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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997
COMMISSION FILE NUMBER 0-23245
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CAREER EDUCATION CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 39-3932190
(STATE OF INCORPORATION) (I.R.S. EMPLOYER ID NO.)
2800 WEST HIGGINS ROAD, SUITE 790, HOFFMAN ESTATES, ILLINOIS 60195
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (847) 781-3600
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
COMMON STOCK, $.01 PAR VALUE
(TITLE OF CLASS)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes No X
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
The aggregate market value of the registrant's voting stock held by non-
affiliates of the registrant, based upon the $21.50 per share closing sale
price of the registrant's Common Stock on March 25, 1998, was approximately
$75,285,496. For the purposes of this calculation, the Registrant's directors
and executive officers have been assumed to be affiliates.
The number of shares outstanding of the registrant's Common Stock, par value
$.01, as of March 27, 1998 was 7,099,858.
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DOCUMENTS INCORPORATED BY REFERENCE
None.
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CAREER EDUCATION CORPORATION
FORM 10-K
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<C> <S> <C>
PART I................................................................... 3
ITEM 1. BUSINESS.................................................... 3
ITEM 2. PROPERTIES.................................................. 26
ITEM 3. LEGAL PROCEEDINGS........................................... 26
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS......... 26
PART II.................................................................. 27
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS......................................... 27
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA........................ 28
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS................................... 29
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA................. 36
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE.................................... 36
PART III................................................................. 36
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.......... 36
ITEM 11. EXECUTIVE COMPENSATION...................................... 38
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.................................................. 42
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.............. 43
PART IV.................................................................. 43
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM
8-K......................................................... 43
</TABLE>
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PART I
ITEM 1. BUSINESS
The discussion below contains certain forward-looking statements (as such
term is defined in Section 21E of the Securities Exchange Act of 1934) that
are based on the beliefs of the management of Career Education Corporation and
its subsidiaries (collectively, the "Company" or "CEC"), as well as
assumptions made by, and information currently available to, the Company's
management. The Company's actual growth, results, performance and business
prospects and opportunities in 1998 and beyond could differ materially from
those expressed in, or implied by, any such forward-looking statements. See
"Special Note Regarding Forward-looking Statements" on page 35 for a
discussion of risks and uncertainties that could cause or contribute to such
material differences.
OVERVIEW
CEC is one of the largest providers of private, for-profit postsecondary
education in North America, with approximately 12,500 students enrolled as of
February 28, 1998. CEC operates 10 schools, with 19 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 10 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>
YEAR DATE
SCHOOL FOUNDED ACQUIRED
------ ------- --------
<S> <C> <C>
Al Collins Graphic Design School........................ 1978 1/94
Brooks College.......................................... 1970 6/94
Allentown Business School............................... 1869 7/95
Brown Institute......................................... 1946 7/95
Western Culinary Institute.............................. 1983 10/96
School of Computer Technology........................... 1967 2/97
The Katharine Gibbs Schools............................. 1911 5/97
International Academy of Merchandising & Design (U.S.).. 1977 6/97
International Academy of Merchandising & Design
(Canada)............................................... 1983 6/97
Southern California School of Culinary Arts............. 1994 3/98
</TABLE>
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 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.
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. Visual Communication and Design Technologies: These programs include
desktop publishing, graphic design, fashion design, interior design and
graphic imaging and are offered at Allentown, Brown, Collins, IAMD-Canada
and IAMD-U.S. In addition, Brooks added a visual communications program
in the summer of 1996, which now has the largest enrollment of any of
Brooks' programs. In addition to diplomas, which can be earned at
selected schools, students in these fields can earn associate degrees at
Allentown, Brooks, Brown, Collins and IAMD-U.S. and bachelor's degrees at
Collins and IAMD-U.S. The U.S. Bureau of Labor Statistics projects growth
of approximately 30%, a gain of over 80,000 jobs, for design-related
occupations between 1994 and 2005.
. Business Studies: These programs include business administration and
business operations. Allentown and Gibbs offer diploma and associate
degree programs in business-related areas of study. According to the U.S.
Bureau of Labor Statistics, over two million new jobs will be created
between 1994 and 2005 in the executive, administrative and managerial
fields.
. Culinary Arts: In these programs, students can earn a diploma in culinary
arts at Western Culinary and an associate degree in culinary arts at SCT.
The Company believes significant opportunities exist to offer culinary
arts programs at other schools, on a contract training basis and in a
short program format on weekends, and to offer additional related
programs. The U.S. Department of Labor projects approximately 14% growth
in the food preparation and service occupations by 2005. This represents
an increase of over one million jobs from 1994.
In addition to the core curricula, the Company's schools offer a number of
other programs. These include secretarial and allied health (medical assisting
and medical office management) programs at Allentown; broadcasting and
electronics programs at Brown; laser surgery technology programs at SCT;
secretarial and hospitality programs at Gibbs; and merchandising programs at
Brooks, IAMD-Canada and IAMD-U.S.
INDUSTRY BACKGROUND
Based on estimates for 1995 by the DOE's National Center for Education
Statistics (the "NCES"), postsecondary education is a $200 billion industry in
the United States, with over 14 million students obtaining some form of
postsecondary education. Of this total, approximately 1.5 million students are
enrolled in approximately 3,000 proprietary postsecondary schools. Federal
funds available to support postsecondary education exceed $40 billion dollars
each year and have grown steadily over the last two decades. Additionally, the
federