pro forma basis giving effect to
the consummation of the Acquisition) (which comparisons to the annual
budget need not be audited), all in reasonable detail, and, as to the
consolidated statements, reported upon by Arthur Andersen or another
independent accounting firm of nationally recognized standing whose
certification shall be without qualification as to the scope of the audit
or as to GAAP, and, as to the consolidating statements, certified by the
chief financial officer of the Company;
(v) promptly upon transmission thereof, copies of all such
financial statements, proxy statements, notices and reports as it or any of
its Subsidiaries shall send to its security holders, copies of all reports
which it or any of its officers or directors send to, and all registration
statements (without exhibits) which it files, with the Commission or any
securities exchange (should the Company or any of its Subsidiaries be or
become public companies), copies of all press releases and other statements
made
11
<PAGE>
generally available by the Company or any Subsidiary to the public
concerning material developments in the business of the Company and its
Subsidiaries, as the case may be, copies of communications sent to or
received from stockholders of the Company (in their capacity as
stockholders) and copies of all material communications sent to or received
from the Senior Lenders or any other lender to the Company;
(vi) promptly upon receipt thereof, a copy of each other report
(including, without limitation, each management and/or controller letter)
submitted to the Company or any of its Subsidiaries by independent
accountants in connection with any annual, interim or special audit of the
books of the Company or any of its Subsidiaries made by such accountants;
(vii) together with each delivery of financial statements
required by clauses (iii) and (iv) above, an Officers' Certificate of the
Company (a) stating that the signers have reviewed the terms of this
Agreement and the Securities and have made, or caused to be made under
their supervision, a review in reasonable detail of the transactions and
condition of the Company and its Subsidiaries during the fiscal period
covered by such financial statements and that such review has not
disclosed the existence during or at the end of such fiscal period, and
that the signers do not have knowledge of the existence, as at the date of
the Officers' Certificate, of any condition or event which constitutes a
Preferred Stock Failure Event or Preferred Stock Failure or, if any such
condition or event existed or exists, specifying the nature and period of
existence thereof and what action, if any, the Company has taken or is
taking or proposes to take with respect thereto, and (b) demonstrating
(with computations in reasonable detail) compliance by the Company and its
Subsidiaries with, to the extent each remains applicable at such time, (I)
the provisions of Sections 6.1 and 6.7 and (II) in the event of the sale,
lease, transfer or other disposition of material assets of the Company or
any of its Subsidiaries, either directly or through the sale of stock or
other equity of any such Subsidiary, during such fiscal period, Sections
6.5,
12
<PAGE>
6.6, 6.14 or 6.15, as the case may be;
(viii) together with each delivery of consolidated financial
statements required by clause (iv) above, a certificate of the independent
public accountants giving the report thereon stating that in conducting the
audit of such financial statements, they have obtained no knowledge of any
Preferred Stock Failure Event or Preferred Stock Failure or, if they have
obtained knowledge of any Preferred Stock Failure Event or Preferred Stock
Failure, specifying the nature and period of existence thereof;
(ix) immediately upon any executive officer of the Company or
any of its Subsidiaries obtaining knowledge (a) of any condition or event
which constitutes a Preferred Stock Failure Event or Preferred Stock
Failure, (b) that the holder of any Preferred Shares has given any notice
or taken any other action with respect to a claimed Preferred Stock Failure
Event or Preferred Stock Failure under this Agreement, (c) of any
condition or event which, in the opinion of management of the Company,
could have a Material Adverse Effect, (d) that any Person has given any
notice to the Company or any of its Subsidiaries or taken any other action
with respect to a claimed default or event or condition of the type
referred to in clause (ii) of Section 7.1 hereof, or (e) of the institution
of any litigation involving claims against the Company or any of its
Subsidiaries equal to or greater than $100,000 with respect to any single
cause of action or $250,000 with respect to the aggregate of all causes of
action, or any adverse determination in any litigation involving a
potential liability to the Company or any of its Subsidiaries equal to or
greater than $100,000 with respect to any single cause of action or
$250,000 with respect to the aggregate of all causes of action, an
Officers' Certificate specifying the nature and period of existence of any
such condition or event, or specifying the notice given or action taken by
such holder or Person and the nature of such claimed Preferred Stock
Failure Event, Preferred Stock Failure, event or condition, and what
action, if any, the Company has taken, is taking or proposes to take with
respect thereto;
13
<PAGE>
(x) immediately upon any officer of the Company or any of its
Subsidiaries becoming aware of the occurrence of (i) any "reportable
event", as such term is defined in Section 4043 of ERISA, in connection
with any Plan or trust created thereunder, (ii) an event requiring the
Company or any Subsidiary to provide security to a Plan under Section
401(a)(29) of the Code, (iii) any "prohibited transaction" incurred by the
Company, any of its Subsidiaries or any "Disqualified Person" (as defined
in Section 4975 of the Code) (other than an exempt "prohibited
transaction"), as such term is defined in section 4975 of the Code or in
section 406 of ERISA in connection with any Plan or any trust created
thereunder, (iv) the institution of proceedings or the taking or expected
taking of action by the PBGC or the Company or any of its Subsidiaries to
terminate or withdraw or partially withdraw from a Multiemployer Plan
within the meaning of Section 4203 or 4205 of ERISA or under Section 4062,
4063 or 4064 of ERISA (in connection with any Plan or any trust created
thereunder), (v) any "accumulated funding deficiency" within the meaning of
Section 412 of the Code or Section 302 of ERISA or any delinquency as to
contributions or payments to or in respect of any Plans, (vi) any employee
benefit Plan and trust which is intended to be qualified within the meaning
of Section 401(a) and tax exempt within the meaning of 501(a) of the Code,
no longer being qualified or tax exempt, (vii) any transaction or any
failure to take any action or make any required contributions or any act or
omission which would give rise to liability for any excise tax under
Section 4971 through 4980B of the Code inclusive, (viii) any action or
event which would materially increase the cost of any employee benefit
Plan, or (ix) any other action taken by the Internal Revenue Service, the
PBGC or the Department of Labor in connection with any employee benefit
Plan and trust of the Company or its Subsidiaries, a written notice
specifying the nature thereof, what action, if any, the Company or any such
Subsidiary has taken, is taking or proposes to take with respect thereto,
and, when known, any action taken or threatened by the Internal Revenue
Service or the PBGC with respect thereto;
14
<PAGE>
(xi) immediately upon any revision to any of the financial
statements referred to in clauses (i), (ii), (iii) or (iv) above, such
financial statements, as revised;
(xii) with reasonable promptness, such other information and
data with respect to the Company or any of its Subsidiaries as such
Significant Holder may reasonably request;
(xiii) (a) within 30 days after Closing, an audited opening
balance sheet of the NEC Schools on a stand-alone basis as of the Closing
Date, with an opinion of Arthur Andersen, and (b) within 60 days after
Closing, an opening certified consolidated balance sheet of the Company,
with a review opinion of Arthur Andersen or another independent accounting
firm of nationally recognized standing;
(xiv) together with each delivery of financial statements
required by clauses (iii) and (iv) above, and, to the extent prepared by
the Company, clause (ii) above, an Officers' Certificate of the Company
containing an analysis of the variance between the results of operations
and the budget for such period and a management commentary as to such
results of operation; and
(xv) promptly upon transmission thereof, copies of all
applications, notices and other reports as it or any of its Subsidiaries
shall send to DOE or any Accrediting Body.
5.2 INSPECTION OF PROPERTY. The Company covenants that it, and
----------------------
each of its Subsidiaries, will permit any Person designated by a majority of the
holders of the Securities in writing, at such holders' expense, to visit and
inspect any of the properties of the Company and any of its Subsidiaries, to
examine the books and financial records of the Company and any of its
Subsidiaries and make copies thereof or extracts therefrom and to discuss its
affairs, finances and accounts with its officers and its independent public
accountants, all at such reasonable times during normal business hours, upon
reasonable prior notice and as often as such holders may reasonably request.
15
<PAGE>
5.3 MAINTENANCE OF PROPERTIES; INSURANCE. The Company and its
------------------------------------
Subsidiaries will maintain or cause to be maintained in good repair, working
order and condition (ordinary wear and tear excepted) all material properties
used in the business of the Company and its Subsidiaries and from time to time
will make or cause to be made all appropriate repairs, renewals and replacements
thereof. The Company and its Subsidiaries shall not permit any lease or
agreement pursuant to which the Company or any Subsidiary leases, uses or
occupies any of its respective real or personal property to be canceled or
terminated by the other party to such lease or agreement prior to the expiration
of its stated term which individually or in the aggregate would have a Material
Adverse Effect. The Company and its Subsidiaries will maintain or cause to be
maintained, with financially sound and reputable insurers who are rated by A. M.
Best Company's Rating Service as "A" or higher or, as to workers' compensation
or similar insurance, in an insurance fund or by self-insurance authorized by
the laws of the jurisdiction in question, insurance with respect to their
respective properties and businesses against loss or damage of the kinds
customarily insured against by corporations of established reputation engaged in
the same or similar businesses and similarly situated, of such type and in such
amounts including appropriate deductible levels as are customarily carried under
similar circumstances by such other corporations. All policies under this
Section 5.3 shall provide that 30 days prior written notice shall be given to
the holders of the Securities by the insurer prior to a termination of such
policy. The Company, in its discretion, will use the proceeds of all such
casualty insurance policies to either (i) repay the Senior Debt, (ii) redeem the
Series C Preferred Stock, subject to the rights of the Senior Lenders under the
Senior Loan Documents, (iii) repair or replace the damaged property or (iv)
reinvest such proceeds in the Company's business in accordance with the Senior
Loan Documents. The Company will use every reasonable effort to provide
Directors and Officers insurance to all of its directors and officers on
commercially reasonable terms within sixty (60) days after the Closing Date.
5.4 EXISTENCE, ETC. Subject to the sales of assets permitted in
--------------
accordance with Section 6.6, the Company will, and
16
<PAGE>
will cause each of its Subsidiaries to, at all times preserve and keep in full
force and effect its corporate existence, and Permits, rights, licenses,
franchises, trademarks, trade names, patents and other proprietary information
material to its business, and will qualify and cause each of its Subsidiaries to
qualify to do business in any jurisdiction where the ownership of such property
or Permits or the operation of its business makes such qualification necessary
except where the failure to so qualify does not have a Material Adverse Effect.
5.5 PAYMENT OF TAXES AND CLAIMS. The Company will, and will cause
---------------------------
each of its Subsidiaries to, pay all taxes, assessments and other governmental
charges imposed upon it or any of its properties or assets or in respect of any
of its franchises, business income or properties before any penalty or interest
accrues thereon, and all claims (including, without limitation, claims for
labor, services, materials and supplies) for sums which have become due and
payable and which by law have or may become a Lien upon any of their properties
or assets; provided, however, that no such charge or claim need be paid if being
-------- -------
contested in Good Faith and if adequate reserves shall have been made therefor
in accordance with GAAP.
5.6 COMPLIANCE WITH LAWS, ETC. The Company will, and will cause
-------------------------
each of its Subsidiaries to, comply with the requirements of all applicable
laws, rules, regulations and orders of any court, Accrediting Body or other
governmental authority, including, without limitation, 34 C.F.R. Section 600 and
Section 668, except where the failure to so comply will not have, and is not
likely to result in, a Material Adverse Effect. The Company will, and will cause
each of its Subsidiaries to, timely make all filings required to be made by it
with all relevant Federal, state and/or local regulatory bodies, except where
the failure to so file will not have, and is not likely to result in, a Material
Adverse Effect.
5.7 ADDITIONAL FEES. The Company hereby agrees to pay an annual
---------------
non- refundable portfolio administration fee to EI of $75,000, payable in equal
quarterly installments commencing on September 30, 1995 for the pro rata period
from the Closing Date and, thereafter, every March 31, June 30, September 30 and
17
<PAGE>
December 31, for so long as any Preferred Shares are outstanding, and for the
pro-rata period from the payment of the last quarterly installment to the date
on which the Preferred Shares are no longer outstanding. Such payments shall be
made by either a check drawn on a U.S. bank and delivered to EI at 70 East 55th
Street, New York, New York 10022 or a wire transfer of immediately available
funds to EI at NatWest Bank, N.A., 175 Water Street, 14th Floor, New York, New
York 10038, Account Name: Electra, Inc., ABA Number: 021000322, Account Number:
2753103667 or at such other bank or other financial institution and account
therein as shall be designated by Electra or EI, as appropriate. The parties
hereby agree that the portfolio administration fee is intended solely as, and
represents, reasonable compensation to EI for its time and expenses in
administering Electra's investment in the Securities and is not and shall not be
regarded as a consulting or financial advisory or other similar fee.
5.8 USE OF PROCEEDS. The Company shall use all of the proceeds
---------------
received from the sale of the Securities pursuant to this Agreement to fund (i)
the Acquisition, (ii) the closing costs associated with the closing under this
Agreement and the transactions contemplated herein and/or (iii) working capital
in the ordinary course of business.
5.9 ACCOUNTANTS. The Company has retained Arthur Andersen to audit
-----------
the Company's and its Subsidiaries' financial statements. In the event the
services of Arthur Andersen or any firm of independent public accountants
hereafter so employed by the Company are terminated, the Company will promptly
thereafter notify the Significant Holders and will request the firm of
independent public accountants whose services were terminated to deliver to the
Significant Holders a letter of such firm setting forth the reasons for the
termination of their services. In its notice, the Company shall state whether
the change of accountants was recommended or approved by the Board of Directors
or any committee thereof. In the event of any such termination, the Company will
promptly thereafter engage a firm of independent public accountants of
recognized national standing or other firm of independent public accountants
approved by the Significant Holders.
18
<PAGE>
5.10 FURTHER ASSURANCES. From time to time the Company will, and
------------------
will cause each of its Subsidiaries to, execute and deliver to the Significant
Holders, such other instruments, certificates agreements and documents and
take such other action and do all other things as may be requested by any of the
Significant Holders in order to implement or effectuate the terms and provisions
of this Agreement and the other Transaction Documents (other than the Third
Party Documents).
5.11 ACCOUNTS AND RECORDS. The Company and all of its Subsidiaries
--------------------
will keep true records and books of account in which full, true and correct
entries will be made of all dealings or transactions in relation to its business
and affairs.
5.12 RESERVATION OF SHARES. The Company shall at all times keep
---------------------
reserved and available for issuance the number of shares of Common Stock for
issuance upon exercise of all of the Warrants (as such number may be adjusted
from time to time pursuant to the terms of the Warrants), and, upon issuance
of any Penalty Warrants, will reserve and keep available for issuance the number
of shares of Common Stock issuable upon exercise of the Penalty Warrants (as
such number may be adjusted from time to time pursuant to the terms of the
Penalty Warrants).
6. NEGATIVE COVENANTS.
------------------
The Company hereby covenants from and after the date of this Agreement
through the Closing and thereafter so long as any Securities remain outstanding
as follows; provided, however, that upon the redemption in full of all of the
-------- -------
shares of Series C Preferred Stock, (i) Sections 6.1 through 6.3, 6.9, 6.13,
6.14 and 6.16 shall no longer be applicable and (ii) Sections 6.5, 6.6 and 6.15
shall be amended as provided therein:
6.1 LIMITATION ON DEBT. The Company covenants that it will not,
------------------
and will not permit any of its Subsidiaries to, create, incur, assume, suffer to
exist or otherwise become or be liable with respect to any Debt except for
Permitted Indebtedness.
6.2 LIMITATION ON RESTRICTED PAYMENTS. The Company
---------------------------------
19
<PAGE>
covenants that it will not, and will not permit any of its Subsidiaries to,
directly or indirectly, pay or declare or set apart for payment any Restricted
Payment.
6.3 LIMITATION ON INVESTMENTS. The Company covenants that it will
-------------------------
not, and will not permit any of its Subsidiaries to, make or obligate itself to
make, directly or indirectly, any Investment, other than Permitted Investments.
6.4 TRANSACTIONS WITH AFFILIATES. The Company covenants that it
----------------------------
will not, and will not permit any of its Subsidiaries to, directly or
indirectly, purchase, acquire or lease any property to, or otherwise deal with,
in the ordinary course of business or otherwise, any Affiliate of the Company or
its Subsidiaries except (i) as set forth on Schedule 6.4 hereto, (ii) on an
------------
arm's length basis in transactions which are on no less favorable terms to the
Company or such Subsidiary than would be the case with a similar transaction
with an unaffiliated Person; provided, however, that if the transaction or
-------- -------
series of related transactions is over $50,000 then the transaction shall be
approved by a majority of the independent directors of the Company, (iii) the
Company may pay the fees provided for in Section 5.7 hereof, (iv) reasonable,
customary and regular fees to the non-management directors of the Company or any
of its Subsidiaries, (v) any Restricted Payment that is not otherwise prohibited
by Section 6.2 hereof, (vi) any transaction among the Company and its Wholly-
Owned Subsidiaries or among such Sub sidiaries in the ordinary course of their
respective businesses, or (vii) any transaction related to compensation or
benefit arrangements in the ordinary course of business, with an employee
benefit plan or trust for the benefit of employees of the Company or its
Subsidiaries. Notwithstanding the foregoing, the Company covenants that it will
not, and will not permit any of its Subsidiaries to, without the consent of the
Significant Holders, make any payments to Heller of fees and/or reimbursement of
expenses (other than reasonable third-party expenses and, to the extent that
during any fiscal year Heller shall not otherwise have received or be entitled
to receive a fee as provided below, direct out of pocket expenses incurred by
Heller) relating to (a) the consummation of the acquisition of certain
subsidiaries and operations of the Company and/or (b) consulting, advisory or
20
<PAGE>
other services provided by Heller; provided, however, that the Company shall be
-------- -------
permitted to pay Heller fees in respect of such services not to exceed $100,000
during any fiscal year so long as no Preferred Stock Failure Event or Preferred
Stock Failure, or Event of Default or Default (each as defined in the Senior
Loan Agreement), shall be in existence at the time of such payment or would
result from the payment of such fees.
6.5 MERGER, CONSOLIDATION, SALE OR TRANSFER OF ASSETS. The Company
-------------------------------------------------
covenants that it shall not, and will not permit any of its Subsidiaries to, be
a party to any merger or consolidation with any Person or sell, lease or
transfer or otherwise dispose of all or substantially all of its assets or the
assets acquired in the Acquisition, to any Person, except that (i) any Wholly-
Owned Subsidiary of the Company may merge into the Company or another Wholly-
Owned Subsidiary of the Company if the Company or such other Wholly-Owned
Subsidiary, as the case may be, shall be the surviving corporation, and if,
immediately after giving effect to such transaction, no condition or event shall
exist which constitutes a Preferred Stock Failure Event or Preferred Stock
Failure, and (ii) any Subsidiary of the Company may sell, lease, transfer or
otherwise dispose of any of its assets to the Company or to any other Wholly-
Owned Subsidiary of the Company, whether by dissolution, liquidation or
otherwise; provided, however, that from and after the date on which the shares
-------- -------
of Series C Preferred Stock shall have been redeemed in full, none of the
foregoing transactions shall be prohibited if as a result of such transaction
there shall be a general distribution to stockholders of the Company whereby
Electra shall realize its IRR Threshold Amount (as defined in the Stockholder
Agreement).
6.6 SALES OF ASSETS. Except for (i) the pledge of and security
---------------
interest in assets under the terms of the Senior Loan Documents, (ii) Permitted
Liens incurred in connection with Permitted Indebtedness, and (iii) any
Subsidiary of the Company selling or leasing its assets in the manner described
in Section 6.5(ii) hereof, the Company covenants that it will not, and will not
permit any of its Subsidiaries to, sell, lease, transfer or otherwise dispose
of, in a single transaction or a series of related transactions, any asset,
directly or through the sale of Capital Stock or other equity of a Subsidiary of
the Company to
21
<PAGE>
any Person in excess of $100,000 in any fiscal year, other than sales of
obsolete equipment and equipment to be replaced in accordance with the capital
budget and the proposed sale of the building located at 3118 Lake Street East,
Minneapolis, Minnesota. Notwithstanding the foregoing, from and after the date
on which the shares of Series C Preferred Stock shall have been redeemed in
full, none the foregoing transactions shall be prohibited (i) if as a result of
such transaction there shall be a general distribution to stockholders whereby
Electra shall realize its IRR Threshold Amount or (ii) if such sale or series of
related sales of assets, when aggregated with all sales of assets during the
twelve (12) months preceding such sale, does not involve a Substantial Part.
6.7 ANNUAL BUDGET. The Company covenants that it will submit the
-------------
preliminary annual budget of the Company and its Subsidiaries, setting forth, on
a consolidated basis, the aggregate expenditures for capital assets and lease
expenses expected to be made by the Company and its Subsidiaries during the
fiscal year to which such budget relates, and any subsequent material
modifications thereto, to the Significant Holders prior to the submission of
such preliminary annual budget (and such material modifications thereto) to the
Board of Directors for its approval.
6.8 CERTAIN CONTRACTS. The Company covenants that it will not, and
-----------------
will not permit any of its Subsidiaries to, without the prior written consent of
the Significant Holders, enter into or be a party to, or amend, modify,
supplement or waive any provisions under, the following types of agreements:
(i) except as permitted by Section 6.3, any contract or agreement
providing for the making of loans, advances or capital contributions to any
Person or for the purchase of any property from any Person, in each case in
order to enable such Person to maintain working capital, net worth or any
other balance sheet condition or to pay debts, dividends or expenses;
(ii) any contract or agreement for the purchase of materials,
supplies or other property or services if such
22
<PAGE>
contract (or any related document) requires that payment by the Company or
a Subsidiary for such materials, supplies or other property or services
shall be made regardless of whether or not delivery of such materials,
supplies or other property or services is ever made or tendered;
(iii) any contract or agreement to rent or lease (as lessee) any real
or personal property if such contract (or any related document) provides
that such obligation to make payments thereunder is absolute and
unconditional under conditions not customarily found in commercial leases
then in general use or requires that the lessee purchase or otherwise
acquire securities or obligations of the lessor;
(iv) any contract or agreement for the sale or use of materials,
supplies or other property, or the rendering of services, if such contract
(or any related document) requires that payment for such materials,
supplies or other property, or the use thereof, or payment for such
services, shall be expressly subordinated to any indebtedness of the
purchaser or user of such materials, supplies or other property or the
Person entitled to the benefit of such services owed or to be owed to any
Person; or
(v) except as permitted by Section 6.3, any other contract or
agreement which, in economic effect, is substantially equivalent to a
guarantee (other than as permitted in accordance with Section 6.1), except
by the endorsement of negotiable instruments for deposit or collection or
similar transactions in the ordinary course of business.
6.9 NO NEW SUBSIDIARIES; NO AMENDMENT OF CERTAIN DOCUMENTS. The
------------------------------------------------------
Company covenants that, without the prior written consent of the Significant
Holders, it will not (i) except in connection with a Permitted Acquisition,
create any new Subsidiaries or enter into any joint ventures or partnerships;
provided, that any new Subsidiaries created in connection with a Permitted
- --------
Acquisition shall be incorporated in the State of Delaware, the Certificate of
Incorporation and Bylaws of such newly-formed Subsidiary shall be substantially
similar to the
23
<PAGE>
Certificates of Incorporation and Bylaws of the Company's Subsidiaries in
existence on the date hereof, and such newly-formed Subsidiary shall have agreed
to become a party to the Guaranty Agreement by the execution of a counterpart
signature page thereto, (ii) permit any amendment of, or modification or
supplement to, its or any of its Subsidiaries' Certificates of Incorporation or
By-laws, (iii) enter into, or permit any Subsidiary to enter into, any
management or similar agreement for the management of any school unless such
management or similar agreement contains an option for the purchase of such
school, or (iv) permit any amendment of, or modification or supplement to, the
Transaction Documents or the Senior Loan Documents; provided, however, that,
-------- -------
without the prior written consent of the Significant Holders, (x) the School
Management Agreement may be amended in any manner that does not increase the
exercise price for the purchase of Arizona Automotive Institute or make more
onerous the covenants and obligations of the Company under the School Management
Agreement and any other management or similar agreement entered into by the
Company from time to time may be amended in a similar fashion, and (y) the
Senior Loan Documents may be amended provided that such amendment does not (1)
increase the amount of such indebtedness, (2) result in any earlier scheduled
maturity date or payment date of any amount under the Senior Loan Agreement, (3)
result in any increase in the interest rate by more than 150 basis points,
prepayment charges, fees or other amounts payable pursuant to the Senior Loan
Agreement, (4) increase the amount of collateral securing such Senior Debt, (5)
result in the Senior Debt having a Weighted Average Life to Maturity less than
the Weighted Average Life to Maturity of such Senior Debt prior to such
amendment, or (6) in the judgment of the Company's Board of Directors contain
terms, provisions and conditions that taken as a whole are more burdensome or
onerous to the Company than those in effect prior to such contemplated
amendment.
6.10 CHANGE IN BUSINESS. Neither the Company nor any of its
------------------
Subsidiaries will enter into or engage in any business other than that currently
engaged in or as currently anticipated, and previously disclosed in writing to
the Significant Holders, as a result of the consummation of the Acquisition and
the Transaction Documents.
24
<PAGE>
6.11 EXECUTIVE OFFICERS. The Company covenants that (i) if at any one
------------------
time John M. Larson shall cease to serve as the chief executive officer of the
Company, the Company will, within 180 days of such individual's ceasing to serve
as the chief executive officer, fill such individual's position or have such
individual's responsibilities assumed by an individual, who has been approved by
the Significant Holders, with comparable stature, reputation and experience in
the industry as the individual ceasing to serve and (ii) the Company shall
employ a chief financial officer, which individual shall be approved by the
Significant Holders, and if at any time such individual shall cease to serve as
the chief financial officer of the Company, the Company will, within 180 days of
such individual's ceasing to serve as the chief financial officer, fill such
individual's position or have such individual's responsibilities assumed by an
individual, who has been approved by the Significant Holders, with comparable
stature, reputation and experience in the industry as the individual ceasing to
serve.
6.12 WITHHOLDING TAXES. (a) The Company covenants that it will not
-----------------
withhold United States withholding taxes from payments to be made to holders of
the Securities if such holders (i) are corporations organized under the laws of
a jurisdiction out side the United States or are otherwise persons not resident
in the United States for United States federal income tax purposes, and (ii)
provide the Company, upon the Company's reasonable request, with one or more of
Internal Revenue Service Form W-8, Form 4224 or other applicable forms,
certificates or documents certifying as to entitlement to an exemption from any
such withholding requirements.
(b) The Company covenants that it will not withhold United
States withholding taxes from payments to be made to holders of the Securities
in excess of an applicable treaty rate if such holders (i) are corporations
organized under the laws of a jurisdiction outside the United States or are
otherwise persons not resident in the United States for United States federal
income tax purposes, and (ii) provide the Company, upon the Company's reasonable
request, with one or more of certifications of their residence address, Internal
Revenue
25
<PAGE>
Service Form 1001 or other applicable forms, certificates or documents
certifying as to entitlement to a reduced rate of withholding under any such
withholding requirements.
(c) Neither Section 6.12(a) nor Section 6.12(b) hereof shall
require the Company to apply an exemption or reduced rate of withholding during
any period when it shall have received notice or has knowledge (i) that the
residence information previously provided on any applicable form, certificate or
document is incorrect and no corrected form, certificate or document as
applicable has been provided to the Company, or (ii) of any other information
which would render such exemption or reduced rate inapplicable.
6.13 NO PLEDGE OF SHARES. The Company covenants that it will not
-------------------
mortgage, pledge, hypothecate or create or permit to exist any security interest
in, or Lien on, any shares of the Capital Stock of its Subsidiaries, other than
as may be con templated by the Senior Loan Documents.
6.14 CHANGE IN CONTROL. Prior to the effective date of an Initial
-----------------
Public Offering, (i) there shall not occur a Disposition and (ii) Heller shall
at no time own less than 40% of the outstanding shares of Common Stock of the
Company on a fully diluted basis.
6.15 SALE OF EQUITY SECURITIES. The Company covenants that it will
-------------------------
not, and will not permit any of its Subsidiaries to, sell or otherwise dispose
of, or part with control of, any shares of Capital Stock of the Company or any
of its Subsidiaries; provided, however, that the Company shall be permitted
-------- -------
to sell (i) any of its shares of Capital Stock in a public offering of
securities registered pursuant to Section 5 of the Securities Act if, and only
if, (a) such offering shall meet the thresholds set forth in the definition of
"Initial Public Offering" herein and (b) the net proceeds of such offering
(after making any and all payments required under the Senior Loan Documents) are
sufficient to allow the Company to make the mandatory redemption payments
required under Section 5 of the Certificate of Designations, (ii) any of its
shares of Capital Stock in a private offering of securities which is exempt from
the registration requirements of
26
<PAGE>
Section 5 of the Securities Act in conjunction with the Permitted Acquisitions,
(iii) shares of Common Stock under and pursuant to the stock option plan to be
instituted for the benefit of the management employees of the Company and which
plan shall provide for the issuance of up to 12,215 shares of Common Stock (as
such number may be adjusted in accordance with such plan) and (iv) any
Subsidiary of the Company may issue additional shares of its Capital Stock to
the Company. In no event will the Company at any time, directly or indirectly,
own less than 100% of the Capital Stock of each of its Subsidiaries.
Notwithstanding anything herein to the contrary, from and after the redemption
in full of all of the shares of Series C Preferred Stock, the only limitation of
this Section 6.15(i) which shall continue shall be the requirement that a public
offering of securities by the Company must meet the thresholds set forth in the
definition of "Initial Public Offering" herein.
6.16 FISCAL YEAR; CHANGE IN ACCOUNTING PRACTICES. Neither the Company
-------------------------------------------
nor any of its Subsidiaries shall change its fiscal year for accounting or tax
purposes from a period consisting of the 12-month period ending on December 31
of each calendar year. The Company covenants that it will not, and will not
permit any of its Subsidiaries to, change the accounting practices which have
been consistently applied, other than in compliance with required changes in
GAAP.
7. PREFERRED STOCK FAILURE EVENTS.
------------------------------
7.1 PREFERRED STOCK FAILURE EVENTS. If any of the following events
------------------------------
shall occur and be continuing for any reason whatsoever (and whether such
occurrence shall be voluntary or involuntary or come about or be effected by
operation of law or otherwise):
(i) the Company defaults in the payment of any dividends payable on
the Series C Preferred Stock on the scheduled dividend payment date or
breaches any other material terms of the Certificate of Designations, which
default is not cured within five (5) days of such date; or
(ii) any representation or warranty made in
27
<PAGE>
writing by the Company in this Agreement, in any other Transaction Document
(other than the Third Party Documents) or in any writing furnished to
Electra in connection with or pursuant to this Agreement, the Transaction
Documents (other than the Third Party Documents) or in connection with the
transactions contemplated by this Agreement, shall be false or misleading
in any material respect on the date as of which made; or
(iii) the Company fails to perform or observe any agreement, term or
condition contained in this Agreement or in any other Transaction Document
(other than the Certificate of Designations as provided in clause (i)
above or the Third Party Documents), and, if such failure is capable of
being remedied, such failure shall not have been remedied within 60 days
after such failure shall first have become known to any officer of the
Company or written notice shall have been received by the Company
(regardless of the source of such notice); or
(iv) Any Plan (or any employee benefit Plan of any entity which is
in the same controlled group of corporations as the Company or any
Subsidiary (the "Related Plans")) which is subject to ERISA or the Code
shall have incurred an "accumulated funding deficiency" within the meaning
of Section 412 of the Code or Section 302 of ERISA, or any lien shall arise
with respect to any such Plan or any such Related Plan under Section 412(n)
of the Code, which in either case results in the imposition of liability on
the Company or any Subsidiary in an amount in excess of $250,000.
(v) the Company or any Subsidiary makes an assignment for the
benefit of creditors or is generally not paying its debts as such debts
become due; or any order or decree for relief in respect of the Company or
any Subsidiary is entered under any bankruptcy, reorganization, compromise,
arrangement, insolvency, readjustment of debt, dissolution or liquidation
or similar law, whether now or hereafter in effect (herein called the
"Bankruptcy Law"), of any jurisdiction; or the Company or any of its
--------------
Subsidiaries petitions or applies to any tribunal for, or consents to,
28
<PAGE>
the appointment of, or taking possession by, a trustee, receiver,
custodian, liquidator or similar official of the Company or any of its
Subsidiaries, or of any Substantial Part of the assets of the Company or
any of its Subsidiaries, or commences a voluntary case under the Bankruptcy
Law of the United States or any proceedings relating to the Company or any
of its Subsidiaries under the Bankruptcy Law of any other jurisdiction; or
(vi) any such petition or application is filed, or any such
proceedings are commenced, against the Company or any of its Subsidiaries
and such petition, application or proceeding is unstayed or undismissed
within 60 days, or any such petition or application is filed, or any such
proceedings are commenced against the Company or any of its Subsidiaries
and the Company or such Subsidiary by any act indicates its approval
thereof, consent thereto or acquiescence therein, or an order, judgment or
decree is entered appointing any such trustee, receiver, custodian,
liquidator or similar official, or approving the petition in any such
proceedings, and such order, judgment or decree remains unstayed and in
effect for more than 60 days; or
(vii) any order, judgment or decree is entered in any proceedings
against the Company or any of its Subsidiaries decreeing the dissolution
of the Company or such Subsidiary, a split-up of the Company or such
Subsidiary which requires the divestiture of a Substantial Part, or the
divestiture of the stock of the Company or its Subsidiary, as the case may
be, the assets of which constitute a Substantial Part, of the assets of the
Company and its Subsidiaries, and such order, judgment or decree remains
unstayed and in effect for more than 60 days; or
(viii) a judgment in an amount in excess of $250,000 is rendered
against the Company or any of its Subsidiaries and, within 60 days after
entry thereof, such judgment is not discharged or execution thereof stayed
pending appeal, or within 60 days after the expiration of any such stay,
such judgment is not discharged; or
29
<PAGE>
(ix) The Company fails to pay when due two or more interest payments
or principal payments (whether scheduled or upon a mandatory prepayment
date) during any rolling six (6) month period on the Senior Debt or any
other Debt in excess of $250,000, whether or not such Senior Debt or other
Debt is accelerated, or the Senior Debt or any other Debt in excess of
$250,000 shall have been accelerated for any reason; or
(x) (a) there shall occur a cessation of a substantial part of the
business of the Company and/or any of its Subsidiaries for a period which
significantly affects the Company's and/or any of its Subsidiaries'
capacity to continue their businesses, or (b) Title IV funding is
terminated or suspended for any School, or any School subsequently
acquired, constituting a Substantial Part, or the continuation of Title IV
funding is qualified with operational restrictions which would have a
Material Adverse Effect compared to the restrictions previously imposed (I)
on the operation of the NEC Schools as conducted by NEC and NEC, Inc., or
(II) on the operation of the other Schools as conducted by the Company and
its Subsidiaries prior to the date of this Agreement or, with respect to
Schools subsequently acquired on the operation of such Schools as conducted
immediately prior to such acquisition, or (c) the Company or any Subsidiary
shall suffer the loss or revocation of any material license or Permit now
held or hereafter acquired by the Company or any Subsidiary which is
necessary to the continued or lawful operation of a substantial part of
their businesses; or (d) the Company or any Subsidiary shall be enjoined,
restrained or in any way prevented by court, governmental or administrative
order from conducting all or any material part of their business affairs
for a period of thirty days (other than (I) the suspension of Title IV
funding under 34 C.F.R. Section 600.31 in connection with the acquisition
of any school permitted hereunder, or (II) a change in ownership resulting
in a change of control under 34 C.F.R. Section 600.31 which occurs as a
result of the exercise of the Warrants and the conversion of Class D Non-
voting Common Stock held by Electra into voting stock, when there is not
otherwise a
30
<PAGE>
Preferred Stock Failure Event then in existence); provided, that with
respect to clause (b) above, no Preferred Stock Failure Event shall be
deemed to occur as the result of (X) the granting of a provisional approval
pursuant to 34 C.F.R. Section 600.10 in connection with the acquisition of
the NEC Schools or any other schools subsequently acquired by the Company
or its Subsidiaries or (Y) the implementation of new or revised rules or
regulations by the DOE which are generally applicable to all private post-
secondary schools unless such rules or regulations result in a termination
or suspension of Title IV funding in accordance with (b) above or otherwise
have a Material Adverse Effect; or
(xi) there shall occur an event or circumstance as specified in
Section 11 of the Purchase Agreement giving rise to a right and option of
rescission on the part of the Company pursuant to Section 11 of the
Purchase Agreement, whether or not such right and option is exercised by
the Company;
then the holders of a majority of the Preferred Shares then outstanding may, at
any time and from time to time, by written demand to the Company,
(a) (i) cause the Company to increase the size of its Board of
Directors and (ii) allow the holders of the Series C Preferred Stock to elect a
majority of directors to the Board of Directors in the manner set forth in
paragraph 6(c) of the Certificate of Designations until such time as the
Preferred Shares are redeemed in full; provided, however, that the remedies set
-------- -------
forth in this clause (a) shall not be available if (1) the Preferred Stock
Failure Event is an event described in Section 7.1(i) by reason of nonpayment of
dividends unless the failure to pay such dividends occurs on two or more
required dividend payments during any rolling four quarter periods; (2) the
Preferred Stock Failure Event is an event described in Section 7.1(iii) and (A)
arises solely out of the failure of the Company to observe the agreements, terms
and conditions set forth in Sections 5.7 through 5.11, 6.7, 6.11(ii), 6.12 or
6.16 of this Agreement, or (B) arises solely out of the failure of the Company
to observe the agreements, terms and conditions set forth in
31
<PAGE>
Section 5.5, unless such failure would have, or would be likely to have, a
Material Adverse Effect, in which case the remedies set forth in this clause (a)
shall be available, or (C) arises solely out of the failure of the Company to
observe the agreements, terms and conditions set forth in Section 6.4, unless
either (x) Heller shall have knowledge of the existence of such transaction or
(y) such failure by the Company would have, or would be likely to have, a
Material Adverse Effect, in either case the remedies set forth in this clause
(a) shall be available, or (3) the Preferred Stock Failure Event is an event
described in Section 7.1(xi) and the shares of Series C Preferred Stock are
redeemed in full within ninety (90) days of receipt by the Company of the
written demand from the holders of the Series C Preferred Stock as provided
below, and/or
(b) in conjunction with clause (a) or otherwise, require the Company
to purchase in full the Preferred Shares in the manner set forth in paragraph 5
of the Certificate of Designations.
In addition, if (x) such event is the failure of the Company to pay a dividend
payable on the Series C Preferred Stock on the scheduled dividend payment date
and (y) at such time the holders of the Series C Preferred Stock shall not have
exercised their right to elect a majority of the directors to the Board of
Directors, then for each fiscal quarter or portion thereof that such Preferred
Stock Failure Event remains uncured, the holders of the shares of Series C
Preferred Stock shall receive additional penalty warrants (together with any
such warrants which may be issued hereunder in substitution or exchange
therefor, collectively, the "Penalty Warrants" and each individually, a "Penalty
---------------- -------
Warrant") to purchase an aggregate of 0.5%, subject to certain adjustments, of
- -------
the then outstanding shares of Class A Voting Common Stock, par value $.01 per
share, of the Company, on a fully diluted basis, at an exercise price of $.01
per share, evidenced by one or more warrant certificates (the "Penalty Warrant
---------------
Certificates") to be substantially in the form of Exhibit 7.1 attached hereto.
- ------------ -----------
If such Preferred Stock Failure Event is an event or circumstance specified in
Section 7.1(xi) above and the holders of the Series C Preferred Stock have given
the written demand to the Company under clause (b)
32
<PAGE>
above, subject to the immediately following proviso, the Company shall have the
right, exercisable within ninety (90) days of the occurrence of such Preferred
Stock Failure Event, to repurchase the Warrants for an aggregate consideration
of $1.00; provided, however, that the Company shall not be permitted to
-------- -------
repurchase the Warrants unless it shall have paid, or concurrently therewith is
paying, to the holders of the Series C Preferred Stock all amounts required to
redeem all of the Series C Preferred Stock then outstanding.
7.2 OTHER REMEDIES. No remedy conferred in this Agreement upon the
--------------
holder of any Preferred Shares is intended to be exclusive of any other remedy
available to such holder, and each and every such remedy shall be cumulative and
shall be in addition to every other remedy conferred herein or now or hereafter
existing at law or in equity or by statute or otherwise.
8. REPRESENTATIONS, COVENANTS AND WARRANTIES.
-----------------------------------------
The Company hereby represents, covenants and warrants for the benefit of
each holder from time to time of the Securities and Electra, as of the Closing
and after giving effect to the transactions contemplated by this Agreement and
the other Transaction Documents, as follows:
8.1 ORGANIZATION; AUTHORITY. Each of the Company and its
-----------------------
Subsidiaries is a corporation duly organized, validly existing and in good
standing under the laws of its jurisdiction of incorporation and has all
requisite corporate power and authority to own or lease and operate its
properties and to carry on its business as presently conducted and as proposed
to be conducted after the Closing. Each of the Company and its Subsidiaries is
duly qualified and in good standing as a foreign corporation duly authorized to
do business in each jurisdiction where it owns or leases property or in which
the conduct of its existing business or its business as of the Closing Date
requires it so to qualify or be licensed, except in those jurisdictions in which
the failure to qualify will not individually or in the aggregate have a Material
Adverse Effect. Schedule 8.1 hereto sets forth each jurisdiction where the
------------
Company and each of its Subsidiaries is qualified or licensed to do business.
Other than
33
<PAGE>
as listed on Schedule 8.1 hereto, the Company has no Subsidiaries and does not
------------
own of record or beneficially any Capital Stock or equity interest or investment
in any corporation, association, partnership, joint venture or other entity. The
Company and each of its Subsidiaries have furnished Electra with true, correct
and complete copies of its Certificate of Incorporation (including, without
limitation, the Certificate of Designations) and By-laws, each as amended to
date.
8.2 AUTHORIZATION. All corporate action on the part of the Company
-------------
and its directors and stockholders necessary for the authorization, execution,
delivery and performance by (i) the Company of this Agreement, the Series C
Preferred Stock certificates, the Warrants, the Penalty Warrants and the other
Transaction Documents, and (ii) the consummation of the transactions
contemplated herein and therein shall have been taken or will be taken prior to
the Closing. Each of the Transaction Documents to which the Company is a party
is the legal, valid and binding obligation of the Company enforceable against it
in accordance with its terms. The execution, delivery and performance by the
Company of each Transaction Document to which it is a party and compliance
therewith and the issuance and sale of the shares of Series C Preferred Stock,
the Warrants and the Penalty Warrants will not result in any violation of and
will not (i) conflict with, or result in a breach of, any of the terms of, or
constitute a default under, (a) any provision of state or Federal law to which
the Company is subject, (b) the Company's Certificate of Incorporation
(including, without limitation, the Certificate of Designations) or By-laws, or
(c) any mortgage, indenture, agreement, instrument, judgment, decree, order,
rule or regulation, or other restriction to which the Company is a party or by
which it is bound, or (ii) result in the creation of any Lien (except as
contemplated by the Transaction Documents) upon any of the properties or assets
of the Company (including, without limitation, any assets acquired in the
Acquisition) pursuant to any such term, or (iii) except as set forth on Schedule
--------
8.2, result in the suspension, revocation, impairment, forfeiture or non-renewal
- ---
of any Permit, license, authorization or approval applicable to the Company's
operations or any of its assets (including, without limitation, any assets
acquired in the Acquisition) or properties. No stockholder has any preemptive
34
<PAGE>
rights or rights of first refusal by reason of the issuance of the Warrants or
the shares of Series C Preferred Stock. The shares of Series C Preferred Stock
have been duly and validly issued and are fully paid and non-assessable. The
shares of Common Stock issuable upon exercise of the Warrants, have, in each
case, been duly and validly reserved and are not subject to any preemptive
rights or rights of first refusal and, upon issuance, will be validly issued,
fully paid and non-assessable. The shares of Common Stock issuable upon exercise
of the Penalty Warrants, if issued, will be duly and validly reserved and will
not be subject to any preemptive rights or rights of first refusal and, upon
issuance, will be validly issued, fully paid and non-assessable.
8.3 CAPITAL STOCK AND RELATED MATTERS. At the time of the Closing
---------------------------------
and after giving effect to the Acquisition and the transactions contemplated by
this Agreement, (i) the authorized capital stock of the Company will consist of
(a) 500,000 shares of Class A Voting Common Stock, par value $.01 per share, of
which 5,250 shares will be issued and outstanding, (b) 100,000 shares of Class B
Voting Common Stock, par value $.01 per share, of which 5,100 shares will be
issued and outstanding, (c) 100,000 shares of Class C Non-voting Common Stock,
par value $.01 per share, of which 69,900 shares will be issued and outstanding,
(d) 100,000 shares of Class D Non-voting Common Stock, par value $.01 per share,
of which no shares will be issued and outstanding and 25,295 shares will be
reserved for issuance upon the exercise of the Warrants, (e) 100,000 shares of
Class E Non-voting Common Stock, par value $.01 per share, of which no shares
will be issued and outstanding, (f) 50,000 shares of Series A Preferred Stock,
par value $.01 per share, of which 7,850 shares will be issued and outstanding,
(g) 1,000 shares of Series B Preferred Stock, par value $.01 per share, none of
which shares will be issued and outstanding, (h) 500 shares of Series C
Preferred Stock, par value $.01 per share, of which 500 shares of Series C
Preferred Stock will be issued to Electra and outstanding, and (i) 10,000 shares
of Undesignated Preferred Stock, par value $.01 per share, of which no shares
will be issued and outstanding; (ii) no shares of Common Stock will be owned or
held by or for the account of the Company; (iii) all of the outstanding shares
of Common Stock and Preferred Stock (including without limitation
35
<PAGE>
the Series C Preferred Stock) will be validly issued and outstanding, fully paid
and non-assessable and will be owned of record and, to the best knowledge of the
Company, beneficially, free and clear of any Liens (except as may be
contemplated by the Senior Loan Documents) by the individuals and entities and
in the amounts set forth on Schedule 1 and Schedule 8.3 hereto; (iv) except
---------- ------------
for the Class A Voting Common Stock, the Class B Voting Common Stock, the Class
C Non-voting Common Stock, the Class D Non-voting Common Stock, the Class E Non-
voting Common Stock, the Series A Preferred Stock, the Series C Preferred Stock,
and the Warrants, and except as set forth on Schedule 8.3 hereto, the Company
------------
has no, and at the time of the Closing will not have, outstanding stock or
securities convertible into or exchangeable for any shares of its Capital Stock,
or any outstanding rights (either preemptive or other) to subscribe for or to
purchase, or any outstanding options for the purchase of, or any agreements
providing for the issuance (contingent or otherwise) of, or any outstanding
calls, commitments or claims of any character relating to, any Capital Stock or
any stock or securities convertible into or exchangeable for any Capital Stock
of the Company, or any outstanding demand or piggyback registration rights to
register any Capital Stock or any stock or securities convertible into or
exchangeable for the Capital Stock of the Company; (v) except with respect to
the Warrants, the Series C Preferred Stock and the Series A Preferred Stock, the
Company will not be subject to any obligation (contingent or other) to
repurchase, otherwise acquire or retire any shares of Capital Stock; and (vi)
the Company has no knowledge of any agreement (except as set forth in this
Agreement or the Stockholders Agreement) restricting the transfer of any shares
of the Company's Capital Stock, except as set forth on Schedule 8.3. Schedule
------------ --------
8.3 sets forth the number of shares of Capital Stock, the holders thereof, and
- ---
the percentage held by each holder of the issued and outstanding Capital Stock
of the Company and each Subsidiary at the time of the Closing and after giving
effect to the Acquisition and the transactions contemplated by this Agreement.
8.4 LITIGATION. Except as disclosed on Schedule 8.4 hereto, there is
---------- ------------
no action, suit, investigation or proceeding pending, or, to the Company's
knowledge threatened, or any basis
36
<PAGE>
therefor or threat thereof, in, nor is there any existing judgment, order or
decree of, any court, governmental authority, arbitration board or tribunal,
foreign or domestic to which the Company or any of its Subsidiaries is or may be
named as a party or its property is or may be subject or which challenges this
Agreement or any of the transactions contemplated hereby, or to the Company's
knowledge, to which any officer, employee or stockholder of the Company or any
of its Subsidiaries is subject, and the Company has no knowledge of any
unasserted claim, the assertion of which is likely and which, if asserted, will
seek damages, an injunction or other legal, equitable, monetary or nonmonetary
relief which claim individually or collectively with other such unasserted
claims, if granted, or actions, suits, investigations or proceedings would have
a Material Adverse Effect or which challenges this Agreement or any of the other
Transaction Documents or any of the transactions contemplated hereby or thereby.
No legislation, order, rule, ruling or regulation has been enacted or made by or
on behalf of any governmental body, department or agency, nor to the Company's
knowledge has there been any legislation introduced and favorably reported for
passage to either House of Congress by any committee of either such House to
which such legislation has been referred for consideration or any state
legislature in any jurisdiction in which the Schools operate or by any committee
of such legislature to which such legislation has been referred for
consideration, nor to the Company's knowledge has any decision of any court of
competent jurisdiction within the United States been rendered which, in the
Company's judgment, would have a Material Adverse Effect.
8.5 COMPLIANCE. (a) Neither the Company nor any Subsidiary is in
----------
violation of any statute, law, ordinance, governmental rule or regulation
(including environmental laws) or any judgment, order or decree (federal, state,
local or foreign) to which it is subject, except where such violation would not
have, and is not likely to result in, a Material Adverse Effect, nor has it
failed to obtain any, and it possesses all, licenses, Permits, franchises or
other governmental authorizations necessary for the ownership or operation of
its properties or the conduct of its business as presently conducted and as
proposed to be conducted, except where the failure to so obtain or to so
37
<PAGE>
possess would not have, and is not likely to result in, a Material Adverse
Effect.
(b) Neither the Company nor any Subsidiary is in violation of any
term of its Certificate of Incorporation, as amended (including, without
limitation, the Certificate of Designations in the case of the Company), or By-
laws, as amended.
(c) Neither the Company nor any Subsidiary is in violation of any
term of any Contract, judgment, decree, order, statute, rule or regulation to
which either the Company or any Subsidiary is subject or which would permit any
party to any Contract to terminate, amend or modify such Contract, except for
any violations which do not cause, and are not likely to result in, a Material
Adverse Effect. To the Company's knowledge, neither the Company nor any
Subsidiary has waived any right or default by any party under any Contract. All
Contracts are in full force and effect, and the Company and its Subsidiaries
each have no knowledge that any party to any Contract, or any parties to any
Contract is or is seeking or presently intends to seek to (i) terminate, amend
or modify such Contract or (ii) upon the expiration of such Contract, not renew
such Contract on terms substantially similar to those terms currently in such
Contract, except where the termination, amendment, modification or failure to
renew does not have, and is not likely to result in, a Material Adverse Effect.
8.6 OFFERING. Based upon the representations and warranties of
--------
Electra set forth in Section 9 hereof, the offer, sale and issuance of the
shares of Series C Preferred Stock, the Warrants, the Penalty Warrants and the
shares of Common Stock issuable upon the exercise of the Warrants and the
Penalty Warrants are all exempt from the registration requirements of the
Securities Act and from the registration or qualification requirements of the
laws of any applicable state or other jurisdiction, and neither the Company nor
anyone acting on its behalf will take any action hereafter that would cause the
loss of such exemption.
8.7 ERISA AND LABOR RELATIONS. (a) Schedule 8.7 hereto contains a
------------------------- ------------
true and complete list of each written (or, to
38
<PAGE>
the knowledge of the Company and its Subsidiaries, oral), employee bonus,
retirement, pension, profit sharing, savings, stock option, stock appreciation,
stock purchase, incentive, deferred compensation, hospitalization, medical,
dental, vision, life or other health or disability (whether provided by
insurance or otherwise), severance, termination or other similar plan, policy or
program of the Company and each Subsidiary, including, without limitation, any
collective bargaining agreement involving direct or indirect compensation (the
"Employee Benefit Plans"), including, without limitation, each "employee pension
----------------------
benefit plan" within the meaning of Section 3(2) of ERISA (without regard to any
applicable exception from ERISA), each employee welfare benefit plan as defined
in Section 3(1) of ERISA (without regard to any applicable exception from
ERISA). Schedule 8.7 sets forth the expense charged for financial accounting
------------
purposes (whether through insurance premiums or otherwise) attributable to each
plan determined on an annual basis for the past fiscal year.
(b) To the Company's knowledge, neither the Company nor any
Subsidiary nor any "disqualified person" (as defined in Section 4975 of the
Code) nor any Employee Benefit Plan has engaged in any non-exempt prohibited
transaction within the meaning of Section 4975 of the Code or Section 406 of
ERISA which would result in any liability to the Company or any Subsidiary which
has had or would have a Material Adverse Effect. To the Company's knowledge, all
contributions required to have been made by same to each Employee Benefit Plan
have been timely made. No premium payments have been or are required to be made
to the PBGC.
(c) Each Employee Benefit Plan has been maintained substantially in
compliance with its terms, and with the requirements prescribed by any and all
statutes, orders, rules and regulations, including, without limitation, ERISA
and the Code, which are applicable to such Employee Benefit Plan, except those
which could not, individually or in the aggregate, have a Material Adverse
Effect.
(d) Except as set forth in the Purchase Agreement or this Agreement,
neither the execution and delivery of this Agreement or the other Transaction
Documents nor the consummation
39
<PAGE>
of the Acquisition and the transactions contemplated thereby will (i) result in
any payment to be made by the Company or any Subsidiary (including, without
limitation, severance, unemployment compensation, golden parachute, or
otherwise) becoming due to any employee under any Employee Benefit Plan or
otherwise or (ii) increase any benefits otherwise payable under any Employee
Benefit Plan.
(e) No benefit payable or which may become payable by the Company or
any Subsidiary pursuant to any Employee Benefit Plan shall constitute an "excess
parachute payment" (as defined in Section 280G(b)(1) of the Code) which is
subject to the imposition of an excise tax under Section 4999 of the Code or
which would not be deductible by reason of Section 280G of the Code.
(f) The execution and delivery of this Agreement or the other
Transaction Documents, the issue and sale of the Securities and the consummation
of the Acquisition and the transactions contemplated by the Transaction
Documents will not involve any transaction which is subject to the prohibitions
of section 406 of ERISA or in connection with which a tax could be imposed
pursuant to Section 4975 of the Code.
(g) Except as set forth on Schedule 8.7, since December 31, 1994 and
------------
other than with respect to the acquisition of the NEC Schools, there has been no
amendment to, interpretation or announcement (whether or not written) by the
Company or any Subsidiary relating to, or change in, employee participation or
coverage under, any Employee Benefit Plan which would increase the level of the
expense incurred in respect thereof for the current fiscal year or any prior
year. The Company and its Subsidiaries do not maintain and have not maintained
any Plans.
(h) To the Company's knowledge, the Company and each Subsidiary has
provided, or will have provided, to individuals entitled thereto all required
notices within the applicable time period and coverage pursuant to Section 4980B
of the Code with respect to any "qualifying event" (as defined in Section
4980B(f)(3) of the Code), and no tax payable on account
40
<PAGE>
of Section 4980B of the Code has been incurred with respect to any employees of
the Company or any Subsidiary.
(i) No lawsuits, claims (other than routine claims for benefits) or
complaints to, or by, any Person or governmental entity have been filed, are
pending or, to the best of the Company's knowledge, have been threatened, and,
to the Company's knowledge, no facts or contemplated events exist that could be
expected to give rise to any such lawsuit, claim (other than a routine claim for
benefits) or complaint, with respect to any Employee Benefit Plan where the
Company or any Subsidiary may be either (i) liable directly on such lawsuit,
claim or complaint, or (ii) obligated to indemnify any Person, group of Persons,
or entity with respect to such lawsuit, claim or complaint.
(j) To the Company's knowledge, neither the Company nor any
Subsidiary has engaged in any transaction, failed to make required
contributions, committed any act or omission, or otherwise incurred any
liability for any excise tax under Section 4971 through 4980B of the Code.
(k) Neither the Company nor any Subsidiary maintains nor has each
ever maintained a foreign Employee Benefit Plan.
(l) Each Employee Benefit Plan and, if any, the applicable, related
trust agreement, which are intended to be qualified within the meaning of
Section 401(a) of the Code and tax exempt within the meaning of Section 501(a)
of the Code, has received a favorable determination letter from the IRS and to
the Company's knowledge nothing has occurred since the date of such letter which
would prevent any such Employee Benefit Plan from remaining qualified. The
Company has furnished to Electra the most recent IRS determination letter with
respect to any such Employee Benefit Plan.
(m) To the Company's knowledge, except as disclosed on Schedule 8.7,
------------
the Company and each Subsidiary have no obligation to provide any employee
welfare benefits to retirees, including, without limitation, any medical and
life
41
<PAGE>
insurance benefits. With respect to former employees or retirees of the Company
and each Subsidiary, Schedule 8.7 separately indicates the life insurance,
------------
medical, severance, pension benefits, and similar benefits provided to former
employees and retirees and shall include true and complete copies of any
calculations prepared by a third party at the Company's request with respect to
the estimated present value of the liabilities and, which calculations shall,
where appropriate, specify the underlying actuarial assumptions used by such
third party in calculating such liabilities.
(n) Current copies of all Employee Benefit Plans of the Company and
each Subsidiary (and, if applicable, related trust or other funding
arrangements, including but not limited to insurance contracts), and all
amendments thereto and written interpretations thereof (including summary plan
descriptions and summaries of material modifications) have been furnished to
Electra, other than the three (3) (or such smaller number, if applicable) most
recent annual reports (Form 5500, including, if applicable, Schedule B thereto)
prepared in connection with any such Employee Benefit Plan, which will be
delivered to Electra as soon as available following the Closing, but including
with respect to any Employee Benefit Plan providing post-retirement medical or
other welfare benefits, a calculation of the actual liability accrued (or which
would have been accrued had the employer elected to comply) under such Employee
Benefit Plan under Financial Accounting Standard 106 as of the date hereof.
(o) No Employee Benefit Plan constitutes, or within the past 6 years,
has constituted, a Multiemployer Plan within the meaning of Section 4001(a)(3)
of ERISA.
(p) Except as otherwise disclosed in Schedule 8.7, the Company and
------------
any Subsidiary have furnished to Electra true and complete copies of all Summary
Plan Descriptions and Summary of Material Modifications and other written
employee benefit communications provided to employees with respect to any
employee welfare plan. The Company believes that it has legally reserved the
right to increase the level of employee contributions to any employee welfare
plan.
42
<PAGE>
(q) (i) There are no discrimination charges (relating to sex, age,
race, national origin, handicap or veteran status or otherwise) pending or, to
the Company's knowledge, threatened, against, or involving the Company or any
Subsidiary; (ii) except as disclosed on Schedule 8.4, to the Company's
------------
knowledge, there are no grievances or disputes between the Company or any
Subsidiary and any such Employee; (iii) neither the Company nor any Subsidiary
is delinquent in payments to any of such Employees for any wages, salaries,
commissions, bonuses, benefits or other direct or indirect compensation for any
services performed by them; (iv) the Company and each Subsidiary is in
compliance with all Federal, state, local and foreign laws and regulations
respecting labor, employment, wages, hours and benefits, except where the
failure to so comply does not cause, and is not likely to result in, a Material
Adverse Effect; (v) there is no unfair labor practice with respect to the
Company or any Subsidiary pending before the National Labor Relations Board or
any comparable state, local or foreign agency; (vi) there is no labor strike,
dispute, slowdown or stoppage actually pending or, to the Company's knowledge,
threatened, against or involving the Company or any Subsidiary; (vii) to the
best of the Company's knowledge, no labor organization activities have occurred
with respect to employees of any School during the past three (3) years, and
there are no collective bargaining agreements binding on the Company relating
the operation of any School.
(r) Set forth on Schedule 8.7 hereto is a true, correct and complete
------------
list (including the term, expiration date and amount of annual compensation) of
all employment, consulting and non-competition agreements to which the Company
and the Subsidiaries is a party or by which the Company and the Subsidiaries is
bound, and all union and non-union employees of the Company and its Subsidiaries
(true, correct and complete copies of which have previously been delivered to
Electra) and which, in the case of employees of the Company or its Subsidiaries,
involve annual compensation in excess of $50,000. To the Company's knowledge,
except as set forth on Schedule 8.7, no current or former employee of the
------------
Company or any Subsidiary is in violation of any term of any employment contract
with the Company or any Subsidiary or any non-compete or confidentiality
agreement entered into for the benefit of the Company or any Subsidiary, nor is
any employee of the Company or any of its Subsidiaries in violation of any
employment contract, or any other contract or agreement with or any restrictive
covenant or any other common law obligation to a former employer relating to the
right of any such employee to be employed by the Company or any
43
<PAGE>
Subsidiary because of the nature of the business conducted or to be conducted by
the Company and any Subsidiary or to the use of trade secrets or proprietary
information of others, and, except as set forth in Schedule 8.7, to the
Company's knowledge, the employment of the Company's or its Subsidiaries'
employees does not subject the Company or its Subsidiaries to liability in
connection with such covenants or agreements. There is neither pending nor, to
the Company's knowledge threatened any actions, suits, proceedings or claims
with respect to any contract, agreement, covenant or obligation referred to
above.
8.8 FINANCIAL STATEMENTS; MATERIAL FACTS. The Company has furnished
------------------------------------
Electra with true, correct and complete copies of (i) the audited consolidated
financial statements of the Company for the year ended December 31, 1994, (ii)
the audited financial statements of NEC, Inc. for the NEC Schools for the years
ended December 31, 1994 and 1993, (iii) to the extent available, the unaudited
financial statements of each of the Company and NEC, Inc. for the Schools for
each of the months prior to the Closing since December 31, 1994, (iv) the pro
forma consolidated balance sheet of the Company and its Subsidiaries as of the
Closing Date after giving effect to the Acquisition and the transactions
contemplated hereby and under the Transaction Documents, (v) the proposed annual
operating and capital budget for the Company and its Subsidiaries for the fiscal
year ending December 31, 1995 (collectively, known as the "Financials") and (vi)
----------
the financial projections contained in the Memorandum (the "Projections"). The
-----------
Financials and the Projections, are herein collectively called the "Financial
---------
Disclosure Documents." The Financials (i) have been prepared in conformity in
- --------------------
all material respects with GAAP (and with respect to historical interim periods
subject only to normal year-end adjustments consistent with past practices),
(ii) disclose all liabilities, direct and contingent, required to be shown in
accordance with such principles and (iii) accurately reflect the financial
position of the respective companies at the dates indicated and results of
operations for the periods
44
<PAGE>
indicated. In the opinion of the Company, the Projections reflect the reasonable
estimates of the Company on the date made and on the date hereof of the results
of operations and other information projected therein, and were prepared in Good
Faith in accordance with substantially the same accounting principles, standards
and assumptions with respect to which the Financials have been prepared, and on
estimates, information and assumptions which are reasonable in light of current
conditions on the date made and on the date hereof. The Financial Disclosure
Documents, this Agreement and the other Electra Documents do not contain an
untrue statement of a material fact or omit to state a material fact necessary
in order to make the statements therein and herein, in light of the
circumstances under which they were made, not misleading.
8.9 OUTSTANDING DEBT. Except as set forth on Schedule 6.1, the
---------------- ------------
Company and its Subsidiaries do not have any outstanding secured or unsecured
Debt or commitments for any such Debt, other than with respect to the Senior
Loan Agreement.
8.10 TAXES. The Company and its Subsidiaries have each timely
-----
filed such federal, state and other tax returns required by law to be filed by
it, and all taxes, assessments and other governmental charges which are due and
payable, other than those presently payable without penalty or interest, have
been timely paid. All taxes, assessments and other governmental charges which
are presently payable without penalty or interest have been adequately reserved
for in accordance with GAAP. There are no tax liens upon any properties or
assets of the Company or any Subsidiary.
All such tax reports or returns fairly reflect the taxes of the
Company and its Subsidiaries for the periods covered thereby. Neither the
Company nor any Subsidiary is delinquent in the payment of any taxes,
assessments or governmental charges, there are no tax deficiencies or
delinquencies asserted against the Company and its Subsidiaries, and, except as
provided above, there are no unpaid assessments, proposals for additional taxes,
deficiencies or delinquencies in the payment of any of the taxes of the Company
and its Subsidiaries or any violations of any federal, state, local or foreign
tax laws that could be asserted
45
<PAGE>
by any taxing authority. No Internal Revenue Service audit of the Company and
its Subsidiaries is pending or, to the knowledge of the Company and its
Subsidiaries, threatened, and the results of any completed audits are properly
reflected in the financial statements. Other than an extension for filing of
corporate tax returns, federal and state, for the Company and its Subsidiaries
for the fiscal year ended December 31, 1994, neither the Company nor its
Subsidiaries have granted any extension to any taxing authority of the
limitation period during which any tax liability may be asserted. Neither the
Company nor its Subsidiaries have committed any violation of any federal, state,
local or foreign tax laws, except for any violations which do not have, and are
not likely to have, a Material Adverse Effect. All monies required to be
withheld by the Company or its Subsidiaries from employees or collected from
customers for income taxes, social security and unemployment insurance taxes and
sales, excise and use taxes, and the portion of any such taxes to be paid by the
Company or its Subsidiaries to governmental agencies or set aside in accounts
for such purpose have been so paid or set aside, or such monies have been
approved, reserved against and entered upon the books and financial statements
of the Company and its Subsidiaries, except where the failure to do any of the
foregoing does not have, and is not likely to have, a Material Adverse Effect.
8.11 CONFLICTING AGREEMENTS. Neither the Company nor any of its
----------------------
Subsidiaries is a party to any contract or agreement or subject to any
restriction which would have, or would be likely to have, a Material Adverse
Effect. Except as set forth on Schedule 8.11 hereto, neither the Company nor
-------------
any of its Subsidiaries is a party to or otherwise subject to any contract or
agreement which limits the amounts of, or otherwise imposes restrictions on, the
issuance of the Warrants, the Series C Preferred Stock or the Common Stock (upon
the exercise of the Warrants).
8.12 POLLUTION AND OTHER REGULATIONS. Except as set forth in
-------------------------------
Schedule 8.12, (i) the operations of the Company and its Subsidiaries are in
full compliance with Environmental Laws, except where the failure to so comply
does not have and is not likely to have a Material Adverse Effect; (ii) the
Company and
46
<PAGE>
its Subsidiaries have obtained all necessary permits or authorizations required
under Environmental Laws, except where the failure to so obtain does not have,
and is not likely to have, a Material Adverse Effect; (iii) to the knowledge of
the Company and its Subsidiaries, there has been no Release at any of the
properties owned or operated by the Company and its Subsidiaries or a
Predecessor, or at any disposal or treatment facility which received Hazardous
Materials generated by the Company, any of its Subsidiaries or any Predecessor;
(iv) no Environmental Claims relating to (A) any assets, properties or
businesses of the Company, any Subsidiary or any Predecessor; (B) properties
adjoining properties or businesses owned or operated by the Company, any
Subsidiary or any Predecessor; or (C) any facilities which received Hazardous
Materials generated by the Company, any Subsidiary or any Predecessor, have been
asserted against the Company or any of its Subsidiaries or, to the knowledge of
the Company and its Subsidiaries, any Predecessor, nor does the Company or any
of its Subsidiaries have knowledge or notice that any such Environmental Claim
is threatened or pending; and (v) to the knowledge of the Company and its
Subsidiaries, no Environmental Claim has been asserted against any facilities
that may have received Hazardous Materials generated by the Company or any of
its Subsidiaries or any Predecessor; provided, that for the purposes of clauses
--------
(iii) and (v) of this Section 8.12, knowledge of the Company and its
Subsidiaries with respect to offsite facilities shall mean actual knowledge
without inquiry other than the review by the Company and its Subsidiaries of
certain environmental database search results of offsite facilities, copies of
which have been previously provided to Electra and which are described on
Schedule 8.12. The Company does not believe that any of the items listed on
- -------------
Schedule 8.12 pertaining to clauses (iii), (iv) and (v) above are likely to have
- -------------
a Material Adverse Effect.
8.13 CERTAIN ACTS. Neither the Company nor any of its Subsidiaries
------------
is an "investment company," or a company "controlled" by an "investment
company," within the meaning of the Investment Company Act of 1940, as amended,
nor will it become such by virtue of the transactions contemplated hereby or by
the Transaction Documents. Neither the Company nor any of its Subsidiaries is a
"holding company," or a "subsidiary company" of
47
<PAGE>
a "holding company," or an "affiliate" of a "holding company" or of a
"subsidiary company" of a "holding company," as such terms are defined in the
Public Utility Holding Company Act of 1935, as amended, nor will it become such
by virtue of the transactions contemplated hereby or by the Transaction
Documents. None of the transactions contemplated by this Agreement (including,
without limitation, the use of the proceeds from the sale of the Securities)
will violate or result in a violation Section 7 of the Exchange Act or any
regulation issued pursuant thereto, including, without limitation, Regulations
G, T, U, and X of the Board of Governors of the Federal Reserve System.
8.14 GOVERNMENTAL PERMITS, CONSENTS, ETC. Except as set forth on
-----------------------------------
Schedule 8.14, no consent, approval, authorization, exemption or other action
- -------------
by, or notice to or filing with, any court or administrative or governmental
body which has not been obtained, taken or made is required in connection with
the execution and delivery of this Agreement or the Transaction Documents, the
consummation of the transactions contemplated hereby or thereby or fulfillment
of or compliance with the terms and provisions hereof. Schedule 8.14 hereto sets
-------------
forth all material permits, licenses and use authorizations (the "Permits")
-------
issued or anticipated to be issued to the Company and its Subsidiaries by the
appropriate Federal, state, local and foreign regulatory bodies. The Permits
constitute all material permits necessary to own and operate the Company's
and/or its Subsidiaries' businesses as presently being conducted and as
contemplated to be conducted after the Closing. Except as set forth on Schedule
8.14, all Permits are valid and subsisting and in full force and effect. There
are no proceedings pending, or to the Company's knowledge, threatened, that seek
the revocation, cancellation, suspension or any adverse modification of any
Permit. The Company and each of its Subsidiaries are in compliance in all
material respects with the terms of such Permits obtained as of the date hereof.
The Company has received no notice that any of the Permits will not be renewed
and to the best of the Company's knowledge, there is no basis for nonrenewal.
Except as set forth on Schedule 8.14, each School is accredited by the
-------------
Accrediting Body or Accrediting Bodies set forth opposite such School's name on
Schedule 8.14 hereto and, except as set forth on Schedule 8.14, is certified by
- ------------- -------------
the DOE as
48
<PAGE>
a qualified institution under Title IV, and is a party to, and in compliance
with, valid program participation agreements with the DOE with respect to the
operations of such School. The Company has not received any notice, not
previously complied with, and the Company does not have any knowledge of any
such notice, with respect to any alleged violation of the rules or regulations
of the DOE or any applicable Accrediting Body in respect of any School,
including sales and marketing activities, or the terms of any program
participation agreement to which it is or was a party. If any such notices have
been received and complied with, the Company has disclosed their receipt and
disposition to Electra prior to the execution of this Agreement in writing.
Except as set forth on Schedule 8.14 hereto, the Company is not aware of any
-------------
investigation or review of the student financial aid programs of any School or
any review of the accreditation of any School by any Person.
8.15 FEES AND COMMISSIONS. No broker's or finder's fee or
--------------------
commission will be payable by the Company with respect to the issuance and sale
of the Securities or the transactions con templated hereby, other than an
investment banking fee payable to Bowles Hollowell Conner & Co.
8.16 INTELLECTUAL PROPERTY. Each of the Company and its Subsidiaries
---------------------
possesses all Intellectual Property, including, without limitation, all patents,
patent rights, trademarks, trademark rights, trade names, trade name rights,
service marks, patents, copyrights, trade secrets, know-how, manufacturing
processes, formulas, information, proprietary rights and processes and options,
licenses and agreements relating to the above, necessary to conduct its business
as contemplated herein and in the Transaction Documents after the Closing, (i)
to the knowledge of the Company, without conflict with or infringement upon any
valid rights of others, (ii) which are owned by the Company or its Subsidiaries
free and clear of any and all liabilities, obligations, Liens or claims, other
than in favor of the Senior Lenders, if any, and (iii) the lack of which could
have a Material Adverse Effect, and have not received any notice of infringement
upon or conflict with the asserted rights of others. Except as set forth on
Schedule 8.16 hereto and other than licenses for software purchased by the
- -------------
Company in retail
49
<PAGE>
transactions, there are no outstanding options, licenses, or agreements of any
kind relating to the foregoing, nor is the Company or any Subsidiary bound by or
a party to any option, license or agreement of any kind with respect to the
patents, patent rights, copyrights, trade secrets, information, proprietary
rights and processes of any other person or entity. No stockholder, director,
officer or employee of the Company or any Subsidiary has any interest in any
such patents, patent rights, trademarks, trademark rights, trade names, trade
name rights, copyrights, trade secrets, information, proprietary rights and
processes.
8.17 ABSENCE OF CERTAIN CHANGES. Except as set forth on Schedule
--------------------------
4.11 hereto, since December 31, 1994, and as of the date hereof, there has not
been any event or change of any character which has or would reasonably be
expected to have a Material Adverse Effect, including, but not limited to (i)
any damage, destruction or loss of any of the properties or assets of the
Company and/or any its Subsidiaries (whether or not covered by insurance), (ii)
any waiver by the Company and/or any of its Subsidiaries of a valuable right
(including without limitation, in the case of the Company, any rights under the
Purchase Agreement) or of a material debt owed to it, (iii) any material change
or amendment to a Contract or arrangement by which the Company, any of its
Subsidiaries or any of their respective assets or properties is bound or
subject, (iv) any declaration, setting aside for payment or other distribution
in respect of any of the Company's or any of its Subsidiaries' capital stock, or
any direct or indirect redemption, purchase or other acquisition of any of such
stock by the Company or any of its Subsidiaries, or (v) any labor trouble,
problem, grievance, dispute or controversy with any union or other organization
of the Company's or any of its Subsidiaries' employees, or threats of strikes,
work stoppages or any asserted pending demands for collective bargaining by any
union or organization.
8.18 LEASES. Set forth on Schedule 8.18 hereto is a complete and
------ -------------
correct list (including the amount of rents called for and a description of the
leased property) of all leases of real property under which the Company or any
of its Subsidiaries is a lessee. The Company and its Subsidiaries enjoy
peaceful and
50
<PAGE>
undisturbed possession under all such leases, all of such leases are valid and
subsisting and none of them is in default in any material respect, nor has the
Company or any of its Subsidiaries received any written notice of its default
under any such lease.
8.19 PURCHASE AGREEMENT. (a) The Purchase Agreement has not been
------------------
amended, modified or supplemented, nor have any conditions precedent to closing
or defaults under such Purchase Agreement been waived by the Company or NEC or
NEC, Inc. without
the prior written consent of Electra. Assuming the accuracy of the
representations and warranties of NEC and NEC, Inc. contained in the Purchase
Agreement, the obligations of each of the parties to the Purchase Agreement are
the legal, valid and binding obligations of each such party. Except as set
forth on Schedule 8.19, the Company has not waived any right or default by any
party under the Purchase Agreement.
(b) The Company is not in violation of any term of the Purchase
Agreement, judgment, decree, order, statute, rule or regulation to which the
Company is subject or which would permit any party to the Purchase Agreement to
terminate, amend or modify such agreement. The Purchase Agreement is in full
force and effect, and the Company and its Subsidiaries each have no knowledge
that any party to such agreement is or is seeking or presently intends to seek
to terminate, amend or modify such agreement.
8.20 INSURANCE. Schedule 8.20 attached hereto sets forth all
--------- -------------
insurance policies maintained by the Company and each of its Subsidiaries. The
insurance maintained by the Company and each of its Subsidiaries is in amounts
and of a nature as is customarily maintained by Persons conducting operations
similar to that of the Company and its Subsidiaries and, except as otherwise
indicated on Schedule 8.20, is with insurance carriers who are rated by A. M.
-------------
Best Company's Rating Service as "A" or better. Since December 31, 1994,
neither the business, proper ties nor assets (including, without limitation,
the assets acquired in the Acquisition) of the Company or any of its
Subsidiaries has suffered a loss which would have, or would be likely to have, a
Material Adverse Effect (whether or not covered by insurance) as a result of
fire, flood, act of God or any other
51
<PAGE>
casualty or similar event.
8.21 RESERVATION OF SHARES. The Company has reserved for issuance
---------------------
the number of its authorized but unissued shares of Common Stock necessary to
permit the exercise in full of all the outstanding Warrants.
8.22 TITLE TO PROPERTIES. (a) Subject to the right of rescission
-------------------
set forth in Section 11 of the Purchase Agreement, the Company and its
Subsidiaries have, and on the Closing Date will have, (i) good and marketable
title to all of their assets and properties, real, personal and mixed,
including, without limitation, the assets acquired in the Acquisition and all of
the other assets and properties reflected on their respective balance sheets, in
each case free and clear of any Liens or claims affecting any such assets or
properties referred to above (other than as contemplated under the Senior Loan
Documents).
(b) Schedule 8.22 hereto sets forth all of the real property
-------------
owned or leased by the Company and its Subsidiaries. All required certificates
of occupancy, certificates relating to electrical work, zoning, building,
housing, safety, fire and health approvals, and other permits, franchises and
licenses necessary to enable the Company and each Subsidiary to use or operate
its facilities in the manner currently used or operated, or as is currently
anticipated to be used or operated by it, have been issued and are in full force
and effect, except where the failure to obtain such approvals, permits,
franchises or licenses would not have, or would not be likely to have, a
Material Adverse Effect. There are no proceedings pending for the reduction of
the assessed valuation of any real property owned by the Company and each
Subsidiary. No default or breach now exists and no event has occurred or is
continuing which, with notice or the passage of time or both, would constitute a
default under any of the covenants, restrictions, rights of way, easements or
other agreements affecting any of the facilities of the Company or its
Subsidiaries. Under existing easements, rights at law, certificates, deeds,
leases and other applicable agreements and instruments, the Company and each
Subsidiary after the Closing Date shall have access to and the same rights to
utilize all access roads, utilities, and other facilities not
52
<PAGE>
belonging to it which have been used in the operation of its facilities at full
capacity prior to the Closing Date, on the same terms and conditions as have
been previously available. No state of facts exists which would or could prevent
the Company and each Subsidiary after the Closing Date from carrying on, or
impair or restrict its ability to carry on, the business of operating such
facilities in the same manner as they have been previously operated at full
capacity prior to the Closing Date, or as they are anticipated to be operated by
the Company and each Subsidiary after the Closing Date. The Company does not
have any knowledge of any condemnation or eminent domain proceedings now pending
nor has the Company or any Subsidiary received notice or has any knowledge of
any such proceeding being contemplated with respect to its facilities.
(c) The facilities, machinery, equipment, furniture, fixtures,
vehicles, any related capitalized items and other tangible property material to
the business of the Company or its Subsidiaries are, and on the Closing Date
will be in operating condition suitable for their intended use, except for (i)
maintenance in the ordinary course and (ii) normal wear and tear.
8.23 CONTRACTS AND AGREEMENTS. Schedule 8.23 hereto sets forth a
------------------------ -------------
list of all of the Contracts relating to the Schools or the assets acquired in
the Acquisition or to which the Company or any of its Subsidiaries is a party or
has any present or future liabilities, obligations or rights to, or in, pursuant
to the Purchase Agreement.
8.24 RECRUITMENT; ADMISSIONS PROCEDURES; ATTENDANCE; REPORTS.
-------------------------------------------------------
Schedule 8.24 hereto sets forth a complete list of all policy manuals and other
- -------------
statements of procedures or instruction relating to recruitment of students for
each School (other than the NEC Schools), including (a) procedures for assisting
in the application by prospective students for direct or indirect state or
federal financial assistance; (b) admissions procedures, including any
descriptions of procedures for insuring compliance with state or federal or
other appropriate standards or tests of eligibility; and (c) procedures for
encouraging and verifying attendance, minimum required attendance policies, and
other relevant criteria relating to course completion and certification
53
<PAGE>
(collectively, the "Policy Guidelines"). The Company has delivered to Electra
true, correct and complete copies of all Policy Guidelines for the Schools
(other than the NEC Schools) and true and complete copies of the Policy
Guidelines received with respect to the NEC Schools. To the best of the
Company's knowledge, and except as disclosed on Schedule 8.24 or Schedule 4.6 to
------------- ------------
the Purchase Agreement, the operations of each School have, in all material
respects, been conducted in accordance and all relevant standards imposed by
applicable Accrediting Bodies, agencies administering state or federal
governmental programs in which the Company or such School participates, and
other applicable laws or regulations. All reports, audits, and other
information, whether periodic in nature or pursuant to specific requests, for
each School (other than the NEC Schools) ("Compliance Reports") have been
submitted to all agencies or other entities with which such filings are required
relating to such School's compliance with (i) applicable accreditation standards
governing its activities or (ii) laws or regulations governing programs pursuant
to which the School or its students receive funding, and (iii) all articulation
agreements, if any, with degree-granting colleges and universities in effect as
of the date of this Agreement. Complete and accurate records in all material
respects for all present and past students attending each School (other than the
NEC Schools) have been maintained consistent with the operations of a school
business. To the best of the Company's knowledge, all forms and records with
respect to each School have been prepared, completed, maintained and filed in
all material respects in accordance with all applicable federal and state laws
and regulations, and are true and correct in all material respects. All
financial aid grants and loans, disbursements and record keeping relating
thereto with respect to the Schools (other than the NEC Schools) have been
completed in substantial compliance with all federal and state requirements, and
there are no material deficiencies in respect thereto. To the best of the
Company's knowledge and except as previously disclosed in prior audits by DOE,
no student at any School has been funded prior to the date for which such
student was eligible for funding, and such student's records conform in form and
substance to all relevant regulatory requirements. To the knowledge of the
Company, the representations of NEC and NEC, Inc. set forth in Section 4.6 of
the Purchase Agreement are true,
54
<PAGE>
complete and correct.
8.25 COHORT DEFAULT RATE. Schedule 8.25 hereto sets forth the
------------------- -------------
published cohort default rate for each School, calculated in the manner
prescribed by the DOE, of all students attending such school receiving
assistance pursuant to Title IV programs for the years ended December 31, 1989
through 1992. Except as set forth in the appeals described on Schedule 8.25, to
-------------
the best of the Company's knowledge, such schedule is materially accurate in all
respects. To the best of the Company's knowledge, except as set forth on
Schedule 8.25, no notice has been received as to the calculation or amount of
- -------------
the cohort default rates for any School for the years ended December 31, 1993
and 1994.
8.26 RECEIVABLES. The tuition receivable and accounts receivable
-----------
of each School (other than the NEC Schools), except to the extent of the
allowance for cancellations and doubtful accounts set forth in the Financial
Statements, are bona fide receivables, arose out of arms' length transactions in
the normal and usual practices of the Company and such School, are recorded
correctly on the applicable books and records of the Company and such School,
and to the best of the Company's knowledge, are collectable in full in the
ordinary course of business, within the ordinary time frame for such
receivables, subject in the case of certain receivables to reserves established
for such receivables in the Financial Statements. Such receivables are not
subject to any defense, counterclaim or setoff or trade discounts or credits not
reflected in the Financial Statements (other than tuition refund policies
administered in accordance with all applicable legal requirements and the
applicable Policy Guidelines), and the Company has no knowledge of any facts or
circumstances which would cause any of such receivables to have to be written
down or written off. To the knowledge of the Company, the representations and
warranties of NEC and NEC, Inc. set forth in Section 4.12 of the Purchase
Agreement are true, complete and correct.
8.27 WORKING CAPITAL AT THE DATE OF THIS AGREEMENT. All items
---------------------------------------------
comprising the net working capital for each School (other than the NEC Schools)
at the date of this Agreement,
55
<PAGE>
including cash, accounts receivable, tuition deposits and tuition receivable,
less accounts payable and accrued expenses, are at normal amounts for the
current level of operations at such School and consistent with normal practices,
and tuition receivable and the reserve for cancellation relating thereto, are
consistent with the experience during the past twelve (12) months. To the
knowledge of the Company, the representations and warranties of NEC and NEC,
Inc. set forth in Section 4.25 of the Purchase Agreement are true, complete and
correct.
9. REPRESENTATIONS OF ELECTRA. Each Electra entity represents, severally
--------------------------
and not jointly, and in making its purchase hereunder it is specifically
understood and agreed, that:
9.1 PURCHASE OF SECURITIES. Such Electra entity is purchasing the
----------------------
Securities set forth opposite its name on Schedule 1 hereto for its own account,
----------
for investment purposes and not with a view to or for sale in connection with
any distribution thereof; and (ii) it is an "accredited investor" within the
meaning of Regulation D promulgated under the Securities Act. Such Electra
entity agrees that it will not, directly or indirectly, offer, transfer, sell,
assign, pledge, hypothecate or otherwise dispose of any of the Securities
purchased by it hereunder (or solicit any offers to buy, purchase, or otherwise
acquire or take a pledge of any of such Securities), except in compliance with
the Securities Act, the Exchange Act, any applicable state securities or blue
sky laws and the Stockholders Agreement.
9.2 INCORPORATION; AUTHORIZATION. Such Electra entity is a
----------------------------
corporation duly organized, validly existing and in good standing under the laws
of its jurisdiction of incorporation and such Electra entity has the full legal
right, power and authority to enter into this Agreement and to perform its
obligations hereunder without the need for the consent of any other person; and
this Agreement has been duly authorized, executed and delivered and constitutes
the legal, valid and binding obligation of such Electra entity enforceable
against such Electra entity in accordance with the terms hereof.
9.3 NO CONFLICTS. The execution, delivery and
------------
56
<PAGE>
performance by such Electra entity of each Transaction Document to which it is a
party and compliance therewith and the purchase of the Securities will not
result in any violation of and will not conflict with, or result in a breach of,
any of the terms of, or constitute a default under, (a) any provision of state,
Federal or foreign law to which it is subject, (b) its Certificate of
Incorporation or By-laws, or (c) any mortgage, indenture, agreement, instrument,
judgment, decree, order, rule or regulation, or other restriction to which it is
a party or by which it is bound.
9.4 NO BROKERS' FEES. Such Electra entity has not agreed or
----------------
committed to pay any broker's or finder's fee or commission with respect to the
purchase of the Securities or the transactions contemplated hereby.
10. DEFINITIONS.
-----------
For the purpose of this Agreement, the following terms shall have the
meanings specified with respect thereto below:
"Accrediting Body" shall mean, with respect to any School, any entity or
----------------
organization, whether governmental, government-chartered, inter-governmental,
private or quasi-private, which engages in granting or withholding licensing,
accreditation or similar approval for such School, in accordance with standards
relating to the performance, operation, financial condition and/or academic
standing of private post-secondary schools, including, without limitation, the
instrumentality or instrumentalities of the relevant state in which such School
is situated, and, as applicable, the Accrediting Commission of Career Schools
and Colleges of Technology, the Accrediting Council for Independent Colleges and
Schools, the Commission of Colleges of the Western Association of Colleges and
Schools, and the other entities listed on Exhibit I to the Purchase Agreement.
"Acquisition" has the meaning set forth in the recitals hereof.
-----------
"Affiliate" means, with respect to any Person, any other Person directly or
---------
indirectly controlling, controlled by, or
57
<PAGE>
under direct or indirect common control with, such Person, but shall exclude,
with respect to the Company, Electra and any transferee that might be deemed to
be an Affiliate of the Company solely by reason of its ownership of Securities
purchased by Electra under this Agreement or securities issued in exchange for
any such Securities, or by reason of its benefiting from any agreements or
covenants of the Company contained in this Agreement. A Person shall be deemed
to control another Person if such Person possesses, directly or indirectly, the
power to direct or cause the direction of the management and policies of such
other Person, whether through the ownership of voting securities, by contract or
otherwise.
"Agreement" means this Securities Purchase Agreement, as this Agreement may
---------
be amended from time to time, together with all Exhibits and Schedules hereto.
"Bankruptcy Law" has the meaning specified in clause (vi) of Section 7.1
--------------
hereof.
"Business Day" means any day other than a Saturday, a Sunday or a day on
------------
which commercial banks in New York City are required or authorized to be closed.
"By-laws" means for any Person all By-laws, Codes of Regulation or other
-------
equivalent charter documents in the jurisdiction of incorporation of such
Person.
"Capital Expenditures" means as to any Person for any period, the aggregate
--------------------
amount of all capital expenditures which would be classified as capital
expenditures in a statement of income or operations of such Person for such
period prepared in accordance with GAAP.
"Capital Lease" means, at the time any determination thereof is to be made,
-------------
any lease of property, real or personal, in respect of which the present value
of the minimum rental commitment would be capitalized on a balance sheet of
the lessee in accordance with GAAP.
"Capital Lease Obligation" means, at the time any determina-
------------------------
58
<PAGE>
tion thereof is to be made, the amount of the liability in respect of a Capital
Lease which would at such time be so required to be capitalized on a balance
sheet of the lessee in accordance with GAAP.
"Capital Stock" means any and all shares, interests, rights to purchase,
-------------
warrants, options, participations or other equivalents of, rights to acquire,
or interests in (however designated) corporate stock, including, without
limitation, any security which is convertible into or exercisable for such
corporate stock.
"Certificate of Designations" has the meaning set forth in Section 1
---------------------------
hereof.
"Certificate of Incorporation" means for any Person all Certificates of
----------------------------
Incorporation, Articles of Incorporation or other equivalent charter documents
in the jurisdiction of incorporation of such Person.
"Closing" has the meaning specified in Section 3 hereof.
-------
"Closing Date" has the meaning specified in Section 3 hereof.
------------
"Code" means the Internal Revenue Code of 1986, as amended
----
from time to time.
"Commission" means the United States Securities and Exchange Commission or
----------
any governmental body or agency succeeding to the functions thereof.
"Common Stock" means the Company's common stock, par value $.01 per share.
------------
"Company" means Career Education Corporation, a Delaware corporation, and
-------
its successors and assigns.
"Consents" has the meaning specified in Section 4E hereof.
--------
"Consolidated Net Earnings" means consolidated gross revenues of the
-------------------------
Company and its Subsidiaries less all operating and non-operating expenses of
the Company and its Subsidiaries,
59
<PAGE>
including all charges of a proper character (including current and deferred
Taxes on income, provisions for Taxes on income, provisions for Taxes on
unremitted foreign earnings which are included in gross revenues, and current
additions to reserves), all determined in accordance with GAAP, but not
including (to the extent otherwise included) in gross revenues (i) any gains
(net of expenses and taxes applicable thereto) in excess of losses resulting
from the sale, conversion or other disposition of capital assets (i.e., assets
---
other than Current Assets), (ii) any gains resulting from the write-up of
assets, (iii) any gains resulting from an acquisition by the Company or any of
its Subsidiaries at a discount of any Debt of the Company or any of its
Subsidiaries, (iv) any equity of the Company or any of its Subsidiaries in the
unremitted earnings of any corporation which is not a Subsidiary of the Company,
(v) any earnings of any Person acquired by the Company or any of its
Subsidiaries through purchase, merger or consolidation or otherwise for any time
prior to the date of acquisition, or (vi) any deferred credit representing the
excess of equity in any Subsidiary of the Company at the date of acquisition
over the cost of the investment in such Subsidiary.
"Contracts" means any written or oral contract, agreement, commitment,
---------
note, bond, pledge, lease, sublease, deed, mortgage, guaranty, indenture,
license, option, consulting agreement, supply contract, repair contract,
distribution agreement, purchase order, joint venture agreement, franchise,
technology and know-how agreement, employment agreement, instrument or any other
contractual commitment that is binding on any Person or its property, which
provide for payments from or to such Person of $50,000 or more after the date
hereof.
"Current Assets" means current assets of the Company and its
--------------
Subsidiaries, as computed under GAAP.
"Current Liabilities" means the liabilities of the Company and its
-------------------
Subsidiaries which in accordance with GAAP are classified as "current";
provided, however, that the current portion of Debt permitted under Section 6.1
- -------- -------
hereof shall be considered "current liabilities".
"Debt" means, as to any Person, any indebtedness, whether or
----
60
<PAGE>
not contingent, in respect of borrowed money or evidenced by bonds, notes,
debentures or similar instrument or letters of credit (or reimbursement
agreements in respect thereof) or representing the balance deferred and unpaid
of the purchase price of any property (including pursuant to Capital Leases), if
and to the extent any of the foregoing indebtedness would appear as a liability
upon a balance sheet of such Person prepared on a consolidated basis in
accordance with GAAP, and shall also include, to the extent not otherwise
included, (a) the guarantee of items which would be included within this
definition and any joint obligation of such Person in respect of items which
would be included in this definition, and (b) any indebtedness of a third person
of the type that would be included in this definition which is secured by a Lien
on the property or assets of such Person.
"Disposition" means any transaction or series of related transactions
-----------
(other than a Non-Surviving Combination) if, after giving effect to such
transaction, any one or more Unrelated Persons beneficially own, directly or
indirectly, in the aggregate 50% or more of the Common Stock on a fully diluted
basis (without giving effect to any shares purchased or purchasable upon
exercise of the Warrants), outstanding as of the date of computation.
"DOE" means the United States Department of Education and any successor
---
agency administering federal student financial assistance under Title IV.
"EAI" means Electra Associates, Inc., a Delaware corporation, and its
---
successors and assigns.
"EI" means Electra Inc., a Delaware corporation, and its successors and
--
assigns.
"EIT" means Electra Investment Trust P.L.C., a corporation organized under
---
the laws of England and Wales, and its successors and assigns.
"Electra" means EIT and EAI.
-------
61
<PAGE>
"Electra Documents" means the Transaction Documents other than the Third
-----------------
Party Documents.
"Employee Benefit Plan" has the meaning specified in Section 8.7 hereof.
---------------------
"Environmental Claim" means any complaint, summons, citation, notice,
-------------------
directive, order, claim, litigation, investigation, judicial or administrative
proceeding, judgment, letter or other communication from any Governmental
Authority, or any third party involving violations of Environmental Laws or
Releases.
"Environmental Laws" means any and all laws, statutes, ordinances, rules,
------------------
regulations, orders, or determinations of any governmental authority pertaining
to health or the environment in effect in any and all jurisdictions in which the
Company and its Subsidiaries are conducting or at any time have conducted
business, including, without limitation, the Clean Air Act, as amended, the
Comprehensive Environmental Response, Compensation, and Liability Act of 1980
("CERCLA"), as amended, the Federal Water Pollution Control Act, as amended, the
-------
Occupational Safety and Health Act of 1970, as amended, the Resource
Conservation and Recovery Act of 1976 ("RCRA"), as amended, the Safe Drinking
----
Water Act, as amended, the Toxic Substances Control Act, as amended, the
Superfund Amendments and Reauthorization Act of 1986, as amended, and other
environmental conservation or protection laws.
"Environmental Liabilities" means any monetary obligations, losses,
-------------------------
damages, punitive damages, consequential damages, treble damages, costs and
expenses (including all reasonable out-of-pocket fees, disbursements and
expenses of counsel, out-of-pocket expert and consulting fees and out-of-pocket
costs for environmental site assessments, remedial investigation and feasibility
studies), fines, penalties, sanctions and interest incurred as a result of any
Environmental Claim filed by any Governmental Authority or any third party which
relate to any environmental condition, remedial action, Release or threatened
Release from or onto (i) any presently or formerly owned by the Borrower or any
of its Subsidiaries or a Predecessor, or (ii) any
62
<PAGE>
facility which received Hazardous Materials generated by the Borrower or any of
its Subsidiaries or a Predecessor.
"Environmental Permit" means any permit, license, notice, order, approval
--------------------
or other authorization under any applicable law, rule, regulation or other
requirement of the United States or Canada or of any state, municipality or
other subdivision thereof required by any Environmental Law.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
-----
amended from time to time.
"Exchange Act" means the Securities Exchange Act of 1934, as amended, from
------------
time to time, and any successor statute or law thereto.
"Existing Indebtedness" means, as to the Company and its Subsidiaries, the
---------------------
Debt of the Company and its Subsidiaries outstanding as of the Closing Date,
reflected in Schedule 6.1 hereto, other than the Senior Debt.
------------
"Financial Disclosure Documents" has the meaning specified in Section 8.8
------------------------------
hereof.
"Financials" has the meaning set forth in Section 8.8 hereof.
----------
"Financing Fee" has the meaning set forth in Section 3 hereof.
-------------
"GAAP" means generally accepted accounting principles in the United States
----
of America as in effect at the time any determina tion is made or financial
statement is required hereunder as promulgated by the American Institute of
Certified Public Accountants, the Accounting Principles Board, the Financial
Accounting Standards Board or any other body existing from time to time which is
authorized to establish or interpret such principles, applied on a consistent
basis throughout any applicable period, subject to any change required by a
change in GAAP; provided, however, that if any change in generally accepted
-------- -------
accounting principles during the term of this Agreement affects
63
<PAGE>
the calculation of any financial covenant or determination of value contained
herein, the parties hereto hereby agree to amend this Agreement to the effect
that each such financial covenant or determination of value is not more or less
restrictive than such covenant as in effect on the date hereof.
"Good Faith" means honesty in fact in the conduct or transaction
----------
concerned, without regard to whether standards which might be deemed reasonable
by another Person have been observed; but which does not include intentionally
unreasonable conduct.
"Governmental Authority" means any action of government, any state, local
----------------------
or other political subdivision thereof and any other entity exercising
executive, legislative, judicial, regulatory or administrative functions of or
pertaining to such government.
"Hazardous Materials" means (a) any element, compound, or chemical that is
-------------------
defined, listed or otherwise classified by a Governmental Authority as a
contaminant, pollutant, toxic pollutant, toxic or hazardous substances,
extremely hazardous substance or chemical, hazardous waste, medical waste,
biohazardous or infectious waste, special waste, or solid waste under
Environmental Laws; (b) petroleum and its refined products; (c) polychlorinated
biphenyls; (d) any substance exhibiting a hazardous waste characteristic as
defined in 40 C.F.R. 261.21-.24; and (e) any raw materials, building components,
including but not limited to asbestos-containing materials and manufactured
products, containing Hazardous Materials.
"Heller" shall mean, collectively, Heller Equity Capital Corporation, a
------
Delaware corporation, and any entity controlling or under common control with
Heller Equity Capital Corporation.
"Initial Public Offering" shall mean an initial underwritten public
-----------------------
offering and sale for cash by the Corporation of the Common Stock of the
Corporation to an underwriter or underwriters pursuant to a "firm commitment"
underwriting agreement and a registration statement declared effective by the
Securities and Exchange Commission under the Securities Act of 1933, as amended,
in which (i) the minimum equity valuation of the Corporation is
64
<PAGE>
$45,000,000 before December 31, 1999 and $55,000,000 thereafter and (ii) the
Corporation receives gross proceeds of at least $20,000,000. The valuation of
the Corporation will be determined by dividing the dollar amount raised in such
public offering on a gross basis by the percentage of equity in the Corporation
sold in such public offering on a fully-diluted basis, taking into account all
shares outstanding, and all warrants, options and convertible securities or
other rights to acquire equity of the Corporation. An Initial Public Offering
shall be deemed consummated upon the first sale of Common Stock under the
related registration statement. An Initial Public Offering shall not include the
registration of an offer and sale of the Common Stock (i) to the employees of or
other persons providing services to the Corporation pursuant to an employee
benefit or similar benefit plan registered on Form S-8 or a successor form or
(ii) relating to a merger, acquisition or other transaction of the type
described in Rule 145 or a successor rule registered on Form S-4 or a successor
form.
"Intellectual Property" means, as to any Person, that Person's Patents and
---------------------
Patent Applications, Trademarks, licenses and brand names, and including without
limitation all logos and designs, trade secrets, technical information,
engineering procedures, designs, know-how and processes, software, copyrights,
and other intellectual property.
"Investment" in any Person includes all investments by stock purchase,
----------
capital contribution, loan, advance, guarantee of any indebtedness or creation
or assumption of any other liability in respect of any indebtedness of such
Person, or otherwise.
"knowledge" means, with respect to any Person, such Person's best knowledge
---------
after due inquiry; provided, that with respect to the NEC Schools no knowledge
--------
of any managerial personnel of the NEC Schools, who were not managerial
personnel of the Company immediately prior to the Acquisition, shall be imputed
to the Company.
"Lien" means any mortgage, pledge, security interest, encumbrance, lien or
----
charge of any kind (including any agreement to give any of the foregoing, any
conditional sale or other title
65
<PAGE>
retention agreement, any lease in the nature thereof and the filing of or
agreement to give any financing statement under the Uniform Commercial Code of
any jurisdiction).
"Material Adverse Change" of such Person means a material adverse change in
-----------------------
the business, condition (financial or otherwise), assets, properties or
operations or prospects of such Person.
"Material Adverse Effect" means a material adverse effect on the business,
-----------------------
condition (financial or other), assets, properties or operations or prospects of
the Company and its Subsidiaries, taken as a whole.
"Memorandum" means that certain Financing Memorandum dated April 1995
----------
prepared by Bowles Hollowell Conner & Co., a copy of which was provided to
Electra by the Company.
"Multiemployer Plan" means any "multiemployer plan" (as such term is
------------------
defined in Section 3(37) of ERISA and Section 414(f) of the Code) to which
contributions are or have been made by the Company or any of its Subsidiaries.
"NEC Schools" shall have the meaning assigned to such term in the
-----------
preambles.
"Net Cash Flow" means the amount shown as the "Cash from Operations" on the
-------------
cash flow statements prepared by the Company and delivered to the Significant
Holders in accordance with Section 5.1 hereof, determined in accordance with
GAAP.
"Non-Surviving Combination" means any merger, consolidation or other
-------------------------
business combination of the Company with or into one or more Persons in which
the Person other than the Company is the survivor, or a sale of all or a
substantial part of the assets of the Company (whether held directly by the
Company or through a subsidiary of the Company) to one or more such other
Persons (including but not limited to a voluntary or involuntary dissolution,
liquidation or winding up of the affairs of the Company); provided that if any
such merger, consolidation or other business combination or sale of assets, in
which the holders of Common Stock receive cash or non-cash consideration,
66
<PAGE>
is structured in the form of a reverse subsidiary merger so that the Company is
the surviving entity, such transaction shall nevertheless be deemed to be a Non-
Surviving Combination.
"Officers' Certificate" means a certificate signed in the name of the
---------------------
Company, as applicable, by its chief executive officer, president or one of its
vice presidents and by its chief financial officer, treasurer or controller.
"Patents and Patent Applications" means, as to any Person, all of such
-------------------------------
Person's right, title and interest in and to all of its now owned or existing
and filed and hereinafter acquired or arising and filed patents and patent
applications, inventions and improvements thereto, and (a) the reissues,
divisions, continua tions, renewals, extensions, and continuations-in-part
thereof, (b) all income, royalties, damages and payments now or hereafter due
and/or payable under or with respect thereto, including without limitation
damages and payments for past or future infringements thereof, (c) the right to
sue for past, present and future infringements thereof, (d) all rights
corresponding thereto throughout the world, and (e) all right as licensor or
licensee with respect to any of the foregoing.
"PBGC" means the Pension Benefit Guaranty Corporation or any corporation or
----
governmental body or agency succeeding to the functions thereof.
"Penalty Warrant Certificates" shall have the meaning set forth in Section
----------------------------
7.1 hereof.
"Penalty Warrants" shall have the meaning set forth in Section 7.1 hereof.
----------------
"Permitted Acquisitions" shall mean acquisitions by the Company or its
----------------------
Subsidiaries (including newly-formed Subsidiaries to the extent permitted
hereunder) of vocational or similar schools meeting the requirements set forth
in Section 4.2(e)(iii), (iv), (v) and (vi) of the Senior Loan Document;
provided, that (i) during any twelve-month period there shall not be more than
- --------
four (4) Permitted Acquisitions and the aggregate purchase price (including all
deferred payments and seller notes)
67
<PAGE>
for all such Permitted Acquisitions during such twelve-month period shall not
exceed $14,000,000, and (ii) the the total acquisition price (including all
deferred payments and seller notes) with respect to the acquisition of any
school may not exceed five (5) times EBITDA of such school for the most recently
completed fiscal year (as the EBITDA of such school may be adjusted to eliminate
the effect of any extraordinary compensation arrangements with regard to the
operation of such school).
"Permitted Indebtedness" means: (a) the Senior Debt, (b) the Existing
----------------------
Indebtedness, (c) Debt giving rise to Permitted Liens, (d) current trade
accounts payable or accrued, operating lease obligations and deferred
liabilities other than for borrowed money, all incurred and continuing in the
ordinary course of business, (e) Capital Lease Obligations which are with
recourse to the Company or other Debt of the Company which is with recourse to
the Company incurred for the purchase of real or personal property or businesses
that do not exceed, as of any date outstanding, the aggregate amount of such
Debt permitted under the Senior Loan Documents; provided, however, that, subject
-------- -------
to the other terms and conditions set forth herein, the Company may incur
Capital Lease Obligations or other Debt incurred for the purchase of real or
personal property or businesses in any amount so long as such Capital Lease
Obligations and other Debt is without recourse to the Company, (f) Debt which
serves to refund or refinance the Existing Indebtedness to the extent in each
case permitted by the terms of the documents and instruments evidencing such
Debt (each of such Debt being so incurred, "Refinancing Indebtedness"), it being
------------------------
understood that the Company shall be permitted to pay prepayment penalties and
premiums in connection with such refunding or refinancing; provided, however,
-------- -------
that such Refinancing Indebtedness (i) is subordinated to the Senior Debt to at
least the same extent as such Debt being refunded or refinanced, (ii) bears an
interest rate per annum which does not exceed by more than 150 basis points the
interest rate per annum then payable under such Debt being refunded or
refinanced (calculated in accordance with any formula set forth in the documents
evidencing any such Debt), (iii) has an aggregate principal amount outstanding
which does not exceed the then outstanding aggregate amount of such Debt being
refunded or
68
<PAGE>
refinanced plus customary transaction costs incurred in connection with such
refinancing, and (iv) has, at the time of such refunding or refinancing, a
Weighted Average Life to Maturity greater than the Weighted Average Life to
Maturity of such Debt being refunded or refinanced, (g) Debt incurred in the
ordinary course of the Company's business in connection with any lease
obligations of the Company pursuant to any lease agreements executed by the
Company as lessee of any real property, (h) Debt payable to any seller or
sellers in Permitted Acquisition(s) by the Company up to a maximum of $2,000,000
in the aggregate for all such acquisitions (which amount shall not include any
amounts payable immediately and contingent upon the resumption of Title IV
funding with respect to the school which is the subject of such Permitted
Acquisition (the "Deferred Payment"), but shall be deemed to include the stated
value of any shares of preferred stock which provide for a current-pay dividend
and which are issued in connection with a Permitted Acquisition), (i) additional
Debt up to a maximum of $1,000,000, (j) any Deferred Payment and (k) additional
Debt incurred solely for the purposes of satisfying the Acid Test of DOE, or if
such requirement shall no longer be applicable, such similar requirement as in
effect at such time; provided, however, that such Debt (i) shall be fully cash-
-------- -------
collateralized, (ii) shall have a stated maturity of in excess of 1-year, and
(iii) shall not remain outstanding for a period of time in excess of one-hundred
twenty (120) days.
"Permitted Investments" means (i) an Investment by the Company or any
---------------------
Wholly-Owned Subsidiary of the Company in a Wholly-Owned Subsidiary of the
Company, subject, in the case of any such Investments that constitute Debt, to
the provisions of Section 6.1 hereof; (ii) loans or advances made in the
ordinary course of business to employees of the Company or its Sub sidiaries
for travel and like expenses and relocation expenses; (iii) Investments in
direct obligations of the United States of America or obligations of any
instrumentality or agency thereof, the payment of which is unconditionally
guaranteed by the United States of America; (iv) negotiable certificates of
deposit issued by any commercial bank or trust company organized under the laws
of the United States of America or any state thereof having capital and surplus
of not less than $100,000,000; (v) readily marketable commercial paper rated A-1
by Standard & Poor's
69
<PAGE>
Corporation or Prime-1 by NCO/Moody's Commercial Paper Division of Moody's
Investor Services, Inc. (all of which Investments shall be payable in U.S.
dollars in the United States of America and shall have maturities not in excess
of twelve months); (vi) Current Assets arising from the sale of goods and
services in the ordinary course of business of the Company and its Subsidiaries;
(vii) Investments not to exceed $100,000 in the aggregate in connection with the
operation of any and all third party schools pursuant to any management or
similar agreement (including the School Management Agreement); provided, that
--------
such Investment shall only be permitted if (A) the Company has an option to
purchase such school and (B) the Board of Directors determines that such
Investment is necessary to preserve the value of such option to the Company; and
(viii) Permitted Acquisitions.
"Permitted Liens" means as to the property, personal and real, tangible and
---------------
intangible, of any Person: (a) Liens for Taxes or assessments and similar
charges either (i) not delinquent, or (ii) contested in Good Faith by
appropriate proceedings which have the effect of staying any action to foreclose
or to obtain a judgment to enforce such Liens and as to which such Person shall
have set aside on its books adequate reserves; (b) Liens incurred or pledges and
deposits in connection with workers' compensation, unemployment insurance and
other social security benefits, or securing the performance of bids, tenders,
leases, contracts (other than for the repayment of borrowed money), statutory
obligations, progress payments, surety and appeal bonds and other obligations of
like nature, incurred in the ordinary course of business; (c) Liens imposed by
law, such as mechanics', carriers', warehousemen's, materialmen's, supplier's
and vendors' Liens, incurred in Good Faith in the ordinary course or contested
in Good Faith by appropriate proceedings which have the effect of staying any
action to foreclose or to obtain a judgment to enforce such Liens; (d) zoning
restrictions, easements, licenses, covenants, reservations, restrictions on the
use of real property or minor irregularities of title incident thereto which do
not in the aggregate materially impair the use of such property in the operation
of the businesses of such Person; (e) Liens, other than as described in clause
(j) of this definition of Permitted Liens, existing on assets or properties at
the time of, or in connection with, the acquisition thereof by a Person which do
not materially
70
<PAGE>
interfere with the use of the property subject thereto or extend to or cover any
assets or property of such Person other than the assets or property being
acquired; (f) Liens existing on the Closing Date and disclosed on Schedule 10.1
-------------
hereto; (g) Liens of landlords or mortgages of landlords, arising solely by
operation of law, on fixtures and movable property located on premises leased in
the ordinary course of business, provided that the rental payments secured
thereby are not yet due; (h) Liens of judgment creditors to the extent (i) any
judgment secured by such Lien does not give rise to a Preferred Stock Failure,
and (ii) not material alone or in the aggregate; (i) Liens in favor of the
Senior Lenders or to secure Debt permitted by subparagraph (e) of the definition
of Permitted Indebtedness, provided, however, that, if not in favor of the
-------- -------
Senior Lenders or any lender refinancing the Senior Debt, such Liens do not
extend to any assets other than the assets being acquired with the proceeds of
such Debt or being leased; and (j) Liens granted as a result of any Refinancing
Indebtedness (as defined in subparagraph (f) of the definition of Permitted
Indebtedness), provided that in the case of any such Refinancing Indebtedness
the aggregate scope of all Liens, if any, on the property, real and personal,
tangible and intangible, of the Company securing the Debt being refunded or
refinanced are not increased thereby (e.g., additional types or items of
---
collateral have been added).
"Person" means and includes an individual, a partnership, a joint venture,
------
a corporation, a trust, an unincorporated organization, a government or any
department or agency thereof, and any other legal entity.
"Plan" means an employee pension benefit plan within the meaning of Section
----
3(2) of ERISA, maintained or contributed to by the Company or any Subsidiary,
and subject to Section 412 of the Code.
"Predecessor" means those entities from whom the Company or its
-----------
Subsidiaries, as the case may be, has purchased or concurrently with the Closing
is purchasing assets constituting a private post-secondary vocational school, or
on whose behalf commencing concurrently with the Closing will operate a private
post-secondary vocational school as of the date hereof. Such
71
<PAGE>
entities are (i) F.C. Collins Investment Corporation, an Arizona corporation
formerly known as Al Collins Graphic Design School, Ltd., (ii) BC Venture, a
Texas general partnership formerly known as Brooks College, and (iii) National
Education Centers, Inc., a California corporation, with respect only to the
operations of the NEC Schools and Arizona Automotive Institute.
"Preferred Shares" means the shares of Series C Preferred Stock of the
----------------
Company.
"Preferred Stock Failure Event" means any of the events specified in
-----------------------------
Section 7.1 hereof, provided that there has been satisfied any requirement set
forth therein in connection with such event for the giving of notice, or the
lapse of time, or the happening of any further condition, event or act, and
"Preferred Stock Failure" shall mean any of such events, whether or not any such
-----------------------
requirement has been satisfied.
"Projections" has the meaning specified in Section 8.8 hereof.
-----------
"Purchase Agreement" has the meaning set forth in the recitals hereto.
------------------
"Registration Rights Agreement" has the meaning set forth in Section 4.14
-----------------------------
hereof.
"Release" means any spilling, leaking, pumping, emitting, emptying,
-------
discharging, injecting, escaping, leaching, dumping, or disposing of Hazardous
Materials (including the abandonment or discarding of barrels, containers or
other closed receptacles containing Hazardous Materials) into the environment.
"Restricted Payment" means (i) any dividend on, or any distribution in
------------------
respect of, any shares of Capital Stock of the Company or any of its
Subsidiaries or the incurrence of any liability in respect thereof, other than
(a) a dividend payable solely in shares of that class of stock, (b) dividends by
any of its Wholly-Owned Subsidiaries to the Company, (c) dividends payable on
the shares of Series C Preferred Stock and (d) dividends payable on any shares
of preferred stock issued in
72
<PAGE>
connection with the Permitted Acquisitions, (ii) any payment or distribution on
account of the redemption, purchase, retirement or other acquisition of any
shares of Capital Stock of the Company or any of its Subsidiaries or any
warrant, option or other right to purchase or acquire any shares of Capital
Stock of the Company or any of its Subsidiaries, other than (a) the redemption
of the Series C Preferred Stock, (b) the redemption, purchase, retirement or
other acquisition of any and all shares of the Series C Preferred Stock in
connection with the "put" provided for in, and pursuant to, the Certificate of
Designations, (c) the exercise of the Warrants, (d) the redemption, purchase,
retirement or other acquisition of any and all Warrants in connection with the
"put" provided for in, and pursuant to, the Warrant Certificates, and (e) the
redemption, purchase, retirement or other acquisition of any and all warrants in
connection with the "put" provided for in, and pursuant to, the warrant
certificates issued to the Senior Lender as provided in the Senior Loan
Documents, and (iii) any payment, prepayment or retirement of Debt of the
Company or any of its Subsidiaries other than (a) mandatory scheduled payments
made in accordance with the terms of such Debt, (b) payments of the Senior Debt
and (c) payments of trade debt made in the ordinary course of business.
"Revolving Loans" means the total of all advances and extensions of
---------------
credit, if any, made from time to time on a revolving basis under the Senior
Loan Agreement.
"School Management Agreement" means the School Management Agreement, dated
---------------------------
the Closing Date, by and among NEC, NEC, Inc. CEC Management, Inc., an Illinois
corporation, and the Company.
"Schools" means (i) the NEC Schools, (ii) the Al Collins Graphic Design
-------
School in Tempe, Arizona, and (iii) Brooks College in Long Beach, California.
"Securities" means the Warrants and the Series C Preferred Stock.
----------
"Securities Act" means the Securities Act of 1933, as amended, and the
--------------
rules and regulations promulgated thereunder.
73
<PAGE>
"Senior Debt" means, subject to the proviso of Section 6.1 hereof and
-----------
Section 6.9 hereof, the Debt created pursuant to the Senior Loan Agreement in a
maximum aggregate principal amount equal to $20,000,000, minus the aggregate
amount of (a) all payments and prepayments of principal made from time to time
after the Closing Date (excluding any payments made on the Revolving Loans) and
(b) all permanent reductions made from time to time after the Closing Date in
the maximum commitment amounts for the Revolving Loans, and any refinancing
thereof; provided, however, that such refinancing shall not (i) increase the
-------- -------
amount of such indebtedness (other than with respect to prepayment penalties or
premiums or capitalized loan origination fees or expenses), (ii) result in any
earlier scheduled maturity date or payment date of any amount under the Senior
Loan Agreement, (iii) result in any increase in the interest rate by more than
150 basis points, prepayment charges, fees or other amounts payable pursuant to
the Senior Loan Agreement, (iv) increase the amount of collateral securing such
Senior Debt, (v) have, at the time of such refunding or refinancing, a Weighted
Average Life to Maturity less than the Weighted Average Life to Maturity of such
Senior Debt being refunded or refinanced, or (vi) in the judgment of the
Company's Board of Directors contain terms, provisions and conditions that taken
as a whole are more burdensome to the Company than those of the Senior Loan
Agreement.
"Senior Loan Agreement" means the loan agreement to be entered into by and
---------------------
among the Senior Lenders and the Company, in form and substance reasonably
acceptable to Electra.
"Senior Loan Documents" means the Senior Loan Agreement and the documents
---------------------
entered into in connection with or provided for in the Senior Loan Agreement,
each in form and substance reasonably acceptable to Electra.
"Senior Lenders" means the lenders under the Senior Loan Agreement, and
--------------
their successors, assigns and participants.
"Series C Preferred Stock" means the Series C Redeemable Preferred Stock of
------------------------
the Company, par value $.01 per share with a stated value of $10,000 per share,
to be issued solely to
74
<PAGE>
Electra.
"Significant Holder" means, for so long as any shares of Series C Preferred
------------------
Stock are outstanding, any holder holding at least 25% of the outstanding shares
of Series C Preferred Stock, and thereafter, any holder holding at least 25% of
the outstanding Warrants. Any approval or consent of the Significant Holders
required or given hereunder shall be deemed given if the holders of a majority
of the aggregate shares of Series C Preferred Stock (or Warrants, if applicable)
then outstanding held by all Significant Holders give such approval or consent.
"Stockholders Agreement" has the meaning set forth in Section 4.13 hereof.
----------------------
"Subsidiary" means, with respect to any Person, any corporation or similar
----------
entity, a majority of the Capital Stock or other equity of which, except
directors' qualifying shares, shall, at the time as of which any determination
is being made, be owned by such Person either directly or through Subsidiaries.
"Substantial Part" means, as of any date, assets (i) having a net book
----------------
value equal to or in excess of 15% of the consolidated assets of the Company and
its Subsidiaries (determined in accordance with GAAP) or (ii) which have
provided 15% or more of Consolidated Net Earnings in any of the three most
recent fiscal years of the Company.
"Taxes" means, as to any Person, any present or future income, stamp or
-----
other taxes, levies, imposts, duties, charters, fees, deductions or
withholdings, of every kind and nature, now or hereafter imposed, levied,
collected, withheld or assessed by any Governmental Authority, including net
income and franchise taxes.
"Third Party Documents" means the Purchase Agreement, the School Management
---------------------
Agreement and the Senior Loan Documents.
"Title IV" means Chapter 28, Subchapter IV of the Higher Education Act of
--------
1965, as amended, 20 U.S.C.A. Section 1070, and any amendments or successor
statutes thereto.
75
<PAGE>
"Trademarks" means, as to any Person, all of such Person's right, title and
----------
interest in and to all of its now owned or existing and filed, and hereafter
acquired or arising and filed, trademarks, service marks, trademark or service
mark registrations, trade names, trademark rights, trade name rights and
trademark or service mark applications, and (a) the reissues, divisions,
continuations, renewals, extensions and continuations-in-part thereof, (b) all
income, royalties, damages and payments now or hereafter due and/or payable with
respect thereto, including, without limitation, damages and payment for past or
future infringements thereof, (c) the right to sue for past, present and future
infringements thereof, (d) all rights corresponding thereto throughout the
world, (e) all rights as licensor or licensee with respect to any of the
foregoing, and (f) together in each case with the goodwill of such Person's
business connected with the use of, and symbolized by any of the foregoing.
"Transaction Documents" means this Agreement, the Warrants, the Penalty
---------------------
Warrants, the Warrant Certificates, the Penalty Warrant Certificates, the
Certificate of Designations, the Stockholders Agreement, the Registration Rights
Agreement, the Guaranty Agreement, the Purchase Agreement, the School Management
Agreement and the Senior Loan Documents.
"United States" or "U.S." means the United States of America.
------------- ----
"Unrelated Person" means any Person other than (i) a Person that, on the
----------------
date of this Agreement, owns, directly or indirectly, any shares of any class of
common stock of the Company, and (ii) an Affiliate of a Person specified in
clause (i).
"Warrant Certificates" shall have the meaning set forth in Section 1
--------------------
hereof.
"Warrants" shall have the meaning set forth in Section 1 hereof.
--------
76
<PAGE>
"Weighted Average Life to Maturity" means, when applied to any Debt at any
---------------------------------
date, the number of years obtained by dividing (a) the then outstanding
principal amount of such Debt into (b) the sum of all products obtained by
multiplying (i) the amount of each then remaining installment, sinking fund,
serial maturity or other required payment of principal, including payment at
final maturity, in respect thereof, by (ii) the number of years (calculated to
the nearest 1/12th) which will elapse between such date and the making of such
payment.
"Wholly-Owned Subsidiary" means any Subsidiary of which 100% of the total
-----------------------
voting power of shares of stock entitled to vote in the election of directors,
managers or trustees thereof (other than directors' qualifying shares) is at the
time owned or controlled, directly or indirectly, by any Person or one or more
of the other Subsidiaries of that Person or a combination thereof.
11. MISCELLANEOUS.
-------------
11.1 PAYMENTS. The Company agrees that, so long as any Electra
--------
entity shall hold any Securities, it will make payments in respect of such
Securities, in compliance with the terms of this Agreement and the other
Transaction Documents, by wire transfer of immediately available funds for
credit to the account set forth on Schedule 1 opposite such Electra entity's
----------
name, or to such other account or accounts as such Electra entity may designate
in writing, notwithstanding any contrary provision herein or in any Transaction
Document with respect to the place of payment. The Company agrees to afford the
benefits of this Section 11.1 to any transferee which shall have made the same
agreements as Electra has made in this Section 11.1.
------------
11.2 EXPENSES; INDEMNITY. (a) The Company hereby agrees, whether or
-------------------
not the transactions hereby contemplated shall be consummated, to pay, and
save any holder harmless against liability for the payment of, the costs and
expenses incurred by such holder, including, without limitation, the fees and
disbursements of special counsel engaged by the Significant Holders, on behalf
of Electra and any subsequent holder of Securities, in connection with (i) this
Agreement, the Warrants, the Series C Preferred Stock, the other Transaction
Documents or the trans-
77
<PAGE>
actions contemplated hereby or thereby, (ii) any subsequent proposed amendment
to, modification of, or proposed consent under, whether or not such proposed
modification shall be effected or proposed consent granted, and (iii) the costs
and expenses, including attorney's fees, incurred by Electra or any subsequent
holder of the Securities in enforcing its rights under any of this Agreement,
the Warrants, the Series C Preferred Stock or any other Transaction Document
(other than the Third Party Documents) or in responding to any subpoena or other
legal process issued in connection with this Agreement or the other Transaction
Documents or the transactions contemplated hereby or by reason of Electra's or
any subsequent holder's of the Securities having acquired any Security,
including without limitation, costs and expenses incurred in any bankruptcy case
involving the Company or any of its Subsidiaries; provided, however, that the
-------- -------
Company shall not be obligated to pay any costs, fees or expenses incurred by
any holder solely by reason of such holder's gross negligence or willful
misconduct. The obligations of the Company under this Section 11.2 shall survive
the transfer of any Securities or portion thereof or interest therein by Electra
or any subsequent holder of the Securities and the redemption of the Preferred
Shares.
(b) Notwithstanding any investigation performed by Electra prior to
the Closing, from and after the Closing the Company shall indemnify, save and
hold harmless, release and discharge each holder of any Securities and all of
its officers, directors, stockholders, agents, representatives, consultants,
employees, and Affiliates, and all of its heirs, successors and permitted
assigns from and against any and all damages, obligations, losses, claims,
deficiencies, penalties, interest, expenses, fines, assessments, charges and
costs (including attorneys' fees and court costs) and other liabilities of any
kind, including, without limitation, Environmental Liabilities (collectively,
"Damages"), arising from, out of or in any manner connected with or based on (i)
notwithstanding any disclosure in this Agreement (including the exhibits and
schedules attached hereto) or otherwise, the breach of any covenant of the
Company or the failure by the Company to perform any of its obligations
contained herein or in any of the agreements, documents or instruments required
to be executed and delivered by the Company
78
<PAGE>
in connection with the transactions contemplated hereby and in the other
Transaction Documents, (ii) any inaccuracy in or breach of any representation or
warranty of the Company under this Agreement or any agreement, document or
instrument required to be executed and delivered by the Company in connection
with the transactions contemplated hereby and in the other Transaction
Documents, (iii) notwithstanding any disclosure in this Agreement (including the
exhibits and schedules attached hereto) or otherwise, any and all acts,
omissions, events, conditions or circumstances involving or related to the
assets, properties, businesses, operations or activities of the Company, any of
its Subsidiaries or any predecessor of any thereof, whether occurring or
existing on, prior to or after the Closing, except if any such Damages arise
solely as a result of Electra's gross negligence or willful misconduct and (iv)
any of the items disclosed in Schedule 8.12.
-------------
11.3 CONSENT TO AMENDMENTS; SUBORDINATION. (a) This Agreement may be
------------------------------------
amended and the Company may take any action herein prohibited, or omit to
perform any act herein required to be performed by it, only if the Company shall
have obtained the written consent to such amendment, action or omission to act,
of the holders of sixty-six and two-thirds (66 2/3%) of the number of shares of
Series C Preferred Stock at the time outstanding, and each holder of any shares
of Series C Preferred Stock at the time or thereafter outstanding shall be bound
by any consent authorized by this Section 11.3. No course of dealing between the
Company and the holder of any share of Series C Preferred Stock nor any delay in
exercising any rights hereunder or under any share of Series C Preferred Stock
shall operate as a waiver of any rights of any holder of such shares of Series C
Preferred Stock. As used herein, the term "this Agreement" and references
--------------
thereto shall mean this Agreement as it may from time to time be amended or
supplemented.
(b) Once the Preferred Shares have been redeemed in full, this
Agreement may be amended and the Company may take any action herein prohibited,
or omit to perform any act herein required to be performed by it, only if the
Company shall have obtained the written consent to such amendment, action or
omission to act, of the holders of 51% of the then outstanding
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<PAGE>
Warrants, and each holder of Warrants at the time or thereafter outstanding
shall be bound by any consent authorized by this paragraph 11.3.
(c) Electra and the Company agree that, prior to the Company's taking
any action prohibited by Section 6 above, the Company will deliver to the
holders of the Warrants and/or shares of Series C Preferred Stock, as the case
may be, a written notice (the "Company Notice") setting forth in reasonable
detail the proposed action to be taken by the Company or any of its
Subsidiaries. Unless the Company receives written authorization from the
percentage of holders of Preferred Shares or the Warrants, as the case may be,
required for consent in paragraphs (a) and (b) above by the 20th Business Day
after delivery of the Company Notice, the Company may not proceed with the
proposed action set forth in the Company Notice.
11.4 PERSONS DEEMED OWNERS. Prior to due presentment for
---------------------
registration of transfer, the Company may treat the Person in whose name any
shares of Series C Preferred Stock is registered as the owner and holder of such
shares of Series C Preferred Stock for the purpose of receiving payment of the
liquidation value of, and dividends on, such shares and for all other purposes
whatsoever.
11.5 SURVIVAL OF REPRESENTATIONS AND WARRANTIES; ENTIRE AGREEMENT.
------------------------------------------------------------
All representations and warranties contained herein and under the other
Transaction Documents or made in writing by or on behalf of the Company in
connection herewith or therewith or in connection with the transactions
contemplated hereby or thereby shall survive the execution and delivery of this
Agreement and the Securities, the transfer by Electra of any Securities or
portion thereof or interest therein, or the repurchase or redemption of the
Securities and may be relied upon by any transferee regardless of any
investigation made at any time by or on behalf of Electra or any subsequent
Significant Holder; provided, however, that the representations and warranties
-------- -------
set forth in any Transaction Document shall survive only for such period of time
specifically set forth in such Transaction Document to the extent that a shorter
period is set forth therein. Subject to the preceding sentence, this Agreement,
the
80
<PAGE>
Securities and the other Transaction Documents embody the entire agreement
and understanding among Electra, the Company and supersede all prior agreements
and understandings relating to the subject matter hereof.
11.6 SUCCESSORS AND ASSIGNS. All covenants and other agreements in
----------------------
this Agreement contained by or on behalf of any of the parties hereto shall bind
and inure to the benefit of the respective successors and assigns of the parties
hereto (including, without limitation, any subsequent Significant Holder and
Electra) whether so expressed or not.
11.7 NOTICES. All written communications provided for hereunder
-------
shall be sent by first class mail or nationwide overnight delivery service
(with charges prepaid) and (i) if to Electra, addressed to it at 65 Kingsway,
London, England WC2B 6QT, Telecopier No.: 011-4471-242-1806, Attention: Mr.
Philip Dyke, with a copy to Electra Inc., 70 East 55th Street, New York, New
York 10022, Telecopier No.: 212-319-3069, Attention: Ms. Diane M. Smith, Senior
Vice President, with copies to Pryor, Cashman, Sherman & Flynn, 410 Park Avenue,
New York, New York 10022, Telecopier No.: 212-326-0806, Attention: Selig D.
Sacks, Esq., or to such other address or addresses as Electra shall have
specified to the parties hereto in writing, (ii) if to any other holder of any
shares of Series C Preferred Stock, addressed to such holder at such address as
such other holder shall have specified to the Company in writing or, if any such
other holder shall not have so specified an address to the Company, then
addressed to such other holder in care of the last holder of such share of
Series C Preferred Stock which shall have so specified an address to the
Company, and (iii) if to the Company, addressed to it at Career Education
Corporation, 2300 N. Barrington, Suite 400, Hoffman Estates, Illinois 60195,
Telecopier No.: (708) 884-8973, Attention: President, with a copy to: D'Ancona
and Pflaum, 30 North LaSalle Street, Suite 2900, Chicago, Illinois 60602,
Telecopier No.: (312) 580-0923, Attention: Michael J. Feldman, Esq., and with a
copy to Heller Equity Capital Corp., 500 West Monroe Street, Chicago, Illinois
60661, Telecopier No.: (312) 441-7378, Attention: Todd H. Steele, or to such
other address or addresses as the Company may have designated in writing to each
holder of the Securities at the time outstanding.
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<PAGE>
11.8 DESCRIPTIVE HEADINGS, ETC. The descriptive headings of the
-------------------------
several Sections of this Agreement are inserted for convenience only and do not
constitute a part of this Agreement. References herein to a Section are, unless
otherwise specified, to one of the Sections of this Agreement and references
to an "Exhibit" or "Schedule" are, unless otherwise specified, to one of the
------- --------
Exhibits or Schedules to this Agreement.
11.9 GOVERNING LAW; CHOICE OF FORUM. THIS AGREEMENT SHALL BE DEEMED
------------------------------
TO HAVE BEEN EXECUTED AND DELIVERED AT AND SHALL BE DEEMED TO HAVE BEEN MADE IN
NEW YORK, NEW YORK. THIS AGREEMENT, AND THE RIGHTS AND OBLIGATIONS OF THE
PARTIES HEREUNDER SHALL BE CONSTRUED IN ACCORDANCE WITH AND BE GOVERNED BY THE
SUBSTANTIVE LAWS OF THE STATE OF NEW YORK (WITHOUT GIVING EFFECT TO ANY
CONFLICTS OF LAW RULES OR PRINCIPLES) AND THE RIGHTS AND OBLIGATIONS OF THE
PARTIES UNDER THE SERIES C PREFERRED STOCK SHALL BE CONSTRUED IN ACCORDANCE WITH
AND BE GOVERNED BY THE SUBSTANTIVE LAWS OF THE STATE OF DELAWARE (WITHOUT GIVING
EFFECT TO ANY CONFLICTS OF LAW RULES OR PRINCIPLES). ANY LEGAL ACTION OR
PROCEEDING WITH RESPECT HERETO AND THERETO SHALL ONLY BE BROUGHT IN THE COURTS
OF THE UNITED STATES OF AMERICA FOR THE SOUTHERN DISTRICT OF NEW YORK, AND, BY
EXECUTION AND DELIVERY OF THIS AGREEMENT, THE COMPANY HEREBY ACCEPTS FOR ITSELF
AND IN RESPECT OF ITS PROPERTY, GENERALLY AND UNCONDITIONALLY, THE JURISDICTION
OF THE AFORESAID COURTS AND IRREVOCABLY WAIVES ANY DEFENSE OR CLAIM TO SUCH
JURISDICTION WHICH EITHER OR BOTH MAY HAVE BASED, DIRECTLY OR INDIRECTLY, ON THE
GROUNDS OF FORUM NON CONVENIENS. IF ANY ACTION IS COMMENCED IN ANY OTHER
JURISDICTION, THE PARTIES HERETO HEREBY CONSENT TO THE REMOVAL OF SUCH ACTION
TO THE SOUTHERN DISTRICT OF NEW YORK. THE COMPANY HEREBY IRREVOCABLY DESIGNATES
CT CORPORATION SYSTEM, AS THE DESIGNEE, APPOINTEE AND AGENT, OF THE COMPANY TO
RECEIVE, FOR AND ON BEHALF OF THE COMPANY, SERVICE OF PROCESS IN SUCH RESPECTIVE
JURISDICTIONS IN ANY LEGAL ACTION OR PROCEEDING WITH RESPECT TO THIS AGREEMENT
OR THE RIGHTS AND OBLIGATIONS HEREUNDER OR THEREUNDER OR UNDER THE SERIES C
PREFERRED STOCK AND SUCH SERVICE SHALL BE DEEMED COMPLETED UPON DELIVERY THEREOF
TO SUCH AGENT. IT IS UNDERSTOOD THAT A COPY OF SUCH PROCESS SERVED ON SUCH AGENT
WILL BE PROMPTLY FORWARDED BY MAIL TO THE COMPANY AT ITS ADDRESS SET FORTH IN
SECTION 11.7, BUT THE FAILURE OF THE COMPANY TO RECEIVE
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<PAGE>
SUCH COPY SHALL NOT AFFECT IN ANY WAY THE SERVICE OF SUCH PROCESS. THE COMPANY
FURTHER IRREVOCABLY CONSENTS TO THE SERVICE OF PROCESS OUT OF ANY OF THE
AFOREMENTIONED COURTS IN ANY SUCH ACTION OR PROCEEDING BY THE MAILING OF COPIES
THEREOF BY REGISTERED OR CERTIFIED MAIL, POSTAGE PREPAID, TO THE COMPANY AT ITS
ADDRESS, SUCH SERVICE TO BECOME EFFECTIVE 30 DAYS AFTER SUCH MAILING. NOTHING
HEREIN SHALL AFFECT THE RIGHT OF ELECTRA, OR ANY HOLDER OF ANY OF THE SECURITIES
TO SERVE PROCESS IN ANY OTHER MANNER PERMITTED BY LAW OR COMMENCE LEGAL
PROCEEDINGS OR OTHERWISE PROCEED AGAINST THE COMPANY IN ANY OTHER JURISDICTION.
11.10 WAIVER OF JURY TRIAL. THE COMPANY AND ELECTRA HEREBY WAIVE
--------------------
THEIR RESPECTIVE RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED
UPON OR ARISING OUT OF THIS AGREEMENT OR ANY DEALINGS BETWEEN THEM RELATING TO
THE SUBJECT MATTER OF THIS AGREEMENT AND THE TRANSACTIONS CONTEMPLATED HEREBY
AND THE RELATIONSHIP THAT IS BEING ESTABLISHED HEREUNDER. THE COMPANY AND
ELECTRA ALSO WAIVE ANY BOND OR SURETY OR SECURITY UPON SUCH BOND WHICH MIGHT,
BUT FOR THIS WAIVER, BE REQUIRED OF THE OTHER PARTIES. THE SCOPE OF THIS WAIVER
IS INTENDED TO BE ALL-ENCOMPASSING OF ANY AND ALL DISPUTES THAT MAY BE FILED IN
ANY COURT AND THAT RELATE TO THE SUBJECT MATTER OF THIS AGREEMENT, INCLUDING,
WITHOUT LIMITATION, CONTRACT CLAIMS, TORT CLAIMS, BREACH OF DUTY CLAIMS, AND ALL
OTHER COMMON LAW AND STATUTORY CLAIMS. THE COMPANY AND ELECTRA ACKNOWLEDGE THAT
THIS WAIVER IS A MATERIAL INDUCEMENT TO ENTER INTO A BUSINESS RELATIONSHIP, THAT
EACH HAS ALREADY RELIED ON THE WAIVER IN ENTERING INTO THIS AGREEMENT AND THAT
EACH WILL CONTINUE TO RELY ON THE WAIVER IN THEIR RELATED FUTURE DEALINGS. THE
COMPANY AND ELECTRA FURTHER WARRANT AND REPRESENT THAT EACH HAS REVIEWED THIS
WAIVER WITH ITS LEGAL COUNSEL, AND THAT EACH KNOWINGLY AND VOLUNTARILY WAIVES
ITS JURY TRIAL RIGHTS FOLLOWING CONSULTATION WITH LEGAL COUNSEL. THIS WAIVER IS
IRREVOCABLE, MEANING THAT IT MAY NOT BE MODIFIED EITHER ORALLY OR IN WRITING,
AND THE WAIVER SHALL APPLY TO ANY SUBSEQUENT AMENDMENTS, RENEWALS, SUPPLEMENTS
OR MODIFICATIONS TO THIS AGREEMENT OR TO ANY OTHER DOCUMENTS OR AGREEMENTS
RELATING TO THE TRANSACTIONS CONTEMPLATED HEREBY. IN THE EVENT OF LITIGATION,
THIS AGREEMENT MAY BE FILED AS A WRITTEN CONSENT TO A TRIAL BY THE COURT.
83
<PAGE>
IN WITNESS WHEREOF, the Company and Electra have caused this Agreement to
be executed by its duly authorized officer as of the date first above written.
CAREER EDUCATION CORPORATION
By: /s/ JOHN M. LARSON
-------------------------------
Name: John M. Larson
Title: President
ELECTRA INVESTMENT TRUST P.L.C.
By: /s/ HUGH M. MUMFORD
-------------------------------
Name: Hugh M. Mumford
Title: Director
ELECTRA ASSOCIATES, INC.
By: /s/ R.J. LEWIS
-------------------------------
Name: R.J. Lewis
Title: Director
84
<PAGE>
EXHIBIT 10.17
-------------
FORM OF
WARRANT CERTIFICATE
THESE WARRANTS AND ANY SHARES ACQUIRED UPON THE EXERCISE HEREOF HAVE NOT
BEEN REGISTERED UNDER THE UNITED STATES SECURITIES ACT OF 1933, AS AMENDED, OR
UNDER ANY APPLICABLE STATE SECURITIES LAWS. THESE WARRANTS AND SUCH SHARES AND
ANY INTEREST OR PARTICIPATION HEREIN OR THEREIN MAY NOT BE SOLD OR TRANSFERRED
IN THE ABSENCE OF SUCH REGISTRATION OR AN EXEMPTION THEREFROM UNDER SUCH ACT AND
UNDER ANY APPLICABLE STATE SECURITIES LAWS. THESE WARRANTS AND SUCH SHARES MAY
NOT BE TRANSFERRED EXCEPT UPON THE CONDITIONS SPECIFIED IN THIS WARRANT
CERTIFICATE, AND NO TRANSFER OF THESE WARRANTS OR SUCH SHARES SHALL BE VALID OR
EFFECTIVE UNLESS AND UNTIL SUCH CONDITIONS SHALL HAVE BEEN COMPLIED WITH.
THESE WARRANTS AND ANY SHARES ACQUIRED UPON THE EXERCISE HEREOF ARE SUBJECT
TO RESTRICTIONS ON TRANSFER AND MAY NOT BE SOLD, EXCHANGED, TRANSFERRED,
PLEDGED, HYPOTHECATED OR OTHERWISE DISPOSED OF EXCEPT IN ACCORDANCE WITH AND
SUBJECT TO ALL THE TERMS AND CONDITIONS OF A CERTAIN AMENDED AND RESTATED
STOCKHOLDERS AGREEMENT, DATED AS OF JULY 31, 1995, AMONG CAREER EDUCATION
CORPORATION AND ITS STOCKHOLDERS, A COPY OF WHICH THE COMPANY WILL FURNISH TO
THE HOLDER OF THESE WARRANTS UPON REQUEST AND WITHOUT CHARGE.
THESE WARRANTS AND THE OBLIGATIONS EVIDENCED HEREBY ARE SUBORDINATE IN THE
MANNER AND TO THE EXTENT SET FORTH IN THAT CERTAIN SUBORDINATION AGREEMENT (THE
"SUBORDINATION AGREEMENT") DATED AS OF JULY 31, 1995 AMONG CAREER EDUCATION
CORPORATION ("COMPANY"), AND THE PROVIDENT BANK, TO THE DEBT (INCLUDING
INTEREST) OWED BY THE HOLDERS OF ALL SENIOR INDEBTEDNESS (AS DEFINED IN THE
SUBORDINATION AGREEMENT) IN ACCORDANCE WITH THE TERMS THEREOF.
WARRANT CERTIFICATE
To Purchase Shares of Class D Common Stock of
CAREER EDUCATION CORPORATION
No. 1 ______ Warrants
THIS CERTIFIES THAT, for good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, Electra Investment Trust P.L.C.
or its registered assigns (the
<PAGE>
"holder"), is the registered owner of the number of Warrants specified above,
each of which Warrants entitles the holder hereof, subject to the adjustment
provisions and the conditions and limitations hereinafter set forth, to
purchase from CAREER EDUCATION CORPORATION (the "Company"), a corporation
organized and existing under the laws of the State of Delaware (the
"Company"), one share of the Company's Class D Common Stock, par value $.01
per share (the "Common Stock"), at a purchase price of $.01 per share (the
"Exercise Price"). The Warrants shall not be terminable by the Company prior
to the Expiration Date. The shares of Common Stock issuable upon exercise of
the Warrants (and any other or additional shares, securities or property that
may hereafter be issuable upon exercise of the Warrants) are sometimes
referred to herein as the "Warrant Shares," and the maximum number of shares
so issuable under this Warrant Certificate is sometimes referred to as the
"Aggregate Number" (as such number may be increased or decreased, as more
fully set forth herein).
The Warrants shall be void and all rights represented hereby shall cease
on the Expiration Date (as defined in Section 10 hereof).
The Warrants represented hereby are part of an authorized issue of 25,285
Warrants, Warrant Certificates for all of which were originally issued on July
31, 1995 (such originally issued Warrants, or such number thereof as shall
from time to time remain unexercised, together with all Penalty Warrants (as
defined in the Securities Purchase Agreement (as defined below)) issued
pursuant to the provisions of Section 7.1 of the Securities Purchase
Agreement, or such number of Penalty Warrants as shall from time to time
remain unexercised, being herein collectively called the "Warrants"). The
Warrants (other than any such Penalty Warrants) are being issued concurrently
with the issuance by the Company of shares of its Series C Preferred Stock
pursuant to a Securities Purchase Agreement dated as of July 31, 1995 (the
"Securities Purchase Agreement").
Certain terms used in this Warrant Certificate are defined in Section 10
hereof.
The Warrants are subject to the following provisions, terms and
conditions:
1. Exercise; Issue of Certificates; Payment for Shares.
---------------------------------------------------
(a) The rights represented by this Warrant Certificate may be
exercised by the holder hereof, in whole or in part (but not as to fractional
shares of Common Stock), to purchase a total number of shares equal to 21,492
shares (subject to the
2
<PAGE>
adjustments described in Section 5 hereof), less the Earned Amount; provided,
--------
however, that upon the receipt of a notice from the Electra Investors of an
-------
occurrence of a Preferred Stock Failure Event under the Securities Purchase
Agreement and the exercise by the Electra Investors of their rights under
clause (a) of Section 7.1 of the Securities Purchase Agreement, or upon the
occurrence of a Triggering Event, the Earned Amount, if any, shall be fixed
and finally determined as of the date of the occurrence of such Preferred
Stock Failure Event or Triggering Event, as the case may be, and, with respect
to any period from and after the March 31 immediately preceding such date, no
additional calculations under the definition of the Earned Amount shall be
made; provided, further, however, that nothing contained herein is intended to
-------- ------- -------
deny the Company the right to receive payment of the Clawback Amount (as
defined in Section 4.2(c)(ii)) in accordance with the provisions of Section
4.2.
(b) The Warrants shall be exercisable by surrendering this Warrant
Certificate (with the Exercise Form annexed hereto as Schedule 1 properly
completed and executed) to the Company at its principal office specified in
Section 15, or its then current address, and upon payment to the Company of
the Exercise Price for the Warrant Shares being purchased.
(c) Payment of the Exercise Price may be made, in the sole
discretion of the holder, in the form of any of the following: (i) cash, (ii)
a check or bank draft in New York Clearing House funds, or (iii) by the
surrender of a portion of the Warrants other than that which is then being
exercised. For purposes of making payment of the Exercise Price in accordance
with the foregoing clause (iii), the portion of any Warrants being surrendered
shall be deemed to have a value as determined by a good faith determination of
the Board of Directors of the Company. The shares so purchased shall be and
shall be deemed to be issued to the holder hereof as the record owner of such
shares as of the close of business on the date on which this Warrant
Certificate shall have been surrendered and payment made for such shares as
aforesaid.
(d) Certificates for the shares so purchased shall be delivered to
the holder hereof within a reasonable time, not exceeding 10 days, after this
Warrant Certificate shall have been so exercised, and unless the Warrants have
expired, a new Warrant Certificate representing the number of shares, if any,
with respect to which this Warrant Certificate shall not then have been
exercised or tendered as payment of the Exercise Price as provided in Section
1(c)(iii) above shall also be delivered to the holder hereof within such time.
Such certificate or certificates shall be deemed to have been issued and any
Person so designated to be named therein shall be deemed for all
3
<PAGE>
purposes to have become a holder of record of such Warrant Shares as of the
close of business on the date of the surrender of this Warrant Certificate and
payment of the Exercise Price as aforesaid.
(e) Mandatory Exercise Upon Threshold Public Offering. Concurrently
-------------------------------------------------
with the consummation of a Threshold Public Offering, if the shares of Series
C Preferred Stock shall have been redeemed in full prior to the Threshold
Public Offering or if the shares of Series C Preferred Stock will be paid in
full upon the consummation of the Threshold Public Offering, the holder of
this Warrant shall be required to exercise this Warrant.
2. Shares to be Fully Paid; Reservation of Shares; Listing. The
----------------------------------------------- -------
Company covenants and agrees that: (a) all Warrant Shares will, upon
issuance, be original-issue shares (and not treasury stock) fully paid and
nonassessable and free from all taxes, claims, liens, charges and other
encumbrances with respect to the issue thereof; (b) without limiting the
generality of the foregoing, it will from time to time take all such action as
may be required to assure that the par value per share of Common Stock shall
at all times be less than or equal to the Exercise Price; (c) during the
period within which the rights represented by this Warrant Certificate may be
exercised, the Company will at all times have authorized and reserved for the
purpose of issue or transfer upon exercise of the Warrants a sufficient number
of original-issue shares of its Common Stock to provide for the exercise of
all the Warrants; (d) upon the exercise of the Warrants represented by this
Warrant Certificate, it will, at its expense, promptly notify each securities
exchange on which any Common Stock is at the time listed of such issuance, and
maintain a listing of all shares of Common Stock from time to time issuable
upon the exercise of the Warrants to the extent such shares can be listed.
3. Representations and Warranties. All representations, warranties and
------------------------------
covenants contained in Article 8 of the Securities Purchase Agreement are true
and correct as of the date of the Closing (as defined in the Securities
Purchase Agreement) and are incorporated herein as if made by the Company to
the holders from time to time of the Warrants.
4. Put and Other Rights.
--------------------
4.1 Put Right. (a) On or after the earliest of (i) March 31,
---------
2001, (ii) the occurrence of a Preferred Stock Failure Event as described in
paragraphs 7.1(v) through 7.1(vii) of the Securities Purchase Agreement, or
(iii) the failure to pay all amounts payable in respect of the redemption of
the shares of
4
<PAGE>
Series C Preferred Stock, including the stated value, dividends, interest, if
any, and any costs, fees and expenses covered by Section 11.2 of the
Securities Purchase Agreement, in full within 15 days after the acceleration
of the redemption date of the shares of Series C Preferred Stock due to a
Preferred Stock Failure Event (other than those events specified in clause
(ii) above) under the Securities Purchase Agreement, but prior to the earlier
of (x) the Expiration Date and (y) the occurrence of a Triggering Event,
holders of at least 51% of the Warrants then outstanding shall have the right
(the "Put"), upon 90 days written notice to the Company, to require the
Company, on one occasion, to purchase on the date specified in such notice all
or any part of the then outstanding Warrants of such holders, and any
additional holders who wish to join such exercise after receipt of the notice
provided in the next succeeding sentence, subject to the provisions of Section
4.1(d) below. The Company shall promptly give written notice to all holders of
Warrants of the receipt by it of notification of the exercise of the Put
provided for in this Section 4.1(a). The purchase price for each tendered
Warrant shall be determined as provided in Section 4.1(b) below, and payable
as provided in Section 4.1(c) below. If the Company shall not have sufficient
surplus to permit it lawfully to purchase the Warrants, the Company shall take
such action as it may be lawfully permitted to take to reduce the stated
capital of the Company to the extent permitted by law or to authorize such
other steps as may be appropriate or necessary in order to enable the Company,
if possible, lawfully to purchase such Warrants.
(b) Repurchase Price. (i) The purchase price (the "Repurchase
----------------
Price") of each Warrant properly tendered to the Company pursuant to Section
4.1(a) shall be equal to the number of Warrant Shares that each Warrant is
exercisable for multiplied by the Fair Market Value Per Share calculated as of
the date notice of the exercise of such Put is given pursuant to Section
4.1(e).
(ii) Fair Market Value Per Share shall be equal to the greater
of (A) the common stock book value of the Company, as of the end of the most
recently completed fiscal quarter and as reflected on the balance sheet of the
Company as of such date, plus the aggregate amount of proceeds to be received
----
by the Company upon the exercise, conversion and/or exchange of all warrants,
options and convertible securities of the Company or other rights to acquire
equity of the Company whose exercise price is less than the fair market value
of the Common Stock and which are then exercisable or which will become
exercisable within twelve (12) months from the date of such determination (the
"Exercisable Convertible Securities"), divided by the total number of shares
of Common Stock then outstanding on
5
<PAGE>
the date of calculation (assuming the conversion, exercise or exchange of all
Exercisable Convertible Securities), all determined in accordance with
generally accepted accounting principles (GAAP) in the United States applied
on a basis consistent with prior years, (B) four (4) times EBITDA of the
Company and its Subsidiaries for the most recently completed fiscal year, less
----
outstanding Debt (as defined in the Securities Purchase Agreement) and non-
convertible preferred stock of the Company and its Subsidiaries as of the end
of the most recently completed fiscal quarter, plus any discount recorded due
----
to the allocation of value to the Warrants or the Provident Warrant, plus all
cash and cash equivalents and marketable securities of the Company and its
Subsidiaries as of the end of the most recently completed fiscal quarter, plus
----
the aggregate amount of proceeds to be received by the Company upon the
exercise, conversion and/or exchange of all Exercisable Convertible
Securities, divided by the total number of shares of Common Stock then
outstanding on the date of calculation (assuming the conversion, exercise or
exchange of all Exercisable Convertible Securities), all determined in
accordance with generally accepted accounting principles (GAAP) in the United
States applied on a basis consistent with prior years, and (C) the Fair Market
Value Per Share as determined in good faith by the Board of Directors of the
Company; provided, however, that if the holders of the Warrants subject to
-------- -------
such Put shall not be satisfied for any reason with the determination of the
Board of Directors of the Company, the Fair Market Value Per Share shall be
determined in accordance with the following procedures: first, by an
-----
investment banking firm selected by holders of 51% of the Warrants which are
subject to such Put, which determination shall be made within thirty (30) days
after the delivery of the notice of the exercise of the Put, second, if such
------
determination shall not be satisfactory to the Company, as evidenced by a
written objection by the Company delivered to the holders of the Warrants
subject to such Put within two weeks of receipt by the Company of such
determination, the Company shall be entitled to select an investment banking
firm which shall make its own determination within thirty (30) days of its
appointment, and if such determination shall differ by less than 10% from the
determination of the investment banking firm selected by the Company, the Fair
Market Value Per Share shall be the average of such determinations and third,
-----
if such determinations shall differ by 10% or more, such investment banking
firms shall appoint a third investment banking firm which shall make its own
determination within two weeks of its appointment, which determination shall
be binding upon the Company and the holders of the Warrants subject to the
put. Any and all determinations required to be made by an investment banking
firm pursuant to this Section 4.1(b) shall be performed by an investment
banking firm experienced in the conduct of corporate valuations and shall
6
<PAGE>
be based upon the fair market value of 100% of the Company on a consolidated
basis if sold as a going concern, without giving effect to any discount for
lack of liquidity of the shares of Common Stock, or to any restrictions upon
the conversion of any shares of non-voting common stock into voting common
stock, or to the fact that the shares of Common Stock issuable upon exercise
of the Warrants being put to the Company represent a minority equity interest
in the Company, or to any discount relating to, or reclassification because
of, the right of any stockholder, Preferred Stock holder or warrant holder of
the Company to sell its shares of Common Stock, Preferred Stock or warrants to
the Company, including pursuant to this Put. In addition, in making such
determination, the investment banking firm shall assume the conversion,
exercise or exchange of all Exercisable Convertible Securities and shall take
into account the valuations associated with companies engaged in businesses
and with capital structures similar to the Company and such other matters as
are relevant to the valuation of the Company.
Notwithstanding anything herein to the contrary, in determining Fair
Market Value Per Share under this Section 4.1(b)(ii), (i) any adverse changes
in GAAP from the date of original issuance of this Warrant Certificate shall
be disregarded such that any computations shall be made as if the GAAP change
had not been implemented, and (ii) any dividends paid or redemptions or
repurchases of any of the securities of the Company (other than the Series C
Preferred Stock) by the Company within one year of the exercise of the put
shall be disregarded and any amounts distributed shall be treated as if such
amounts had been retained by the Company. All costs of such determinations
shall be borne by the Company.
(c) Payment. Upon surrender of any Warrants in conformity with
-------
the provisions of this Section 4.1, all amounts due to a holder in connection
with a Put shall be paid to such holder in immediately available funds on the
date specified for payment set forth in the notice (the "Repurchase Date").
(d) Inability To Comply With Put Option. If the Company does
-----------------------------------
not purchase the Warrants within 30 days after the Repurchase Date (the "Grace
Period") for any reason whatsoever, or in the event that there has occurred
and is continuing an event which would (but for the redemption in full of the
shares of Series C Preferred Stock) be a Preferred Stock Failure Event (as
defined in the Securities Purchase Agreement) following the exercise of the
Put option set forth in Section 4.1(a)(ii), then, in addition to any other
remedy under this Warrant, the Securities Purchase Agreement or at law or in
equity the holder might have, upon the expiration of the Grace Period, the
Company shall remain liable on demand to the holder for the Repurchase
7
<PAGE>
Price of Warrants which it has failed to repurchase, plus interest thereon at
the rate of 12% per annum from the Repurchase Date; provided that there shall
--------
be deducted from the outstanding Repurchase Price all amounts received by the
holder upon the sale of the Warrants, less an amount equal to the sum of (A)
interest on the outstanding Repurchase Price at the rate of 12% per annum from
the Repurchase Date to and including the date of sale, and (B) all costs and
expenses relating to the sale of the Warrants which is consummated at any time
after the Grace Period; provided, further, that upon any such sale of the
-------- -------
Warrants, the Company shall remain liable to the purchaser of the Warrants for
interest relating solely to the period in which such purchaser held the
Warrants.
(e) Notice. The Company shall promptly deliver notice of the
------
exercise of any Put rights to all holders of Warrants which notice shall
specify (i) the Warrants subject to purchase, (ii) the Repurchase Date, which
date shall be no later than 30 days from the date of determination of the
Repurchase Price in accordance with the provisions of Section 4.1(b), and
(iii) that such holders shall have the right to put their Warrants and require
the Company to purchase such Warrants on the specified Repurchase Date.
4.2 IRR Clawback. (a) At such time (the "Exit") as EIT sells or
------------
otherwise disposes of for cash all of the Covered Securities (as defined in
Section 4.2(b)(iii) below) owned by EIT, whether through the sale of the
Company or otherwise, if EIT shall have realized on a cumulative basis an IRR
of at least 28% to the date of Exit, EIT shall pay to the Company the Clawback
Amount (as defined below); provided, however, that for purposes of this
-------- -------
Section 4.2 the sale or other disposition by EIT to a Permitted Transferee (as
defined in the Stockholders Agreement) in accordance with Section 2.6(a) or
(d) of the Stockholders Agreement shall not be deemed a sale or other
disposition. Such payment shall be made at the election of EIT in cash, other
securities of the Company, or any combination thereof.
(b) Defined Terms. For purposes of this Section 4.2, the
-------------
following terms shall have the meanings specified with respect thereto:
(i) "Cash Inflows" shall equal the sum of all payments of
dividends on the shares of Series C Preferred Stock made to EIT as a holder of
the shares of Series C Preferred Stock, all payments in respect of the
redemption of the shares of Series C Preferred Stock made to EIT as a holder
of the shares of Series C Preferred Stock, and all cash proceeds received by
EIT from any disposition of Covered Securities prior to or at Exit (net of all
selling expenses, brokerage commissions and other
8
<PAGE>
expenses incurred in such sale), but shall not include the value of any
Penalty Warrants issued by the Company to EIT.
(ii) "Clawback Amount" shall mean the product of (A) the
percentage represented by a fraction, the numerator of which is the difference
of (I) the Applicable Percentage multiplied by 9,894 (as such number may be
adjusted in accordance with the principles of Section 5), minus (II) the
Earned Amount (determined as of such date), such difference multiplied by 50%,
and the denominator of which is the Prior Outstanding Number (as defined in
Section 5(c) below), multiplied by (B) the Enterprise Value (as defined
below); provided, however, that in no event shall the payment of the Clawback
-------- -------
Amount reduce the IRR of EIT to less than 28%.
(iii) "Covered Securities" shall consist of the shares of
Series C Preferred Stock and the Warrants originally issued to EIT under the
Securities Purchase Agreement, any shares of Common Stock issued upon exercise
of such Warrants, and any shares received in a stock split or similar
transaction with respect to the Common Stock issued upon exercise of such
Warrants.
(iv) "Enterprise Value" shall mean, as of the date of
determination, the quotient of (x) the difference of (A) Cash Inflows minus
(B) the sum of all payments of dividends on the shares of Series C Preferred
Stock made to EIT, plus all payments in respect of the redemption of the
----
shares of Series C Preferred Stock made to EIT, plus all cash proceeds
----
received by EIT from any disposition of shares of Series C Preferred Stock
prior to or at Exit, divided by (y) the percentage represented by the
fraction, (A) the numerator of which is the sum of the number of Warrant
Shares sold by EIT plus the number of Warrant Shares which may be issued upon
----
the exercise of any Warrants sold by EIT, and (B) the denominator of which is
the total outstanding shares of Common Stock as of such date (assuming for
purposes of such calculation the conversion, exercise or exchange of all
Exercisable Convertible Securities).
(v) "IRR" shall mean an internal rate of return (compounded
annually) which, when used to calculate the net present value as of July 31,
1995 of all Cash Inflows and Cash Outflows, causes such net amount to equal
zero. For purposes of the net present value computation, each Cash Inflow and
each Cash Outflow specified above shall be deemed to have been received or
made on the first day of the month nearest to the actual date of such payment.
(vi) "Cash Outflows" shall mean $4,250,000 (representing the
amount invested by EIT under the Securities
9
<PAGE>
Purchase Agreement).
5. Adjustments to Aggregate Number.
-------------------------------
Under certain conditions, the Aggregate Number is subject to
adjustment as set forth herein.
The Aggregate Number shall be subject to adjustment from time to
time as follows and thereafter as adjusted shall be deemed to be the Aggregate
Number hereunder.
(a) In case at any time or from time to time the Company
shall:
(i) take a record of the holders of its Common Stock for
the purpose of entitling them to receive a dividend payable in, or other
distribution of, Common Stock,
(ii) subdivide its outstanding shares of Common Stock into
a larger number of shares of Common Stock, or
(iii) combine its outstanding shares of Common Stock into a
smaller number of shares of Common Stock, or
(iv) change the class or classes of stock of the Warrant
Shares that are issuable upon a Recapitalization or otherwise, or
(v) consummate a Non-Surviving Combination,
then the Aggregate Number in effect immediately prior thereto shall be
adjusted so that the holder or holders of Warrants shall thereafter be
entitled to receive, upon exercise thereof, the number of shares of Common
Stock or shares of other stock, securities or property that such holder or
holders of Common Stock would have owned or have been entitled to receive
after the occurrence of such Recapitalization, Non-Surviving Combination or
other event had such Warrants been exercised immediately prior to the
occurrence of such event.
(b) In case at any time or from time to time the Company shall
take a record of the holders of its Common Stock for the purpose of entitling
them to receive any dividend or other distribution (collectively, a
"Distribution") of:
(i) cash,
(ii) any evidences of its indebtedness (other than
Convertible Securities), any shares of its
10
<PAGE>
Capital Stock (other than additional shares of Common Stock or
Convertible Securities) or any other securities or property of any nature
whatsoever (other than cash), or
(iii) any options or warrants or other rights to subscribe
for or purchase any of the following: any evidences of its indebtedness
(other than Convertible Securities), any shares of its capital stock
(other than additional shares of Common Stock or Convertible Securities)
or any other securities or property of any nature whatsoever,
then the holder or holders of Warrants shall be entitled to receive upon the
exercise thereof (or upon exercise of the Put pursuant to Section 4.1 hereof)
at any time on or after the taking of such record the number of shares of
Common Stock to be received upon exercise of such Warrants determined as
stated herein and, in addition and without further payment, the cash
(including interest at a rate equal to the T-bill rate in effect from time to
time) from the date such cash was paid to the other stockholders through the
date of payment to the holders of the Warrants, stock, securities, other
property, options, warrants and/or other rights to which such holder or
holders would have been entitled by way of the Distribution and subsequent
dividends and distributions if such holder or holders (x) had exercised such
Warrants immediately prior to such Distribution, and (y) had retained the
Distribution in respect of the Common Stock and all subsequent dividends and
distributions of any nature whatsoever in respect of any stock or securities
paid as dividends and distributions and originating directly or indirectly
from such Common Stock. A reclassification of the Common Stock into shares of
Common Stock and shares of any other class of stock shall be deemed a
distribution by the Company to the holders of its Common Stock of such shares
of such other class of stock within the meaning of this paragraph (b) and, if
the outstanding shares of Common Stock shall be changed into a larger or
smaller number of shares of Common Stock as a part of such reclassification,
such event shall be deemed a subdivision or combination, as the case may be,
of the outstanding shares of Common Stock within the meaning of paragraph (a)
of this Section 5.
(c) In case at any time or from time to time prior to a
Threshold Public Offering the Company shall (except as hereinafter provided)
issue or sell any additional shares of Common Stock or securities at a price
per share which is (A) less than $36.386, as adjusted by application of the
principles set forth in this Section 5, then the Aggregate Number in effect
immediately prior thereto shall be adjusted immediately so that the Aggregate
Number thereafter shall be an amount equal to the product of (x) the
percentage represented by the fraction, the
11
<PAGE>
numerator of which is the Aggregate Number in effect immediately prior to such
issuance or sale and the denominator of which is the total outstanding shares
of Common Stock immediately prior to such issuance or sale (assuming for
purposes of such calculation the exercise of all of the Warrants, and the
conversion, exercise or exchange of all other securities then outstanding and
convertible, exercisable or exchangeable into shares of Common Stock, but not
the exercise of options to acquire up to 12,215 shares (as such number may be
adjusted in accordance with the terms of the Employee Benefit Plans (as
defined in the Securities Purchase Agreement)) of Common Stock granted
pursuant to the Employee Benefit Plans (the "Management Plan Shares") (such
total number of shares of Common Stock outstanding immediately prior to such
issuance or sale, the "Prior Outstanding Number"), and (y) the total number of
shares of Common Stock outstanding immediately after such issuance or sale
(assuming for purpose of such calculation (i) the exercise of all of the
Warrants, and (ii) the conversion, exercise or exchange of all other
securities then outstanding convertible, exercisable or exchangeable into
shares of Common Stock; but not the exercise of options to acquire the
Management Plan Shares) or (B) equal to or in excess of $36.386, as adjusted
by application of the principles set forth in this Section 5, but less than
the fair market value per share of Common Stock as determined in good faith by
the Board of Directors of the Company, then the Aggregate Number then in
effect shall be adjusted immediately so that the Aggregate Number thereafter
shall be an amount equal to the product of (x) the fraction, (1) the numerator
of which is the Prior Outstanding Number plus the difference between (A) the
----
number of shares of Common Stock actually issued or sold in such transaction
and (B) the number of shares of Common Stock which the aggregate consideration
received by the Company for all such shares of Common Stock issued or sold in
such transaction would purchase at the fair market value in effect immediately
prior to the issuance or sale of such additional shares of Common Stock, and
(2) the denominator of which shall be the Prior Outstanding Number, and (y)
the Aggregate Number immediately prior to such issuance or sale.
The provisions of this paragraph (c) shall not apply to any issuance of
additional shares of Common Stock for which an adjustment is provided under
Section 5(a).
(d) In case at any time or from time to time prior to a
Threshold Public Offering the Company shall (except as hereinafter provided)
take a record of the holders of its Common Stock for the purpose of entitling
them to receive a distribution of, or shall in any manner issue or sell, any
warrants or other rights to subscribe for or purchase (x) any shares of Common
Stock or (y) any Convertible Securities, whether or not the
12
<PAGE>
rights to subscribe, purchase, exchange or convert thereunder are immediately
exercisable, at a purchase price per share of Common Stock which is (A) less
than $36.386, as adjusted by application of the principles set forth in this
Section 5, then the Aggregate Number in effect immediately prior thereto shall
be adjusted immediately so that the Aggregate Number thereafter shall be an
amount equal to the product of (x) the percentage represented by the fraction,
the numerator of which is the Aggregate Number in effect immediately prior to
such distribution, issuance or sale and the denominator of which is the total
outstanding shares of Common Stock immediately prior to such distribution,
issuance or sale (assuming for purposes of such calculation the exercise of
all of the Warrants, and the conversion, exercise or exchange of all other
securities then outstanding and convertible, exercisable or exchangeable into
shares of Common Stock, but not the exercise of options to acquire the
Management Plan Shares) and (y) the total number of shares of Common Stock
outstanding immediately after such issuance or sale (assuming for purposes of
such calculation (i) the exercise of all of the Warrants, (ii) the exercise of
the warrants or other rights and/or the conversion of the Convertible
Securities distributed, issued or sold at such time, and (iii) the conversion,
exercise or exchange of all other securities then outstanding convertible,
exercisable or exchangeable into shares of Common Stock; but not the exercise
of options to acquire the Management Plan Shares) or (B) equal to or in excess
of $36.386, as adjusted by application of the principles set forth in this
Section 5, but less than the fair market value per share of Common Stock as
determined in good faith by the Board of Directors of the Company, then the
Aggregate Number then in effect shall be adjusted immediately so that the
Aggregate Number thereafter shall be an amount equal to the product of (x) the
fraction, (1) the numerator of which is the Prior Outstanding Number plus the
----
difference between (A) the number of shares of Common Stock issuable upon
exercise of such rights or upon exercise or conversion of such Convertible
Securities issuable upon exercise of the warrants or other rights actually
issued or sold in such transaction and (B) the number of shares of Common
Stock which the aggregate consideration received by the Company for all
warrants or other rights issued or sold in such transaction, and/or receivable
by the Company upon exercise of such warrants or other rights and/or upon
exercise or conversion of the Convertible Securities issuable upon exercise of
such warrants or other rights, would purchase at the fair market value in
effect immediately prior to the issuance or sale of such warrants or other
rights, and (2) the denominator of which shall be the Prior Outstanding
Number, and (y) the Aggregate Number immediately prior to such issuance or
sale.
Notwithstanding anything in the foregoing, if in connection with the
issuance of Permitted Preferred the Company
13
<PAGE>
shall issue or sell any warrants or other rights to subscribe for or purchase
(x) any shares of Common Stock or (y) any Convertible Securities, with respect
to which an adjustment of the Aggregate Number pursuant to Section 5(d)(A)
would otherwise be required, no adjustment of the Aggregate Number shall be
required pursuant hereto if the total number of shares of Common Stock
issuable upon exercise of such warrant or right (assuming the conversion of
all Convertible Securities received upon such exercise) does not exceed 3.68%
of the total outstanding shares of Common Stock at the time of such issuance
(assuming for purposes of such calculation the conversion, exercise or
exchange of all Exercisable Convertible Securities including the options or
rights which are the subject of such issuance) for each $1,000,000 of stated
amount of Permitted Preferred issued. If the warrants or rights issued
constitute in excess of the percentage set forth above, the Aggregate Number
would be adjusted in accordance with Section 5(d)(A). Nothing herein shall
prevent the application of Section 5(d)(B) to such issuance, to the extent
applicable; provided, that the amount specified in Section 5(d)(B)(1)(B) shall
be calculated based upon the aggregate consideration received for the
Permitted Preferred and such warrants or rights. In calculating the percentage
of warrants or rights issued in connection with any Permitted Preferred, such
calculation shall be made without giving effect to any provisions therein
which permit the Company to reduce the number of shares issuable pursuant to
such warrants or rights or to recover a portion of the warrants or rights
originally issued based upon the satisfaction of certain conditions or
criteria. In calculating the stated amount of Permitted Preferred issued, the
amount of the exercise price of any such warrants or rights (including any
amounts payable in connection with the conversion, exercise or exchange of any
Convertible Securities issuable upon exercise of such warrants or rights)
shall be aggregated with the stated purchase price of the Permitted Preferred.
The provisions of this paragraph (d) shall not apply to any issuance
of additional shares of Common Stock for which an adjustment is provided under
Section 5(a).
(e) In case at any time or from time to time prior to a
Threshold Public Offering the Company shall take a record of the holders of
its Common Stock for the purpose of entitling them to receive a distribution
of or shall in any manner issue or sell Convertible Securities, whether or not
the rights to exchange or convert thereunder are immediately exercisable, at
an exercise price per share of Common Stock which is (A) less than $36.386, as
adjusted by application of the principles set forth in this Section 5, then
the Aggregate Number in effect immediately prior thereto shall be adjusted
immediately so that the Aggregate Number thereafter shall be an amount equal
14
<PAGE>
to the product of (x) the percentage represented by the fraction, the
numerator of which is the Aggregate Number in effect prior to such
distribution, issuance or sale and the denominator of which is the total
outstanding shares of Common Stock immediately before such distribution,
issuance or sale (assuming for purposes of such calculation the exercise of
all of the Warrants, and the conversion, exercise or exchange of all other
securities then outstanding and convertible, exercisable or exchangeable into
shares of Common Stock, but not the exercise of options to acquire the
Management Plan Shares) and (y) the total number of shares of Common Stock
outstanding immediately after such issuance or sale (assuming for purpose of
such calculation (i) the exercise of the Warrants, (ii) the conversion of the
Convertible Securities distributed, issued or sold at such time, and (iii) the
conversion, exercise or exchange of all other securities then outstanding and
convertible, exercisable or exchangeable into shares of Common Stock; but not
the exercise of options to acquire the Management Plan Shares) or (B) equal to
or in excess of $36.386, as adjusted by application of the principles set
forth in this Section 5, but less than the fair market value per share of
Common Stock as determined in good faith by the Board of Directors of the
Company, then the Aggregate Number then in effect shall be adjusted
immediately so that the Aggregate Number thereafter shall be an amo unt equal
to the product of (x) the fraction, (1) the numerator of which is the Prior
Outstanding Number plus the difference between (A) the number of shares of
----
Common Stock issuable upon exercise or conversion of such Convertible
Securities actually issued or sold in such transaction and (B) the number of
shares of Common Stock which the aggregate consideration received by the
Company for all such Convertible Securities issued or sold in such transaction
and/or receivable by the Company upon exercise or conversion of such
Convertible Securities would purchase at the fair market value in effect
immediately prior to the issuance or sale of such Convertible Securities, and
(2) the denominator of which shall be the Prior Outstanding Number, and (y)
the Aggregate Number immediately prior to such issuance or sale.
No adjustment of the Aggregate Number shall be made under this Section 5(e)
upon the issuance of any Convertible Securities which are issued pursuant to
the exercise of any warrants or other subscription or purchase rights if an
adjustment shall previously have been made.
(f) In case at any time or from time to time the Company
desires to issue or sell any shares of Common Stock or Convertible Securities,
or options, rights or warrants to subscribe for or purchase Common Stock or
Convertible Securities, as contemplated by subparagraphs (c), (d) or (e) above
(other than (A) in a registered public offering (i.e., an underwritten
----
15
<PAGE>
public offering and sale for cash by the Company of securities of the Company
to an underwriter(s) pursuant to a binding underwriting agreement and the
registration statement has been declared effective by the Commission) or (B)
pursuant to the exercise of options to acquire the Management Plan Shares),
each holder of the Warrants shall have the right to purchase a portion of such
securities as provided in accordance with the terms and conditions of that
certain Amended and Restated Stockholders Agreement, dated as of July 31,
1995, among the Corporation and its stockholders (the "Stockholders
Agreement").
(g) The following provisions shall be applicable to the making
of adjustments of the Aggregate Number hereinbefore provided for in this
Section 5:
(i) The sale or other disposition of any issued shares of
Common Stock owned or held by or for the account of the Company shall be
deemed an issuance thereof for the purposes of this Section 5.
(ii) The adjustments required by the preceding paragraphs
of this Section 5 shall be made whenever and as often as any specified
event requiring an adjustment shall occur, except as expressly provided
herein. For the purpose of any adjustment, any specified event shall be
deemed to have occurred at the close of business on the date of its
occurrence.
(iii) In computing adjustments under this Section 5
fractional interests in Common Stock shall be taken into account to the
nearest one-thousandth (.001) of a share and shall be aggregated until
they equal one whole share.
(iv) If the Company shall take a record of the holders of
its Common Stock for the purpose of entitling them to receive a dividend,
distribution, warrants or subscription or purchase rights under Sections
5(a) through 5(e) hereof, but abandon its plan to pay or deliver such
dividend, distribution, warrants, subscription or purchase rights, then
no adjustment shall be required by reason of the taking of such record
and any such adjustment previously made in respect thereof shall be
rescinded and annulled.
(v) Notwithstanding anything herein to the contrary, no
adjustment shall be made to the Aggregate Number as a result of the
issuance of the Management Plan Shares or the issuance of the options to
acquire the Management Plan Shares.
16
<PAGE>
(vi) Upon the expiration or termination of any of the
warrants or other rights or options referred to in Section 5(d) above or
the Convertible Securities referred to in Section 5(e) above, the
Aggregate Number after the expiration or termination of any such
warrants, rights, options or Convertible Securities, the issuance of
which caused an adjustment to the Aggregate Number, shall be readjusted
to such Aggregate Number as would have been obtained had the adjustment
made upon the issuance of such warrants, rights, options or Convertible
Securities, been made upon the basis of the issuance of only the number
of shares of Common Stock actually issued upon the exercise of such
warrants, options or rights, upon the conversion or exchange of such
securities or upon the exercise of the options or rights related to such
securities and subsequent conversion or exchange thereof. Upon the
cancellation, expiration or termination of the Provident Warrant or any
options issued under the Larson Supplemental Option Agreement, or in
either case any portion thereof (other than in connection with the
redemption, or the payment of or parting by the Company with
consideration in connection with the cancellation, expiration or
termination, of the Provident Warrant or any options issued under the
Larson Supplemental Option Agreement, or in either case any portion
thereof), the Aggregate Number after such expiration or termination shall
be adjusted to an Aggregate Number as would have been in effect if such
Provident Warrant or options issued under the Larson Supplemental Option
Agreement (or such applicable portion) had not been issued. For purposes
of this Section 5, the vesting, from time to time, of any options under
the terms of the Larson Option Agreement and the Dowdell Option Agreement
shall be deemed to be an issuance of options to Larson and/or Dowdell, as
the case may be, as of the date of such vesting.
(vii) For the purposes of such Sections 5(c), (d) and (e),
the determination of fair market value shall be made by the Board of
Directors of the Company, with a majority of independent directors voting
in favor thereof; provided that, for purposes hereof no director who is
an Affiliate of a Significant Holder or a stockholder of the Company
shall be deemed to be independent. If a determination of fair market
value cannot be agreed upon as aforesaid, the fair market value shall be
determined in accordance with Section 4.1(b)(ii)(C) hereof, without
regard to references to Puts included therein. In addition, for purposes
of Sections 5(c), (d) and (e) hereof, the date as of which the applicable
fair market value per share shall be computed shall be as close to the
date of actual issuance of such additional shares of Common Stock,
warrants or
17
<PAGE>
Convertible Securities, as practical.
(viii) The consideration for any additional shares of
Common Stock issuable pursuant to any options, warrants or other rights
to subscribe for or purchase the same shall be the consideration received
or receivable by the Company for issuing such options, warrants or other
rights, plus the additional consideration payable to the Company upon the
exercise of such options, warrants or other rights. The consideration for
any additional shares of Common Stock issuable pursuant to the terms of
any Convertible Securities shall be the consideration received or
receivable by the Company for issuing any options, warrants or other
rights to subscribe for or purchase such Convertible Securities, plus the
consideration paid or payable to the Company in respect of the
subscription for or purchase of such Convertible Securities, plus the
additional consideration, if any, payable to the Company upon the
exercise of the right of conversion, exercise or exchange of such
Convertible Securities. In case of the issuance at any time of any
additional shares of Common Stock or Convertible Securities in payment or
satisfaction of any dividend upon any class of stock other than Common
Stock, the Company shall be deemed to have received for such additional
shares of Common Stock or Convertible Securities a consideration equal to
the amount of such dividend so paid or satisfied.
(h) (i) If any event occurs as to which the other
provisions of this Section 5 are not strictly applicable but the lack of any
provision for the exercise of the rights of a holder or holders of Warrants
would not fairly protect the purchase rights of such holder or holders of
Warrants in accordance with the essential intent and principles of such
provisions, or, if strictly applicable, would not fairly protect the
conversion rights of the holder or holders of Warrants in accordance with the
essential intent and principles of such provisions, then the Company shall
appoint a firm of independent certified public accountants in the United
States (which may be the regular auditors of the Company) of recognized
national standing in the United States reasonably satisfactory to the
Significant Holders, which shall give their opinion as to the adjustments, if
any, necessary to preserve, without dilution, on a basis consistent with the
essential intent and principles established in the other provisions of this
Section 5, the exercise rights of the holders of Warrants. Upon receipt of
such opinion, the Company shall forthwith make the adjustments described
therein.
(ii) In the case of a Non-Surviving Combination or
Recapitalization contemplated by Section 5(a)(v) hereof, appropriate
adjustments (as determined in good faith by
18
<PAGE>
the Board of Directors) shall be made in the application of the provisions in
this Section 5 with respect to the rights and interests thereafter of the
holders of the Warrant, to the end that the provisions of this Section 5 shall
thereafter be applicable, as nearly as reasonable, in relation to any shares
of stock, securities or other property thereafter deliverable upon exercise of
the Warrant.
(i) Within 45 days after the end of each fiscal quarter
during which an event occurred that resulted in an adjustment pursuant to this
Section 5, and at any time upon the request of any holder of Warrants, the
Company shall cause to be promptly mailed to each holder of Warrants by first-
class mail, postage prepaid, notice of each adjustment or adjustments to the
Aggregate Number effected since the date of the last such notice and a
certificate of the Company's Chief Financial Officer or, in the case of any
such notice delivered within 45 days after the end of a fiscal year, a firm of
independent public accountants in the United States selected by the Company
and reasonably acceptable to the Significant Holder(s) (who may be the regular
accountants employed by the Company), in each case, setting forth the
Aggregate Number after such adjustment, a brief statement of the facts
requiring such adjustment and the computation by which such adjustment was
made. The fees and expenses of such accountants shall be paid by the Company.
(j) The occurrence of a single event shall not trigger an
adjustment of the Aggregate Number under more than one paragraph of this
Section 5.
6. Taxes on Conversion. The issuance of certificates for Warrant Shares
-------------------
upon the exercise of the Warrants shall be made without charge to the holder
exercising any such Warrant for any issue or stamp tax in respect of the
issuance of such certificates, and such certificates shall be issued in the
respective names of, or in such names as may be directed by, the holder;
provided, however, that the Company shall not be required to pay any tax that
-------- -------
may be payable in respect of any transfer involved in the issuance and
delivery of any such certificate in a name other than that of the holder, and
the Company shall not be required to issue or deliver such certificates unless
or until the Person or Persons requesting the issuance thereof shall have paid
to the Company the amount of such tax or shall have established to the
satisfaction of the Company that such tax has been paid.
7. Limitation of Liability. No provision hereof in the absence of the
-----------------------
exercise of the Warrants by the holder and no enumeration herein of the rights
or privileges of the holder shall give rise to any liability on the part of
the holder for
19
<PAGE>
the Exercise Price of the Warrant Shares or as a stockholder of the Company,
whether such liability is asserted by the Company or by any creditor of the
Company.
8. Closing of Books. The Company will at no time close its transfer
----------------
books against the transfer of any Warrant or of any shares of Common Stock
issued or issuable upon the exercise of any Warrant in any manner that
interferes with the timely exercise of the Warrants. The Company shall deem
and treat the registered holder of this Warrant as the absolute owner thereof
for all purposes, including without limitation for the purpose of exercise
thereof. The Company agrees that, upon exercise of this Warrant in accordance
with the terms hereof (including receipt by the Company of payment of the
aggregate Exercise Price), the shares so purchased shall be deemed to be
issued to such holder as the record owner of such shares as of the close of
business on the date on which this Warrant shall have been exercised and the
holder of this Warrant shall be deemed for all purposes a stockholder of the
Company with respect to such shares as though the certificate for such shares
had been issued on the date of such exercise.
9. Restrictions on Transfer.
------------------------
(a) Transfer in Accordance with Securities Laws; Restrictive
--------------------------------------------------------
Legends. Any transfer of these Warrants or any Warrant Shares may only be
-------
made in compliance with the Securities Act and applicable state securities
laws or pursuant to an exemption therefrom and any transferee shall acquire
the Warrants and/or Warrant Shares subject to all of the terms and conditions
of this Warrant Certificate. Each certificate for any Warrant Shares issued
upon the exercise of any Warrant, and each stock certificate issued upon the
transfer of any such Warrant Shares (except as otherwise permitted by this
Section 9) shall be stamped or otherwise imprinted with a legend in
substantially the following form:
THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE UNITED STATES SECURITIES ACT OF 1933, AS AMENDED, OR UNDER ANY
APPLICABLE STATE SECURITIES LAWS. SUCH SHARES MAY NOT BE SOLD OR
TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR ANY EXEMPTION
THEREFROM UNDER SUCH ACT AND UNDER ANY APPLICABLE STATE SECURITIES LAWS.
THESE SHARES MAY NOT BE TRANSFERRED EXCEPT UPON THE CONDITIONS SPECIFIED
IN THIS WARRANT CERTIFICATE, AND NO TRANSFER OF THESE SHARES SHALL BE
VALID OR EFFECTIVE UNLESS AND UNTIL SUCH CONDITIONS SHALL HAVE BEEN
COMPLIED WITH.
Each Warrant Certificate issued in substitution for any Warrant
Certificate pursuant to Section 11, 12 or 13 hereof and
20
<PAGE>
each Warrant Certificate issued upon the transfer of any Warrant (except as
otherwise permitted by this Section 9) shall be stamped or otherwise imprinted
with a legend in substantially the following form:
THESE WARRANTS AND ANY SHARES ACQUIRED UPON THE EXERCISE HEREOF HAVE
NOT BEEN REGISTERED UNDER THE UNITED STATES SECURITIES ACT OF 1933, AS
AMENDED, OR UNDER ANY APPLICABLE STATE SECURITIES LAWS. THESE WARRANTS
AND SUCH SHARES AND ANY INTEREST OR PARTICIPATION THEREIN MAY NOT BE SOLD
OR TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR AN EXEMPTION
THEREFROM UNDER SUCH ACT AND UNDER ANY APPLICABLE STATE SECURITIES LAWS.
THESE WARRANTS AND SUCH SHARES MAY NOT BE TRANSFERRED EXCEPT UPON THE
CONDITIONS SPECIFIED IN THIS WARRANT CERTIFICATE, AND NO TRANSFER OF
THESE WARRANTS OR SUCH SHARES SHALL BE VALID OR EFFECTIVE UNLESS AND
UNTIL SUCH CONDITIONS SHALL HAVE BEEN COMPLIED WITH.
(b) Termination of Restrictions. The restrictions imposed by this
---------------------------
Section 9 upon the transferability of Warrants and Warrant Shares shall cease
and terminate as to any particular Warrants or Warrant Shares, (a) when such
securities shall have been effectively registered under the Securities Act and
disposed of in accordance with the registration statement covering such
securities, or (b) when in the reasonable opinion of counsel for the Company
or upon the written opinion of counsel for the holder thereof reasonably
acceptable to the Company such restrictions are no longer required in order to
comply with the Securities Act. Whenever such restrictions shall terminate as
to any Warrants or Warrant Shares, the holder thereof shall be entitled to
receive from the Company, without expense, new certificates of like tenor not
bearing the restrictive legends set forth in Section 9(a).
10. Definitions. As used in this Warrant Certificate, unless the
-----------
context otherwise requires, the following terms have the following respective
meanings:
Aggregate Number: as set forth in the first paragraph of the
----------------
Warrant Certificate and as may be adjusted pursuant to Section 5.
Applicable Percentage: shall mean the percentage represented by the
---------------------
fraction, the numerator of which is the Aggregate Number and the
denominator of which is 25,285 (as such number may be adjusted in
accordance with the principles of Section 5).
Capital Stock: shall mean any and all shares, in-
-------------
21
<PAGE>
terests, rights to purchase, warrants, options, participations or other
equivalents of or interest in (however designated) corporate stock.
Commission: the United States Securities and Exchange Commission
----------
and any other similar or successor agency of the United States federal
government administering the Securities Act of 1933, as amended, or the
Securities Exchange Act of 1934, as amended.
Common Stock: the shares of Common Stock, par value $.01 per share,
------------
of the Company, currently provided for in the Certificate of
Incorporation of the Company, and including, for all purposes hereunder,
any other capital stock of the Company into which such shares of Common
Stock may be converted or reclassified or that may be issued in respect
of, in exchange for, or in substitution of, such Common Stock by reason
of any stock splits, stock dividends, distributions, mergers,
consolidations or like events.
Company: Career Education Corporation, a Delaware corporation, and
-------
its successors and assigns.
Convertible Securities: securities convertible into or exchangeable
----------------------
for Common Stock.
Disposition: any transaction or series of related transactions
-----------
(other than a Non-Surviving Combination) if, after giving effect to such
transaction, any one or more Unrelated Persons beneficially own, directly
or indirectly, in the aggregate 50% or more of the Common Stock on a
fully diluted basis (without giving effect to any Warrant Shares
purchased or purchasable), outstanding as of the date of computation.
Distribution: shall have the meaning specified in Section 5(b).
------------
Dowdell Option Agreement: shall mean that certain Dowdell Option
------------------------
Agreement, dated as of January 31, 1994, between the Company and Robert
E. Dowdell ("Dowdell"), as such agreement may be amended from time to
time.
EAI: shall mean, collectively, Electra Associates, Inc., a Delaware
---
corporation, and its successors and assigns.
Earned Amount: shall mean the aggregate of the following: (i) with
-------------
respect to each of the twelve-month periods ending ending March 31, 1997
or March 31, 1998,
22
<PAGE>
considered individually, if the Company shall have met or exceeded the
applicable EBITDA Target for such period, the Company shall automatically
be deemed to have earned back the product of (w) the Applicable
Percentage and (x) 1,649 (as such number may be adjusted in accordance
with the principles of Section 5) Warrants, and if the Company shall not
have met or exceeded the applicable EBITDA Target for such period but
shall have achieved at least 80% of the EBITDA Target for such period and
the Company shall have met or exceeded the applicable EBITDA Target for
the next succeeding twelve-month period, the Company shall automatically
be deemed to have earned back the product of (y) the Applicable
Percentage and (z) 824.5 (as such number may be adjusted in accordance
with the principles of Section 5) Warrants, for such period, (ii) with
respect to each of the twelve-month periods ending ending March 31, 1999,
March 31, 2000 or March 31, 2001, considered individually, if the Company
shall have met or exceeded the applicable EBITDA Targets for such period,
the Company shall automatically be deemed to have earned back the product
of (w) the Applicable Percentage and (x) 2199 (as such number may be
adjusted in accordance with the principles of Section 5) Warrants, and if
the Company shall not have met or exceeded the applicable EBITDA Target
for such period but shall have achieved at least 80% of the EBITDA Target
for such period and the Company shall have met or exceeded the applicable
EBITDA Target for the next succeeding twelve-month period, the Company
shall automatically be deemed to have earned back the product of (y) the
Applicable Percentage and (z) 1099.5 (as such number may be adjusted in
accordance with the principles of Section 5) Warrants, for such period;
and (iii) if the Company shall have met or exceeded the EBITDA Target for
the twelve-month period ending March 31, 2001, and the Company shall have
achieved at least 75% of the cumulative EBITDA Target for the five year
period ending March 31, 2001, then, subject to the immediately following
proviso, the Company shall automatically be deemed to have earned back
50% of the Warrants that the Company would have earned back in any year
in which it failed to do so had it met the applicable EBITDA Target for
such year; provided, however, that the maximum amount of Warrants which
-------- -------
the Company shall be entitled to earn back (including pursuant to the
operation of Section 4.2) shall be the product of (w) the Applicable
Percentage and (x) 9,894 (as such number may be adjusted in accordance
with the principles of Section 5) Warrants.
EBITDA: shall mean for any period, the following, each calculated
------
on a consolidated basis for such period: (a) Net Income (without
deduction of income and franchise taxes),
23
<PAGE>
plus (b) Interest Expenses paid or accrued, plus (c) amortization and
depreciation deducted in determining Net Income, plus (d) non-cash
charges arising from changes in non-current assets and non-current
liabilities, plus (e) to the extent reflected in Net Income for such
period, the fees, charges or expenses paid or accrued in respect of the
Warrants.
EBITDA Targets: shall mean $6,000,000 for the twelve-month period
--------------
ending March 31, 1997; $9,500,000 for the twelve-month period ending
March 31, 1998; $13,500,000 for the twelve-month period ending March 31,
1999; $16,000,000 for the twelve-month period ending March 31, 2000; and
$17,500,000 for the twelve-month period ending March 31, 2001.
EIT: shall mean, collectively, Electra Investment Trust P.L.C., a
---
corporation organized under the laws of England and Wales, and its
successors and assigns.
Electra Investors: shall mean, collectively, EIT and EAI.
-----------------
Exchange Act: shall mean the Securities Exchange Act of 1934, as
------------
amended from time to time, and any successor statute or law thereto.
Expiration Date: July 31, 2005.
---------------
Interest Expenses: shall mean, without duplication, for any period,
-----------------
the following, each calculated for such period: (a) interest expenses
deducted in the determination of Net Income (excluding in the case of the
Company (i) the amortization of fees, costs and expenses with respect to
the transactions contemplated hereunder or under the Senior Loan
Agreement (as defined in the Securities Purchase Agreement); (ii)
interest paid in kind and (iii) the amortization of any "original issue
discount" transaction costs); less (b) interest income included in the
----
determination of Net Income.
Larson Option Agreement: shall mean that certain Larson Option
-----------------------
Agreement, dated as of January 31, 1994, between the Company and John M.
Larson ("Larson"), as such agreement may be amended from time to time.
Larson Supplemental Option Agreement: shall mean that certain
------------------------------------
Larson Supplemental Option Agreement, dated as of July 31, 1995, between
the Company and Larson, as such agreement may be amended from time to
time.
24
<PAGE>
Net Income: shall mean, with respect to any Person and for any
----------
period, such Person's net income (or loss) after income and franchise
taxes determined in conformity with generally accepted accounting
principles, but excluding: (a) the income of any unconsolidated entity in
which such Person has an ownership interest, unless such income is
received by such Person in a cash distribution; (b) after-tax gains or
losses from sales or other dispositions of assets outside of the ordinary
course of business; and (c) to the extent not included in clauses (a) and
(b) above, any after-tax extraordinary or non-recurring non-cash gains or
losses.
Non-Surviving Combination: any merger, consolidation or other
-------------------------
business combination of the Company with or into one or more Persons in
which the Person other than the Company is the survivor, or a sale of all
or a substantial part of the assets of the Company (whether held directly
by the Company or through a subsidiary of the Company) to one or more
such other Persons (including but not limited to a voluntary or
involuntary dissolution, liquidation or winding up of the affairs of the
Company); provided that if any such merger, consolidation or other
business combination or sale of assets, in which the holders of Common
Stock receive cash or non-cash consideration, is structured in the form
of a reverse subsidiary merger so that the Company is the surviving
entity, such transaction shall nevertheless be deemed to be a Non-
Surviving Combination.
Permitted Preferred: preferred stock of the Company with the
-------------------
following characteristics: (a) a dividend rate (including for this
purpose any original issue discount) not to exceed the greater of 12.5%
or 400 basis points above the then current yield for 10-year treasury
notes; (b) a redemption date not earlier than the later of five years
from the date of issuance or three (3) months after the mandatory
redemption date for the Series C Preferred Stock and no right to require
prepayment prior to July 31, 2003; (c) no right to convert into Common
Stock or other Convertible Securities; (d) no right to receive any
additional dividends based on income or earnings and not otherwise
entitled to any success fees, termination fees or other fees or charges
(other than stated dividends, closing fees and reasonable management
fees); and (e) junior with respect to dividends and upon liquidation to
the Series C Preferred Stock.
Person: an individual, corporation, partnership, trust or
------
unincorporated organization, or other legal entity, or a government or
any agency or political subdivision thereof.
25
<PAGE>
Provident: The Provident Bank, and its successors and assigns.
---------
Provident Warrant: the warrant to purchase Class D Common Stock of
-----------------
the Company issued to Provident pursuant to the Provident Warrant
Agreement.
Provident Warrant Agreement: the Warrant Agreement dated as of July
---------------------------
31, 1995 between the Company and Provident.
Recapitalization: any reorganization or recapitalization or other
----------------
change of outstanding shares of Common Stock (other than a change in par
value, or from par value to no par value, or from no par value to par
value).
Securities Act: the Securities Act of 1933, as amended, from time
--------------
to time, and any successor statute or law thereto.
Securities Purchase Agreement: the Securities Purchase Agreement,
-----------------------------
dated as of July 31, 1995, among the Company and the purchasers named
therein.
Significant Holder: any holder holding at least 25% of the
------------------
outstanding Warrants and Warrant Shares (it being understood that two or
more investment funds which have the same investment manager shall be
treated as one holder for this purpose). Any approval or consent of the
Significant Holders required or given hereunder shall be deemed given if
the holders of a majority of the Warrants and Warrant Shares then
outstanding held by all Significant Holders give such approval or
consent.
Threshold Public Offering: shall mean an initial underwritten
-------------------------
public offering and sale for cash by the Company of the Common Stock of
the Company to an underwriter or underwriters pursuant to a "firm
commitment" underwriting agreement and a registration statement declared
effective by the Commission under the Securities Act of 1933, as amended,
in which (i) the minimum equity valuation of the Company is $45,000,000
before December 31, 1999 and $55,000,000 thereafter, and (ii) the Company
receives gross proceeds of at least $20,000,000. The valuation of the
Company will be determined by dividing the dollar amount raised in such
public offering on a gross basis by the percentage of equity in the
Company sold in such public offering on a fully-diluted basis, taking
into account all shares outstanding, and all warrants, options and
convertible securities or other rights to acquire equity of the Company.
A Threshold Public Offering shall be deemed consummated upon the first
26
<PAGE>
sale of Common Stock under the related registration statement. A
Threshold Public Offering shall not include the registration of an offer
and sale of the Common Stock (i) to the employees of or other persons
providing services to the Corporation pursuant to an employee benefit or
similar benefit plan registered on Form S-8 or a successor form or (ii)
relating to a merger, acquisition or other transaction of the type
described in Rule 145 or a successor rule registered on Form S-4 or a
successor form.
Triggering Event: shall mean (i) a Disposition or Non-Surviving
----------------
Combination or the sale of all or substantially all of the stock of the
Company or (ii) the occurrence of a Threshold Public Offering.
Unrelated Person: any Person other than (i) a Person that, on the
----------------
date of this Agreement, owns, directly or indirectly, any shares of any
class of common stock of the Company, and (ii) an Affiliate of a Person
specified in clause (i).
Warrants: as set forth in the first paragraph of this Warrant
--------
Certificate.
Warrant Shares: as set forth in the first paragraph of this Warrant
--------------
Certificate.
11. Warrants Transferable. These Warrants are issued as Warrants for
---------------------
which there is a register maintained by the Company. Subject to the
provisions of Section 9 and applicable securities laws, the transfer of any
Warrant and all rights hereunder, in whole or in part, is registerable at the
office or agency of the Company referred to in Section 1 hereof by the holder
hereof in person or by duly authorized attorney, upon surrender of this
Warrant Certificate with a properly completed Form of Assignment in the form
annexed hereto as Schedule 2. Each taker and holder of any Warrant, by taking
----------
or holding the same, consents and agrees that this Warrant Certificate, when
endorsed in blank, shall be deemed negotiable, and that the holder hereof,
when this Warrant Certificate shall have been so endorsed, may be treated by
the Company and all other persons dealing with this Warrant Certificate as the
absolute owner hereof for any purpose and as the person entitled to exercise
the rights represented by this Warrant Certificate, or to the registration of
transfer hereof on the books of the Company; and until due presentment for
registration of transfer on such books, the Company may treat the registered
holder hereof as the owner for all purposes, and the Company shall not be
affected by notice to the contrary.
12. Warrant Certificates Exchangeable for Different
-----------------------------------------------
27
<PAGE>
Denominations. This Warrant Certificate is exchangeable, upon the surrender
- --------------
hereof by the holder hereof at such office or agency of the Company, for new
Warrant Certificates of like tenor representing in the aggregate the right to
purchase the number of shares that may be purchased hereunder, each of such new
Warrant Certificates to represent the right to purchase such number of shares as
shall be designated by said holder at the time of such surrender.
13. Replacement of Warrant Certificates. Upon receipt of evidence
-----------------------------------
reasonably satisfactory to the Company of the loss, theft, destruction or
mutilation of this Warrant Certificate and, in the case of any such loss, theft
or destruction, upon delivery of an indemnity bond (or, in the case of the
original holder hereof or any substantial financial institution to which any
Warrants represented by this Warrant Certificate may be transferred, an
unsecured indemnity agreement) reasonably satisfactory in form and amount to the
Company or, in the case of any such mutilation, upon surrender and cancellation
of such Warrant Certificate, the Company at its expense will execute and
deliver, in lieu thereof, a new Warrant Certificate of like tenor.
14. Certificate Rights and Obligations Survive Exercise of Warrants.
---------------------------------------------------------------
The rights and obligations of the Company contained in this Warrant Certificate
shall survive the exercise or repurchase of any or all of the Warrants to the
extent that such survival is necessary to give effect to a provision hereof.
15. Notices. All notices, requests and other communications required or
-------
permitted to be given or delivered to the holders of Warrants shall be in
writing, and shall be delivered by hand, first class mail (certified or
registered mail, return receipt requested), telex, telecopier or overnight air
courier guaranteeing next day delivery, to each holder at the address shown on
such holder's Warrant Certificate, or at such other address as shall have been
furnished to the Company by notice from such holder. All notices, requests and
other communications required or permitted to be given or delivered to the
Company shall be in writing, and shall be delivered by hand, first class mail
(certified or registered mail, return receipt requested), telex, telecopier or
overnight air courier guaranteeing next day delivery, to the office of the
Company at 2400 North Barrington, Suite 400, Hoffman Estates, Illinois 60195,
Attention: John M. Larson, with a copy to: D'Ancona and Pflaum, 30 North LaSalle
Street, Suite 2900, Chicago, Illinois 60602, Attention: Michel H. Feldman, Esq.,
and with a copy to Heller Equity Capital Corp., 500 West Monroe Street, Chicago,
Illinois 60661, Attention: Todd H. Steele. Any such notice, request or other
communication sent by telecopy or telex shall in such case be subsequently
confirmed by a writing delivered or sent by certified or registered mail as
28
<PAGE>
provided above. All notices shall be deemed to have been given either at the
time of the delivery thereof to (or the receipt by, in the case of a telecopy or
telex) any officer or employee of the person entitled to receive such notice at
the address of such person for purposes of this Section 15, or, if mailed, at
the completion of the third full day following the time of such mailing thereof
to such address, as the case may be.
16. Amendments. Neither this Warrant Certificate nor any term or
----------
provision may be changed, waived, discharged or terminated orally, but only by
an instrument in writing signed by the party against which enforcement of the
change, waiver, discharge or termination is sought, provided that any change or
waiver of any term or provision hereof, and any consent or direction given
hereunder by the holders may be effected by the holders of 51% in interest of
the Warrants then outstanding, except that no change or waiver that would (i)
increase the Exercise Price of any Warrant, reduce the Aggregate Number, or
change or waive any of the provisions of Section 4.1 with respect to Put rights
shall be effective as to any holder of a Warrant without the consent of such
holder, or (ii) change or waive any of the provisions of this Section with
respect to the requisite persons required to effect any change, waiver or
amendment of a particular Section of this Warrant Certificate shall be effective
without the consent of such requisite persons.
17. Remedies. The Company stipulates that remedies at law of the holder
--------
of this Warrant Certificate in the event of any default or threatened default by
the Company in the performance of or compliance with any of the terms of this
Warrant Certificate are not and will not be adequate, and that such terms may be
specifically enforced by a decree for the specific performance of any agreement
contained herein or by an injunction against a violation of any of the terms
hereof of otherwise. If any default under the terms of this Warrant Certificate
shall occur and be continuing, the holders of the Warrants may proceed to
protect and enforce their rights under this Warrant Certificate and the
Securities Purchase Agreement by exercising such remedies as are available to
such holders in respect thereof under applicable law, either by suit in equity
or by action at law, or both, whether for specific performance of any covenant
or other agreement contained in this Warrant Certificate or the Securities
Purchase Agreement or in aid of the exercise of any power granted in this
Warrant Certificate or the Securities Purchase Agreement. No remedy conferred in
this Warrant Certificate or the Securities Purchase Agreement upon the holder of
any Warrants is intended to be exclusive of any other remedy available to such
holder, and each and every such remedy shall be cumulative and shall be in
addition to every other remedy conferred herein or now or hereafter existing at
law or in equity or by statute or
29
<PAGE>
otherwise.
18. Governing Law. THIS WARRANT CERTIFICATE HAS BEEN EXECUTED AND
-------------
DELIVERED AT AND SHALL BE DEEMED TO HAVE BEEN MADE IN NEW YORK, NEW YORK. THIS
WARRANT CERTIFICATE AND THE RIGHTS GRANTED HEREIN SHALL BE GOVERNED BY AND
CONSTRUED AND ENFORCED UNDER THE LAWS OF THE STATE OF NEW YORK (WITHOUT GIVING
EFFECT TO ANY CONFLICTS OF LAW RULES OR PRINCIPLES). ANY JUDICIAL PROCEEDING
BROUGHT BY OR AGAINST THE COMPANY WITH RESPECT TO THIS WARRANT CERTIFICATE OR
ANY RELATED AGREEMENT SHALL BE BROUGHT IN ANY COURT OF COMPETENT JURISDICTION IN
THE UNITED STATES OF AMERICA FOR THE SOUTHERN DISTRICT OF NEW YORK, AND, BY
EXECUTION AND DELIVERY OF THIS WARRANT CERTIFICATE, THE COMPANY ACCEPTS THE
EXCLUSIVE JURISDICTION OF THE AFORESAID COURTS AND IRREVOCABLY AGREES TO BE
BOUND BY ANY JUDGMENT RENDERED THEREBY IN CONNECTION WITH THIS WARRANT. IF ANY
ACTION IS COMMENCED IN ANY OTHER JURISDICTION THE PARTIES HERETO HEREBY CONSENT
TO THE REMOVAL OF SUCH ACTION TO THE SOUTHERN DISTRICT OF NEW YORK. THE COMPANY
HEREBY IRREVOCABLY DESIGNATES CT CORPORATION SYSTEM, AS THE DESIGNEE, APPOINTEE
AND AGENT, OF THE COMPANY TO RECEIVE, FOR AND ON BEHALF OF THE COMPANY, SERVICE
OF PROCESS IN THE ABOVE DESCRIBED JURISDICTION IN ANY LEGAL ACTION OR PROCEEDING
WITH RESPECT TO THIS WARRANT, THE WARRANT SHARES OR THE RIGHTS AND OBLIGATIONS
HEREUNDER OR THEREUNDER AND SUCH SERVICE SHALL BE DEEMED COMPLETED UPON DELIVERY
THEREOF TO SUCH AGENT. IT IS UNDERSTOOD THAT A COPY OF SUCH PROCESS SERVED ON
SUCH AGENT WILL BE PROMPTLY FORWARDED BY MAIL TO THE COMPANY AT ITS ADDRESS SET
FORTH IN SECTION 15 HEREOF, BUT THE FAILURE OF THE COMPANY TO RECEIVE SUCH COPY
SHALL NOT AFFECT IN ANY WAY THE SERVICE OF SUCH PROCESS. THE COMPANY FURTHER
IRREVOCABLY CONSENTS TO THE SERVICE OF PROCESS OUT OF ANY OF THE AFOREMENTIONED
COURTS IN ANY SUCH ACTION OR PROCEEDING BY THE MAILING OF COPIES THEREOF BY
REGISTERED OR CERTIFIED MAIL, POSTAGE PREPAID, TO THE COMPANY AT ITS ADDRESS,
SUCH SERVICE TO BECOME EFFECTIVE 30 DAYS AFTER SUCH MAILING. NOTHING HEREIN
SHALL AFFECT THE RIGHT OF THE HOLDERS OF THE WARRANTS OR THE WARRANT SHARES TO
SERVE PROCESS IN ANY OTHER MANNER PERMITTED BY LAW OR COMMENCE LEGAL PROCEEDINGS
IN OR OTHERWISE PROCEED AGAINST THE COMPANY IN ANY OTHER JURISDICTION.
19. WAIVER OF JURY TRIAL. THE COMPANY AND THE HOLDER OF THIS WARRANT
--------------------
HEREBY WAIVE THEIR RESPECTIVE RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF
ACTION BASED UPON OR ARISING OUT OF THIS WARRANT OR ANY DEALINGS BETWEEN THEM
RELATING TO THE SUBJECT MATTER OF THIS WARRANT AND THE TRANSACTIONS CONTEMPLATED
HEREBY AND THE RELATIONSHIP THAT IS BEING ESTABLISHED HEREUNDER. THE COMPANY AND
THE HOLDER OF THIS WARRANT ALSO WAIVE ANY BOND OR SURETY OR SECURITY UPON SUCH
BOND WHICH MIGHT, BUT FOR THIS WAIVER, BE REQUIRED OF THE OTHER PARTIES. THE
SCOPE OF THIS WAIVER IS INTENDED TO BE ALL-ENCOMPASSING OF ANY AND ALL DISPUTES
THAT MAY BE FILED IN ANY COURT AND THAT RELATE TO THE SUBJECT
30
<PAGE>
MATTER OF THIS WARRANT, INCLUDING, WITHOUT LIMITATION, CONTRACT CLAIMS, TORT
CLAIMS, BREACH OF DUTY CLAIMS, AND ALL OTHER COMMON LAW AND STATUTORY CLAIMS.
THE COMPANY AND THE HOLDER OF THIS WARRANT ACKNOWLEDGE THAT THIS WAIVER IS A
MATERIAL INDUCEMENT TO ENTER INTO A BUSINESS RELATIONSHIP, THAT EACH HAS ALREADY
RELIED ON THE WAIVER IN ENTERING INTO THIS WARRANT AND THAT EACH WILL CONTINUE
TO RELY ON THE WAIVER IN THEIR RELATED FUTURE DEALINGS. THE COMPANY AND THE
HOLDER OF THIS WARRANT FURTHER WARRANT AND REPRESENT THAT EACH HAS REVIEWED THIS
WAIVER WITH ITS LEGAL COUNSEL, AND THAT EACH KNOWINGLY AND VOLUNTARILY WAIVES
ITS JURY TRIAL RIGHTS FOLLOWING CONSULTATION WITH LEGAL COUNSEL. THIS WAIVER IS
IRREVOCABLE, MEANING THAT IT MAY NOT BE MODIFIED EITHER ORALLY OR IN WRITING,
AND THE WAIVER SHALL APPLY TO ANY SUBSEQUENT AMENDMENTS, RENEWALS, SUPPLEMENTS
OR MODIFICATIONS TO THIS WARRANT OR TO ANY OTHER DOCUMENTS OR AGREEMENTS
RELATING TO THE TRANSACTIONS CONTEMPLATED HEREBY. IN THE EVENT OF LITIGATION,
THIS AGREEMENT MAY BE FILED AS A WRITTEN CONSENT TO A TRIAL BY THE COURT.
20. Withholding Taxes. (a) The Company covenants that it will not
-----------------
withhold United States withholding taxes from payments to be made to holders of
Warrants if such holders (i) are corporations organized under the laws of a
jurisdiction outside the United States or are otherwise persons not resident in
the United States for United States federal income tax purposes, and (ii)
provide the Company, upon the Company's reasonable request, with Internal
Revenue Service Form W-8, Form 4224, Form 1001 or other applicable form,
certificate or document prescribed by the Internal Revenue Service certifying as
to such holders' entitlement to an exemption from any such withholding
requirements.
(b) The Company further covenants that it will not withhold United
States withholding taxes from payments to be made to holders of Warrants in
excess of an applicable treaty rate under an income tax treaty between the
United States and the holders' country of tax residence if such holders (i) are
corporations organized under the laws of a jurisdiction outside the United
States or are otherwise persons not resident in the United States for United
States federal income tax purposes, and (ii) provide the Company, upon the
Company's reasonable request, with Internal Revenue Service Form 1001 or other
applicable form, certificate or document prescribed by the Internal Revenue
Service certifying as to such holders' entitlement to a reduced rate of
withholding under any such withholding requirements.
(c) Neither Section 20(a) nor Section 20(b) shall require the
Company to apply an exemption or reduced rate of withholding during any period
when it shall have received notice or has actual knowledge that the residence
information previously provided on any applicable form, certificate or document
is in-
31
<PAGE>
correct and no corrected form, certificate or document as applicable has
been provided to the Company.
IN WITNESS WHEREOF, the Company has caused this Warrant Certificate to be
executed as a deed by its duly authorized officer and this Warrant Certificate
to be dated July 31, 1995.
CAREER EDUCATION CORPORATION
By:___________________________
Name:
Title:
32
<PAGE>
SCHEDULE 1
----------
EXERCISE FORM
[To be executed only upon exercise of Warrant]
To: CAREER EDUCATION CORPORATION
The undersigned irrevocably exercises ______________ of the Warrants for
the purchase of one share (subject to adjustment) of Class D Common Stock, par
value $.01 per share, of Career Education Corporation (the "Company") for each
Warrant represented by the within Warrant Certificate and herewith makes payment
of $____ (such payment being in cash or by check or bank draft in immediately
available funds payable to the order of the Company or by the surrender of a
portion of the Warrants other than that which is being exercised), all at the
exercise price and on the terms and conditions specified in the within Warrant
Certificate, surrenders the within Warrant Certificate and all right, title and
interest therein (except as to any unexercised Warrants) to the Company and
directs that the shares of Class D Common Stock deliverable upon the exercise of
such Warrants be registered or placed in the name and at the address specified
below and delivered thereto.
Date:______________
_______________________________
(Signature of Owner)
_______________________________
(Street Address)
_______________________________
(City) (State) (Zip Code)
_________________
(1) The signature must correspond with the name as written upon the face of
the within Warrant Certificate in every particular, without alteration or
enlargement or any change whatever.
<PAGE>
SCHEDULE 2
----------
FORM OF ASSIGNMENT
FOR VALUE RECEIVED the undersigned registered Holder of the within
Warrant Certificate hereby sells, assigns, and transfers unto the Assignee(s)
named below (including the undersigned with respect to any Warrants constituting
a part of the Warrants evidenced by the within Warrant Certificate not being
assigned hereby) all of the right of the undersigned under the within Warrant
Certificate, with respect to the number of Warrants set forth below:
Social securi-
ty or other
identifying
Names of number of Number of
Assignees Address Assignee(s) Warrants
--------- ------- ----------- --------
and does hereby irrevocably constitute and appoint ______________ the
undersigned's attorney to make such transfer on the books of Career Education
Corporation maintained for that purpose, with full power of substitution in the
premises.
Dated: ______________
_______________________________ (1)
(Signature of Owner)
_______________________________
(Street Address)
_______________________________
(City) (State) (Zip Code)
_____________________
(1) The signature must correspond with the name as written upon the face of
the within Warrant Certificate in every particular, without alteration or
enlargement or any change whatever.
<PAGE>
EXHIBIT 10.18
----------------------------------------
SECURITIES PURCHASE AGREEMENT
----------------------------------------
Series D Redeemable Preferred Stock of Career Education Corporation
($7,500,000.00)
and
Warrants to Purchase Class E Common Stock of Career Education Corporation
(Exercisable for 8,924 Aggregate Shares,
$.01 per share Exercise Price)
Dated as of February 28, 1997
<PAGE>
TABLE OF CONTENTS
(Not Part of the Agreement)
<TABLE>
<CAPTION>
Page
----
<S> <C>
1. AUTHORIZATION OF FINANCING.............................................. 2
2. PURCHASE AND SALE OF SECURITIES; CLOSING................................ 2
2.1. PURCHASE AND SALE................................................ 2
2.2. CLOSING.......................................................... 2
3. CONDITIONS TO EACH CLOSING.............................................. 3
3.1. CLOSING OF THE COMPUTERTECH ACQUISITION.......................... 3
3.2. OPINION OF COUNSEL............................................... 3
3.3. REPRESENTATIONS AND WARRANTIES................................... 3
3.4. PURCHASE PERMITTED BY APPLICABLE LAWS............................ 4
3.5. NO ADVERSE LEGISLATION, ACTION OR DECISION....................... 4
3.6. APPROVALS AND CONSENTS........................................... 4
3.7. PROCEEDINGS...................................................... 5
3.8. SERIES D PREFERRED STOCK AND WARRANT CERTIFICATES................ 5
3.9. STOCKHOLDERS AGREEMENT........................................... 5
3.10. CERTIFICATE OF DESIGNATION...................................... 5
3.11. COMPLIANCE CERTIFICATE.......................................... 5
3.12. ADDITIONAL INFORMATION.......................................... 5
3.13. NO CHANGE RESULTING IN MATERIAL ADVERSE EFFECT.................. 6
4. SUBSEQUENT INVESTMENTS.................................................. 6
4.1. CONDITIONS TO SUBSEQUENT INVESTMENTS............................. 6
4.2. LIMITATION OF OBLIGATION OF PURCHASERS TO MAKE ANY
SUBSEQUENT INVESTMENT.......................................... 7
4.3. FURTHER LIMITATION OF OBLIGATION OF INDIVIDUAL
INVESTORS TO MAKE ANY SUBSEQUENT INVESTMENT.................... 7
5. AFFIRMATIVE COVENANTS................................................... 7
5.1. FINANCIAL STATEMENTS AND OTHER REPORTS........................... 8
5.2. USE OF PROCEEDS.................................................. 8
5.3. RESERVATION OF SHARES............................................ 8
6. NEGATIVE COVENANTS...................................................... 8
6.1. WITHHOLDING TAXES................................................ 8
7. OTHER REMEDIES.......................................................... 9
</TABLE>
-i-
<PAGE>
<TABLE>
<S> <C>
8. REPRESENTATIONS, COVENANTS AND WARRANTIES OF THE COMPANY................ 9
8.1. ORGANIZATION; AUTHORITY.......................................... 9
8.2. AUTHORIZATION.................................................... 10
8.3. CAPITAL STOCK AND RELATED MATTERS................................ 10
8.4. LITIGATION....................................................... 12
8.5. COMPLIANCE....................................................... 12
8.6. OFFERING......................................................... 13
8.7. CONFLICTING AGREEMENTS........................................... 13
8.8. GOVERNMENTAL PERMITS, CONSENTS, ETC.............................. 13
8.9. FEES AND COMMISSIONS............................................. 14
8.10. RESERVATION OF SHARES........................................... 14
9. REPRESENTATIONS OF THE PURCHASERS....................................... 14
9.1. PURCHASE OF SECURITIES........................................... 14
9.2. INCORPORATION AND AUTHORIZATION OF INSTITUTIONAL INVESTORS....... 14
9.3. NO CONFLICTS..................................................... 14
9.4. NO BROKERS' FEES................................................. 15
10. DEFINITIONS............................................................ 15
11. MISCELLANEOUS.......................................................... 19
11.1. PAYMENTS........................................................ 19
11.2. EXPENSES; INDEMNITY............................................. 19
11.3. CONSENT TO AMENDMENTS; SUBORDINATION............................ 20
11.4. PERSONS DEEMED OWNERS........................................... 21
11.5. SURVIVAL OF REPRESENTATIONS AND WARRANTIES; ENTIRE AGREEMENT.... 21
11.6. SUCCESSORS AND ASSIGNS.......................................... 22
11.7. NOTICES......................................................... 22
11.8. DESCRIPTIVE HEADINGS, ETC....................................... 22
11.9. GOVERNING LAW; CHOICE OF FORUM.................................. 23
11.10. WAIVER OF JURY TRIAL........................................... 24
11.11. ISSUANCE OF SECURITIES TO KLETTKE.............................. 24
</TABLE>
-ii-
<PAGE>
LIST OF SCHEDULES AND EXHIBITS
SCHEDULES:
- ---------
Schedule 1 Investments
Schedule 8.2 Authorization
Schedule 8.3 Capitalization
Schedule 8.4 Litigation
Schedule 8.7 Conflicting Agreements
Schedule 8.8 Governmental Permits
EXHIBITS:
- --------
Exhibit A Form of Certificate of Designations for Series D Preferred Stock
Exhibit B Form of Warrant Certificate
Exhibit C Form of Opinion of the Company's Counsel
Exhibit D Form of First Amendment to Stockholders Agreement
-iii-
<PAGE>
SECURITIES PURCHASE AGREEMENT
THIS SECURITIES PURCHASE AGREEMENT, dated as of February 28, 1997, is
made by and among CAREER EDUCATION CORPORATION, a Delaware corporation (the
"COMPANY"), HELLER EQUITY CAPITAL CORPORATION, an Illinois corporation
("HELLER"), ELECTRA INVESTMENT TRUST P.L.C. ("EIT"), Robert E. Dowdell
("DOWDELL"), John M. Larson ("LARSON"), Wallace O. Laub and Constance L. Laub
(collectively, the "LAUBS"), and William A. Klettke ("KLETTKE" and together with
Dowdell, Larson and the Laubs, the "INDIVIDUAL INVESTORS"). Heller and EIT are
sometimes collectively referred to herein as the "INSTITUTIONAL INVESTORS." The
Institutional Investors and the Individual Investors are sometimes collectively
referred to herein as the "PURCHASERS."
W I T N E S S E T H:
WHEREAS, Purchasers are the holders of all of the issued and
outstanding capital stock of the Company, and all issued and outstanding
warrants and other options and rights to purchase capital stock of the Company
(other than certain options issued to employees of the Company pursuant to its
1995 Stock Option Plan dated August 23, 1995 (as amended, the "MANAGEMENT OPTION
PLAN") and certain Warrants issued to The Provident Bank.
WHEREAS, the Company has requested additional equity financing in the
amount of up to Seven Million Five Hundred Thousand Dollars ($7,500,000) from
Purchasers, and desires to sell the Series D Preferred Stock and the Warrants
(as each is hereinafter defined, and collectively, the "SECURITIES") to the
Purchasers, for the purpose of providing funds for, among other things, the
acquisition of capital stock of The School of Computer Technology, Inc., a
Pennsylvania corporation (the "COMPUTERTECH ACQUISITION") and for other future
private, post-secondary vocational school acquisitions by the Company (each, a
"FUTURE ACQUISITION"); and
WHEREAS, the Purchasers desire, upon the terms and conditions
hereinafter provided, to purchase from the Company the Series D Preferred Stock
and Warrants;
NOW, THEREFORE, in consideration of the mutual promises and covenants
herein contained and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties, intending to be
bound, hereby agree as follows:
Certain terms used in this Agreement are defined in Section 10 hereof.
----------
Unless otherwise indicated, references to statutes are to statutes of the United
States. Accounting terms used herein shall be construed in accordance with
GAAP. In addition, unless the contrary intention appears, terms and expressions
having a defined or generally
-1-
<PAGE>
accepted meaning under the securities laws of the United States shall have the
same meaning in this Agreement.
1. AUTHORIZATION OF FINANCING.
--------------------------
The Company has authorized the issuance, sale and delivery of (a)
7,500 shares of its Series D Redeemable Preferred Stock, par value $.01 per
share, with a stated value of $1,000 per share (the "SERIES D PREFERRED STOCK"),
which series has the rights, restrictions, privileges and preferences as set
forth in the Certificate of Designations for the Series D Preferred Stock of the
Company, substantially in the form of Exhibit A attached hereto (the
---------
"CERTIFICATE OF DESIGNATIONS"), and (b) the detachable warrants to be issued in
connection with each issuance of Series D Preferred Stock in accordance with
Schedule 1 attached hereto (collectively, the "WARRANTS" and each individually,
- ----------
a "WARRANT") to purchase a maximum aggregate of 8,924 shares of Class E Common
Stock of the Company, at an exercise price of $.01 per share, evidenced by one
or more warrant certificates (the "WARRANT CERTIFICATES") to be substantially in
the form of Exhibit B attached hereto.
---------
2. PURCHASE AND SALE OF SECURITIES; CLOSING.
----------------------------------------
2.1. PURCHASE AND SALE.
-----------------
The Company hereby agrees to issue and sell to each Purchaser and each
Purchaser, severally and not jointly, agrees, subject to the terms and
conditions herein set forth and in reliance upon the representations, warranties
and agreements of the Company herein contained, to purchase at the Closings from
the Company for the purchase price set forth opposite such Purchaser's name in
Schedule 1 attached hereto, (a) the aggregate number of shares of Series D
- ----------
Preferred Stock set forth opposite such Purchaser's name under the heading Total
Investment in Schedule 1 attached hereto, and registered in such Purchaser's
----------
name (or, in the case of Heller and EIT, the name of such Institutional
Investor's nominee, as such Institutional Investor shall request) and (b) the
aggregate number of Warrants set forth opposite such Purchaser's name under the
heading Total Investment in Schedule 1 attached hereto, in the form of one or
----------
more Warrant Certificates, registered in such Purchaser's name (or, in the case
of Heller and EIT, the name of such Institutional Investor's nominee, as such
Institutional Investor shall request).
2.2. CLOSING.
-------
The purchase and delivery of the Securities shall take place at the
offices of Goldberg, Kohn, Bell, Black, Rosenbloom & Moritz, Ltd., 55 E. Monroe
Street, Suite 3700, Chicago, Illinois 60603 at one or more closings (each, a
"CLOSING"). Subject to the satisfaction or waiver of the conditions described
in Section 3 below, the Closing of the purchase and sale of the Securities set
---------
forth opposite each Purchaser's name under the heading Initial Investment in
Schedule 1 attached hereto, which Closing shall pertain to an aggregate
- ----------
investment of $2,000,000 (the "INITIAL INVESTMENT"), shall be held
-2-
<PAGE>
simultaneously with the execution and delivery of this Agreement, or at such
other place or on such other date as the Institutional Investors and the Company
may agree upon, but in no event later than February 28, 1997 (the "INITIAL
CLOSING DATE"). Subject to the satisfaction or waiver of the conditions
described in Section 3 and Section 4 below, each Closing of the purchase and
--------- ---------
sale of the Securities, or any portion thereof, set forth opposite each
Purchaser's name under the heading Subsequent Investment(s) in Schedule 1
----------
attached hereto, which Closings shall pertain to an aggregate investment of up
to $5,500,000 (each, a "SUBSEQUENT INVESTMENT"), shall be held simultaneously
with the closing of a Future Acquisition which the Company intends to finance
with the proceeds of such Subsequent Investment. At each Closing, the Company
will deliver one or more certificates evidencing the appropriate number of
shares of Series D Preferred Stock and one or more certificates evidencing the
appropriate number of Warrants to each Purchaser, against payment by such
Purchaser of the purchase price therefor by transfer of immediately available
funds to such bank or other financial institution as the Company may direct in
writing, for credit to the Company's account The date of each Closing hereunder
is sometimes referred to as a "CLOSING DATE".
3. CONDITIONS TO EACH CLOSING.
--------------------------
Each Purchaser's obligation to purchase and pay for the Securities to
be sold in connection with the Initial Investment and each Subsequent Investment
is subject to the satisfaction prior to or at each Closing of each of the
following conditions:
3.1. CLOSING OF THE COMPUTERTECH ACQUISITION.
---------------------------------------
With respect to the Initial Closing only, the ComputerTech Acquisition
shall close simultaneously with the Initial Investment, in accordance with the
terms and subject to the conditions approved by the Board of Directors of the
Company, without any material deviation therefrom.
3.2 OPINION OF COUNSEL.
------------------
The Institutional Investors shall have received from Goldberg, Kohn,
Bell, Black, Rosenbloom & Moritz, Ltd., special counsel to the Company, an
opinion substantially in the form set forth in Exhibit C, addressed to the
---------
Institutional Investors, dated the Closing Date and otherwise reasonably
satisfactory in form and substance to such parties.
3.3. REPRESENTATIONS AND WARRANTIES.
------------------------------
The representations and warranties of the Company contained in this
Agreement and those otherwise made in any writing by the Company, furnished in
connection with or pursuant to this Agreement and the ComputerTech Acquisition
or Future Acquisition to be financed hereby, as applicable (the "TRANSACTION
DOCUMENTS") or in connection with the transactions contemplated hereby or
thereby, shall be true and correct when made and at the time of such Closing
(unless expressly made as of a
-3-
<PAGE>
particular date) as though made at such time, and the Company shall have
performed or complied with the covenants, conditions and agreements contained in
this Agreement and the applicable Transaction Documents required to be performed
and complied with by the Company at or prior to such Closing, other than
covenants, conditions and agreements contained in such Transaction Documents
which have been waived by the parties thereto and disclosed to the Institutional
Investors on or prior to such Closing.
3.4. PURCHASE PERMITTED BY APPLICABLE LAWS.
-------------------------------------
The purchase of and payment for the Securities to be purchased at such
Closing shall not violate any applicable law or governmental regulation
(including, without limitation, Section 5 of the Securities Act) and shall not
subject the Purchasers to any tax, penalty, liability or other onerous condition
under or pursuant to any applicable law or governmental regulation or order.
Each Purchaser shall have received such certificates or other evidence as they
may reasonably request to establish compliance with the conditions set forth in
this Section 3.4.
-----------
3.5. NO ADVERSE LEGISLATION, ACTION OR DECISION.
------------------------------------------
After the date hereof and prior to the applicable Closing Date, no
legislation, order, rule, ruling or regulation shall have been enacted or made
by or on behalf of any governmental body, department or agency, nor shall have
any legislation been introduced and favorably reported for passage to either
House of Congress by any committee of either such House to which such
legislation has been referred for consideration or any state legislature in any
jurisdiction in which the Company operates or by any committee of such
legislature to which such legislation has been referred for consideration, nor
shall any decision of any court of competent jurisdiction within the United
States have been rendered which, in any Institutional Investor's judgment, would
have a Material Adverse Effect. There shall be no action, suit, investigation,
or proceeding pending, or to the Company's knowledge, threatened, against or
affecting the Company or any of its Subsidiaries, the Company's or any such
Subsidiary's properties or rights, or any of the Company's or any such
Subsidiary's Affiliates, officers or directors, before any court, arbitrator or
administrative or governmental body which (a) seeks to restrain, enjoin, prevent
the consummation of or otherwise affect the transactions contemplated by this
Agreement or the applicable Transaction Documents or (b) questions the validity
or legality of any such transactions or seeks to recover damages or to obtain
other relief in connection with any such transactions, and, to the Company's
knowledge, there shall be no valid basis for any such action, proceeding or
investigation.
3.6. APPROVALS AND CONSENTS.
----------------------
The Company shall have duly received all material authorizations,
waivers, consents, approvals, licenses, franchises, permits and certificates
(collectively, "CONSENTS") by or of all federal, state and local governmental
authorities and all material Consents by or
-4-
<PAGE>
of all other Persons necessary or advisable for the issuance of the applicable
Securities, and all thereof shall be in full force and effect at the time of
Closing.
3.7. PROCEEDINGS.
-----------
All proceedings taken or to be taken in connection with the
transactions contemplated hereby and in the applicable Transaction Documents,
and all documents incident thereto, shall be reasonably satisfactory in form and
substance to each Institutional Investor, and each Institutional Investor shall
have received all such counterpart originals or certified or other copies of
such documents as it may request.
3.8. SERIES D PREFERRED STOCK AND WARRANT CERTIFICATES.
-------------------------------------------------
The Company shall have delivered to each Purchaser one or more Series
D Preferred Stock certificates and one or more Warrant certificates representing
the aggregate number of shares of Series D Preferred Stock and Warrants being
purchased from the Company by such Purchaser at such Closing.
3.9. STOCKHOLDERS AGREEMENT.
----------------------
The First Amendment to the Amended and Restated Stockholders'
Agreement of the Company, in the form of Exhibit D hereto, shall have been
---------
executed and delivered by and to all parties thereto.
3.10. CERTIFICATE OF DESIGNATION.
--------------------------
The Certificate of Designations shall have been executed and duly
filed with the Delaware Secretary of State, and shall remain in full force and
effect, and since the date of such filing the Company will not have adopted or
filed any other document designating terms, relative rights or preferences of
its Preferred Stock, or otherwise amending or modifying the Certificate of
Designation, without the prior written consent of the Institutional Investors.
3.11. COMPLIANCE CERTIFICATE.
----------------------
Each Purchaser shall have received an Officers' Certificate, dated as
of such Closing Date, certifying that the conditions specified in this Section 3
---------
required to be fulfilled on such Closing Date (other than actions required to be
taken by such Purchaser) have been fulfilled.
3.12. ADDITIONAL INFORMATION.
----------------------
The Company shall have executed and/or delivered such other
information and documentation as each Purchaser and its counsel may reasonably
request. Each Purchaser shall have received such other documents and opinions,
in form and substance
-5-
<PAGE>
satisfactory to its counsel, relating to matters incident to the ComputerTech
Acquisition or relevant Future Acquisition, as applicable, and the transactions
contemplated by the applicable Transaction Documents.
3.13. NO CHANGE RESULTING IN MATERIAL ADVERSE EFFECT.
----------------------------------------------
Since November 30, 1996, there shall have been no change in the
business or operations of the Company, nor any other event, which has had, or is
likely to have, in any Institutional Investor's reasonable judgment, a Material
Adverse Effect.
Any condition specified in this Section 3 (or in Section 4 below) may
--------- ---------
be waived with respect to any Purchaser upon express written consent executed by
such Purchaser.
4. SUBSEQUENT INVESTMENTS.
----------------------
4.1. CONDITIONS TO SUBSEQUENT INVESTMENTS.
------------------------------------
Following the Initial Closing, upon written request of the Company,
each Purchaser shall be obligated to make one or more Subsequent Investments,
for the purchase of Series D Preferred Stock and Warrants up to a maximum
aggregate purchase in the amount set forth opposite such Purchaser's name under
the heading Subsequent Investment(s) in Schedule 1 attached hereto, subject to
----------
the satisfaction prior to or at the Closing of such Subsequent Investment of
each of the following conditions:
(a) No Event of Default. No default or event of default shall
-------------------
exist or be continuing under the Senior Loan Agreement, other than any
default or event of default caused by the Purchasers' failure to
purchase all or any of the Series D Preferred Stock or Warrants or
which would be cured by the purchase of the Series D Preferred Stock
and Warrants being requested by the Company.
(b) Representations and Warranties. The representations and
------------------------------
warranties contained in Section 8 (other than those made as of a particular
---------
date) shall be true and correct in all material respects as of the date of
such Closing.
(c) Conditions. The conditions contained in Section 3 shall
---------- ---------
continue to be fulfilled in all material respects.
(d) Approval of Company Board of Directors; Use of Proceeds. The
-------------------------------------------------------
proceeds of such Subsequent Investment shall be used to fund a Future
Acquisition previously approved by the Board of Directors of the
Company, which approval shall include the affirmative vote of the
Heller Director (as defined in the Stockholders Agreement), Patrick K.
Pesch (or any successor to his seat on the Board of Directors).
-6-
<PAGE>
(e) Prior Notice. The Company shall have given to each
------------
Purchaser written notice of the Company's request for a Subsequent
Investment not less than thirty (30) days prior to the date of the
Closing for such Subsequent Investment, which notice shall indicate
the number of shares of Series D Preferred Stock and the number of
Warrants which such Purchaser is requested to purchase, the price
therefor, and the anticipated date of such Closing.
4.2. LIMITATION OF OBLIGATION OF PURCHASERS TO MAKE ANY SUBSEQUENT
-------------------------------------------------------------
INVESTMENT.
----------
Notwithstanding any provision of this Agreement to the contrary, in no
event shall Purchasers, or any one of them, be obligated to make a Subsequent
Investment, the proceeds of which will be used by the Company to pay in excess
of thirty-five percent (35%) of the aggregate consideration for the Future
Acquisition to be funded with the proceeds of such Subsequent Investment.
Furthermore, in no event shall any Purchaser be obligated to make any Subsequent
Investment after July 31, 1998.
4.3. FURTHER LIMITATION OF OBLIGATION OF INDIVIDUAL INVESTORS TO
-----------------------------------------------------------
MAKE ANY SUBSEQUENT INVESTMENT.
------------------------------
Notwithstanding any provision of this Agreement to the contrary, no
Individual Investor shall be obligated to make any Subsequent Investment
pursuant to this Agreement; provided, that within fifteen (15) days after any
--------
Individual Investor desiring not to make a Subsequent Investment receives notice
of the Company's request for such Subsequent Investment in accordance with
subsection 4.1(e) above, such Individual Investor provides written notice to the
- -----------------
Company of his election not to participate in such Subsequent Investment. No
notice given pursuant to the immediately preceding sentence shall be deemed an
election by the Individual Investor giving such notice not to participate in any
later Subsequent Investment. In the event that one or more Individual Investors
elect not to participate in any Subsequent Investment pursuant to this Section
-------
4.3, the parties hereto agree that the Securities that would have been purchased
- ---
by such Individual Investor or Investors shall be purchased at the closing of
such Subsequent Investment by the Institutional Investors, pro rata.
5. AFFIRMATIVE COVENANTS.
---------------------
The Company hereby covenants from and after the date of this
Agreement, so long as any Securities remain outstanding, as follows:
5.1. FINANCIAL STATEMENTS AND OTHER REPORTS.
--------------------------------------
The Company covenants that it will deliver, or cause to be delivered,
to each Purchaser, the financial statements and other reports described in
Section 5.1 of the Electra Securities Agreement, in the form and in accordance
with the deadlines for delivery of such financial statements and other reports
set forth in the Electra Securities Agreement.
-7-
<PAGE>
5.2. USE OF PROCEEDS.
---------------
The Company shall use all of the proceeds received from the sale of
the Securities pursuant to this Agreement to fund (a) in the case of the Initial
Investment, the ComputerTech Acquisition and related costs and expenses, (b) in
the case of any Subsequent Investment, the Future Acquisition for which such
Subsequent Investment is requested by the Company and any related costs and
expenses.
5.3. RESERVATION OF SHARES.
---------------------
The Company shall at all times keep reserved, and available for
issuance, the number of shares of Common Stock for issuance upon exercise of all
of the Warrants (as such number may be adjusted from time to time pursuant to
the terms of the Warrants).
6. NEGATIVE COVENANTS.
------------------
The Company hereby covenants from and after the date of this
Agreement, so long as any Securities remain outstanding, as follows:
6.1. WITHHOLDING TAXES.
-----------------
(a) The Company covenants that it will not withhold United
States withholding taxes from payments to be made to holders of the
Securities if such holders (i) are corporations organized under the
laws of a jurisdiction outside the United States or are otherwise
persons not resident in the United States for United States federal
income tax purposes, and (ii) provide the Company, upon the Company's
reasonable request, with one or more of Internal Revenue Service Form
W-8, Form 4224 or other applicable forms, certificates or documents
certifying as to entitlement to an exemption from any such withholding
requirements.
(b) The Company covenants that it will not withhold United
States withholding taxes from payments to be made to holders of the
Securities in excess of an applicable treaty rate if such holders (i)
are corporations organized under the laws of jurisdictions outside the
United States or are otherwise persons not resident in the United
States for United States federal income tax purposes, and (ii) provide
the Company, upon the Company's reasonable request, with one or more
of certifications of their residence address, Internal Revenue Service
Form 1001 or other applicable forms, certificates or documents
certifying as to entitlement to a reduced rate of withholding under
any such withholding requirements.
(c) Neither subsection 6.1(a) nor subsection 6.1(b) hereof shall
----------------- -----------------
require the Company to apply an exemption or reduced rate of
withholding during any period when it shall have received notice or
has knowledge (i) that the residence information previously provided
on any applicable form,
-8-
<PAGE>
certificate or document is incorrect and no corrected form,
certificate or document as applicable has been provided to the
Company, or (ii) of any other information which would render such
exemption or reduced rate inapplicable.
7. OTHER REMEDIES.
--------------
No remedy conferred in this Agreement upon the holder of any Preferred
Shares is intended to be exclusive of any other remedy available to such holder,
and each and every such remedy shall be cumulative and shall be in addition to
every other remedy conferred herein or now or hereafter existing at law or in
equity or by statute or otherwise.
8. REPRESENTATIONS, COVENANTS AND WARRANTIES OF THE COMPANY.
--------------------------------------------------------
The Company hereby represents, covenants and warrants for the benefit
of each holder from time to time of the Securities and the Purchasers, as of the
applicable Closing and after giving effect to the transactions contemplated by
this Agreement to be consummated simultaneously with such Closing, as follows:
8.1. ORGANIZATION; AUTHORITY.
-----------------------
Each of the Company and its Subsidiaries is a corporation duly
organized, validly existing and in good standing under the laws of its
jurisdiction of incorporation and has all requisite corporate power and
authority to own or lease and operate its properties and to carry on its
business as presently conducted and as proposed to be conducted. Each of the
Company and its Subsidiaries is duly qualified and in good standing as a foreign
corporation duly authorized to do business in each jurisdiction where it owns or
leases property or in which the conduct of its business requires it so to
qualify or be licensed, except in those jurisdictions in which the failure to
qualify will not individually or in the aggregate have a Material Adverse
Effect. Other than the Subsidiaries, the Company does not own of record or
beneficially any Capital Stock or equity interest or investment in any
corporation, association, partnership, joint venture or other entity. The
Company and each of its Subsidiaries have furnished Purchasers with true,
correct and complete copies of its Certificate of Incorporation (including,
without limitation, the Certificate of Designations) and By-Laws, each as
amended to date.
8.2. AUTHORIZATION.
-------------
All corporate action on the part of the Company and its directors and
stockholders necessary for the authorization, execution, delivery and
performance by (a) the Company of this Agreement, the Series D Preferred Stock
certificates, the Warrants and the other transactions to be consummated in
connection with the applicable Closing, and (b) the consummation of the
transactions contemplated herein and therein shall have been taken or will be
taken prior to such Closing. Each of the Transaction Documents to which the
Company is a party is the legal, valid and binding obligation of the Company
enforceable against it in accordance with its terms. The execution, delivery
and
-9-
<PAGE>
performance by the Company of each Transaction Document to which it is a party
and compliance therewith and the issuance and sale of the shares of Series D
Preferred Stock and the Warrants will not result in any violation of and will
not (i) conflict with, or result in a breach of, any of the terms of, or
constitute a default under, (a) any provision of state or Federal law to which
the Company is subject, (b) the Company's Certificate of Incorporation
(including, without limitation, the Certificate of Designations) or By-Laws, or
(c) any mortgage, indenture, agreement, instrument, judgment, decree, order,
rule or regulation, or other restriction to which the Company is a party or by
which it is bound, or (ii) result in the creation of any Lien (except as
contemplated by the Senior Loan Documents) upon any of the properties or assets
of the Company pursuant to any such term, or (iii) except as set forth on
Schedule 8.2, result in the suspension, revocation, impairment, forfeiture or
- ------------
non-renewal of any permit, license, authorization or approval applicable to the
Company's operations or any of its assets or properties. No stockholder has any
preemptive rights or rights of first refusal by reason of the issuance of the
Warrants or the shares of Series D Preferred Stock which have not previously
been waived. The issued and outstanding shares of Series D Preferred Stock have
been duly and validly issued and are fully paid and non-assessable. The shares
of Common Stock issuable upon exercise of the Warrants, have, in each case, been
duly and validly reserved, and are not subject to any preemptive rights or
rights of first refusal which have not previously been waived, and, upon
issuance, will be validly issued, fully paid and non-assessable.
8.3. CAPITAL STOCK AND RELATED MATTERS.
---------------------------------
At the time of the Closing of the Initial Investment, (a) the
authorized capital stock of the Company will consist of (i) 500,000 shares of
Class A Voting Common Stock, par value $.01 per share, of which 5,250 shares
will be issued and outstanding, (ii) 100,000 shares of Class B Voting Common
Stock, par value $.0l per share, of which 5,100 shares will be issued and
outstanding, (iii) 100,000 shares of Class C Non-Voting Common Stock, par value
$.01 per share, of which 69,900 shares will be issued and outstanding, (iv)
100,000 shares of Class D Non-Voting Common Stock, par value $.01 per share, of
which no shares will be issued and outstanding and 27,484 shares will be
reserved for issuance upon the exercise of certain warrants held by Electra and
The Provident Bank, (v) 100,000 shares of Class E Non-Voting Common Stock, par
value $.01 per share, of which 1,648 shares will be issued and outstanding and
13,400 shares will be reserved for issuance upon exercise of certain management
stock options, 490 shares will be reserved for issuance upon exercise of certain
warrants held by The Provident Bank and 8,924 shares will be reserved for
issuance upon exercise of the Warrants, (vi) 50,000 shares of Series A Preferred
Stock, par value $.01 per share, of which 7,852 shares will be issued and
outstanding, (vii) 1,000 shares of Series B Preferred Stock, par value $.01 per
share, none of which shares will be issued and outstanding, (viii) 5,000 shares
of Series C Preferred Stock, par value $.01 per share, of which 4,954 shares of
Series C Preferred Stock will be issued to Electra and outstanding, and (ix)
10,000 shares of Series D Preferred Stock, par value $.01 per share, per share,
of which 2,000 shares will be issued and outstanding, (b) no shares of Common
Stock will be owned or held by or for the account of the Company; (c) all of the
issued and outstanding shares of the Company's Capital Stock will be validly
-10-
<PAGE>
issued and outstanding, fully paid and non-assessable and will be owned of
record (other than shares attributable to Klettke, which shall be owned of
record by First Chicago, Custodian, William A. Klettke IRA) and, to the best
knowledge of the Company, beneficially, free and clear of any Liens (except as
may be contemplated by the Senior Loan Documents) by the individuals and
entities and in the amounts set forth on Schedule 1 and Schedule 8.3 hereof; (d)
---------- ------------
except for the Class A Voting Common Stock, the Class B Voting Common Stock, the
Class C Non-Voting Common Stock, warrants for the Class D Non-Voting Common
Stock, the Class E Non-Voting Common Stock and certain warrants and options for
the Class E Non-Voting Common Stock, the Series A Preferred Stock, the Series C
Preferred Stock, the Series D Preferred Stock, and the Warrants, and except as
set forth on Schedule 8.3 hereto, the Company has no, and at the time of the
------------
Closing of the Initial Investment will not have, outstanding stock or securities
convertible into or exchangeable for any shares of its Capital Stock, or any
outstanding rights (either preemptive or other) to subscribe for or to purchase,
or any outstanding options for the purchase of, or any agreements providing for
the issuance (contingent or otherwise) of, or any outstanding calls, commitments
or claims of any character relating to, any Capital Stock or any stock or
securities convertible into or exchangeable for any Capital Stock of the
Company, or any outstanding demand or piggyback registration rights to register
any Capital Stock or any stock or securities convertible into or exchangeable
for the Capital Stock of the Company (other than rights of certain Purchasers
which have been waived or are being waived simultaneously herewith); (e) except
with respect to the Series C Preferred Stock, the Series A Preferred Stock and
the Series D Preferred Stock, the Company will not be subject to any obligation
(contingent or other) to repurchase, otherwise acquire or retire any shares of
Capital Stock; and (f) the Company has no knowledge of any agreement (except as
set forth in this Agreement, the Electra Securities Agreement or the
Stockholders Agreement) restricting the transfer of any shares of the Company's
Capital Stock, except as set forth on Schedule 8.3. Schedule 8.3 sets forth the
------------ ------------
number of shares of Capital Stock, the holders thereof, and the percentage held
by each holder of the issued and outstanding Capital Stock of the Company and
each Subsidiary at the time of the Closing of the Initial Investment and after
giving effect to the Initial Investment.
8.4. LITIGATION.
----------
Except as disclosed on Schedule 8.4 hereto, there is no action, suit,
------------
investigation or proceeding pending, or, to the Company's knowledge threatened,
or any basis therefor or threat thereof, in, nor is there any existing judgment,
order or decree of, any court, governmental authority, arbitration board or
tribunal, foreign or domestic to which the Company or any of its Subsidiaries is
or may be named as a party or its property is or may be subject or which
challenges this Agreement or any of the transactions contemplated hereby, or to
the Company's knowledge, to which any officer, employee or stockholder of the
Company or any of its Subsidiaries is subject, and the Company has no knowledge
of any unasserted claim, the assertion of which is likely and which, if
asserted, will seek damages, an injunction or other legal, equitable, monetary
or nonmonetary relief which claim individually or collectively with other such
unasserted claims, if granted, or
-11-
<PAGE>
actions, suits, investigations or proceedings would have a Material Adverse
Effect or which challenges this Agreement or any of the other Transaction
Documents or any of the transactions contemplated hereby or thereby. No
legislation, order, rule, ruling or regulation has been enacted or made by or on
behalf of any governmental body, department or agency, nor to the Company's
knowledge has there been any legislation introduced and favorably reported for
passage to either House of Congress by any committee of either such House to
which such legislation has been referred for consideration or any state
legislature in any jurisdiction in which the schools operated by the Company and
its Subsidiaries operate or by any committee of such legislature to which such
legislation has been referred for consideration, nor to the Company's knowledge
has any decision of any court of competent jurisdiction within the United States
been rendered which, in the Company's judgment, would have a Material Adverse
Effect.
8.5. COMPLIANCE.
----------
(a) Neither the Company nor any Subsidiary is in violation of
any statute, law, ordinance, governmental rule or regulation
(including environmental laws) or any judgment, order or decree
(federal, state, local or foreign) to which it is subject, except
where such violation would not have, and is not likely to result in, a
Material Adverse Effect, nor has it failed to obtain any, and it
possesses all, licenses, permits, franchises or other governmental
authorizations necessary for the ownership or operation of its
properties or the conduct of its business as presently conducted and
as proposed to be conducted, except where the failure to so obtain or
to so possess would not have, and is not likely to result in, a
Material Adverse Effect.
(b) Neither the Company nor any Subsidiary is in violation of
any term of its Certificate of Incorporation, as amended (including,
without limitation, the Certificate of Designations in the case of the
Company), or By-Laws, as amended.
(c) Neither the Company nor any Subsidiary is in violation of
any term of any Contract, judgment, decree, order, statute, rule or
regulation to which either the Company or any Subsidiary is subject or
which would permit any party to any Contract to terminate, amend or
modify such Contract, except for any violations which do not cause,
and are not likely to result in, a Material Adverse Effect. To the
Company's knowledge, neither the Company nor any Subsidiary has waived
any right or default by any party under any Contract. All Contracts
are in full force and effect, and the Company and its Subsidiaries
each have no knowledge that any party to any Contract, or any parties
to any Contract is or is seeking or presently intends to seek to (i)
terminate, amend or modify such Contract or (ii) upon the expiration
of such Contract, not renew such Contract on terms substantially
similar to those terms currently in such
-12-
<PAGE>
Contract, except where the termination, amendment, modification or
failure to renew does not have, and is not likely to result in, a
Material Adverse Effect.
8.6. OFFERING.
--------
Based upon the representations and warranties of each Purchaser set
forth in Section 9 hereof, the offer, sale and issuance of the shares of Series
---------
D Preferred Stock, the Warrants, and the shares of Common Stock issuable upon
the exercise of the Warrants are all exempt from the registration requirements
of the Securities Act and from the registration or qualification requirements of
the laws of any applicable state or other jurisdiction, and neither the Company
nor anyone acting on its behalf will take any action hereafter that would cause
the lose of such exemption.
8.7. CONFLICTING AGREEMENTS.
----------------------
Neither the Company nor any of its Subsidiaries is a party to any
Contract or subject to any restriction which would have, or would be likely to
have, a Material Adverse Effect. Except as set forth on Schedule 8.7 hereto,
------------
neither the Company nor any of its Subsidiaries is a party to or otherwise
subject to any Contract which limits the amounts of, or otherwise imposes
restrictions on, the issuance of the Warrants, the Series D Preferred Stock or
the Common Stock (upon the exercise of the Warrants).
8.8. GOVERNMENTAL PERMITS, CONSENTS, ETC.
-----------------------------------
Except as set forth on Schedule 8.8, no consent, approval,
------------
authorization, exemption or other action by, or notice to or filing with, any
court or administrative or governmental body which has not been obtained, taken
or made is required in connection with the execution and delivery of this
Agreement or the Transaction Documents, the consummation of the transactions
contemplated hereby or thereby or fulfillment of or compliance with the terms
and provisions hereof.
8.9. FEES AND COMMISSIONS.
--------------------
No broker 's or finder 's fee or commission will be payable by the
Company with respect to the issuance and sale of the Securities or the
transactions contemplated hereby.
8.10. RESERVATION OF SHARES.
---------------------
The Company has reserved for issuance the number of its authorized but
unissued shares of Common Stock necessary to permit the exercise in full of all
the outstanding Warrants.
-13-
<PAGE>
9. REPRESENTATIONS OF THE PURCHASERS.
---------------------------------
Each Purchaser represents, severally and not jointly, and in making
its purchase hereunder it is specifically understood and agreed, that:
9.1. PURCHASE OF SECURITIES.
----------------------
Such Purchaser is purchasing the Securities set forth opposite his or
its name on Schedule 1 hereto for its own account, (a) for investment purposes
----------
and not with a view to or for sale in connection with any distribution thereof;
and (b) it, he or she is an "accredited investor" within the meaning of
Regulation D promulgated under the Securities Act. Such Purchaser agrees that
it will not, directly or indirectly, offer, transfer, sell, assign, pledge,
hypothecate or otherwise dispose of any of the Securities purchased by it
hereunder (or solicit any offers to buy, purchase, or otherwise acquire or take
a pledge of any of such Securities), except in compliance with the Securities
Act, the Exchange Act, any applicable state securities or blue sky laws and the
Stockholders Agreement.
9.2. INCORPORATION AND AUTHORIZATION OF INSTITUTIONAL INVESTORS.
----------------------------------------------------------
In the case of each Institutional Investor, such Institutional
Investor is a corporation duly organized, validly existing and in good standing
under the laws of its jurisdiction of incorporation and such Institutional
Investor has the full legal right, power and authority to enter into this
Agreement and to perform its obligations hereunder without the need for the
consent of any other person; and this Agreement has been duly authorized,
executed and delivered and constitutes the legal, valid and binding obligation
of such Institutional Investor enforceable against such Institutional Investor
in accordance with the terms hereof.
9.3. NO CONFLICTS.
------------
The execution, delivery and performance by such Purchaser of this
Agreement and each Transaction Document to which it is a party and compliance
therewith and the purchase of the Securities will not result in any violation of
and will not conflict with, or result in a breach of, any of the terms of, or
constitute a default under, (a) any provision of state, Federal or foreign law
to which it is subject, (b) where applicable, its Certificate of Incorporation
or By-Laws, or (c) any mortgage, indenture, agreement, instrument, judgment,
decree, order, rule or regulation, or other restriction to which it is a party
or by which it is bound.
9.4. NO BROKERS' FEES.
----------------
Such Purchaser has not agreed or committed to pay any broker's or
finder's fee or commission with respect to the purchase of the Securities or the
transactions contemplated hereby.
-14-
<PAGE>
10. DEFINITIONS.
-----------
For the purpose of this Agreement, the following terms shall have the
meanings specified with respect thereto below:
"AFFILIATE" means, with respect to any Person, any other Person
directly or indirectly controlling, controlled by, or under direct or
indirect common control with, such Person, but shall exclude, with
respect to the Company, Electra and any transferee that might be
deemed to be an Affiliate of the Company solely by reason of its
ownership of Securities purchased by EIT under this Agreement or any
other agreement or securities issued in exchange for any such
Securities, or by reason of its benefiting from any agreements or
covenants of the Company contained in this Agreement. A Person shall
be deemed to control another Person if such Person possesses, directly
or indirectly, the power to direct or cause the direction of the
management and policies of such other Person, whether through the
ownership of voting securities, by contract or otherwise.
"AGREEMENT" means this Securities Purchase Agreement, as this
Agreement may be amended from time to time, together with all Exhibits
and Schedules hereto.
"BY-LAWS" means for any Person all By-Laws, Codes of Regulation
or other equivalent charter documents in the jurisdiction of
incorporation of such Person.
"CAPITAL STOCK" means any and all shares, interests, rights to
purchase, warrants, options, participations or other equivalents of,
rights to acquire, or interests in (however designated) corporate
stock, including, without limitation, any security which is
convertible into or exercisable for such corporate stock.
"CERTIFICATE OF DESIGNATIONS" has the meaning set forth in Section 1
---------
hereof.
"CERTIFICATE OF INCORPORATION" means for any Person all
Certificates of Incorporation, Articles of Incorporation or other
equivalent charter documents in the jurisdiction of incorporation of
such Person.
"CLOSING" has the meaning specified in Section 2.2 hereof.
-----------
"CLOSING DATE" has the meaning specified in Section 2.2 hereof.
-----------
"COMMON STOCK" means the Company's common stock, par value $.01
per share.
-15-
<PAGE>
"COMPANY" means Career Education Corporation, a Delaware
corporation, and its successors and assigns.
"COMPUTERTECH ACQUISITION" has the meaning set forth in the
second recital to this Agreement.
"CONSENTS" has the meaning specified in Section 3.6 hereof.
-----------
"CONTRACT" means any written or oral contract, agreement,
commitment, note, bond, pledge, lease, sublease, deed, mortgage,
guaranty, indenture, license, option, consulting agreement, supply
contract, repair contract, distribution agreement, purchase order,
joint venture agreement, franchise, technology and know-how agreement,
employment agreement, instrument or any other contractual commitment
that is binding on any Person or its property, which provide for
payments from or to such Person of $50, 000 or more after the date
hereof.
"DAMAGES" has the meaning set forth in subsection 11.2(b) hereof.
------------------
"DOWDELL" means Robert E. Dowdell, an individual residing at 1951
Calle Roja, Santa Ana, California 92705.
"EAI" means Electra Associates, Inc., a Delaware corporation, and
its successors and assigns.
"EIT" means Electra Investment Trust P.L.C., a corporation
organized under the laws of England and Wales, and its successors and
assigns.
"ELECTRA" means EIT and EAI.
"ELECTRA SECURITIES AGREEMENT" means that certain Securities
Purchase Agreement dated as of July 31, 1995 between the Company and
Electra.
"EXCHANGE ACT" means the Securities Act of 1934, as amended, from
time to time, and any successor statute or law thereto.
"FUTURE ACQUISITION" has the meaning set forth in the second
recital to this Agreement.
"GAAP" means generally accepted accounting principles in the
United States as in effect at the time any determination is made or
financial statement is required hereunder as promulgated by the
American Institute of Certified Public Accountants, the Accounting
Principles Board, the Financial Accounting Standards Board or any
other body existing from time to time which is authorized to establish
or interpret such principles, applied on a consistent basis throughout
any applicable period, subject to any change
-16-
<PAGE>
required by a change in GAAP; provided, however, that if any change in
-------- -------
generally accepted accounting principles during the term of this
Agreement affects the calculation of any financial covenant or
determination of value contained herein, the parties hereto hereby
agree to amend this Agreement to the effect that each such financial
covenant or determination of value is not more or less restrictive
than such covenant as in effect on the date hereof.
"HELLER" means, collectively, Heller Equity Capital Corporation,
a Delaware corporation, and any entity controlling or under common
control with Heller Equity Capital Corporation, and their successors
and assigns.
"INDIVIDUAL INVESTORS" has the meaning set forth in the
introductory paragraph of this Agreement.
"INITIAL CLOSING DATE" has the meaning set forth in Section 2.2
-----------
hereof.
"INITIAL CLOSING" means the Closing of the Initial Investment.
"INITIAL INVESTMENT" has the meaning set forth in Section 2.2 hereof.
-----------
"INSTITUTIONAL INVESTORS" has the meaning set forth in the
introductory paragraph of this Agreement.
"KLETTKE" means William A. Klettke, an individual residing at
6117 North Wyndwood Drive, Crystal Lake, Illinois 60014.
"LARSON" means John M. Larson, an individual residing at 36
Lakeside Drive, South Barrington, Illinois 60010.
"LAUBS" means Wallace O. Laub and Constance L. Laub, a married
couple residing at 46-380 Manitou Drive, Indian Wells, California
92210.
"LIEN" means any mortgage, pledge, security interest,
encumbrance, lien or charge of any kind (including any agreement to
give any of the foregoing, any conditions sale or other title
retention agreement, any lease in the nature thereof and the filing of
or agreement to give any financing statement under the Uniform
Commercial Code of any jurisdiction).
"MANAGEMENT OPTION PLAN" has the meaning set forth in the first
recital of this Agreement.
"MATERIAL ADVERSE EFFECT" means a material adverse effect on the
business, condition (financial or other), assets, properties or
operations or prospects of the Company and its Subsidiaries, taken as
a whole.
-17-
<PAGE>
"OFFICERS' CERTIFICATE" means a certificate signed in the name of the
Company, as applicable, by its chief executive officer, president or one of
its vice presidents and by its chief financial officer, treasurer or
controller.
"PERSON" means and includes an individual, a partnership, a joint
venture, a corporation, a trust, an unincorporated organization, a
government or any department or agency thereof, and any other legal entity.
"PREFERRED SHARES" means the shares of Series D Preferred Stock of the
Company.
"PURCHASERS" has the meaning set forth in the introductory paragraph
of this Agreement.
"SECURITIES" means the Warrants and the Series D Preferred Stock.
"SECURITIES ACT" means the Securities Act of 1933, as amended, and the
rules and regulations promulgated thereunder.
"SENIOR LOAN AGREEMENT" means that certain Credit Agreement dated as
of July 31, 1995 by and among the Company and various of its Subsidiaries,
The Provident Bank, as Agent, and various lenders, as amended.
"SENIOR LOAN DOCUMENTS" means the Senior Loan Agreement and the
documents entered into in connection with or provided for in the Senior
Loan Agreement.
"SERIES D PREFERRED STOCK" means the Series D Redeemable Preferred
stock of the Company, par value $.01 per share with a stated value of
$1,000.00 per share.
"STOCKHOLDERS AGREEMENT" means that certain Amended and Restated
Stockholders Agreement dated as of July 31, 1995 among the Company and the
Purchasers, as amended by that certain First Amendment to Amended and
Restated Stockholders Agreement of even date herewith among the Company and
Purchasers.
"SUBSEQUENT INVESTMENT" has the meaning set forth in Section 2.2
-----------
hereof.
"SUBSIDIARY" means, with respect to any Person, any corporation or
similar entity, a majority of the Capital Stock or other equity of which,
except directors' qualifying shares, shall, at the time as of which any
determination is being made, be owned by such Person either directly or
through Subsidiaries.
-18-
<PAGE>
"TRANSACTION DOCUMENTS" has the meaning set forth in Section 3.3
-----------
hereof.
"UNITED STATES" or "U.S." means the United States of America.
"WARRANT CERTIFICATE" shall have the meaning set forth in Section 1
---------
hereof.
"WARRANTS" shall have the meaning set forth in Section 1 hereof.
---------
11. MISCELLANEOUS.
-------------
11.1. PAYMENTS.
--------
The Company agrees that, so long as any Purchaser shall hold any
Securities, it will make payments in respect of such Securities, in compliance
with the terms of this Agreement, and the other Transaction Documents, by wire
transfer of immediately available funds for credit to such account or accounts
as such Purchaser may designate in writing.
11.2. EXPENSES; INDEMNITY.
-------------------
(a) The Company hereby agrees, whether or not the transactions
hereby contemplated shall be consummated, to pay, and save any holder harmless
against liability for the payment of, the costs and expenses incurred by such
holder, including, without limitation, the reasonable fees and disbursements of
counsel engaged by Heller, EIT and the Individual Investors, in connection with
(i) any subsequent proposed amendment to, modification of, or proposed consent
under (whether or not such proposed modification shall be effected or proposed
consent granted) and (ii) the costs and expenses, including attorney's fees,
incurred by Heller, EIT and the Individual Investors, in enforcing its rights
under, any of this Agreement, the Warrants or the Series D Preferred Stock or in
responding to any subpoena or other legal process issued in connection with this
Agreement or the transactions contemplated hereby or by reason of such
Purchaser's having acquired any Security, including without limitation, costs
and expenses incurred in any bankruptcy case involving the Company or any of its
Subsidiaries; provided, however, that the Company shall not be obligated to
-------- -------
pay any costs, fees or expenses incurred by any holder solely by reason of such
holder's gross negligence or willful misconduct. The obligations of the Company
under this Section 11.2 shall survive the transfer of any Securities or
------------
portion thereof or interest therein by any Purchaser or any subsequent holder of
the Securities and the redemption of the Preferred Shares.
(b) Notwithstanding any investigation performed by any Purchaser
prior to any Closing of the Initial Investment or any Subsequent Investment,
from and after the Closing of the Initial Investment, the Company shall
indemnify, save and hold harmless, release and discharge each holder of any
Securities and all of its
-19-
<PAGE>
officers, directors, stockholders, agents, representatives, consultants,
employees, and Affiliates, and all of its heirs, successors and permitted
assigns from and against any and all damages, obligations, cases, claims,
deficiencies, penalties, interest, expenses, fines, assessments, charges and
costs (including attorneys' fees and court costs) and other liabilities of any
kind, including, without limitation, environmental liabilities (collectively,
"DAMAGES"), arising from, out of or in any manner connected with or based on (i)
notwithstanding any disclosure in this Agreement (including the exhibits and
schedules attached hereto) or otherwise, the breach of any covenant of the
Company or the failure by the Company to perform any of its obligations
contained herein or in any of the agreements, documents or instruments required
to be executed and delivered by the Company in connection with the transactions
contemplated hereby and in any other Transaction Documents, (ii) any inaccuracy
in or breach of any representation or warranty of the Company under this
Agreement or any agreement, document or instrument required to be executed and
delivered by the Company in connection with the transactions contemplated hereby
and in any other Transaction Documents, (iii) notwithstanding any disclosure in
this Agreement (including the exhibits and schedules attached hereto) or
otherwise, any and all acts, omissions, events, conditions or circumstances
involving or related to the assets, properties, businesses, operations or
activities of the Company, any of its Subsidiaries or any predecessor of any
thereof, whether occurring or existing on, prior to or after the Closing of the
Initial Investment, except if any such Damages arise solely as a result of such
Person's gross negligence or willful misconduct.
11.3. CONSENT TO AMENDMENTS; SUBORDINATION.
-------------------------------------
(a) This Agreement may be amended and the Company may take any
action herein prohibited, or omit to perform any act herein required to be
performed by it, only if the Company shall have obtained the written consent to
such amendment, action or omission to act, of the holders of eighty percent
(80%) of the number of shares of Series D Preferred Stock at the time
outstanding, and each holder of any shares of Series D Preferred Stock at the
time or thereafter outstanding shall be bound by any consent authorized by this
Section 11.3. No course of dealing between the Company and the holder of any
- ------------
share of Series D Preferred Stock nor any delay in exercising any rights
hereunder or under any share of Series D Preferred Stock shall operate as a
waiver of any rights of any holder of such shares of Series D Preferred Stock.
(b) Once the Preferred Shares have been redeemed in full, this
Agreement may be amended and the Company may take any action herein prohibited,
or omit to perform any act herein required to be performed by it, only if the
Company shall have obtained the written consent to such amendment, action or
omission to act, of the holders of eighty percent (80%) of the then outstanding
Warrants, and each holder of Warrants at the time or thereafter outstanding
shall be bound by any consent authorized by this Section 11.3.
------------
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<PAGE>
11.4. PERSONS DEEMED OWNERS.
---------------------
Prior to due presentment for registration of transfer, the Company may
treat the Person in whose name any shares of Series D Preferred Stock is
registered as the owner and holder of such shares of Series D Preferred Stock
for the purpose of receiving payment of the liquidation value of, and dividends
on, such shares and for all other purposes whatsoever.
11.5. SURVIVAL OF REPRESENTATIONS AND WARRANTIES; ENTIRE AGREEMENT.
------------------------------------------------------------
All representations and warranties contained herein and under any
other Transaction Documents or made in writing by or on behalf of the Company in
connection herewith or therewith or in connection with the transactions
contemplated hereby or thereby shall survive the execution and delivery of this
Agreement and the Securities, the transfer by any Purchaser of any Securities or
portion thereof or interest therein, or the repurchase or redemption of the
Securities and may be relied upon by any transferee regardless of any
investigation made at any time by or on behalf of such Purchaser; provided,
--------
however, that the representations and warranties set forth in any Transaction
- -------
Document shall survive only for such period of time specifically set forth in
such Transaction Document to the extent that a shorter period is set forth
therein. Subject to the preceding sentence, this Agreement, the Securities and
the other Transaction Documents embody the entire agreement and understanding
among the Purchasers and the Company and supersede all prior agreements and
understandings relating to the subject matter hereof.
11.6. SUCCESSORS AND ASSIGNS.
----------------------
All covenants and other agreements in this Agreement contained by or
on behalf of any of the parties hereto shall bind and inure to the benefit of
the of the parties hereto whether so expressed or not.
11.7. NOTICES.
-------
All written communications provided for hereunder shall be sent by
first class mail or nationwide overnight delivery service (with charges prepaid)
and (a) if to Heller, addressed to it at 500 West Monroe Street, Chicago,
Illinois 60661, Telecopier no.: 312-441-7236, Attention: Renee M. Rempe, with
copies to Goldberg, Kohn, Bell, Black, Rosenbloom & Moritz, Ltd., 55 East Monroe
Street, Suite 3700, Chicago, Illinois 60603, Telecopier No.: 312-332-2196,
Attention: Dennis B. Black, (b) if to EIT, addressed to it at 65 Kingsway,
London, England WC2B 6QT, Telecopier no.: 011-4471-242-1806, Attention: Mr.
Philip Dyke, with a copy to Electra Fleming, Inc., 320 Park Avenue, 28th Floor,
New York, New York 10022, Telecopier No.: 212-319-3069, Attention: Ms. Diane
M. Smith, Senior Vice President, with copies to Pryor, Cashman, Sherman & Flynn,
410 Park Avenue, New York, New York 10022, Telecopier No.: 212-326-0806,
Attention: Selig D. Sacks, Esq., or to such other address or addresses as EIT
shall have specified to
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<PAGE>
the parties hereto in writing, (c) if to any other holder of any shares of
Series D Preferred Stock or Warrants, including without limitation the
Individual Investors, addressed to such holder at such address as such other
holder shall have specified to the Company in writing or, if any such other
holder shall not have so specified an address to the Company, then addressed to
such other holder in care of the last holder of such share of Series D Preferred
Stock or Warrants which shall have so specified an address to the Company, and
(d) if to the Company, addressed to it at Career Education Corporation, 2800
West Higgins Road, Suite 790, Hoffman Estates, Illinois 60195, Telecopier No.:
847-781-3610, Attention: President, with a copy to: D'Ancona and Pflaum, 30
North LaSalle Street, Suite 2900, Chicago, Illinois 60602, Telecopier No.: 312-
580-0923, Attention: Michel J. Feldman, Esq., and with a copy to Heller Equity
Capital Corp., 500 West Monroe Street, Chicago, Illinois 60661, Telecopier No.:
312-441-7236, Attention: Renee M. Rempe, or to such other address or addresses
as the Company may have designated in writing to each holder of the Securities
at the time outstanding.
11.8. DESCRIPTIVE HEADINGS, ETC.
--------------------------
The descriptive headings of the several Sections of this Agreement are
inserted for convenience only and do not constitute a part of this Agreement.
References herein to a Section are, unless otherwise specified, to one of the
Sections of this Agreement and references to an "Exhibit" or "Schedule" are,
unless otherwise specified, to one of the Exhibits or Schedules to this
Agreement.
11.9. GOVERNING LAW; CHOICE OF FORUM.
------------------------------
THIS AGREEMENT SHALL BE DEEMED TO HAVE BEEN EXECUTED AND DELIVERED AT
AND SHALL BE DEEMED TO HAVE BEEN MADE IN CHICAGO, ILLINOIS. THIS AGREEMENT, AND
THE RIGHTS AND OBLIGATIONS OF THE PARTIES HEREUNDER SHALL BE CONSTRUED IN
ACCORDANCE WITH AND BE GOVERNED BY THE SUBSTANTIVE LAWS OF THE STATE OF ILLINOIS
(WITHOUT GIVING EFFECT TO ANY CONFLICTS OF LAW RULES OR PRINCIPLES) AND THE
RIGHTS AND OBLIGATIONS OF THE PARTIES UNDER THE SERIES D PREFERRED STOCK SHALL
BE CONSTRUED IN ACCORDANCE WITH AND BE GOVERNED BY THE SUBSTANTIVE LAWS OF THE
STATE OF DELAWARE (WITHOUT GIVING EFFECT TO ANY CONFLICTS OF LAW RULES OR
PRINCIPLES). ANY LEGAL ACTION OR PROCEEDING WITH RESPECT HERETO AND THERETO
SHALL ONLY BE BROUGHT IN THE COURTS OF THE UNITED STATES FOR THE NORTHERN
DISTRICT OF ILLINOIS, AND, BY EXECUTION AND DELIVERY OF THIS AGREEMENT, THE
COMPANY AND EACH PURCHASER HEREBY ACCEPTS FOR ITSELF AND IN RESPECT OF ITS
PROPERTY, GENERALLY AND UNCONDITIONALLY, THE JURISDICTION OF THE AFORESAID
COURTS AND IRREVOCABLY WAIVES ANY DEFENSE OR CLAIM TO SUCH JURISDICTION WHICH
EITHER OR BOTH MAY HAVE BASED, DIRECTLY OR INDIRECTLY, ON THE GROUNDS OF FORUM
NON CONVENIENS. IF ANY ACTION IS COMMENCED IN ANY OTHER JURISDICTION, THE
PARTIES
-22-
<PAGE>
HERETO HEREBY CONSENT TO THE REMOVAL OF SUCH ACTION TO THE NORTHERN DISTRICT OF
ILLINOIS. THE COMPANY HEREBY IRREVOCABLY DESIGNATES CT CORPORATION SYSTEM, AS
THE DESIGNEE, APPOINTEE AND AGENT, OF THE COMPANY TO RECEIVE, FOR AND ON BEHALF
OF THE COMPANY, SERVICE OF PROCESS IN SUCH RESPECTIVE JURISDICTIONS IN ANY LEGAL
ACTION OR PROCEEDING WITH RESPECT TO THIS AGREEMENT OR THE RIGHTS AND
OBLIGATIONS HEREUNDER OR THEREUNDER OR UNDER THE SERIES D PREFERRED STOCK AND
SUCH SERVICE SHALL BE DEEMED COMPLETED UPON DELIVERY THEREOF TO SUCH AGENT. IT
IS UNDERSTOOD THAT A COPY OF SUCH PROCESS SERVED ON SUCH AGENT WILL BE PROMPTLY
FORWARDED BY MAIL TO THE COMPANY AT ITS ADDRESS SET FORTH IN SECTION 11.7, BUT
------------
THE FAILURE OF THE COMPANY TO RECEIVE SUCH COPY SHALL NOT AFFECT IN ANY WAY THE
SERVICE OF SUCH PROCESS. THE COMPANY FURTHER IRREVOCABLY CONSENTS TO THE
SERVICE OF PROCESS OUT OF ANY OF THE AFOREMENTIONED COURTS IN ANY SUCH ACTION OR
PROCEEDING BY THE MAILING OF COPIES THEREOF BY REGISTERED OR CERTIFIED MAIL,
POSTAGE PREPAID, TO THE COMPANY AT ITS ADDRESS, SUCH SERVICE TO BECOME EFFECTIVE
THIRTY (30) DAYS AFTER SUCH MAILING. NOTHING HEREIN SHALL AFFECT THE RIGHT OF
ANY PURCHASER, OR ANY OTHER HOLDER OF ANY OF THE SECURITIES TO SERVE PROCESS IN
ANY OTHER MANNER PERMITTED BY LAW OR COMMENCE LEGAL PROCEEDINGS OR OTHERWISE
PROCEED AGAINST THE COMPANY IN ANY OTHER JURISDICTION.
11.10. WAIVER OF JURY TRIAL.
--------------------
THE COMPANY AND EACH PURCHASER HEREBY WAIVE THEIR RESPECTIVE RIGHTS TO
A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF THIS
AGREEMENT OR ANY DEALINGS BETWEEN THEM RELATING TO THE SUBJECT MATTER OF THIS
AGREEMENT AND THE TRANSACTIONS CONTEMPLATED HEREBY AND THE RELATIONSHIP THAT IS
BEING ESTABLISHED HEREUNDER. THE COMPANY AND EACH PURCHASER ALSO WAIVE ANY BOND
OR SURETY OR SECURITY UPON SUCH BOND WHICH MIGHT, BUT FOR THIS WAIVER, BE
REQUIRED OF THE OTHER PARTIES. THE SCOPE OF THIS WAIVER IS INTENDED TO BE ALL
ENCOMPASSING OF ANY AND ALL DISPUTES THAT MAY BE FILED IN ANY COURT AND THAT
RELATE TO THE SUBJECT MATTER OF THIS AGREEMENT, INCLUDING, WITHOUT LIMITATION,
CONTRACT CLAIMS, TORT CLAIMS, BREACH OF DUTY CLAIMS, AND ALL OTHER COMMON LAW
AND STATUTORY CLAIMS. THE COMPANY AND EACH PURCHASER ACKNOWLEDGE THAT THIS
WAIVER IS A MATERIAL INDUCEMENT TO ENTER INTO A BUSINESS RELATIONSHIP, THAT EACH
HAS ALREADY RELIED ON THE WAIVER IN ENTERING INTO THIS AGREEMENT AND THAT EACH
WILL CONTINUE TO RELY ON THE WAIVER IN THEIR RELATED FUTURE DEALINGS. THE
COMPANY AND EACH PURCHASER FURTHER WARRANT AND
-23-
<PAGE>
REPRESENT THAT EACH HAS REVIEWED THIS WAIVER WITH ITS LEGAL COUNSEL, AND THAT
EACH KNOWINGLY AND VOLUNTARILY WAIVES ITS JURY TRIAL RIGHTS FOLLOWING
CONSULTATION WITH LEGAL COUNSEL. THIS WAIVER IS IRREVOCABLE, MEANING THAT IT MAY
NOT BE MODIFIED EITHER ORALLY OR IN WRITING, AND THE WAIVER SHALL APPLY TO ANY
SUBSEQUENT AMENDMENTS, RENEWALS, SUPPLEMENTS OR MODIFICATIONS TO THIS AGREEMENT
OR TO ANY OTHER DOCUMENTS OR AGREEMENTS RELATING TO THE TRANSACTIONS
CONTEMPLATED HEREBY. IN THE EVENT OF LITIGATION, THIS AGREEMENT MAY BE FILED AS
A WRITTEN CONSENT TO A TRIAL BY THE COURT.
11.11. ISSUANCE OF SECURITIES TO KLETTKE.
---------------------------------
The Company and Klettke hereby agree that upon Klettke's prior written
request, any Securities to be issued to Klettke pursuant to this Agreement may
be issued to First Chicago, Custodian, William A. Klettke IRA (the "KLETTKE
IRA"); provided, that the issuance of such Securities to the Klettke IRA would
--------
not result in a breach of the representations and warranties of Klettke in
Section 9 hereof if such representations and warranties were made by the Klettke
- ---------
IRA. Klettke hereby represents and warrants that he is the sole beneficiary of
the Klettke IRA with power of direction, and agrees that, in the event of the
issuance of any Securities to the Klettke IRA, he will cause the Klettke IRA to
be bound by the terms of this Agreement, the Stockholders Agreement and all
other agreements governing the rights of the Company's stockholders to which
Klettke is a party. Furthermore, Klettke hereby agrees to execute and deliver,
or to cause the Klettke IRA to execute and deliver, such other documents as the
Company may reasonably require in connection with any issuance of Securities to
the Klettke IRA.
[Signature page follows.]
-24-
<PAGE>
IN WITNESS WHEREOF, the Company and each Purchaser have caused this
Agreement to be executed by its duly authorized officer as of the date first
above written.
CAREER EDUCATION CORPORATION
/s/ ROBERT E. DOWDELL By /s/ WILLIAM A. KLETTKE
- ----------------------------------- -------------------------------
Robert E. Dowdell Name William A. Klettke
-----------------------------
/s/ JOHN M. LARSON Title Vice President & CFO
- ----------------------------------- ----------------------------
John M. Larson
HELLER EQUITY CAPITAL CORPORATION
/s/ WALLACE O. LAUB
- ----------------------------------- By /s/ RENEE M. REMPE
Wallace O. Laub -------------------------------
Name Renee M. Rempe
-----------------------------
/s/ CONSTANCE L. LAUB Title Vice President
- ----------------------------------- ----------------------------
Constance L. Laub
ELECTRA INVESTMENT TRUST P.L.C.
/s/ WILLIAM A. KLETTKE By /s/ HUGH M. MUMFORD
- ----------------------------------- -------------------------------
William A. Klettke Name Hugh M. Mumford
-----------------------------
Title Director
----------------------------
<PAGE>
EXHIBIT 10.19
________________________________________
SECURITIES PURCHASE AGREEMENT
________________________________________
Series D Redeemable Preferred Stock of Career Education Corporation
($15,000,000)
and
Warrants to Purchase Class E Common Stock of Career Education Corporation
(Exercisable for 36,186 Aggregate Shares,
$.01 per share Exercise Price)
Dated as of May 30, 1997
<PAGE>
TABLE OF CONTENTS
(Not Part of the Agreement)
Page
----
1. AUTHORIZATION OF FINANCING............................................ 2
2. PURCHASE AND SALE OF SECURITIES; CLOSING.............................. 2
2.1. PURCHASE AND SALE.............................................. 2
2.2. CLOSING........................................................ 2
3. CONDITIONS TO EACH CLOSING............................................ 3
3.1. CLOSING OF THE GIBBS ACQUISITION AND CLOSING OF LASALLE LOANS.. 3
3.2. OPINION OF COUNSEL............................................. 3
3.3. REPRESENTATIONS AND WARRANTIES................................. 3
3.4. PURCHASE PERMITTED BY APPLICABLE LAWS.......................... 4
3.5. NO ADVERSE LEGISLATION, ACTION OR DECISION..................... 4
3.6. APPROVALS AND CONSENTS......................................... 5
3.7. PROCEEDINGS.................................................... 5
3.8. SERIES D PREFERRED STOCK AND WARRANT CERTIFICATES.............. 5
3.9. STOCKHOLDERS AGREEMENT......................................... 5
3.10. AMENDMENT TO RESTATED CERTIFICATE OF INCORPORATION
AND CERTIFICATE OF DESIGNATION................................ 6
3.11. COMPLIANCE CERTIFICATE......................................... 6
3.12. ADDITIONAL INFORMATION......................................... 6
3.13. NO CHANGE RESULTING IN MATERIAL ADVERSE EFFECT................. 6
4. FUTURE ACQUISITIONS................................................... 6
4.1. CONDITIONS TO FUTURE ACQUISITIONS.............................. 6
4.2. LIMITATION OF COMPANY'S RIGHT TO MAKE ANY FUTURE ACQUISITION... 7
4.3. [REDEMPTION OF UNUSED PROCEEDS SUBSEQUENT TO JULY 31, 1997].... 7
5. AFFIRMATIVE COVENANTS................................................. 8
5.1. FINANCIAL STATEMENTS AND OTHER REPORTS......................... 8
5.2. USE OF PROCEEDS................................................ 8
5.3. RESERVATION OF SHARES.......................................... 8
6. NEGATIVE COVENANTS.................................................... 8
6.1. WITHHOLDING TAXES............................................... 8
-i-
<PAGE>
7. OTHER REMEDIES......................................................... 9
8. REPRESENTATIONS, COVENANTS AND WARRANTIES OF THE COMPANY............... 9
8.1. ORGANIZATION; AUTHORITY.......................................... 9
8.2. AUTHORIZATION.................................................... 10
8.3. CAPITAL STOCK AND RELATED MATTERS................................ 11
8.4. LITIGATION....................................................... 12
8.5. COMPLIANCE....................................................... 12
8.6. OFFERING......................................................... 13
8.7. CONFLICTING AGREEMENTS........................................... 13
8.8. GOVERNMENTAL PERMITS, CONSENTS, ETC.............................. 14
8.9. FEES AND COMMISSIONS............................................. 14
8.10. RESERVATION OF SHARES........................................... 14
9. REPRESENTATIONS OF THE PURCHASERS...................................... 14
9.1. PURCHASE OF SECURITIES........................................... 14
9.2. INCORPORATION AND AUTHORIZATION OF INSTITUTIONAL INVESTORS....... 14
9.3. NO CONFLICTS..................................................... 15
9.4. NO BROKERS' FEES................................................. 15
10. DEFINITIONS............................................................ 15
11. MISCELLANEOUS.......................................................... 19
11.1. PAYMENTS........................................................ 19
11.2. EXPENSES; INDEMNITY............................................. 20
11.3. CONSENT TO AMENDMENTS; SUBORDINATION............................ 21
11.4. PERSONS DEEMED OWNERS........................................... 21
11.5. SURVIVAL OF REPRESENTATIONS AND WARRANTIES; ENTIRE AGREEMENT.... 21
11.6. SUCCESSORS AND ASSIGNS.......................................... 22
11.7. NOTICES......................................................... 22
11.8. DESCRIPTIVE HEADINGS, ETC....................................... 22
11.9. GOVERNING LAW; CHOICE OF FORUM.................................. 23
11.10. WAIVER OF JURY TRIAL........................................... 24
11.11. ISSUANCE OF SECURITIES TO KLETTKE................................... 24
-ii-
<PAGE>
LIST OF SCHEDULES AND EXHIBITS
SCHEDULES:
- ---------
Schedule 1 Investments
Schedule 8.2 Authorization
Schedule 8.3 Capitalization
Schedule 8.4 Litigation
Schedule 8.7 Conflicting Agreements
Schedule 8.8 Governmental Permits
EXHIBITS:
- --------
Exhibit A Form of Amendment to Restated Certificate of Incorporation
Exhibit B Form of Certificate of Designations for Series D Preferred Stock
Exhibit C Form of Warrant Certificate
Exhibit D Form of Opinion of the Company's Counsel
Exhibit E Form of Second Amendment to Stockholders Agreement
-iii-
<PAGE>
SECURITIES PURCHASE AGREEMENT
THIS SECURITIES PURCHASE AGREEMENT, dated as of May 30, 1997, is made
by and among CAREER EDUCATION CORPORATION, a Delaware corporation (the
"Company"), HELLER EQUITY CAPITAL CORPORATION, an Illinois corporation
("Heller"), ELECTRA INVESTMENT TRUST P.L.C. ("EIT") and William A. Klettke
("Klettke") (Klettke is sometimes referred to herein as the "Individual
Investor"). Heller and EIT are sometimes collectively referred to herein as the
"Institutional Investors." The Institutional Investors and the Individual
Investor are sometimes collectively referred to herein as the "Purchasers."
W I T N E S S E T H:
WHEREAS, Purchasers are the holders of issued and outstanding capital
stock of the Company, and issued and outstanding warrants and other options and
rights to purchase capital stock of the Company.
WHEREAS, the Company has requested additional equity financing in the
amount of up to Fifteen Million Dollars ($15,000,000) from Purchasers, and
desires to sell the Series D Preferred Stock and the Warrants (as each is
hereinafter defined, and collectively, the "Securities") to the Purchasers, for
the purpose of providing funds for, among other things, the acquisition of The
Katharine Gibbs Schools, Inc. (the "Gibbs Acquisition") and for the acquisition
of either or both of IAMD, Limited, an Illinois corporation and International
Academy of Merchandising and Design (Canada), Limited, an Ontario corporation by
the Company (each, a "Future Acquisition"); and
WHEREAS, the Purchasers desire, upon the terms and conditions
hereinafter provided, to purchase from the Company the Securities;
NOW, THEREFORE, in consideration of the mutual promises and covenants
herein contained and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties, intending to be
bound, hereby agree as follows:
Certain terms used in this Agreement are defined in Section 10 hereof.
Unless otherwise indicated, references to statutes are to statutes of the United
States. Accounting terms used herein shall be construed in accordance with
GAAP. In addition, unless the contrary intention appears, terms and expressions
having a defined or generally accepted meaning under the securities laws of the
United States shall have the same meaning in this Agreement.
-1-
<PAGE>
1. AUTHORIZATION OF FINANCING.
--------------------------
The Company has authorized the issuance, sale and delivery of (a)
15,000 shares of its Series D Redeemable Preferred Stock, par value $.01 per
share, with a stated value of $1,000 per share (the "Series D Preferred Stock"),
which series has the rights, restrictions, privileges and preferences as set
forth in the Certificate of Designations for the Series D Preferred Stock of the
Company, substantially in the form of Exhibit B attached hereto, as amended by
the Amendment to Restated Certificate of Incorporation substantially in the form
of Exhibit A attached hereto (the "Certificate of Designations"), and (b) the
detachable warrants to be issued in connection with each issuance of Series D
Preferred Stock in accordance with Schedule 1 attached hereto (collectively, the
"Warrants" and each individually, a "Warrant") to purchase a maximum aggregate
of 36,186 shares of Class E Common Stock of the Company, at an exercise price of
$.01 per share, evidenced by one or more warrant certificates (the "Warrant
Certificates") to be substantially in the form of Exhibit C attached hereto.
2. PURCHASE AND SALE OF SECURITIES; CLOSING.
----------------------------------------
2.1. PURCHASE AND SALE.
-----------------
The Company hereby agrees to issue and sell to each Purchaser and each
Purchaser, severally and not jointly, agrees, subject to the terms and
conditions herein set forth and in reliance upon the representations, warranties
and agreements of the Company herein contained, to purchase at the Closings from
the Company for the purchase price set forth opposite such Purchaser's name in
Schedule 1 attached hereto, (a) the aggregate number of shares of Series D
Preferred Stock set forth opposite such Purchaser's name under the heading Total
Investment in Schedule 1 attached hereto, and registered in such Purchaser's
name (or, in the case of Heller and EIT, the name of such Institutional
Investor's nominee, as such Institutional Investor shall request) and (b) the
aggregate number of Warrants set forth opposite such Purchaser's name under the
heading Total Investment in Schedule 1 attached hereto, in the form of one or
more Warrant Certificates, registered in such Purchaser's name (or, in the case
of Heller and EIT, the name of such Institutional Investor's nominee, as such
Institutional Investor shall request).
2.2. CLOSING.
-------
The purchase and delivery of the Securities shall take place at the
offices of Goldberg, Kohn, Bell, Black, Rosenbloom & Moritz, Ltd., 55 E. Monroe
Street, Suite 3700, Chicago, Illinois 60603 at one or more closings (each, a
"Closing"). Subject to the satisfaction or waiver of the conditions described
in Section 3 below, the Closing of the purchase and sale of the Securities set
forth opposite each Purchaser's name under the heading Initial Investment in
Schedule 1 attached hereto, shall be held simultaneously with the execution and
delivery of this Agreement, or at such other place or on such other date as the
Institutional Investors and the Company may agree upon, but in no event later
than May 30, 1997 (the "Initial Closing Date"). Subject to the satisfaction or
waiver of the
-2-
<PAGE>
conditions described in Section 3 and Section 4 below, each Closing of the
purchase and sale of Securities, or any portion thereof, set forth opposite each
Purchaser's name under the heading Subsequent Investment in Schedule 1 attached
hereto, shall be held simultaneously with the Closing of a Future Acquisition
which the Company intends to finance with the proceeds of such Subsequent
Investment. Simultaneously with each Closing or as promptly as practicable
thereafter, the Company will deliver one or more certificates evidencing the
appropriate number of shares of Series D Preferred Stock and one or more
certificates evidencing the appropriate number of Warrants to each Purchaser,
against payment by such Purchaser of the purchase price therefor by transfer of
immediately available funds to such bank or other financial institution as the
Company may direct in writing, for credit to the Company's account The date of
each Closing hereunder is sometimes referred to as a "Closing Date".
Notwithstanding anything to the contrary contained herein, each Purchaser shall
be permitted, at its option, to purchase all of the Securities set forth
opposite such Purchaser's name on Schedule 1 at the Initial Closing.
3. CONDITIONS TO EACH CLOSING.
--------------------------
Each Purchaser's obligation to purchase and pay for the Securities to
be sold in connection with the Initial Investment and each Subsequent Investment
is subject to the satisfaction prior to or at each Closing of each of the
following conditions:
3.1. CLOSING OF THE GIBBS ACQUISITION AND CLOSING OF LASALLE LOANS.
-------------------------------------------------------------
With respect to the Initial Closing only, the Gibbs Acquisition shall
close simultaneously with the Initial Closing, in accordance with the terms and
subject to the conditions approved by the Board of Directors of the Company,
without any material deviation therefrom. The transactions contemplated by that
certain Credit Agreement dated as of May 30, 1997 by and among the Company,
LaSalle National Bank, as agent and certain lenders thereunder, shall close
simultaneously with the Initial Closing, in accordance with the terms and
subject to conditions approved by the Board of Directors of the Company, without
any material deviation therefrom.
3.2. OPINION OF COUNSEL.
------------------
Simultaneously with each Closing or as promptly as practicable
thereafter, the Institutional Investors shall have received from Goldberg, Kohn,
Bell, Black, Rosenbloom & Moritz, Ltd., special counsel to the Company, an
opinion substantially in the form set forth in Exhibit D, addressed to the
Institutional Investors, dated the Closing Date and otherwise reasonably
satisfactory in form and substance to such parties.
3.3. REPRESENTATIONS AND WARRANTIES.
------------------------------
The representations and warranties of the Company contained in this
Agreement and those otherwise made in any writing by the Company, furnished in
-3-
<PAGE>
connection with or pursuant to this Agreement and the Gibbs Acquisition or
Future Acquisitions to be financed hereby, as applicable (the "Transaction
Documents") or in connection with the transactions contemplated hereby or
thereby, shall be true and correct when made and at the time of such Closing
(unless expressly made as of a particular date) as though made at such time, and
the Company shall have performed or complied with the covenants, conditions and
agreements contained in this Agreement and the applicable Transaction Documents
required to be performed and complied with by the Company at or prior to such
Closing, other than covenants, conditions and agreements contained in such
Transaction Documents which have been waived by the parties thereto and
disclosed to the Institutional Investors on or prior to such Closing.
3.4. PURCHASE PERMITTED BY APPLICABLE LAWS.
-------------------------------------
The purchase of and payment for the Securities to be purchased at such
Closing shall not violate any applicable law or governmental regulation
(including, without limitation, Section 5 of the Securities Act) and shall not
subject the Purchasers to any tax, penalty, liability or other onerous condition
under or pursuant to any applicable law or governmental regulation or order.
Each Purchaser shall have received such certificates or other evidence as they
may reasonably request to establish compliance with the conditions set forth in
this Section 3.4.
3.5. NO ADVERSE LEGISLATION, ACTION OR DECISION.
------------------------------------------
After the date hereof and prior to the applicable Closing Date, no
legislation, order, rule, ruling or regulation shall have been enacted or made
by or on behalf of any governmental body, department or agency, nor shall have
any legislation been introduced and favorably reported for passage to either
House of Congress by any committee of either such House to which such
legislation has been referred for consideration or any state legislature in any
jurisdiction in which the Company operates or by any committee of such
legislature to which such legislation has been referred for consideration, nor
shall any decision of any court of competent jurisdiction within the United
States have been rendered which, in any Institutional Investor's judgment, would
have a Material Adverse Effect. There shall be no action, suit, investigation,
or proceeding pending, or to the Company's knowledge, threatened, against or
affecting the Company or any of its Subsidiaries, the Company's or any such
Subsidiary's properties or rights, or any of the Company's or any such
Subsidiary's Affiliates, officers or directors, before any court, arbitrator or
administrative or governmental body which (a) seeks to restrain, enjoin, prevent
the consummation of or otherwise affect the transactions contemplated by this
Agreement or the applicable Transaction Documents or (b) questions the validity
or legality of any such transactions or seeks to recover damages or to obtain
other relief in connection with any such transactions, and, to the Company's
knowledge, there shall be no valid basis for any such action, proceeding or
investigation.
-4-
<PAGE>
3.6. APPROVALS AND CONSENTS.
----------------------
The Company shall have duly received all material authorizations,
waivers, consents, approvals, licenses, franchises, permits and certificates
(collectively, "Consents") by or of all federal, state and local governmental
authorities and all material Consents by or of all other Persons necessary or
advisable for the issuance of the applicable Securities, and all thereof shall
be in full force and effect at the time of Closing.
3.7. PROCEEDINGS.
-----------
All proceedings taken or to be taken in connection with the
transactions contemplated hereby and in the applicable Transaction Documents,
and all documents incident thereto, shall be reasonably satisfactory in form and
substance to each Institutional Investor, and each Institutional Investor shall
have received all such counterpart originals or certified or other copies of
such documents as it may request.
3.8. SERIES D PREFERRED STOCK AND WARRANT CERTIFICATES.
-------------------------------------------------
The Company shall have delivered to each Purchaser one or more Series
D Preferred Stock certificates and one or more Warrant certificates representing
the aggregate number of shares of Series D Preferred Stock and Warrants being
purchased from the Company by such Purchaser at or promptly after the applicable
Closing.
3.9. STOCKHOLDERS AGREEMENT.
----------------------
The Second Amendment to the Amended and Restated Stockholders'
Agreement of the Company, in the form of Exhibit E hereto, shall have been
executed and delivered by and to all parties thereto.
3.10. AMENDMENT TO RESTATED CERTIFICATE OF INCORPORATION AND
------------------------------------------------------
CERTIFICATE OF DESIGNATION.
--------------------------
The Amendment to Restated Certificate of Incorporation and Certificate
Designation of Series D Preferred Stock increasing the number of authorized
shares of Class A Common Stock to 600,000, the number of authorized shares of
Class E Non-voting Common Stock to 200,000 and the number of authorized shares
of Series D Preferred Stock to 25,000, in the form of Exhibit A shall have been
approved by the requisite stockholders and the Board of Directors of the Company
and shall have been executed and duly filed with the Delaware Secretary of
State, and shall remain in full force and effect, and since the date of such
filing, the Company will not have adopted or filed any other document or
instrument amending or modifying the Restated Certificate of Incorporation or
the Certificate of Designation of Series D Preferred Stock.
-5-
<PAGE>
3.11. COMPLIANCE CERTIFICATE.
----------------------
Each Purchaser shall have received an Officers' Certificate, dated as
of each Closing Date, certifying that the conditions specified in this Section 3
required to be fulfilled on such Closing Date (other than actions required to be
taken by such Purchaser) have been fulfilled.
3.12. ADDITIONAL INFORMATION.
----------------------
The Company shall have executed and/or delivered such other
information and documentation as each Purchaser and its counsel may reasonably
request. Each Purchaser shall have received such other documents and opinions,
in form and substance satisfactory to its counsel, relating to matters incident
to the Gibbs Acquisition and the transactions contemplated by the Transaction
Documents.
3.13. NO CHANGE RESULTING IN MATERIAL ADVERSE EFFECT.
----------------------------------------------
Since February 28, 1997, there shall have been no change in the
business or operations of the Company, nor any other event, which has had, or is
likely to have, in any Institutional Investor's reasonable judgment, a Material
Adverse Effect.
Any condition specified in this Section 3 (or in Section 4 below) may
be waived with respect to any Purchaser upon express written consent executed by
such Purchaser.
4. FUTURE ACQUISITIONS.
-------------------
4.1. CONDITIONS TO FUTURE ACQUISITIONS.
---------------------------------
Following the Initial Closing, the Company shall be permitted to use
the proceeds from the sale of Securities hereunder which are not used to fund
the Gibbs Acquisition (the "Unused Proceeds") to fund Future Acquisitions,
subject to the satisfaction, or waiver by each Institutional Investor, prior to
or at the Closing of such Future Acquisitions, of each of the following
conditions:
(a) No Event of Default. No default or event of default shall exist
or be continuing under the Senior Loan Agreement, other than any default or
event of default caused by the Purchasers' failure to purchase all or any
of the Series D Preferred Stock or Warrants or which would be cured by the
purchase of the Series D Preferred Stock and Warrants being requested by
the Company.
(b) Representations and Warranties. The representations and
warranties of the Company contained in this Agreement and those otherwise
made in any writing by the Company furnished in connection with or pursuant
to this Agreement and the Future Acquisition in question (the "Future
Acquisition Transaction Documents") and in connection with the
-6-
<PAGE>
transactions contemplated hereby and thereby, shall be true and correct in
all material respects as of the closing of the Future Acquisition (unless
expressly made as of a particular date).
(c) Conditions. The Company shall have performed or complied with
the covenants, conditions and agreements contained in this Agreement and
the applicable Future Acquisition Transaction Documents required to be
performed and complied with by the Company at or prior to such closing,
other than covenants, conditions and agreements contained in such future
Acquisition Transaction Documents which have been waived by the parties
thereto and disclosed to the Institutional Investors on or prior to such
closing.
(d) Approval of Company Board of Directors; Use of Proceeds. The
Unused Proceeds shall be used to fund a Future Acquisition previously
approved by the Board of Directors of the Company, which approval shall
include the affirmative vote of the Heller Director (as defined in the
Stockholders Agreement), Patrick K. Pesch (or any successor to his seat on
the Board of Directors), provided that a new approval of the Board of
Directors shall be required in order to fund one Future Acquisition without
the other or to fund a Future Acquisition after June 30, 1997, which
approval shall include the approval of the Heller Director.
(e) Prior Notice. The Company shall have given to each Purchaser
written notice of the proposed closing of the Future Acquisition not less
than five (5) days prior to the date of the Closing for such Future
Acquisition, which notice shall indicate the nature of the Future
Acquisition and the aggregate consideration to be paid by the Company. Any
Purchaser who has not previously purchased all or a sufficient portion of
the Securities set forth opposite such Purchaser's name on Schedule 1 to
fund its portion of such Future Acquisition shall be obligated to purchase
such additional
4.2. LIMITATION OF COMPANY'S RIGHT TO MAKE ANY FUTURE ACQUISITION.
------------------------------------------------------------
Notwithstanding any provision of this Agreement to the contrary, in no
event shall the Company be permitted to obligate any Purchaser to fund any
Future Acquisitions after the earlier of July 31, 1997, or (ii) the occurrence
of a Triggering Event.
4.3. REDEMPTION OF UNUSED PROCEEDS SUBSEQUENT TO JULY 31, 1997.
---------------------------------------------------------
Notwithstanding any provision of this Agreement to the contrary, in
the event that the Company has not used all or any portion of the Unused
Proceeds to fund Future Acquisitions before the earlier of (i) July 31, 1997, or
(ii) the occurrence of a
-7-
<PAGE>
Triggering Event, then the Investors will cause the Company to redeem such
number of shares of Series D Preferred Stock issued hereunder in respect of
Subsequent Investments from each of the Purchasers of such shares, to the extent
the proceeds of such Subsequent Investments constitute Unused Proceeds, so as to
return such Unused Proceeds to the applicable Purchasers, for a redemption price
equal to the Liquidation Value (as defined in the Certificate of Designations)
of such Securities, and, in connection with such redemption, the number of the
Warrants allocable to the redeemed shares of Series D Preferred Stock in
accordance with Schedule 1 attached hereto shall be cancelled.
5. AFFIRMATIVE COVENANTS.
---------------------
The Company hereby covenants from and after the date of this
Agreement, so long as any Securities remain outstanding, as follows:
5.1. FINANCIAL STATEMENTS AND OTHER REPORTS.
--------------------------------------
The Company covenants that it will deliver, or cause to be delivered,
to each Purchaser, the financial statements and other reports described in
Section 5.1 of the Electra Securities Agreement, in the form and in accordance
with the deadlines for delivery of such financial statements and other reports
set forth in the Electra Securities Agreement.
5.2. USE OF PROCEEDS.
---------------
The Company shall use all of the proceeds received from the sale of
the Securities pursuant to this Agreement to fund (a) the Gibbs Acquisition and
related costs and expenses and (b) any Future Acquisition permitted hereunder
and any related costs and expenses. The Company shall invest any Unused
Proceeds in a segregated, interest bearing account pending disbursement in
connection with a Future Acquisition or application to a redemption pursuant to
Section 4.3 above.
5.3. RESERVATION OF SHARES.
---------------------
The Company shall at all times keep reserved, and available for
issuance, the number of shares of Common Stock for issuance upon exercise of all
of the Warrants (as such number may be adjusted from time to time pursuant to
the terms of the Warrants).
6. NEGATIVE COVENANTS.
------------------
The Company hereby covenants from and after the date of this
Agreement, so long as any Securities remain outstanding, as follows:
6.1. WITHHOLDING TAXES.
-----------------
(a) The Company covenants that it will not withhold United States
withholding taxes from payments to be made to holders of the Securities if
such holders (i) are corporations organized under the laws of a
jurisdiction
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<PAGE>
outside the United States or are otherwise persons not resident in the
United States for United States federal income tax purposes, and (ii)
provide the Company, upon the Company's reasonable request, with one or
more of Internal Revenue Service Form W-8, Form 4224 or other applicable
forms, certificates or documents certifying as to entitlement to an
exemption from any such withholding requirements.
(b) The Company covenants that it will not withhold United States
withholding taxes from payments to be made to holders of the Securities in
excess of an applicable treaty rate if such holders (i) are corporations
organized under the laws of jurisdictions outside the United States or are
otherwise persons not resident in the United States for United States
federal income tax purposes, and (ii) provide the Company, upon the
Company's reasonable request, with one or more of certifications of their
residence address, Internal Revenue Service Form 1001 or other applicable
forms, certificates or documents certifying as to entitlement to a reduced
rate of withholding under any such withholding requirements.
(c) Neither subsection 6.1(a) nor subsection 6.1(b) hereof shall
require the Company to apply an exemption or reduced rate of withholding
during any period when it shall have received notice or has knowledge (i)
that the residence information previously provided on any applicable form,
certificate or document is incorrect and no corrected form, certificate or
document as applicable has been provided to the Company, or (ii) of any
other information which would render such exemption or reduced rate
inapplicable.
7. OTHER REMEDIES.
--------------
No remedy conferred in this Agreement upon the holder of any
Securities is intended to be exclusive of any other remedy available to such
holder, and each and every such remedy shall be cumulative and shall be in
addition to every other remedy conferred herein or now or hereafter existing at
law or in equity or by statute or otherwise.
8. REPRESENTATIONS, COVENANTS AND WARRANTIES OF THE COMPANY.
--------------------------------------------------------
The Company hereby represents, covenants and warrants for the benefit
of each holder from time to time of the Securities and the Purchasers, as of the
applicable Closing, and after giving effect to the transactions contemplated by
this Agreement to be consummated simultaneously with such Closing, as follows:
8.1. ORGANIZATION; AUTHORITY.
-----------------------
Each of the Company and its Subsidiaries is a corporation duly
organized, validly existing and in good standing under the laws of its
jurisdiction of incorporation and has all requisite corporate power and
authority to own or lease and operate its properties
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<PAGE>
and to carry on its business as presently conducted and as proposed to be
conducted. Each of the Company and its Subsidiaries is duly qualified and in
good standing as a foreign corporation duly authorized to do business in each
jurisdiction where it owns or leases property or in which the conduct of its
business requires it so to qualify or be licensed, except in those jurisdictions
in which the failure to qualify will not individually or in the aggregate have a
Material Adverse Effect. Other than the Subsidiaries, the Company does not own
of record or beneficially any Capital Stock or equity interest or investment in
any corporation, association, partnership, joint venture or other entity. The
Company and each of its Subsidiaries have furnished Purchasers with true,
correct and complete copies of its Certificate of Incorporation (including,
without limitation, the Certificate of Designations) and By-Laws, each as
amended to date.
8.2. AUTHORIZATION.
-------------
All corporate action on the part of the Company and its directors and
stockholders necessary for the authorization, execution, delivery and
performance by (a) the Company of this Agreement, the Series D Preferred Stock
certificates, the Warrants and the other transactions to be consummated in
connection with the applicable Closing, and (b) the consummation of the
transactions contemplated herein and therein shall have been taken or will be
taken prior to such Closing. Each of the Transaction Documents to which the
Company is a party is the legal, valid and binding obligation of the Company
enforceable against it in accordance with its terms. The execution, delivery
and performance by the Company of each Transaction Document to which it is a
party and compliance therewith and the issuance and sale of the shares of Series
D Preferred Stock and the Warrants will not result in any violation of and will
not (i) conflict with, or result in a breach of, any of the terms of, or
constitute a default under, (a) any provision of state or Federal law to which
the Company is subject, (b) the Company's Certificate of Incorporation
(including, without limitation, the Certificate of Designations) or By-Laws, or
(c) any mortgage, indenture, agreement, instrument, judgment, decree, order,
rule or regulation, or other restriction to which the Company is a party or by
which it is bound, or (ii) result in the creation of any Lien (except as
contemplated by the Senior Loan Documents) upon any of the properties or assets
of the Company pursuant to any such term, or (iii) except as set forth on
Schedule 8.2, result in the suspension, revocation, impairment, forfeiture or
non-renewal of any permit, license, authorization or approval applicable to the
Company's operations or any of its assets or properties. No stockholder has any
preemptive rights or rights of first refusal by reason of the issuance of the
Warrants or the shares of Series D Preferred Stock which have not previously
been waived. The issued and outstanding shares of Series D Preferred Stock have
been duly and validly issued and are fully paid and non-assessable. The shares
of Common Stock issuable upon exercise of the Warrants, have, in each case, been
duly and validly reserved, and are not subject to any preemptive rights or
rights of first refusal which have not previously been waived, and, upon
issuance, will be validly issued, fully paid and non-assessable.
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<PAGE>
8.3. CAPITAL STOCK AND RELATED MATTERS.
---------------------------------
Immediately following the Closing, (a) the authorized capital stock of
the Company will consist of (i) 600,000 shares of Class A Voting Common Stock,
par value $.01 per share, of which 5,250 shares will be issued and outstanding,
(ii) 100,000 shares of Class B Voting Common Stock, par value $.0l per share, of
which 5,100 shares will be issued and outstanding, (iii) 100,000 shares of Class
C Non-Voting Common Stock, par value $.01 per share, of which 69,900 shares will
be issued and outstanding, (iv) 100,000 shares of Class D Non-Voting Common
Stock, par value $.01 per share, of which no shares will be issued and
outstanding and 27,484 shares will be reserved for issuance upon the exercise of
certain warrants held by Electra and The Provident Bank, (v) 200,000 shares of
Class E Non-Voting Common Stock, par value $.01 per share, of which 1,648 shares
will be issued and outstanding and 13,400 shares will be reserved for issuance
upon exercise of certain management stock options, 1,315 shares will be reserved
for issuance upon exercise of certain warrants held by The Provident Bank and
45,110 shares will be reserved for issuance upon exercise of the Warrants and
certain other warrants, (vi) 50,000 shares of Series A Preferred Stock, par
value $.01 per share, of which 7,852 shares will be issued and outstanding,
(vii) 1,000 shares of Series B Preferred Stock, par value $.01 per share, none
of which shares will be issued and outstanding, (viii) 5,000 shares of Series C
Preferred Stock, par value $.01 per share, of which 4,954 shares of Series C
Preferred Stock will be issued to Electra and outstanding, and (ix) 25,000
shares of Series D Preferred Stock, par value $.01 per share, per share, of
which 21,125 shares will be issued and outstanding and 1,375 shares will be
reserved for issuance upon the closing of unconsummated Subsequent Investments,
(b) no shares of Common Stock will be owned or held by or for the account of the
Company; (c) all of the issued and outstanding shares of the Company's Capital
Stock will be validly issued and outstanding, fully paid and non-assessable and
will be owned of record (other than shares attributable to Klettke, which shall
be owned of record by First Chicago, Custodian, William A. Klettke IRA) and, to
the best knowledge of the Company, beneficially, free and clear of any Liens
(except as may be contemplated by the Senior Loan Documents) by the individuals
and entities and in the amounts set forth on Schedule 1 and Schedule 8.3 hereof;
(d) except for the Class A Voting Common Stock, the Class B Voting Common Stock,
the Class C Non-Voting Common Stock, warrants for the Class D Non-Voting Common
Stock, the Class E Non-Voting Common Stock and certain warrants and options for
the Class E Non-Voting Common Stock, the Series A Preferred Stock, the Series C
Preferred Stock, the Series D Preferred Stock, and the Warrants, and except as
set forth on Schedule 8.3 hereto, the Company has no, and at the time of the
Initial Closing, will not have, outstanding stock or securities convertible into
or exchangeable for any shares of its Capital Stock, or any outstanding rights
(either preemptive or other) to subscribe for or to purchase, or any outstanding
options for the purchase of, or any agreements providing for the issuance
(contingent or otherwise) of, or any outstanding calls, commitments or claims of
any character relating to, any Capital Stock or any stock or securities
convertible into or exchangeable for any Capital Stock of the Company, or any
outstanding demand or piggyback registration rights to register any Capital
Stock or any stock or securities convertible into or exchangeable for
-11-
<PAGE>
the Capital Stock of the Company (other than rights of certain Purchasers which
have been waived or are being waived simultaneously herewith); (e) except with
respect to the Series C Preferred Stock, the Series A Preferred Stock and the
Series D Preferred Stock, the Company will not be subject to any obligation
(contingent or other) to repurchase, otherwise acquire or retire any shares of
Capital Stock; and (f) the Company has no knowledge of any agreement (except as
set forth in this Agreement, the Electra Securities Agreement or the
Stockholders Agreement) restricting the transfer of any shares of the Company's
Capital Stock, except as set forth on Schedule 8.3. Schedule 8.3 sets forth the
number of shares of Capital Stock, the holders thereof, and the percentage held
by each holder of the issued and outstanding Capital Stock of the Company and
each Subsidiary at the time of the Closing of the Initial Investment and after
giving effect to the Initial Investment.
8.4. LITIGATION.
----------
Except as disclosed on Schedule 8.4 hereto, there is no action, suit,
investigation or proceeding pending, or, to the Company's knowledge threatened,
or any basis therefor or threat thereof, in, nor is there any existing judgment,
order or decree of, any court, governmental authority, arbitration board or
tribunal, foreign or domestic to which the Company or any of its Subsidiaries is
or may be named as a party or its property is or may be subject or which
challenges this Agreement or any of the transactions contemplated hereby, or to
the Company's knowledge, to which any officer, employee or stockholder of the
Company or any of its Subsidiaries is subject, and the Company has no knowledge
of any unasserted claim, the assertion of which is likely and which, if
asserted, will seek damages, an injunction or other legal, equitable, monetary
or nonmonetary relief which claim individually or collectively with other such
unasserted claims, if granted, or actions, suits, investigations or proceedings
would have a Material Adverse Effect or which challenges this Agreement or any
of the other Transaction Documents or any of the transactions contemplated
hereby or thereby. No legislation, order, rule, ruling or regulation has been
enacted or made by or on behalf of any governmental body, department or agency,
nor to the Company's knowledge has there been any legislation introduced and
favorably reported for passage to either House of Congress by any committee of
either such House to which such legislation has been referred for consideration
or any state legislature in any jurisdiction in which the schools operated by
the Company and its Subsidiaries operate or by any committee of such legislature
to which such legislation has been referred for consideration, nor to the
Company's knowledge has any decision of any court of competent jurisdiction
within the United States been rendered which, in the Company's judgment, would
have a Material Adverse Effect.
8.5. COMPLIANCE.
----------
(a) Neither the Company nor any Subsidiary is in violation of any
statute, law, ordinance, governmental rule or regulation (including
environmental laws) or any judgment, order or decree (federal, state, local
or foreign) to which it is subject, except where such violation would not
have,
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<PAGE>
and is not likely to result in, a Material Adverse Effect, nor has it
failed to obtain any, and it possesses all, licenses, permits, franchises
or other governmental authorizations necessary for the ownership or
operation of its properties or the conduct of its business as presently
conducted and as proposed to be conducted, except where the failure to so
obtain or to so possess would not have, and is not likely to result in, a
Material Adverse Effect.
(b) Neither the Company nor any Subsidiary is in violation of any
term of its Certificate of Incorporation, as amended (including, without
limitation, the Certificate of Designations in the case of the Company), or
By-Laws, as amended.
(c) Neither the Company nor any Subsidiary is in violation of any
term of any Contract, judgment, decree, order, statute, rule or regulation
to which either the Company or any Subsidiary is subject or which would
permit any party to any Contract to terminate, amend or modify such
Contract, except for any violations which do not cause, and are not likely
to result in, a Material Adverse Effect. To the Company's knowledge,
neither the Company nor any Subsidiary has waived any right or default by
any party under any Contract. All Contracts are in full force and effect,
and the Company and its Subsidiaries each have no knowledge that any party
to any Contract, or any parties to any Contract is or is seeking or
presently intends to seek to (i) terminate, amend or modify such Contract
or (ii) upon the expiration of such Contract, not renew such Contract on
terms substantially similar to those terms currently in such Contract,
except where the termination, amendment, modification or failure to renew
does not have, and is not likely to result in, a Material Adverse Effect.
8.6. OFFERING.
--------
Based upon the representations and warranties of each Purchaser set
forth in Section 9 hereof, the offer, sale and issuance of the shares of Series
D Preferred Stock, the Warrants, and the shares of Common Stock issuable upon
the exercise of the Warrants are all exempt from the registration requirements
of the Securities Act and from the registration or qualification requirements of
the laws of any applicable state or other jurisdiction, and neither the Company
nor anyone acting on its behalf will take any action hereafter that would cause
the lose of such exemption.
8.7. CONFLICTING AGREEMENTS.
----------------------
Neither the Company nor any of its Subsidiaries is a party to any
Contract or subject to any restriction which would have, or would be likely to
have, a Material Adverse Effect. Except as set forth on Schedule 8.7 hereto,
neither the Company nor any of its Subsidiaries is a party to or otherwise
subject to any Contract which limits the amounts of,
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<PAGE>
or otherwise imposes restrictions on, the issuance of the Warrants, the Series D
Preferred Stock or the Common Stock (upon the exercise of the Warrants).
8.8. GOVERNMENTAL PERMITS, CONSENTS, ETC.
-----------------------------------
Except as set forth on Schedule 8.8, no consent, approval,
authorization, exemption or other action by, or notice to or filing with, any
court or administrative or governmental body which has not been obtained, taken
or made is required in connection with the execution and delivery of this
Agreement or the Transaction Documents, the consummation of the transactions
contemplated hereby or thereby or fulfillment of or compliance with the terms
and provisions hereof.
8.9. FEES AND COMMISSIONS.
--------------------
No broker's or finder's fee or commission will be payable by the
Company with respect to the issuance and sale of the Securities or the
transactions contemplated hereby.
8.10. RESERVATION OF SHARES.
---------------------
The Company has reserved for issuance the number of its authorized but
unissued shares of Common Stock necessary to permit the exercise in full of all
the outstanding Warrants.
9. REPRESENTATIONS OF THE PURCHASERS.
---------------------------------
Each Purchaser represents, severally and not jointly, and in making
its purchase hereunder it is specifically understood and agreed, that:
9.1. PURCHASE OF SECURITIES.
----------------------
Such Purchaser is purchasing the Securities set forth opposite his or
its name on Schedule 1 hereto for its own account, (a) for investment purposes
and not with a view to or for sale in connection with any distribution thereof;
and (b) it, he or she is an "accredited investor" within the meaning of
Regulation D promulgated under the Securities Act. Such Purchaser agrees that
it will not, directly or indirectly, offer, transfer, sell, assign, pledge,
hypothecate or otherwise dispose of any of the Securities purchased by it
hereunder (or solicit any offers to buy, purchase, or otherwise acquire or take
a pledge of any of such Securities), except in compliance with the Securities
Act, the Exchange Act, any applicable state securities or blue sky laws and the
Stockholders Agreement.
9.2. INCORPORATION AND AUTHORIZATION OF INSTITUTIONAL INVESTORS.
----------------------------------------------------------
In the case of each Institutional Investor, such Institutional
Investor is a corporation duly organized, validly existing and in good standing
under the laws of its
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<PAGE>
jurisdiction of incorporation and such Institutional Investor has the full legal
right, power and authority to enter into this Agreement and to perform its
obligations hereunder without the need for the consent of any other person; and
this Agreement has been duly authorized, executed and delivered and constitutes
the legal, valid and binding obligation of such Institutional Investor
enforceable against such Institutional Investor in accordance with the terms
hereof.
9.3. NO CONFLICTS.
------------
The execution, delivery and performance by such Purchaser of this
Agreement and each Transaction Document to which it is a party and compliance
therewith and the purchase of the Securities will not result in any violation of
and will not conflict with, or result in a breach of, any of the terms of, or
constitute a default under, (a) any provision of state, Federal or foreign law
to which it is subject, (b) where applicable, its Certificate of Incorporation
or By-Laws, or (c) any mortgage, indenture, agreement, instrument, judgment,
decree, order, rule or regulation, or other restriction to which it is a party
or by which it is bound.
9.4. NO BROKERS' FEES.
----------------
Such Purchaser has not agreed or committed to pay any broker's or
finder's fee or commission with respect to the purchase of the Securities or the
transactions contemplated hereby.
10. DEFINITIONS.
-----------
For the purpose of this Agreement, the following terms shall have the
meanings specified with respect thereto below:
"Affiliate" means, with respect to any Person, any other Person
directly or indirectly controlling, controlled by, or under direct or
indirect common control with, such Person, but shall exclude, with respect
to the Company, Electra and any transferee that might be deemed to be an
Affiliate of the Company solely by reason of its ownership of Securities
purchased by EIT under this Agreement or any other agreement or securities
issued in exchange for any such Securities, or by reason of its benefiting
from any agreements or covenants of the Company contained in this
Agreement. A Person shall be deemed to control another Person if such
Person possesses, directly or indirectly, the power to direct or cause the
direction of the management and policies of such other Person, whether
through the ownership of voting securities, by contract or otherwise.
"Agreement" means this Securities Purchase Agreement, as this
Agreement may be amended from time to time, together with all Exhibits and
Schedules hereto.
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<PAGE>
"By-Laws" means for any Person all By-Laws, Codes of Regulation or
other equivalent charter documents in the jurisdiction of incorporation of
such Person, all as amended.
"Capital Stock" means any and all shares, interests, rights to
purchase, warrants, options, participations or other equivalents of, rights
to acquire, or interests in (however designated) corporate stock,
including, without limitation, any security which is convertible into or
exercisable for such corporate stock.
"Certificate of Designations" has the meaning set forth in Section 1
---------
hereof.
"Certificate of Incorporation" means for any Person all Certificates
of Incorporation, Articles of Incorporation or other equivalent charter
documents in the jurisdiction of incorporation of such Person, all as
amended.
"Closing" has the meaning specified in Section 2.2 hereof.
-----------
"Closing Date" has the meaning specified in Section 2.2 hereof.
-----------
"Common Stock" means the Company's common stock, par value $.01 per
share.
"Company" means Career Education Corporation, a Delaware corporation,
and its successors and assigns.
"Consents" has the meaning specified in Section 3.6 hereof.
-----------
"Contract" means any written or oral contract, agreement, commitment,
note, bond, pledge, lease, sublease, deed, mortgage, guaranty, indenture,
license, option, consulting agreement, supply contract, repair contract,
distribution agreement, purchase order, joint venture agreement, franchise,
technology and know-how agreement, employment agreement, instrument or any
other contractual commitment that is binding on any Person or its property,
which provide for payments from or to such Person of $50,000 or more after
the date hereof.
"Damages" has the meaning set forth in subsection 11.2(b) hereof.
------------------
"EAI" means Electra Associates, Inc., a Delaware corporation, and its
successors and assigns.
"EIT" means Electra Investment Trust P.L.C., a corporation organized
under the laws of England and Wales, and its successors and assigns.
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<PAGE>
"Electra" means EIT and EAI.
"Electra Securities Agreement" means that certain Securities Purchase
Agreement dated as of July 31, 1995 between the Company and Electra, as
amended from time to time.
"Exchange Act" means the Securities Act of 1934, as amended, from time
to time, and any successor statute or law thereto.
"Future Acquisition" has the meaning set forth in the second recital
to this Agreement.
"GAAP" means generally accepted accounting principles in the United
States as in effect at the time any determination is made or financial
statement is required hereunder as promulgated by the American Institute of
Certified Public Accountants, the Accounting Principles Board, the
Financial Accounting Standards Board or any other body existing from time
to time which is authorized to establish or interpret such principles,
applied on a consistent basis throughout any applicable period, subject to
any change required by a change in GAAP; provided, however, that if any
change in generally accepted accounting principles during the term of this
Agreement affects the calculation of any financial covenant or
determination of value contained herein, the parties hereto hereby agree to
amend this Agreement to the effect that each such financial covenant or
determination of value is not more or less restrictive than such covenant
as in effect on the date hereof.
"Gibbs Acquisition" has the meaning set forth in the second recital to
this Agreement.
"Heller" means, collectively, Heller Equity Capital Corporation, a
Delaware corporation, and any entity controlling or under common control
with Heller Equity Capital Corporation, and their successors and assigns.
"Individual Investors" has the meaning set forth in the introductory
paragraph of this Agreement.
"Initial Closing Date" has the meaning set forth in Section 2.2
hereof.
"Initial Public Offering" means an initial underwritten public
offering and sale for cash by the Company of the Common Stock of the
Corporation to an underwriter or underwriters pursuant to a "firm
commitment" underwriting agreement and a registration statement declared
effective by the Securities and Exchange Commission under the Securities
Act of 1933, as amended, in which (i) the minimum equity valuation of the
Company is $45,000,000 before December 31, 1999 and $55,000,000 thereafter,
and (ii) the Company receives gross proceeds of at least $20,000,000.
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<PAGE>
"Institutional Investors" has the meaning set forth in the
introductory paragraph of this Agreement.
"Klettke" means William A. Klettke, an individual residing at 6117
North Wyndwood Drive, Crystal Lake, Illinois 60014.
"Lien" means any mortgage, pledge, security interest, encumbrance,
lien or charge of any kind (including any agreement to give any of the
foregoing, any conditions sale or other title retention agreement, any
lease in the nature thereof and the filing of or agreement to give any
financing statement under the Uniform Commercial Code of any jurisdiction).
"Material Adverse Effect" means a material adverse effect on the
business, condition (financial or other), assets, properties or operations
or prospects of the Company and its Subsidiaries, taken as a whole.
"Officers' Certificate" means a certificate signed in the name of the
Company, as applicable, by its chief executive officer, president or one of
its vice presidents and by its chief financial officer, treasurer or
controller.
"Person" means and includes an individual, a partnership, a joint
venture, a corporation, a trust, an unincorporated organization, a
government or any department or agency thereof, and any other legal entity.
"Preferred Shares" means the shares of Series D Preferred Stock of the
Company.
"Purchasers" has the meaning set forth in the introductory paragraph
of this Agreement.
"Securities" means the Warrants and the Series D Preferred Stock.
"Securities Act" means the Securities Act of 1933, as amended, and the
rules and regulations promulgated thereunder.
"Senior Loan Agreement" means that certain Credit Agreement dated as
of May 30, 1997 by and among the Company and various of its Subsidiaries
and LaSalle National Bank, as agent and certain lenders thereunder, as
amended from time to time.
"Senior Loan Documents" means the Senior Loan Agreement and the
documents entered into in connection with or provided for in the Senior
Loan Agreement.
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<PAGE>
"Series D Preferred Stock" means the Series D Redeemable Preferred
stock of the Company, par value $.01 per share with a stated value of
$1,000.00 per share.
"Stockholders Agreement" means that certain Amended and Restated
Stockholders Agreement dated as of July 31, 1995 among the Company and the
Purchasers, as amended by that certain First Amendment to Amended and
Restated Stockholders Agreement, dated as of February 28, 1997 among the
Company and Purchasers and as further amended by that certain Second
Amendment to Amended and Restated Stockholders Agreement of even date
herewith among the Company, Purchaser and the other stockholders of the
Company.
"Subsidiary" means, with respect to any Person, any corporation or
similar entity, a majority of the Capital Stock or other equity of which,
except directors' qualifying shares, shall, at the time as of which any
determination is being made, be owned by such Person either directly or
through Subsidiaries.
"Transaction Documents" has the meaning set forth in Section 3.3
hereof.
"Triggering Event" means (i) a sale, lease or exchange of all or
substantially all of the assets of the Company, (ii) a sale by the
Stockholders of all or substantially all of the outstanding shares of
Common Stock, or (iii) an Initial Public Offering.
"United States" or "U.S." means the United States of America.
"Warrant Certificate" shall have the meaning set forth in Section 1
hereof.
"Warrants" shall have the meaning set forth in Section 1 hereof.
11. MISCELLANEOUS.
-------------
11.1. PAYMENTS.
--------
The Company agrees that, so long as any Purchaser shall hold any
Securities, it will make payments in respect of such Securities, in compliance
with the terms of this Agreement, and the other Transaction Documents, by wire
transfer of immediately available funds for credit to such account or accounts
as such Purchaser may designate in writing.
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<PAGE>
11.2. EXPENSES; INDEMNITY.
-------------------
(a) The Company hereby agrees, whether or not the transactions hereby
contemplated shall be consummated, to pay, and save any holder harmless against
liability for the payment of, the costs and expenses incurred by such holder,
including, without limitation, the reasonable fees and disbursements of counsel
engaged by Heller, EIT and the Individual Investors, in connection with (i) any
subsequent proposed amendment to, modification of, or proposed consent under
(whether or not such proposed modification shall be effected or proposed consent
granted) and (ii) the costs and expenses, including attorney's fees, incurred by
Heller, EIT and the Individual Investors, in enforcing its rights under, any of
this Agreement, the Warrants or the Series D Preferred Stock or in responding to
any subpoena or other legal process issued in connection with this Agreement or
the transactions contemplated hereby or by reason of such Purchaser's having
acquired any Security, including without limitation, costs and expenses incurred
in any bankruptcy case involving the Company or any of its Subsidiaries;
provided, however, that the Company shall not be obligated to pay any costs,
fees or expenses incurred by any holder solely by reason of such holder's gross
negligence or willful misconduct. The obligations of the Company under this
Section 11.2 shall survive the transfer of any Securities or portion thereof or
interest therein by any Purchaser or any subsequent holder of the Securities and
the redemption of the Preferred Shares.
(b) Notwithstanding any investigation performed by any Purchaser
prior to any Closing, the Company shall indemnify, save and hold harmless,
release and discharge each holder of any Securities and all of its officers,
directors, stockholders, agents, representatives, consultants, employees, and
Affiliates, and all of its heirs, successors and permitted assigns from and
against any and all damages, obligations, cases, claims, deficiencies,
penalties, interest, expenses, fines, assessments, charges and costs (including
attorneys' fees and court costs) and other liabilities of any kind, including,
without limitation, environmental liabilities (collectively, "Damages"), arising
from, out of or in any manner connected with or based on (i) notwithstanding any
disclosure in this Agreement (including the exhibits and schedules attached
hereto) or otherwise, the breach of any covenant of the Company or the failure
by the Company to perform any of its obligations contained herein or in any of
the agreements, documents or instruments required to be executed and delivered
by the Company in connection with the transactions contemplated hereby and in
any other Transaction Documents, (ii) any inaccuracy in or breach of any
representation or warranty of the Company under this Agreement or any agreement,
document or instrument required to be executed and delivered by the Company in
connection with the transactions contemplated hereby and in any other
Transaction Documents, (iii) notwithstanding any disclosure in this Agreement
(including the exhibits and schedules attached hereto) or otherwise, any and all
acts, omissions, events, conditions or circumstances involving or related to the
assets, properties, businesses, operations or activities of the Company, any of
its Subsidiaries or any predecessor of any thereof, whether occurring or
existing on, prior to or after
-20-
<PAGE>
the Initial Closing, except if any such Damages arise solely as a result of such
Person's gross negligence or willful misconduct.
11.3. CONSENT TO AMENDMENTS; SUBORDINATION.
-------------------------------------
(a) This Agreement may be amended and the Company may take any action
herein prohibited, or omit to perform any act herein required to be performed by
it, only if the Company shall have obtained the written consent to such
amendment, action or omission to act, of the holders of eighty percent (80%) of
the number of shares of Series D Preferred Stock at the time outstanding, and
each holder of any shares of Series D Preferred Stock at the time or thereafter
outstanding shall be bound by any consent authorized by this Section 11.3. No
course of dealing between the Company and the holder of any share of Series D
Preferred Stock nor any delay in exercising any rights hereunder or under any
share of Series D Preferred Stock shall operate as a waiver of any rights of any
holder of such shares of Series D Preferred Stock.
(b) Once the Preferred Shares have been redeemed in full, this
Agreement may be amended and the Company may take any action herein prohibited,
or omit to perform any act herein required to be performed by it, only if the
Company shall have obtained the written consent to such amendment, action or
omission to act, of the holders of eighty percent (80%) of the then outstanding
Warrants, and each holder of Warrants at the time or thereafter outstanding
shall be bound by any consent authorized by this Section 11.3.
11.4. PERSONS DEEMED OWNERS.
---------------------
Prior to due presentment for registration of transfer, the Company may
treat the Person in whose name any shares of Series D Preferred Stock is
registered as the owner and holder of such shares of Series D Preferred Stock
for the purpose of receiving payment of the liquidation value of, and dividends
on, such shares and for all other purposes whatsoever.
11.5. SURVIVAL OF REPRESENTATIONS AND WARRANTIES; ENTIRE AGREEMENT.
------------------------------------------------------------
All representations and warranties contained herein and under any
other Transaction Documents or made in writing by or on behalf of the Company in
connection herewith or therewith or in connection with the transactions
contemplated hereby or thereby shall survive the execution and delivery of this
Agreement and the Securities, the transfer by any Purchaser of any Securities or
portion thereof or interest therein, or the repurchase or redemption of the
Securities and may be relied upon by any transferee regardless of any
investigation made at any time by or on behalf of such Purchaser; provided,
however, that the representations and warranties set forth in any Transaction
Document shall survive only for such period of time specifically set forth in
such
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<PAGE>
Transaction Document to the extent that a shorter period is set forth therein.
Subject to the preceding sentence, this Agreement, the Securities and the other
Transaction Documents embody the entire agreement and understanding among the
Purchasers and the Company with respect to the subject matter hereof and
supersede all prior agreements and understandings relating to the subject matter
hereof.
11.6. SUCCESSORS AND ASSIGNS.
----------------------
All covenants and other agreements in this Agreement contained by or
on behalf of any of the parties hereto shall bind and inure to the benefit of
the of the parties hereto whether so expressed or not.
11.7. NOTICES.
-------
All written communications provided for hereunder shall be sent by
first class mail or nationwide overnight delivery service (with charges prepaid)
and (a) if to Heller, addressed to it at 500 West Monroe Street, Chicago,
Illinois 60661, Telecopier no.: 312-441-7236, Attention: Renee M. Rempe, with
copies to Goldberg, Kohn, Bell, Black, Rosenbloom & Moritz, Ltd., 55 East Monroe
Street, Suite 3700, Chicago, Illinois 60603, Telecopier No.: 312-332-2196,
Attention: Dennis B. Black, (b) if to EIT, addressed to it at 65 Kingsway,
London, England WC2B 6QT, Telecopier no.: 011-4471-242-1806, Attention: Mr.
Philip Dyke, with a copy to Electra Fleming, Inc., 320 Park Avenue, 28th Floor,
New York, New York 10022, Telecopier No.: 212-319-3069, Attention: Ms. Diane
M. Smith, Senior Vice President, with copies to Pryor, Cashman, Sherman & Flynn,
410 Park Avenue, New York, New York 10022, Telecopier No.: 212-326-0806,
Attention: Selig D. Sacks, Esq., or to such other address or addresses as EIT
shall have specified to the parties hereto in writing, (c) if to any of the
Individual Investors, addressed to such holder at such address as such other
holder shall have specified to the Company in writing or, if any such other
holder shall not have so specified an address to the Company, then addressed to
such other holder in care of the last holder of the Securities issued hereunder
which shall have so specified an address to the Company, and (d) if to the
Company, addressed to it at Career Education Corporation, 2800 West Higgins
Road, Suite 790, Hoffman Estates, Illinois 60195, Telecopier No.: 847-781-3610,
Attention: President, with a copy to: D'Ancona and Pflaum, 30 North LaSalle
Street, Suite 2900, Chicago, Illinois 60602, Telecopier No.: 312-580-0923,
Attention: Michel J. Feldman, Esq., and with a copy to Heller Equity Capital
Corp., 500 West Monroe Street, Chicago, Illinois 60661, Telecopier No.: 312-
441-7236, Attention: Renee M. Rempe, or to such other address or addresses as
the Company may have designated in writing to each holder of the Securities at
the time outstanding.
11.8. DESCRIPTIVE HEADINGS, ETC.
--------------------------
The descriptive headings of the several Sections of this Agreement are
inserted for convenience only and do not constitute a part of this Agreement.
References herein to a Section are, unless otherwise specified, to one of the
Sections of this Agreement
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<PAGE>
and references to an "Exhibit" or "Schedule" are, unless otherwise specified, to
one of the Exhibits or Schedules to this Agreement.
11.9. GOVERNING LAW; CHOICE OF FORUM.
------------------------------
THIS AGREEMENT SHALL BE DEEMED TO HAVE BEEN EXECUTED AND DELIVERED AT
AND SHALL BE DEEMED TO HAVE BEEN MADE IN CHICAGO, ILLINOIS. THIS AGREEMENT, AND
THE RIGHTS AND OBLIGATIONS OF THE PARTIES HEREUNDER SHALL BE CONSTRUED IN
ACCORDANCE WITH AND BE GOVERNED BY THE SUBSTANTIVE LAWS OF THE STATE OF ILLINOIS
(WITHOUT GIVING EFFECT TO ANY CONFLICTS OF LAW RULES OR PRINCIPLES) AND THE
RIGHTS AND OBLIGATIONS OF THE PARTIES WITH RESPECT TO THE SECURITIES SHALL BE
CONSTRUED IN ACCORDANCE WITH AND BE GOVERNED BY THE SUBSTANTIVE LAWS OF THE
STATE OF DELAWARE (WITHOUT GIVING EFFECT TO ANY CONFLICTS OF LAW RULES OR
PRINCIPLES). ANY LEGAL ACTION OR PROCEEDING WITH RESPECT HERETO AND THERETO
SHALL ONLY BE BROUGHT IN THE COURTS OF THE UNITED STATES FOR THE NORTHERN
DISTRICT OF ILLINOIS, AND, BY EXECUTION AND DELIVERY OF THIS AGREEMENT, THE
COMPANY AND EACH PURCHASER HEREBY ACCEPTS FOR ITSELF AND IN RESPECT OF ITS
PROPERTY, GENERALLY AND UNCONDITIONALLY, THE JURISDICTION OF THE AFORESAID
COURTS AND IRREVOCABLY WAIVES ANY DEFENSE OR CLAIM TO SUCH JURISDICTION WHICH
EITHER OR BOTH MAY HAVE BASED, DIRECTLY OR INDIRECTLY, ON THE GROUNDS OF FORUM
NON CONVENIENS. IF ANY ACTION IS COMMENCED IN ANY OTHER JURISDICTION, THE
PARTIES HERETO HEREBY CONSENT TO THE REMOVAL OF SUCH ACTION TO THE NORTHERN
DISTRICT OF ILLINOIS. THE COMPANY HEREBY IRREVOCABLY DESIGNATES CT CORPORATION
SYSTEM, AS THE DESIGNEE, APPOINTEE AND AGENT, OF THE COMPANY TO RECEIVE, FOR AND
ON BEHALF OF THE COMPANY, SERVICE OF PROCESS IN SUCH RESPECTIVE JURISDICTIONS IN
ANY LEGAL ACTION OR PROCEEDING WITH RESPECT TO THIS AGREEMENT OR THE RIGHTS AND
OBLIGATIONS HEREUNDER OR THEREUNDER OR WITH RESPECT TO THE SECURITIES AND SUCH
SERVICE SHALL BE DEEMED COMPLETED UPON DELIVERY THEREOF TO SUCH AGENT. IT IS
UNDERSTOOD THAT A COPY OF SUCH PROCESS SERVED ON SUCH AGENT WILL BE PROMPTLY
FORWARDED BY MAIL TO THE COMPANY AT ITS ADDRESS SET FORTH IN SECTION 11.7, BUT
THE FAILURE OF THE COMPANY TO RECEIVE SUCH COPY SHALL NOT AFFECT IN ANY WAY THE
SERVICE OF SUCH PROCESS. THE COMPANY FURTHER IRREVOCABLY CONSENTS TO THE
SERVICE OF PROCESS OUT OF ANY OF THE AFOREMENTIONED COURTS IN ANY SUCH ACTION OR
PROCEEDING BY THE MAILING OF COPIES THEREOF BY REGISTERED OR CERTIFIED MAIL,
POSTAGE PREPAID, TO THE COMPANY AT ITS ADDRESS, SUCH SERVICE TO BECOME EFFECTIVE
THIRTY (30) DAYS AFTER SUCH MAILING. NOTHING HEREIN SHALL AFFECT THE RIGHT OF
ANY PURCHASER, OR ANY OTHER HOLDER OF ANY OF THE SECURITIES TO SERVE
-23-
<PAGE>
PROCESS IN ANY OTHER MANNER PERMITTED BY LAW OR COMMENCE LEGAL PROCEEDINGS OR
OTHERWISE PROCEED AGAINST THE COMPANY IN ANY OTHER JURISDICTION.
11.10. WAIVER OF JURY TRIAL.
--------------------
THE COMPANY AND EACH PURCHASER HEREBY WAIVE THEIR RESPECTIVE RIGHTS TO
A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF THIS
AGREEMENT OR ANY DEALINGS BETWEEN THEM RELATING TO THE SUBJECT MATTER OF THIS
AGREEMENT AND THE TRANSACTIONS CONTEMPLATED HEREBY AND THE RELATIONSHIP THAT IS
BEING ESTABLISHED HEREUNDER. THE COMPANY AND EACH PURCHASER ALSO WAIVE ANY BOND
OR SURETY OR SECURITY UPON SUCH BOND WHICH MIGHT, BUT FOR THIS WAIVER, BE
REQUIRED OF THE OTHER PARTIES. THE SCOPE OF THIS WAIVER IS INTENDED TO BE ALL
ENCOMPASSING OF ANY AND ALL DISPUTES THAT MAY BE FILED IN ANY COURT AND THAT
RELATE TO THE SUBJECT MATTER OF THIS AGREEMENT, INCLUDING, WITHOUT LIMITATION,
CONTRACT CLAIMS, TORT CLAIMS, BREACH OF DUTY CLAIMS, AND ALL OTHER COMMON LAW
AND STATUTORY CLAIMS. THE COMPANY AND EACH PURCHASER ACKNOWLEDGE THAT THIS
WAIVER IS A MATERIAL INDUCEMENT TO ENTER INTO A BUSINESS RELATIONSHIP, THAT EACH
HAS ALREADY RELIED ON THE WAIVER IN ENTERING INTO THIS AGREEMENT AND THAT EACH
WILL CONTINUE TO RELY ON THE WAIVER IN THEIR RELATED FUTURE DEALINGS. THE
COMPANY AND EACH PURCHASER FURTHER WARRANT AND REPRESENT THAT EACH HAS REVIEWED
THIS WAIVER WITH ITS LEGAL COUNSEL, AND THAT EACH KNOWINGLY AND VOLUNTARILY
WAIVES ITS JURY TRIAL RIGHTS FOLLOWING CONSULTATION WITH LEGAL COUNSEL. THIS
WAIVER IS IRREVOCABLE, MEANING THAT IT MAY NOT BE MODIFIED EITHER ORALLY OR IN
WRITING, AND THE WAIVER SHALL APPLY TO ANY SUBSEQUENT AMENDMENTS, RENEWALS,
SUPPLEMENTS OR MODIFICATIONS TO THIS AGREEMENT OR TO ANY OTHER DOCUMENTS OR
AGREEMENTS RELATING TO THE TRANSACTIONS CONTEMPLATED HEREBY. IN THE EVENT OF
LITIGATION, THIS AGREEMENT MAY BE FILED AS A WRITTEN CONSENT TO A TRIAL BY THE
COURT.
11.11. ISSUANCE OF SECURITIES TO KLETTKE.
---------------------------------
The Company and Klettke hereby agree that upon Klettke's prior written
request, any Securities to be issued to Klettke pursuant to this Agreement may
be issued to First Chicago, Custodian, William A. Klettke IRA (the "Klettke
IRA"); provided, that the issuance of such Securities to the Klettke IRA would
not result in a breach of the representations and warranties of Klettke in
Section 9 hereof if such representations and warranties were made by the Klettke
IRA. Klettke hereby represents and warrants that he is the sole beneficiary of
the Klettke IRA with power of direction, and agrees that, in the
-24-
<PAGE>
event of the issuance of any Securities to the Klettke IRA, he will cause the
Klettke IRA to be bound by the terms of this Agreement, the Stockholders
Agreement and all other agreements governing the rights of the Company's
stockholders to which Klettke is a party. Furthermore, Klettke hereby agrees to
execute and deliver, or to cause the Klettke IRA to execute and deliver, such
other documents as the Company may reasonably require in connection with any
issuance of Securities to the Klettke IRA.
[Signature page follows.]
-25-
<PAGE>
IN WITNESS WHEREOF, the Company and each Purchaser have caused this
Agreement to be executed by its duly authorized officer as of the date first
above written.
CAREER EDUCATION CORPORATION
By /s/ JOHN M. LARSON
----------------------------
Name John M. Larson
---------------------------
Title CEO
--------------------------
HELLER EQUITY CAPITAL CORPORATION
By /s/ RENEE M. REMPE
----------------------------
Name Renee M. Rempe
---------------------------
Title Vice President
--------------------------
ELECTRA INVESTMENT TRUST P.L.C.
By /s/ A.M. VINTON
----------------------------
Name A.M. Vinton
---------------------------
Title Authorized Signatory
--------------------------
/s/ WILLIAM A. KLETTKE
--------------------------------
William A. Klettke
<PAGE>
EXHIBIT 10.20
-------------
FORM OF WARRANT CERTIFICATE
THESE WARRANTS AND ANY SHARES ACQUIRED UPON THE EXERCISE HEREOF HAVE
NOT BEEN REGISTERED UNDER THE UNITED STATES SECURITIES ACT OF 1993, AS AMENDED,
OR UNDER ANY APPLICABLE STATE SECURITIES LAWS. THESE WARRANTS AND SUCH SHARES
AND ANY INTEREST OR PARTICIPATION HEREIN OR THEREIN MAY NOT BE SOLD OR
TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR AN EXEMPTION THEREFROM UNDER
SUCH ACT AND UNDER ANY APPLICABLE STATE SECURITIES LAWS. THESE WARRANTS AND
SUCH SHARES MAY NOT BE TRANSFERRED EXCEPT UPON THE CONDITIONS SPECIFIED IN THIS
WARRANT CERTIFICATE, AND NO TRANSFER OF THESE WARRANTS OR SUCH SHARES SHALL BE
VALID OR EFFECTIVE UNLESS AND UNTIL SUCH CONDITIONS SHALL HAVE BEEN COMPLIED
WITH.
THESE WARRANTS AND ANY SHARES ACQUIRED UPON THE EXERCISE HEREOF ARE
SUBJECT TO RESTRICTIONS ON TRANSFER AND MAY NOT BE SOLD, EXCHANGED, TRANSFERRED,
PLEDGED, HYPOTHECATED OR OTHERWISE DISPOSED OF EXCEPT IN ACCORDANCE WITH AND
SUBJECT TO ALL THE TERMS AND CONDITIONS OF A CERTAIN AMENDED AND RESTATED
STOCKHOLDERS AGREEMENT, DATED AS OF JULY 31, 1995, AMONG CAREER EDUCATION
CORPORATION AND ITS STOCKHOLDERS, AS AMENDED BY THAT CERTAIN FIRST AMENDMENT TO
STOCKHOLDERS AGREEMENT DATED AS OF THE DATE HEREOF (THE "STOCKHOLDERS
AGREEMENT"), COPIES OF WHICH THE COMPANY WILL FURNISH TO THE HOLDER OF THESE
WARRANTS UPON REQUEST AND WITHOUT CHARGE.
WARRANT CERTIFICATE
To Purchase Shares of Class E Common Stock of
CAREER EDUCATION CORPORATION
No. __ _____ Warrants
THIS CERTIFIES THAT, for good and valuable consideration, the receipt
and sufficiency of which is hereby acknowledged, [NAME, ADDRESS]
________________________ (the "HOLDER"), is the registered owner of the number
of Warrants specified above, each of which Warrants entitles the holder hereof,
subject to the adjustment provisions and the conditions and limitations
hereinafter set forth, to purchase from CAREER EDUCATION CORPORATION (the
"COMPANY"), a corporation organized and existing under the laws of the State of
Delaware, one share of the Company's
<PAGE>
Class E Common Stock, par value $.01 per share (the "CLASS E COMMON STOCK"), at
a purchase price of $.01 per share (the "EXERCISE PRICE"). The Warrants shall
not be terminable by the Company prior to the Expiration Date. The shares of
Class E Common Stock issuable upon exercise of the Warrants (and any other or
additional shares, securities or property that may hereafter be issuable upon
exercise of the Warrants) are sometimes referred to herein as the "WARRANT
SHARES," and the maximum number of shares so issuable under this Warrant
Certificate is sometimes referred to as the "AGGREGATE NUMBER" (as such number
may be increased or decreased, as more fully set forth herein).
The Warrants shall be void and all rights represented hereby shall
cease on the Expiration Date (as defined in Section 10 hereof).
The Warrants represented hereby are part of an authorized issue of
Eight Thousand Nine Hundred Twenty-Four (8,924) Warrants to purchase Class E
Common Stock of the Company, Warrant Certificates for Two Thousand Three Hundred
Eighty (2,380) of which were originally issued on the date hereof (such
originally issued Warrants, or such number thereof as shall from time to time
remain unexercised, together with all subsequently issued Warrants (as may be
issued from time to time in accordance with the provisions of Section 4 of the
Securities Purchase Agreement (as defined below)), or such number of such
subsequently issued Warrants as shall from time to time remain unexercised,
being herein collectively called the "WARRANTS"). Two Thousand Three Hundred
Eighty (2,380) of the Warrants are being issued concurrently with the issuance
by the Company of Two Thousand (2,000) shares of its Series D Preferred Stock
pursuant to a Securities Purchase Agreement dated as of the date hereof among
the Company and various Purchasers (as defined therein) (the "SECURITIES
PURCHASE AGREEMENT").
Certain terms used in this Warrant Certificate are defined in Section
10 hereof.
The Warrants are subject to the following provisions, terms and
conditions:
1. Exercise; Issue of Certificates; Payment for Shares.
---------------------------------------------------
(a) The rights represented by this Warrant Certificate may be
exercised by the holder hereof, in whole or in part (but not as to fractional
shares of Class E Common Stock), to purchase a total number of shares equal to
________ shares (subject to the adjustments described in Section 5 hereof).
(b) The Warrants shall be exercisable by surrendering this Warrant
Certificate (with the Exercise Form annexed hereto as Schedule 1 properly
----------
completed and executed) to the Company at its principal office specified in
Section 15, or its then current address, and upon payment to the Company of the
Exercise Price for the Warrant Shares being purchased.
(c) Payment of the Exercise Price may be made, in the sole discretion
of the holder, in the form of any of the following: (i) cash, (ii) a check or
bank draft in New
-2-
<PAGE>
York Clearing House funds, or (iii) by the surrender of a portion of the
Warrants other than that which is then being exercised. For purposes of making
payment of the Exercise Price in accordance with the foregoing clause (iii), the
portion of any Warrants being surrendered shall be deemed to have a value as
determined by a good faith determination of the Board of Directors of the
Company. The shares so purchased shall be and shall be deemed to be issued to
the holder hereof as the record owner of such shares as of the close of business
on the date on which this Warrant Certificate shall have been surrendered and
payment made for such shares as aforesaid.
(d) Certificates for the shares so purchased shall be delivered to
the holder hereof within a reasonable time, not exceeding 10 days, after this
Warrant Certificate shall have been so exercised, and unless the Warrants have
expired, a new Warrant Certificate representing the number of shares, if any,
with respect to which this Warrant Certificate shall not then have been
exercised or tendered as payment of the Exercise Price as provided in subsection
1(c)(iii) above shall also be delivered to the holder hereof within such time.
Such certificate or certificates shall be deemed to have been issued and any
Person properly so designated to be named therein shall be deemed for all
purposes to have become a holder of record of such Warrant Shares as of the
close of business on the date of the surrender of this Warrant Certificate and
payment of the Exercise Price as aforesaid.
(e) Mandatory Exercise Upon Threshold Public Offering. Concurrently
-------------------------------------------------
with the consummation of a Threshold Public Offering, if the then issued and
outstanding shares of Series D Preferred Stock shall have been redeemed in full
prior to the Threshold Public Offering or if the shares of Series D Preferred
Stock will be paid in full upon the consummation of the Threshold Public
Offering, the holder of this Warrant shall be required to exercise this Warrant.
2. Shares to be Fully Paid; Reservation of Shares; Listing. The
-------------------------------------------------------
Company covenants and agrees that: (a) all Warrant Shares will, upon issuance,
be original-issue shares (and not treasury stock) fully paid and nonassessable
and free from all taxes, claims, liens, charges and other encumbrances with
respect to the issue thereof; (b) without limiting the generality of the
foregoing, it will from time to time take all such action as may be required to
assure that the par value per share of Class E Common Stock shall at all times
be less than or equal to the Exercise Price; (c) during the period within which
the rights represented by this Warrant Certificate may be exercised, the Company
will at all times have authorized and reserved for the purpose of issue or
transfer upon exercise of the Warrants a sufficient number of original-issue
shares of its Class E Common Stock to provide for the exercise of all the
Warrants; (d) upon the exercise of the Warrants represented by this Warrant
Certificate, it will, at its expense, promptly notify each securities exchange
on which any Class E Common Stock is at the time listed of such issuance, and
maintain a listing of all shares of Class E Common Stock from time to time
issuable upon the exercise of the Warrants to the extent such shares can be
listed.
3. Representations and Warranties. All representations, warranties
------------------------------
and covenants contained in Article 8 of the Securities Purchase Agreement are
true and correct as
-3-
<PAGE>
of the date of the Closing (as defined in the Securities Purchase Agreement) and
are incorporated herein as if made by the Company to the holders from time to
time of the Warrants.
4. [INTENTIONALLY OMITTED].
5. Adjustments to Aggregate Number/Distributions. Under certain
---------------------------------------------
conditions, the Aggregate Number is subject to adjustment as set forth herein.
The Aggregate Number shall be subject to adjustment from time to
time as follows and thereafter as adjusted shall be deemed to be the Aggregate
Number hereunder. For purposes of this Section 5, Warrants as may be issued from
---------
time to time in accordance with the provisions of Section 4 of the Securities
---------
Purchase Agreement which have not yet been issued at the time of any application
of this Section 5 shall be treated as previously issued for purposes of
---------
calculation of adjustments to the Aggregate Number and all other adjustments and
Distributions (defined below) pursuant to this Section 5, and upon issuance
---------
thereof, the holder of any such Warrants shall be entitled to receive the
benefit of all such adjustments to the Aggregate Number and all such other
adjustments and Distributions as if such Warrants had been issued prior thereto.
(a) In case at any time or from time to time the Company shall:
(i) take a record of the holders of its Common Stock for the
purpose of entitling them to receive a dividend payable in, or other
distribution of, Common Stock or Convertible Securities, or
(ii) subdivide its outstanding shares of Common Stock into a larger
number of shares of Common Stock or Convertible Securities, or
(iii) combine its outstanding shares of Common Stock or Convertible
Securities into a smaller number of shares of Common Stock or Convertible
Securities, respectively, or
(iv) change the class or classes of stock of the Warrant Shares that
are issuable upon a Recapitalization or otherwise, or
(v) consummate a Non-Surviving Combination,
then the Aggregate Number in effect immediately prior thereto shall be adjusted
so that the holder or holders of Warrants shall thereafter be entitled to
receive, upon exercise thereof, the number of shares of Class E Common Stock or
shares of other stock, securities or property that such holder or holders of
Class E Common Stock would have owned or have been entitled to receive after the
occurrence of such Recapitalization, Non-Surviving Combination or other event
had such Warrants been exercised immediately prior to the occurrence of such
event.
-4-
<PAGE>
(b) In case at any time or from time to time the Company shall take
a record of the holders of its Common Stock for the purpose of entitling them to
receive any dividend or other distribution (collectively, a "DISTRIBUTION") of:
(i) cash, or
(ii) any evidences of its indebtedness (other than Convertible
Securities), any shares of its Capital Stock (other than additional shares
of Common Stock or Convertible Securities) or any other securities or
property of any nature whatsoever (other than cash), or
(iii) any options or warrants or other rights to subscribe for or
purchase any of the following: any evidences of its indebtedness (other
than Convertible Securities), any shares of its Capital Stock (other than
additional shares of Common Stock or Convertible Securities) or any other
securities or property of any nature whatsoever,
then the holder or holders of Warrants shall be entitled to receive upon the
exercise thereof at any time on or after the taking of such record the number of
shares of Common Stock to be received upon exercise of such Warrants determined
as stated herein and, in addition and without further payment, the cash
(including interest at a rate equal to the T-bill rate in effect from time to
time from the date such cash was paid to the other stockholders through the date
of payment to the holders of the Warrants), stock, securities, other property,
options, warrants and/or other rights to which such holder or holders would have
been entitled by way of the Distribution and subsequent dividends and
distributions if such holder or holders (A) had exercised such Warrants
immediately prior to such Distribution, and (B) had retained the Distribution in
respect of the Class E Common Stock and all subsequent dividends and
distributions of any nature whatsoever in respect of any stock or securities
paid as dividends and distributions and originating directly or indirectly from
such Class E Common Stock. A reclassification of the Class E Common Stock into
shares of Common Stock and shares of any other class of stock shall be deemed a
distribution by the Company to the holders of its Common Stock of such shares of
such other class of stock within the meaning of this subsection 5(b) and, if the
outstanding shares of Common Stock shall be changed into a larger or smaller
number of shares of Common Stock as a part of such reclassification, such event
shall be deemed a subdivision or combination, as the case may be, of the
outstanding shares of Common Stock within the meaning of subsection 5(a).
(c) In case at any time or from time to time prior to a Threshold
Public Offering the Company shall issue or sell any additional shares of Common
Stock or securities at a price per share which is less than the fair market
value per share of Common Stock as determined in good faith by the Board of
Directors of the Company, then the Aggregate Number then in effect shall be
adjusted immediately so that the Aggregate Number thereafter shall be an amount
equal to the product of (1) the fraction, (A) the numerator of which is the
Prior Outstanding Number plus the difference between (x) the number of shares of
----
Common
-5-
<PAGE>
Stock actually issued or sold in such transaction and (y) the number of
shares of Common Stock which the aggregate consideration received by the Company
for all such shares of Common Stock issued or sold in such transaction would
purchase at the fair market value in effect immediately prior to the issuance or
sale of such additional shares of Common Stock, and (B) the denominator of which
shall be the Prior Outstanding Number, and (2) the Aggregate Number immediately
prior to such issuance or sale.
The provisions of this subsection 5(c) shall not apply to any issuance of
additional shares of Common Stock for which an adjustment is provided under
subsection 5(a).
(d) In case at any time or from time to time prior to a Threshold
Public Offering the Company shall (except as hereinafter provided) take a record
of the holders of its Common Stock for the purpose of entitling them to receive
a distribution of, or shall in any manner issue or sell, any warrants or other
rights to subscribe for or purchase (i) any shares of Common Stock or (ii) any
Convertible Securities, whether or not the rights to subscribe, purchase,
exchange or convert thereunder are immediately exerciseable, at a purchase price
per share of Common Stock which is less than the fair market value per share of
Common Stock as determined in good faith by the Board of Directors of the
Company, then the Aggregate Number then in effect shall be adjusted immediately
so that the Aggregate Number thereafter shall be an amount equal to the product
of (1) the fraction, (A) the numerator of which is the Prior Outstanding Number
plus the difference between (x) the number of shares of Common Stock issuable
- ----
upon exercise of such rights or upon exercise or conversion of such Convertible
Securities issuable upon exercise of the warrants or other rights actually
issued or sold in such transaction and (y) the number of shares of Common Stock
which the aggregate consideration received by the Company for all warrants or
other rights issued or sold in such transaction, and/or receivable by the
Company upon exercise of such warrants or other rights and/or upon exercise or
conversion of the Convertible Securities issuable upon exercise of such warrants
or other rights, would purchase at the fair market value in effect immediately
prior to the issuance or sale of such warrants or other rights, and (B) the
denominator of which shall be the Prior Outstanding Number, and (2) the
Aggregate Number immediately prior to such issuance or sale.
The provisions of this subsection 5(d) shall not apply to any issuance
of additional shares of Common Stock for which an adjustment is provided under
subsection 5(a).
(e) In case at any time or from time to time prior to a Threshold
Public Offering the Company shall take a record of the holders of its Common
Stock for the purpose of entitling them to receive a distribution of, or shall
in any manner issue or sell, Convertible Securities, whether or not the rights
to exchange or convert thereunder are immediately exercisable, at an exercise
price per share of Common Stock which is less than the fair market value per
share of Common Stock as determined in good faith by the Board of Directors of
the Company, then the Aggregate Number then in effect shall be adjusted
immediately so that the Aggregate Number thereafter shall be an amount equal to
the product of (1) the fraction, (A) the numerator of which is the Prior
Outstanding Number plus the
----
-6-
<PAGE>
difference between (x) the number of shares of Common Stock issuable upon
exercise or conversion of such Convertible Securities actually issued or sold in
such transaction and (y) the number of shares of Common Stock which the
aggregate consideration received by the Company for all such Convertible
Securities issued or sold in such transaction and/or receivable by the Company
upon exercise or conversion of such Convertible Securities would purchase at the
fair market value in effect immediately prior to the issuance or sale of such
Convertible Securities, and (B) the denominator of which shall be the Prior
Outstanding Number, and (2) the Aggregate Number immediately prior to such
issuance or sale.
No adjustment of the Aggregate Number shall be made under this subsection 5(e)
upon the issuance of any Convertible Securities which are issued pursuant to the
exercise of any warrants or other subscription or purchase rights if an
adjustment shall previously have been made.
(f) The following provisions shall be applicable to the making of
adjustments of the Aggregate Number hereinbefore provided for in this Section 5:
(i) The sale or other disposition of any issued shares of Common
Stock owned or held by or for the account of the Company shall be deemed an
issuance thereof for the purposes of this Section 5.
(ii) The adjustments required by the preceding paragraphs of this
Section 5 shall be made whenever and as often as any specified event
requiring an adjustment shall occur, except as expressly provided herein.
For the purpose of any adjustment, any specified event shall be deemed to
have occurred at the close of business on the date of its occurrence.
(iii) In computing adjustments under this Section 5 fractional
interests in Common Stock shall be taken into account to the nearest one-
thousandth (.001) of a share and shall be aggregated until they equal one
whole share.
(iv) If the Company shall take a record of the holders of its Common
Stock for the purpose of entitling them to receive a dividend,
distribution, warrants or subscription or purchase rights under subsections
5(a) through 5(e) hereof, but abandon its plan to pay or deliver such
dividend, distribution, warrants, subscription or purchase rights, then no
adjustment shall be required by reason of the taking of such record and any
such adjustment previously made in respect thereof shall be rescinded and
annulled.
(v) Notwithstanding anything herein to the contrary, no adjustment
shall be made to the Aggregate Number as a result of the issuance of the
securities pursuant to the Management Option Plan (as defined in the
Securities Purchase Agreement) or the issuance of the options to acquire
securities pursuant to the Management Option Plan.
-7-
<PAGE>
(vi) The consideration for any additional shares of Common Stock
issuable pursuant to any options, warrants or other rights to subscribe for
or purchase the same shall be the consideration received or receivable by
the Company for issuing such options, warrants or other rights, plus the
additional consideration payable to the Company upon the exercise of such
options, warrants or other rights. The consideration for any additional
shares of Common Stock issuable pursuant to the terms of any Convertible
Securities shall be the consideration received or receivable by the Company
for issuing any options, warrants or other rights to subscribe for or
purchase such Convertible Securities, plus the consideration paid or
payable to the Company in respect of the subscription for or purchase of
such Convertible Securities, plus the additional consideration, if any,
payable to the Company upon the exercise of the right of conversion,
exercise or exchange of such Convertible Securities. In case of the
issuance at any time of any additional shares of Common Stock or
Convertible Securities in payment or satisfaction of any dividend upon any
class of stock other than Common Stock, the Company shall be deemed to have
received for such additional shares of Common Stock or Convertible
Securities a consideration equal to the amount of such dividend so paid or
satisfied.
(vii) Upon the expiration or termination of any of the warrants or
other rights or options referred to in subsection 5(d) above or the
Convertible Securities referred to in Section 5(e) above, the Aggregate
Number after the expiration or termination of any such warrants, rights,
options or Convertible Securities, the issuance of which caused an
adjustment to the Aggregate Number, shall be readjusted to such Aggregate
Number as would have been obtained had the adjustment made upon the
issuance of such warrants, rights, options or Convertible Securities, been
made upon the basis of the issuance of only the number of shares of Common
Stock actually issued upon the exercise of such warrants, options or
rights, upon the conversion or exchange of such securities or upon the
exercise of the options or rights related to such securities and subsequent
conversion or exchange thereof.
(viii) For the purposes of such subsections 5(c), 5(d) and 5(e), the
determination of fair market value shall be made by the Board of Directors
of the Company, with a majority of independent directors voting in favor
thereof; provided that, for purposes hereof no director who is an
--------
Affiliate of a Significant Holder or a stockholder of the Company shall be
deemed to be independent. If a determination of fair market value cannot be
agreed upon as aforesaid, the fair market value shall be determined in
accordance with the procedure described in subsection 4.1(b)(ii)(C) of the
form of Warrant Certificate attached as Exhibit 1B to the Electra
Securities Agreement (as defined in the Securities Purchase Agreement),
with appropriate adjustments to reflect the issuance of Warrants pursuant
to the Securities Purchase Agreement and without regard to references to
"Puts" included therein. In addition, for
-8-
<PAGE>
purposes of subsections 5(c), 5(d) and 5(e) hereof, the date as of which
the applicable fair market value per share shall be computed shall be as
close to the date of actual issuance of such additional shares of Common
Stock, warrants or Convertible Securities, as practical.
(g) (i) If any event occurs as to which the other provisions of this
Section 5 are not strictly applicable but the lack of any provision for the
exercise of the rights of a holder or holders of Warrants would not fairly
protect the purchase rights of such holder or holders of Warrants in accordance
with the essential intent and principles of such provisions, or, if strictly
applicable, would not fairly protect the conversion rights of the holder or
holders of Warrants in accordance with the essential intent and principles of
such provisions, then the Company shall appoint a firm of independent certified
public accountants in the United States (which may be the regular auditors of
the Company) of recognized national standing in the United States reasonably
satisfactory to the Institutional Investors (as defined in the Securities
Purchase Agreement), which shall give their opinion as to the adjustments, if
any, necessary to preserve, without dilution, on a basis consistent with the
essential intent and principles established in the other provisions of this
Section 5, the exercise rights of the holders of Warrants. Upon receipt of such
opinion, the Company shall forthwith make the adjustments described therein.
(ii) In the case of a Non-Surviving Combination or Recapitalization
contemplated by subsection 5(a) hereof, appropriate adjustments (as determined
in good faith by the Board of Directors) shall be made in the application of the
provisions in this Section 5 with respect to the rights and interests thereafter
of the holders of the Warrant, to the end that the provisions of this Section 5
shall thereafter be applicable, as nearly as reasonable, in relation to any
shares of stock, securities or other property thereafter deliverable upon
exercise of the Warrant.
(h) Within 45 days after the end of each fiscal quarter during which
an event occurred that resulted in an adjustment pursuant to this Section 5, and
at any time upon the request of any holder of Warrants, the Company shall cause
to be promptly mailed to each holder of Warrants by first-class mail, postage
prepaid, notice of each adjustment or adjustments to the Aggregate Number
effected since the date of the last such notice and a certificate of the
Company's Chief Financial Officer or, in the case of any such notice delivered
within 45 days after the end of a fiscal year, a firm of independent public
accountants in the United States selected by the Company and reasonably
acceptable to the Institutional Investors (as defined in the Securities Purchase
Agreement) (who may be the regular accountants employed by the Company), in each
case, setting forth the Aggregate Number after such adjustment, a brief
statement of the facts requiring such adjustment and the computation by which
such adjustment was made. The fees and expenses of such accountants shall be
paid by the Company.
(i) The occurrence of a single event shall not trigger an adjustment
of the Aggregate Number under more than one paragraph of this Section 5.
-9-
<PAGE>
6. Taxes on Conversion. The issuance of certificates for Warrant
-------------------
Shares upon the exercise of the Warrants shall be made without charge to the
holder exercising any such Warrant for any issue or stamp tax in respect of the
issuance of such certificates, and such certificates shall be issued in the
respective names of, or in such names as may be properly directed by, the
holder; provided, however, that the Company shall not be required to pay any tax
-------- -------
that may be payable in respect of any transfer involved in the issuance and
delivery of any such certificate in a name other than that of the holder, and
the Company shall not be required to issue or deliver such certificates unless
or until the Person or Persons requesting the issuance thereof shall have paid
to the Company the amount of such tax or shall have established to the
satisfaction of the Company that such tax has been paid.
7. Limitation of Liability. No provision hereof in the absence of
-----------------------
the exercise of the Warrants by the holder and no enumeration herein of the
rights or privileges of the holder shall give rise to any liability on the part
of the holder for the Exercise Price of the Warrant Shares or as a stockholder
of the Company, whether such liability is asserted by the Company or by any
creditor of the Company.
8. Closing of Books. The Company will at no time close its transfer
----------------
books against the transfer of any Warrant or of any shares of Common Stock
issued or issuable upon the exercise of any Warrant in any manner that
interferes with the timely exercise of the Warrants. The Company shall deem and
treat the registered holder of this Warrant as the absolute owner thereof for
all purposes, including without limitation for the purpose of exercise thereof.
The Company agrees that, upon exercise of this Warrant in accordance with the
terms hereof (including receipt by the Company of payment of the aggregate
Exercise Price), the shares so purchased shall be deemed to be issued to such
holder as the record owner of such shares as of the close of business on the
date on which this Warrant shall have been exercised and the holder of this
Warrant shall be deemed for all purposes a stockholder of the Company with
respect to such shares as though the certificate for such shares had been issued
on the date of such exercise.
9. Restrictions on Transfer.
------------------------
(a) Transfer in Accordance with Securities Laws; Restrictive
--------------------------------------------------------
Legends. Any transfer of these Warrants or any Warrant Shares may only be made
- --------
in compliance with the Securities Act and applicable state securities laws or
pursuant to an exemption therefrom and any transferee shall acquire the Warrants
and/or Warrant Shares subject to all of the terms and conditions of this Warrant
Certificate. Each certificate for any Warrant Shares issued upon the exercise of
any Warrant, and each stock certificate issued upon the transfer of any such
Warrant Shares (except as otherwise permitted by this Section 9) shall be
stamped or otherwise imprinted with legends in substantially the following form:
THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE UNITED STATES SECURITIES ACT OF 1933, AS AMENDED, OR UNDER ANY
APPLICABLE STATE SECURITIES LAWS. SUCH SHARES MAY NOT BE SOLD OR
-10-
<PAGE>
TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR ANY EXEMPTION
THEREFROM UNDER SUCH ACT AND UNDER ANY APPLICABLE STATE SECURITIES
LAWS. THESE SHARES MAY NOT BE TRANSFERRED EXCEPT UPON THE CONDITIONS
SPECIFIED IN THAT CERTAIN WARRANT CERTIFICATE DATED _____________
PURSUANT TO WHICH SUCH SHARES WERE ORIGINALLY ISSUED, AND NO TRANSFER
OF THESE SHARES SHALL BE VALID OR EFFECTIVE UNLESS AND UNTIL SUCH
CONDITIONS SHALL HAVE BEEN COMPLETED WITH.
THESE SHARES ARE SUBJECT TO RESTRICTIONS ON TRANSFER AND MAY NOT
BE SOLD, EXCHANGED, TRANSFERRED, PLEDGED, HYPOTHECATED OR OTHERWISE
DISPOSED OF EXCEPT IN ACCORDANCE WITH AND SUBJECT TO ALL THE TERMS AND
CONDITIONS OF A CERTAIN AMENDED AND RESTATED STOCKHOLDERS AGREEMENT,
DATED AS OF JULY 31, 1995, AMONG CAREER EDUCATION CORPORATION AND ITS
STOCKHOLDERS, AS AMENDED BY THAT CERTAIN FIRST AMENDMENT TO
STOCKHOLDERS AGREEMENT DATED AS OF ________________ (THE "STOCKHOLDERS
AGREEMENT"), COPIES OF WHICH THE COMPANY WILL FURNISH TO THE HOLDER OF
THIS CERTIFICATE UPON REQUEST AND WITHOUT CHARGE.
Each Warrant Certificate issued in substitution for any Warrant
Certificate pursuant to Section 11, 12, or 13 hereof and each Warrant
Certificate issued upon the transfer of any Warrant (except as otherwise
permitted by this Section 9) shall be stamped or otherwise imprinted with a
legend in substantially the following form:
THESE WARRANTS AND ANY SHARES ACQUIRED UPON THE EXERCISE HEREOF
HAVE NOT BEEN REGISTERED UNDER THE UNITED STATES SECURITIES ACT OF
1933, AS AMENDED, OR UNDER ANY APPLICABLE STATE SECURITIES LAWS. THESE
WARRANTS AND SUCH SHARES AND ANY INTEREST OR PARTICIPATION THEREIN MAY
NOT BE SOLD OR TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR AN
EXEMPTION THEREFROM UNDER SUCH ACT AND UNDER ANY APPLICABLE STATE
SECURITIES LAWS. THESE WARRANTS AND SUCH SHARES MAY NOT BE TRANSFERRED
EXCEPT UPON THE CONDITIONS SPECIFIED IN THIS WARRANT CERTIFICATE, AND
NO TRANSFER OF THESE WARRANTS OR SUCH SHARES SHALL BE VALID OR
EFFECTIVE UNLESS AND UNTIL SUCH CONDITIONS SHALL HAVE BEEN COMPLIED
WITH.
THESE WARRANTS AND ANY SHARES ACQUIRED UPON THE EXERCISE HEREOF
ARE SUBJECT TO RESTRICTIONS ON TRANSFER
-11-
<PAGE>
AND MAY NOT BE SOLD, EXCHANGED, TRANSFERRED, PLEDGED, HYPOTHECATED OR
OTHERWISE DISPOSED OF EXCEPT IN ACCORDANCE WITH AND SUBJECT TO ALL THE
TERMS AND CONDITIONS OF A CERTAIN AMENDED AND RESTATED STOCKHOLDERS
AGREEMENT, DATED AS OF JULY 31, 1995, AMONG CAREER EDUCATION
CORPORATION AND ITS STOCKHOLDERS, AS AMENDED BY THAT CERTAIN FIRST
AMENDMENT TO STOCKHOLDERS AGREEMENT DATED AS OF ______________ (THE
"STOCKHOLDERS AGREEMENT"), COPIES OF WHICH THE COMPANY WILL FURNISH TO
THE HOLDER OF THIS CERTIFICATE UPON REQUEST AND WITHOUT CHARGE.
(b) Termination of Restrictions. The restrictions imposed by this
---------------------------
Section 9 upon the transferability of Warrants and Warrant Shares shall cease
and terminate as to any particular Warrants or Warrant Shares, (i) when such
securities shall have been effectively registered under the Securities Act and
disposed of in accordance with the registration statement covering such
securities, or (ii) when in the reasonable opinion of counsel for the Company or
upon the written opinion of counsel for the holder thereof reasonably acceptable
to the Company such restrictions are no longer required in order to comply with
the Securities Act. Whenever such restrictions shall terminate as to any
Warrants or Warrant Shares, the holder thereof shall be entitled to receive from
the Company, without expense, new certificates of like tenor not bearing the
restrictive legends set forth in subsection 9(a).
10. Definitions. as used in this Warrant Certificate, unless the
-----------
context otherwise requires, the following terms have the following respective
meanings:
Aggregate Number: as set forth in the preamble of this Warrant
----------------
Certificate and as may be adjusted pursuant to Section 5.
Capital Stock: shall mean any and all shares, interests, rights to
-------------
purchase, warrants, options, participations or other equivalents of or
interest in (however designated) corporate stock.
Class E Common Stock: as set forth in the preamble of this Warrant
--------------------
Certificate.
Commission: means the United States Securities and Exchange Commission
----------
or any governmental body or agency succeeding to the functions thereof.
Common Stock: the shares of common stock, par value $.01 per share, of
------------
the Company, currently provided for in the Certificate of Incorporation of
the Company, and including, for all purposes hereunder, any other capital
stock of the Company into which such shares of Common Stock may be
converted or reclassified or that may be issued in respect of, in exchange
for,
-12-
<PAGE>
or in substitution of, such Common Stock by reason of any stock splits,
stock dividends, distributions, mergers, consolidations or like events.
Company: Career Education Corporation , a Delaware corporation, and
-------
its successors and assigns.
Convertible Securities: securities convertible into or exchangeable
----------------------
for Common Stock.
Distribution: shall have the meaning specified in subsection 5(b) of
------------
this Warrant Certificate.
Exercise Price: shall have the meaning specified in the preamble of
--------------
this Warrant Certificate.
Expiration Date: July 31, 2005.
---------------
Non-Surviving Combination: any merger, consolidation or other business
-------------------------
combination of the Company with or into one or more Persons in which the
Person other than the Company is the survivor, or a sale of all or a
substantial part of the assets of the Company (whether held directly by the
Company or through a subsidiary of the Company) to one or more such other
Persons (including but not limited to a voluntary or involuntary
dissolution, liquidation or winding up of the affairs of the Company);
provided, that if any such merger, consolidation or other business
--------
combination or sale of assets, in which the holders of Common Stock receive
cash or non-cash consideration, is structured in the form of a reverse
subsidiary merger so that the Company is the surviving entity, such
transaction shall nevertheless be deemed to be a Non-Surviving Combination.
Person: an individual, corporation, limited liability company,
------
partnership, trust or unincorporated organization, or other legal entity,
or a government or any agency or political subdivision thereof.
Prior Outstanding Number: the total number of shares of Common Stock
------------------------
outstanding immediately prior to any issuance or sale of Common Stock
(assuming for purposes of such calculation the exercise of all of the
Warrants, and the conversion, exercise or exchange of all other securities
then outstanding and convertible, exercisable or exchangeable into shares
of Common Stock, but not the exercise of options to acquire up to 13,400
shares granted pursuant to the Management Option Plan (as defined in the
Securities Purchase Agreement) (as such number may be adjusted in
accordance with the terms of said Management Option Plan).
-13-
<PAGE>
Recapitalization: any reorganization or recapitalization or other
----------------
change of outstanding shares of Common Stock (other than a change in par
value, or from par value to no par value, or from no par value, to par
value).
Securities Act: the Securities Act of 1933, as amended, from time to
--------------
time, and any successor statute or law thereto.
Securities Purchase Agreement: the Securities Purchase Agreement,
-----------------------------
dated as of February __, 1997, among the Company and the purchasers named
therein.
Significant Holder: any holder holding at least 20% of the outstanding
------------------
Warrants and Warrant Shares (it being understood that two or more
investment funds which have the same investment manager shall be treated as
one holder for this purpose).
Threshold Public Offering: shall mean an initial underwritten public
-------------------------
offering and sale for cash by the Company of the Common Stock of the
Company to an underwriter or underwriters pursuant to a "firm commitment"
underwriting agreement and a registration statement declared effective by
the Commission under the Securities Act of 1933, as amended, in which (i)
the minimum equity valuation of the Company is Forty-Five Million and
No/100 Dollars ($45,000,000) before December 31, 1999 and Fifty-Five
Million and No/100 Dollars ($55,000,000) thereafter, and (ii) the Company
receives gross proceeds of at least Twenty Million and No/100 Dollars
($20,000,000). The valuation of the Company will be determined by dividing
the dollar amount raised in such public offering on a gross basis by the
percentage of equity in the Company sold in such public offering on a
fully-diluted basis, taking into account all shares outstanding, and all
warrants, options and convertible securities or other rights to acquire
equity of the Company. A Threshold Public Offering shall be deemed
consummated upon the first sale of Common Stock under the related
registration statement. A Threshold Public Offering shall not include the
registration of an offer and sale of the Common Stock (i) to the employees
of or other persons providing services to the Corporation pursuant to an
employee benefit or similar benefit plan registered on Form S-8 or a
successor form or (ii) relating to a merger, acquisition or other
transaction of the type described in Rule 145 or a successor rule
registered on Form S-4 or a successor form.
Warrants: as set forth in the preamble of this Warrant Certificate.
--------
Warrant Shares: as set forth in the preamble of this Warrant
--------------
Certificate.
11. Warrants Transferable. These Warrants are issued as Warrants for
---------------------
which there is a register maintained by the Company. Subject to the
provisions of Section 9,
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<PAGE>
the Stockholders Agreement and applicable securities laws, the transfer of any
Warrant and all rights hereunder, in whole or in part, is registerable at the
office or agency of the Company referred to in Section 1 hereof by the holder
hereof in person or by duly authorized attorney, upon surrender of this Warrant
Certificate with a properly completed Form of Assignment in the form annexed
hereto as Schedule 2. Each taker and holder of any Warrant, by taking or holding
----------
the same, consents and agrees that this Warrant Certificate, when endorsed in
blank, shall be deemed negotiable, and that the holder hereof, when this Warrant
Certificate shall have been so endorsed, may be treated by the Company and all
other persons dealing with this Warrant Certificate as the absolute owner hereof
for any purpose and as the person entitled to exercise the rights represented by
this Warrant Certificate, or to the registration of transfer hereof on the books
of the Company; and until due presentment for registration of transfer on such
books, the Company may treat the registered holder hereof as the owner for all
purposes, and the Company shall not be affected by notice to the contrary.
12. Warrant Certificates Exchangeable for Different Denominations.
-------------------------------------------------------------
This Warrant Certificate is exchangeable, upon the surrender hereof by the
holder hereof at such office or agency of the Company, for new Warrant
Certificates of like tenor representing in the aggregate the right to purchase
the number of shares that may be purchased hereunder, each of such new Warrant
Certificates to represent the right to purchase such number of shares as shall
be designated by said holder at the time of such surrender.
13. Replacement of Warrant Certificates. Upon receipt of evidence
-----------------------------------
reasonably satisfactory to the Company of the loss, theft, destruction or
mutilation of this Warrant Certificate and, in the case of any such loss, theft
or destruction, upon delivery of an indemnity bond (or, in the case of any
substantial financial institution to which any Warrants represented by this
Warrant Certificate may be transferred, an unsecured indemnity agreement)
reasonably satisfactory in form and amount to the Company or, in the case of any
such mutilation, upon surrender and cancellation of such Warrant Certificate,
the Company at its expense will execute and deliver, in lieu thereof, a new
Warrant certificate of like tenor.
14. Certificate Rights and Obligations Survive Exercise of Warrants.
---------------------------------------------------------------
The rights and obligations of the Company contained in this Warrant Certificate
shall survive the exercise or repurchase of any or all of the Warrants to the
extent that such survival is necessary to give effect to a provision hereof.
15. Notices. All notices, requests and other communications required
-------
or permitted to be given or delivered to the holders of Warrants shall be in
writing, and shall be delivered by hand, first class mail (certified or
registered mail, return receipt requested), telex, telecopier or overnight air
courier guaranteeing next day delivery, to each holder at the address shown on
such holder's Warrant Certificate, or at such other address as shall have been
furnished to the Company by notice from such holder. All notices, requests and
other communications required or permitted to be given or delivered to the
Company shall be in writing, and shall be delivered by hand, first class mail
(certified or registered mail, return receipt requested), telex, telecopier or
overnight air courier guaranteeing next day delivery, to
-15-
<PAGE>
the office of the Company at 2800 West Higgins Road, Suite 790, Hoffman Estates,
Illinois 60195, Attention: John M. Larson, with a copy to: D'Ancona and Pflaum,
30 North LaSalle Street, Suite 2900, Chicago, Illinois 60602, Attention: Michel
H. Feldman, Esq., and with a copy to Heller Equity Capital Corp., 500 West
Monroe Street, Chicago, Illinois 60661, Attention: Renee M. Rempe. Any such
notice, request or other communication sent by telecopy or telex shall in such
case be subsequently confirmed by a writing delivered or sent by certified or
registered mail as provided above. All notices shall be deemed to have been
given either at the time of the delivery thereof to (or the receipt by, in the
case of a telecopy or telex) any officer or employee of the person entitled to
receive such notice at the address of such person for purposes of this Section
15, or, if mailed, at the completion of the third full day following the time of
such mailing thereof to such address, as the case may be.
16. Amendments. Neither this Warrant Certificate nor any term or
----------
provision may be changed, waived, discharged or terminated orally, but only by
an instrument in writing signed by the party against which enforcement of the
change, waiver, discharge or termination is sought, provided that any change or
--------
waiver of any term or provision hereof, and any consent or direction given
hereunder by the holders may be effected by the holders of eighty percent (80%)
of the Warrants and Warrant Shares then outstanding, except that no change or
waiver that would (a) increase the Exercise Price of any Warrant or reduce the
Aggregate Number shall be effective as to any holder of a Warrant without the
consent of such holder, or (b) change or waive any of the provisions of this
Section with respect to the requisite persons required to effect any change,
waiver or amendment of a particular Section of this Warrant Certificate shall be
effective without the consent of such requisite persons.
17. Remedies. The Company stipulates that remedies at law of the
--------
holder of this Warrant Certificate in the event of any default or threatened
default by the Company in the performance of or compliance with any of the terms
of this Warrant Certificate are not and will not be adequate, and that such
terms may be specifically enforced by a decree for the specific performance of
any agreement contained herein or by an injunction against a violation of any of
the terms hereof or otherwise. If any default under the terms of this Warrant
Certificate shall occur and be continuing, the holders of the Warrants may
proceed to protect and enforce their rights under this Warrant Certificate and
the Securities Purchase Agreement by exercising such remedies as are available
to such holders in respect thereof under applicable law, either by suit in
equity or by action at law, or both, whether for specific performance of any
covenant or other agreement contained in this Warrant Certificate or the
Securities Purchase Agreement or in aid of the exercise of any power granted in
this Warrant Certificate or the Securities Purchase Agreement. No remedy
conferred in this Warrant Certificate or the Securities Purchase Agreement upon
the holder of any Warrants is intended to be exclusive of any other remedy
available to such holder, and each and every such remedy shall be cumulative and
shall be in addition to every other remedy conferred herein or now or hereafter
existing at law or in equity or by statute or otherwise.
18. Governing Law. THIS WARRANT CERTIFICATE HAS BEEN EXECUTED AND
-------------
DELIVERED AT AND SHALL BE DEEMED TO HAVE BEEN
-16-
<PAGE>
MADE IN CHICAGO, ILLINOIS. THIS WARRANT CERTIFICATE AND THE RIGHTS GRANTED
HEREIN SHALL BE GOVERNED BY AND CONSTRUED AND ENFORCED UNDER THE LAWS OF THE
STATE OF ILLINOIS (WITHOUT GIVING EFFECT TO ANY CONFLICTS OF LAW RULES OR
PRINCIPLES). ANY JUDICIAL PROCEEDING BROUGHT BY OR AGAINST THE COMPANY WITH
RESPECT TO THIS WARRANT CERTIFICATE OR ANY RELATED AGREEMENT SHALL BE BROUGHT IN
ANY COURT OF COMPETENT JURISDICTION IN THE UNITED STATES OF AMERICA FOR THE
NORTHERN DISTRICT OF ILLINOIS, AND, BY EXECUTION AND DELIVERY OF THIS WARRANT
CERTIFICATE, THE COMPANY ACCEPTS THE EXCLUSIVE JURISDICTION OF THE AFORESAID
COURTS AND IRREVOCABLY AGREES TO BE BOUND BY ANY JUDGMENT RENDERED THEREBY IN
CONNECTION WITH THIS WARRANT. IF ANY ACTION IS COMMENCED IN ANY OTHER
JURISDICTION THE PARTIES HERETO HEREBY CONSENT TO THE REMOVAL OF SUCH ACTION TO
THE NORTHERN DISTRICT OF ILLINOIS. THE COMPANY HEREBY IRREVOCABLY DESIGNATES CT
CORPORATION SYSTEM, AS THE DESIGNEE, APPOINTEE AND AGENT, OF THE COMPANY TO
RECEIVE, FOR AND ON BEHALF OF THE COMPANY, SERVICE OF PROCESS IN THE ABOVE
DESCRIBED JURISDICTION IN ANY LEGAL ACTION OR PROCEEDING WITH RESPECT TO THIS
WARRANT, THE WARRANT SHARES OR THE RIGHTS AND OBLIGATIONS HEREUNDER OR
THEREUNDER AND SUCH SERVICE SHALL BE DEEMED COMPLETED UPON DELIVERY THEREOF TO
SUCH AGENT. IT IS UNDERSTOOD THAT A COPY OF SUCH PROCESS SERVED ON SUCH AGENT
WILL BE PROMPTLY FORWARDED BY MAIL TO THE COMPANY AT ITS ADDRESS SET FORTH IN
SECTION 15 HEREOF, BUT THE FAILURE OF THE COMPANY TO RECEIVE SUCH COPY SHALL NOT
AFFECT IN ANY WAY THE SERVICE OF SUCH PROCESS. THE COMPANY FURTHER IRREVOCABLY
CONSENTS TO THE SERVICE OF PROCESS OUT OF ANY OF THE AFOREMENTIONED COURTS IN
ANY SUCH ACTION OR PROCEEDING BY THE MAILING OF COPIES THEREOF BY REGISTERED OR
CERTIFIED MAIL, POSTAGE PREPAID, TO THE COMPANY AT ITS ADDRESS, SUCH SERVICE TO
BECOME EFFECTIVE 30 DAYS AFTER SUCH MAILING. NOTHING HEREIN SHALL AFFECT THE
RIGHT OF THE HOLDERS OF THE WARRANTS OR THE WARRANT SHARES TO SERVE PROCESS IN
ANY OTHER MANNER PERMITTED BY LAW OR COMMENCE LEGAL PROCEEDINGS IN OR OTHERWISE
PROCEED AGAINST THE COMPANY IN ANY OTHER JURISDICTION.
19. Waiver of Jury Trial. THE COMPANY AND THE HOLDER OF THIS WARRANT
--------------------
HEREBY WAIVE THEIR RESPECTIVE RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF
ACTION BASED UPON OR ARISING OUT OF THIS WARRANT OR ANY DEALINGS BETWEEN THEM
RELATING TO THE SUBJECT MATTER OF THIS WARRANT AND THE TRANSACTIONS CONTEMPLATED
HEREBY AND THE RELATIONSHIP THAT IS BEING ESTABLISHED HEREUNDER. THE COMPANY AND
THE HOLDER OF THIS WARRANT ALSO WAIVE ANY BOND OR SURETY OR SECURITY UPON SUCH
BOND WHICH MIGHT, BUT FOR THIS
-17-
<PAGE>
WAIVER, BE REQUIRED OF THE OTHER PARTIES. THE SCOPE OF THIS WAIVER IS INTENDED
TO BE ALL-ENCOMPASSING OF ANY AND ALL DISPUTES THAT MAY BE FILED IN ANY COURT
AND THAT RELATE TO THE SUBJECT MATTER OF THIS WARRANT, INCLUDING, WITHOUT
LIMITATION, CONTRACT CLAIMS, TORT CLAIMS, BREACH OF DUTY CLAIMS, AND ALL OTHER
COMMON LAW AND STATUTORY CLAIMS. THE COMPANY AND THE HOLDER OF THIS WARRANT
ACKNOWLEDGE THAT THIS WAIVER IS A MATERIAL INDUCEMENT TO ENTER INTO A BUSINESS
RELATIONSHIP, THAT EACH HAS ALREADY RELIED ON THE WAIVER IN ENTERING INTO THIS
WARRANT AND THAT EACH WILL CONTINUE TO RELY ON THE WAIVER IN THEIR RELATED
FUTURE DEALINGS. THE COMPANY AND THE HOLDER OF THIS WARRANT FURTHER WARRANT AND
REPRESENT THAT EACH HAS REVIEWED THIS WAIVER WITH ITS LEGAL COUNSEL, AND THAT
EACH KNOWINGLY AND VOLUNTARILY WAIVES ITS JURY TRIAL RIGHTS FOLLOWING
CONSULTATION WITH LEGAL COUNSEL. THIS WAIVER IS IRREVOCABLE, MEANING THAT IT MAY
NOT BE MODIFIED EITHER ORALLY OR IN WRITING, AND THE WAIVER SHALL APPLY TO ANY
SUBSEQUENT AMENDMENTS, RENEWALS, SUPPLEMENTS OR MODIFICATIONS TO THIS WARRANT OR
TO ANY OTHER DOCUMENTS OR AGREEMENTS RELATING TO THE TRANSACTIONS CONTEMPLATED
HEREBY. IN THE EVENT OF LITIGATION, THIS AGREEMENT MAY BE FILED AS A WRITTEN
CONSENT TO A TRIAL BY THE COURT.
20. Withholding Taxes. (a) The Company covenants that it will not
-----------------
withhold United States withholding taxes from payments to be made to holders of
Warrants if such holders (i) are corporations organized under the laws of a
jurisdiction outside the United States or are otherwise persons not resident in
the United States for United States federal income tax purposes, and (ii)
provide the Company, upon the Company's reasonable request, with Internal
Revenue Service Form W-8, Form 4224, Form 1001 or other applicable form,
certificate or document prescribed by the Internal Revenue Service certifying as
to such holders' entitlement to an exemption from any such withholding
requirements.
(b) The Company further covenants that it will not withhold United
States withholding taxes from payments to be made to holders of Warrants in
excess of an applicable treaty rate under an income tax treaty between the
United States and the holders' country of tax residence if such holders (i) are
corporations organized under the laws of a jurisdiction outside the United
States or are otherwise persons not resident in the United States for United
States federal income tax purposes, and (ii) provide the Company, upon the
Company's reasonable request, with internal Revenue Service Form 1001 or other
applicable form, certificate or document prescribed by the Internal Revenue
Service certifying as to such holders' entitlement to a reduced rate of
withholding under any such withholding requirements.
(c) Neither subsection 20(a) nor subsection 20(b) shall require the
Company to apply an exemption or reduce rate of withholding during any period
when it shall have received notice or has actual knowledge that the residence
information previously
-18-
<PAGE>
provided on any applicable form, certificate or document is incorrect and no
corrected form, certificate or document as applicable has been provided to the
Company.
IN WITNESS WHEREOF, the Company has caused this Warrant Certificate to
be executed as a deed by its duly authorized officer and this Warrant
Certificate to be dated ________, 199__.
CAREER EDUCATION CORPORATION
By________________________________
Name _____________________________
Title _____________________________
-19-
<PAGE>
SCHEDULE 1
----------
EXERCISE FORM
[To be executed only upon exercise of Warrant]
To: CAREER EDUCATION CORPORATION
The undersigned irrevocably exercises ____________________ of the
Warrants for the purchase of one share (subject to adjustment) of Class E Common
Stock, par value $.01 per share, of Career Education Corporation (the "COMPANY")
for each Warrant represented by the within Warrant certificate and herewith
makes payment of $__________ (such payment being in cash or by check or bank
draft in immediately available funds payable to the order of the Company or by
the surrender of a portion of the Warrants other than that which is being
exercised), all at the exercise price and on the terms and conditions specified
in the within Warrant Certificate, surrenders the within Warrant Certificate and
all right, title and interest therein (except as to any unexercised Warrants) to
the Company and directs that the shares of Class E Common Stock deliverable upon
the exercise of such Warrants be registered or placed in the name and at the
address specified below and delivered thereto.
Dated:__________
_______________________________________
(Signature of Owner) /(1)/
_______________________________________
(Street Address)
_______________________________________
(City) (State) (Zip Code)
_________________________
(1) The signature must correspond with the name as written upon the face of the
within Warrant Certificate in every particular, without alteration or
enlargement or any change whatever.
<PAGE>
SCHEDULE 2
----------
FORM OF ASSIGNMENT
FOR VALUE RECEIVED, the undersigned registered Holder of the within
Warrant Certificate hereby sells, assigns, and transfers unto the Assignee(s)
named below (including the undersigned with respect to any Warrants constituting
a part of the Warrants evidenced by the within Warrant Certificate not being
assigned hereby) all of the right of the undersigned under the within Warrant
Certificate, with respect to the number of Warrants set forth below:
<TABLE>
<CAPTION>
Social security or
other identifying
number of
Names of Assignees Address Assignee(s) Number of Warrants
- ------------------ ------- ----------- ------------------
<S> <C> <C> <C>
</TABLE>
and does hereby irrevocably constitute and appoint ____________________ the
undersigned's attorney to make such transfer on the books of Career Education
Corporation maintained for that purpose, with full power of substitution in the
premises.
Dated:__________
____________________________________
(Signature of Owner) /(1)/
____________________________________
(Street Address)
____________________________________
(City) (State) (Zip Code)
______________________
(1) The signature must correspond with the name as written upon the face of the
within Warrant Certificate in every particular, without alteration or
enlargement or any change whatever.
<PAGE>
EXHIBIT 10.21
CAREER EDUCATION
C O R P O R A T I O N
- --------------------------------------------------------------------------------
Suite 790
2800 West Higgins Road
Hoffman Estates, IL 60195
Tel: (847) 781-3600
Fax: (847) 781-3610
FORM OF MANAGEMENT FEE AGREEMENT
--------------------------------
This agreement is made as of ________ ____, 19___, by and between Career
Education Corporation ("CEC") and _______________ ("____") (this "Agreement").
WITNESSETH
----------
WHEREAS, CEC is a management holding corporation which through its subsidiaries
provides post secondary educational opportunities; and
WHEREAS, CEC through its subsidiaries, including but not limited to ___________,
operates several post secondary proprietary schools; and
WHEREAS, _____________ is in need of the expertise and financial capabilities of
CEC in order to obtain and follow the standards and methods with respect to
marketing, accreditation, curriculum, financing, management information systems
and other services described below; and
WHEREAS, CEC is prepared to assist the local management of _____________ to meet
such standards and methods with respect to academics, financing, organization,
accreditation and other services.
NOW, THEREFORE, in consideration of the foregoing recitals, and of the mutual
covenants and agreement set forth below, the parties hereto agree as follows:
1. SERVICES
In consideration of payment by _____________ to CEC, CEC hereby agrees to
provide to ___________ the following services (hereinafter referred to as
the "Services"):
(a) SYSTEMS AND PROCEDURES
CEC shall issue the standard systems and procedures for
____________ with respect to accounting, management information
systems, financial aid, academics, regulatory agencies, marketing,
finance and administration, and CEC hereby assures ____________ that
these standards shall be available for use by ____________ at the time
of execution of this Agreement, and CEC agrees further that CEC shall
<PAGE>
provide additional assistance in explaining and establishing such
standards, if so requested in writing by ____________. _____________
shall be responsible for all equipment and maintenance costs
associated with the systems selected by CEC.
(b) MANAGEMENT CONSULTING
CEC shall provide consulting services to _____________, which
consulting services may include services with respect to
organizational structure, work procedures, work relationships,
marketing, academics, financial aid and assignment of staff to
_____________. In particular, CEC shall perform the following
services upon the request of ______________: (i) suggest methods to
collect delinquent accounts receivable; (ii) review and recommend
compensation along with review of non-government employee benefits;
(iii) design and recommend lending and other financial programs to
assist financial aid; (iv) perform evaluations of facilities,
curriculum and staffing levels; and (v) analyze capital expenditure
proposals, review annual budgets and perform other financial
evaluations and services.
(c) INFORMATION SERVICES, FINANCING AND ACCOUNTING
CEC shall assist in solving special problems encountered by
____________ with respect to local accounting or management rules.
CEC will provide and manage all banking and financing requirements for
_____________. CEC will also arrange for and coordinate all annual
outside financial audits and assist __________ in the resolution of
any audit findings from any outside auditor or regulatory agency.
(d) LEGAL ASSISTANCE
CEC shall arrange for legal advice on matters of special concern
to ___________ and/or of common concern to _____________ and other
subsidiaries of CEC including, but not limited to, legal advice on
matters relating to trade names, trademarks, patents, licensing
authority, accreditation, and degree authority. CEC also may obtain
referrals for _____________ for legal advice, and will apprise
_____________ of the activities of local attorneys with respect to
matters concerning _____________.
(e) TAX ADVICE
CEC shall arrange for advice with regard to any local or state
tax issues that may be encountered by ____________ as a consequence of
being a subsidiary of CEC. CEC will consolidate all subsidiaries for
federal tax purposes and will allocate tax expenses to _____________
and other subsidiaries based upon the TAX SHARING AGREEMENT dated
January 1, 1996.
<PAGE>
(f) MARKET RESEARCH, MARKETING AND DISTRIBUTION
CEC shall provide _____________ with results of its market
research and marketing analyses. CEC also shall coordinate the
purchasing of marketing materials used by _____________ and other
subsidiaries of CEC.
(g) ADVERTISING
CEC shall coordinate advertising on a local, regional and
national basis, which coordination shall be for the purpose of (i)
deriving savings through the sharing of certain base costs; and (ii)
presenting a professionally prepared, uniform image of _____________,
CEC and all other subsidiaries of CEC.
(h) INSURANCE
CEC shall provide advice and assistance in obtaining insurance
coverage at the lowest possible rates for the protection of the assets
and earnings of ______________ and shall also coordinate the
purchasing of employee and non-employee insurance coverage.
2. BASIC FEE
For the Services describe above, CEC will charge and _____________ hereby
agrees to pay, at the times and in the manner described below, a service fee
(hereinafter referred to as the "Basic Fee"). The amount of the Basic Fee
payable by _____________ to CEC per year shall be based upon the actual total
revenues of _____________ multiplied by x% ("Percentage Rate"), plus charges for
any additional costs associated with such Services, including but not limited
to, charges incurred by CEC for travel.
The Percentage Rate may be increased or decreased by CEC from time to time
during the term, however, the Percentage Rate once established will not change
during a fiscal year.
With respect to Services rendered during the time between the date hereof
and ____________(the "Initial Period"), the basic fee will be invoiced monthly,
one month in arrears. Each invoice will be payable by _____________ to CEC with
terms of net 30 days.
3. TERM
The maximum term of this Agreement will be for 15 years. The Initial
Period will be _______________, through _________________. After the Initial
Period, this Agreement will be extended automatically for two year periods
beginning ____________ through _____________. This Agreement may be terminated
with the mutual agreement of both parties. In the case of termination,
_____________ will be liable for all charges for Services provided by CEC to
_____________ through the effective date of termination.
<PAGE>
4. REVIEWS
As an additional service, CEC hereby agrees to review for effectiveness, on
a monthly basis, all of the operations performed by _____________, and
____________ hereby agrees, in order to aid CEC in such reviews, to complete, in
a timely manner, the weekly Flash Reports, the monthly financial statements,
forecasting reports and other required reports.
5. STANDARD OF CARE: WAIVER OF CLAIMS AGAINST CEC
(a) In performing the Services under this agreement, CEC at all times
shall act in good faith and in a manner which it believes to be
in or not opposed to the best interests of _____________.
(b) Notwithstanding anything to the contrary contained in this
Agreement or provided by law, to the maximum extent permitted by
law, ____________ hereby unconditionally and irrevocably waives
all claims and causes of action against CEC (and its
shareholders, officers, directors and employees), of every kind
and character, including claims and causes of action for loss of
or injury to business and property, caused by or deriving from
any act or omission of CEC (or its shareholders, officers,
directors and employees) under this Agreement, including acts and
omissions constituting negligence or gross negligence, except for
such acts or omissions of CEC made or omitted in bad faith.
6. NO THIRD PARTY BENEFITS
Nothing contained in this Agreement, express or implied, shall grant to or
confer upon any person or entity other than the parties hereto any rights or
remedies.
7. SUCCESSORS AND ASSIGNS
Subject to the availability of personnel of CEC, the rights and obligations
of the parties hereto under this Agreement shall be binding upon and shall inure
to the benefit of the parties hereto, their successors and assigns. CEC hereby
expressly reserves the right to assign or delegate to any third party its rights
or obligations hereunder, which assignment or delegation may be effected without
notice to ______________; provided, however, that if CEC assigns to a third
party its rights to receive payments of the Basic Fee as described in Paragraph
2 above, then CEC shall notify _______________ of such assignment sufficiently
prior thereto, and shall provide ___________ opportunity to make payments of
such Basic Fee in a timely manner.
8. ENTIRE AGREEMENT
This Agreement contains the entire understanding of the parties thereto
with respect to the subject matter hereto.
<PAGE>
AGREED:
IN WITNESS WHEREOF, CEC and _____________ have caused this Agreement to be
executed by their duly authorized officers, all on the ________________.
CAREER EDUCATION CORPORATION
By: ______________________________
Its: _____________________________
______________
By: ______________________________
Its: _____________________________
<PAGE>
CAREER EDUCATION EXHIBIT 10.22
C O R P O R A T I O N
- --------------------------------------------------------------------------------
Suite 790
2800 West Higgins Road
Hoffman Estates, IL 60195
Tel: (847) 781-3600
Fax: (847) 781-3610
FORM OF
TAX SHARING AGREEMENT
---------------------
This agreement is made as of _________________, by and between Career Education
Corporation ("CEC"), and such other affiliates, whether presently existing or
hereafter acquired, as are or shall be part of the "Group" as hereinafter
defined (hereinafter referred to individually as "Subsidiary" and collectively
as "Subsidiaries") for taxable years commencing on and after January 1, 1996.
WITNESSETH
----------
WHEREAS, CEC, Subsidiaries, and any other corporation which together with CEC
form an affiliated Group (the "Group") within the meaning of Section 1504(a) of
the Internal Revenue Code (the "Code") desire to continue to file a consolidated
Federal income tax return and consolidated or combined state income tax returns
where allowed by law; and
WHEREAS, CEC and Subsidiaries wish to preserve the economic rights and
privileges which would accrue to each from the filing of separate Federal and
state income tax returns and, further, wish to set forth their agreement
regarding those rights and privileges in writing.
NOW, THEREFORE, CEC and Subsidiaries hereby agree as follows:
I. Consolidated Return
A. It would be to the mutual advantage of the parties hereto, and could
result in smaller Federal and state income tax being paid by all
parties, if a consolidated Federal income tax return and consolidated
or combined state income tax returns (where allowed) are filed which
will include any Subsidiaries and affiliates of the parties in
accordance with the terms of the Code and related Income Tax
Regulations ("Regulations").
B. CEC and Subsidiaries shall file such consents and other documents and
take such action as may be necessary to continue in filing a
consolidated tax return for the Group.
1
<PAGE>
C. CEC and Subsidiaries shall cause any corporation which hereafter
becomes an affiliate of any of them and a member of the Group to join
in this Agreement.
D. CEC and Subsidiaries shall maintain, and shall cause any subsidiaries
subsequently formed or acquired to maintain, concurrent fiscal years.
E. CEC shall make all elections under the consolidated return regulations
or required to be made for the consolidated group and shall approve
all elections made with respect to each member of the Group.
F. CEC and Subsidiaries agree to pay to CEC all amounts sufficient to pay
for their respective allocable share of Federal and state tax
liabilities as calculated in accordance with the provisions of
Sections II and III, including without limitation amounts satisfying
quarterly estimated tax liabilities, as well provisions of Section IV
hereof.
II. Calculation of Individual Corporate Income Tax Liability
A. Beginning with the year ended December 31, 1996, and for each tax year
thereafter, each member of the Group will calculate its Federal
corporate income tax liability as if it were to file a separate
Federal tax return for such period.
B. In so computing the separate Federal income tax liability of each
member of the Group:
1. Except as otherwise provided herein, "separate company taxable
income" shall be determined as if CEC and each Subsidiary were
filing a separate tax return, and the term will not have the same
meaning as set forth in Regulation Section 1,1502-12;
2. Any dividends received by CEC from Subsidiaries, or by one
Subsidiary from another, will be assumed to qualify for the 100%
dividend received deduction of Code Section 243, or shall be
eliminated from such calculation in accordance with Regulation
Section 1. 1502-14(a)(1);
3. Gain or loss on intercompany transactions, whether deferred or
not, shall be treated by each member of the Group in the manner
required by Regulation Section 1.1502-13;
4. Limitation on the calculation of a deduction, the utilization of
credits, or the calculation of the liability shall be made on a
consolidated basis. Accordingly, the limitations provided in
Code Sections 170(b)(2),
2
<PAGE>
172(b)(2), 38(c), and 53(a) and similar limitations shall be
applied on the consolidated basis;
5. The amounts in each taxable income bracket in Code Section
11(b) shall be allocated in any given year to members of the
Group as Parent shall elect. Such election shall be made on an
annual basis and shall be binding upon all parties to this
Agreement; and
6. The amount of any excess tax credits utilized by the Group on a
consolidated basis shall be allocated in any given year to the
members of the Group as determined by CEC. (Excess tax credits
are the total tax credits utilized on a consolidated basis that
would not have been utilized on a separate company basis.)
7. In calculating any carryback of carryover of net operating
losses, adjustments shall be made to such prior or subsequent
year's separate company tax liability as determined under Code
Section 172(b)(2). For purposes of this calculation the election
under Code Section 172(b)(3) shall be made on a separate company
basis.
C. For purposes of 1 above, separate company taxable income of each
member of the Group shall take into account only those items of
income, deduction, gain and loss recorded on the books and records of
such member.
III. Liability For Tax Payments
A. CEC will pay the Federal corporate income tax liabilities of the Group
for any year in which the Group is required to file consolidated
Federal and state income tax returns.
B. If any Subsidiary would be subject to Federal corporate income tax if
it filed a separate income or franchise tax returns, that Subsidiary
shall pay to CEC that sum which shall result from the calculations
required by paragraph II, above.
C. If any Subsidiary would be entitled to a refund of Federal corporate
income tax if it filed a separate Federal income tax return, or if
currently generated losses or credits of any Subsidiary reduce the
current tax liability of the consolidated group, Parent shall pay to
that Subsidiary that sum which shall result from the calculation
required by Paragraph II, above. In the event that a Subsidiary's
separate company taxable income is a loss in any given year as
calculated under paragraph II, and the consolidated group is unable to
utilize the loss to reduce its current tax liability, the Subsidiary
will first offset this loss against the prior three years' taxable
income. If the loss is greater than the prior three years' profits,
the excess will be carried
3
<PAGE>
forward against future years' taxable income. The tax repayment from
CEC to the Subsidiary under this paragraph will be calculated on the
amount of the loss carried back to prior years, and no further tax
will be payable from CEC to the Subsidiary until the losses carried
forward are utilized against future years' income.
D. If CEC is found liable to pay any state corporate tax with respect to
income earned by Subsidiary or CEC, as the case may be, Subsidiary and
CEC agree to pay to CEC the entire amount of such amount representing
their respective state corporate tax liability.
E. Payment to Parent by any Subsidiary must not include any deferred tax
liability incurred by Subsidiary.
IV. Method and Time of Payment
Payments by Parent of consolidated estimated tax for the consolidated Group
at the normal quarterly due dates will reimbursed by the Subsidiaries at
those quarterly due dates based on estimates prepared by CEC. Each
Subsidiary shall make/receive these quarterly payments/receipts of
estimated tax liability/repayment on account to/from CEC based on the
Subsidiary's separate company taxable income calculated under paragraph II,
above, as of the close of the appropriate quarter. As soon as the Group's
consolidated tax liability for the year is determined, each Subsidiary
shall make/receive payment to/from Parent pursuant to paragraph III, above,
less amounts already paid for estimated tax.
V. Adjustment of Tax Liability
In the event of any adjustment of the tax liability shown on the Federal or
state income tax returns of the Group, by reason of the filing of an
amended return or claim for refund, or arising out of an audit by a taxing
authority, the liability of Parent and any Subsidiary hereunder shall be
redetermined after fully giving effect to such adjustment as if such
adjustment had been made as part of the original computation.
VI. Earnings and Profits Adjustments
This agreement is not intended to establish the method by which the
earnings and profits of each member of the Group will be determined. CEC
reserves the right to elect the method for allocating tax liability for the
purposes of determining earnings and profits as set forth in Regulation
Sections 1.1552-1(a) and 1.1502-33(d).
VII. Financial Statement Tax Provision
In consolidating financial statements of CEC and its Subsidiaries, the
financial reporting policy for tax provision allocations shall be based
upon a separate entity concept whereby
4
<PAGE>
each subsidiary provides income tax expense (or benefits) as if each were
a separate tax return basis and the consolidated financial reporting
allocation basis shall be charged or credited to CEC's separate tax
provision.
VII. Successors Assigns
The provisions and terms of this Agreement shall be binding on and inure
to the benefit of any successor, by merger, acquisition of assets or
otherwise, of any of the parties hereto.
VIII. New Members
If, at any time any other company becomes a member of the Group, the
parties hereto agree that such member may become a party to this Agreement
by executing a duplicate copy of this Agreement. Unless otherwise
specified, such named member shall have all the rights and obligations of
a subsidiary under this Agreement.
IX. Parent Designate
At the election of the CEC, CEC can designate a Subsidiary to act on
behalf of CEC in performing the duties identified in this agreement.
X. Duration
Unless earlier terminated by mutual agreement of the parties, this
Agreement shall remain in effect with respect to any tax year for which
consolidated Federal and state income tax returns are filed by the Group.
Notwithstanding the termination of this Agreement, its provision will
remain in effect with respect to any period of time during the tax year in
which termination occurs, for which the income of the termination party
must be included in the consolidated return. The preceding sentence shall
not be construed, however, to require a Subsidiary to contribute to
consolidated tax liability for any period for which it files a separate
return. Allocations of consolidated tax liability shall be made hereunder
only for periods covered by a consolidated Federal income tax return.
XI. General
All material including but not limited to, returns, supporting schedules,
workpapers, correspondence and other documents relating to the
consolidated return shall be made available to any party to this Agreement
during regular business hours. This Agreement shall be governed by the
laws of Illinois and Delaware.
5
<PAGE>
THIS AGREEMENT contains the entire agreement of the parties and there are
no agreements, representations or warranties not contained herein. This
Agreement may not be modified or amended except by written instrument
executed with the same formality as this Agreement.
IN WITNESS WHEREOF, the parties hereto have caused their names to be
subscribed and executed by their respective authorized officers on the
dates indicated, effective as of the date first written above.
Career Education Corporation
By: ______________________________
Its: _____________________________
__________________________________
By: ______________________________
Its: _____________________________
6
<PAGE>
EXHIBIT 21
CAREER EDUCATION CORPORATION
SUBSIDIARIES
Jurisdiction
Subsidiary of Incorporation
---------- ----------------
CEC Management, Inc. Illinois
Market Direct, Inc., Illinois
d/b/a Market Direct
Al Collins Graphic Design School, Ltd., Delaware
d/b/a Al Collins Graphic Design School
Allentown Business School, Ltd., Delaware
d/b/a Allentown Business School
Brooks College, Ltd., Delaware
d/b/a Brooks College
Brown Institute, Ltd., Delaware
d/b/a Brown Institute
International Academy of Merchandising & Design, Ltd., Illinois
d/b/a IAMD Chicago
International Academy of Merchandising & Design, Inc., Florida
d/b/a IAMD-Tampa
IAMD, Limited (holding company) Delaware
International Academy of Design - Toronto, Ontario
d/b/a IAOD-Toronto
International Academy of Design - Montreal, Quebec
d/b/a IAOD-Montreal
International Academy of Merchandising and Design, Ontario
(Canada), Ltd.
The Katharine Gibbs School of Norwalk, Inc., Connecticut
d/b/a Gibbs College
K-III KG Corporation - Massachusetts, Massachusetts
d/b/a Katharine Gibbs School-Massachusetts
The Katharine Gibbs School of Montclair, Inc., New Jersey
d/b/a Katharine Gibbs School-Montclair
The Katharine Gibbs School of Piscataway, Inc., New Jersey
d/b/a Katharine Gibbs School-Piscataway
The Katharine Gibbs Corporation - Melville, New York
d/b/a Katharine Gibbs School-Melville
The Katharine Gibbs Corporation - New York, New York
d/b/a Katharine Gibbs School-New York
The Katharine Gibbs School of Providence, Inc., Rhode Island
d/b/a Katharine Gibbs School-Providence
The Katharine Gibbs Schools, Inc. Delaware
School of Computer Technology, Inc.,
d/b/a Computer Tech & International Culinary Academy
Western Culinary Institute, Inc., Delaware
d/b/a Western Culinary Institute
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
report (and to all references to our Firm) included in or made a part of this
registration statement.
Arthur Andersen LLP
Chicago, Illinois
October 9, 1997
<PAGE>
EXHIBIT 23.3
CONSENT
I hereby consent to the use of my name as a nominee for the Board of
Directors of Career Education Corporation in the Prospectus forming part of
this Registration Statement on Form S-1 (the "Registration Statement") and for
use of this consent for filing as Exhibit 23.3 to the Registration Statement.
/s/ Thomas B. Lally
-------------------------------------
Thomas B. Lally
Dated: October 9, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> YEAR 6-MOS
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1997
<PERIOD-START> JAN-01-1996 JAN-01-1997
<PERIOD-END> DEC-31-1996 JUN-30-1997
<CASH> 7,798 9,745
<SECURITIES> 0 0
<RECEIVABLES> 3,237 8,158
<ALLOWANCES> 455 1,026
<INVENTORY> 213 427
<CURRENT-ASSETS> 11,832 19,154
<PP&E> 22,517 51,223
<DEPRECIATION> 2,957 4,135
<TOTAL-ASSETS> 36,208 100,767
<CURRENT-LIABILITIES> 10,453 15,404
<BONDS> 0 0
13,691 31,697
0 0
<COMMON> 1 1
<OTHER-SE> (1,720) 2,379
<TOTAL-LIABILITY-AND-EQUITY> 36,208 100,767
<SALES> 29,269 23,073
<TOTAL-REVENUES> 33,580 25,652
<CGS> 31,205 24,141
<TOTAL-COSTS> 0 0
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 672 985
<INCOME-PRETAX> 1,703 526
<INCOME-TAX> 208 210
<INCOME-CONTINUING> 1,495 316
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 418
<CHANGES> 0 0
<NET-INCOME> 1,495 (102)
<EPS-PRIMARY> 0 0
<EPS-DILUTED> 0 0
</TABLE>
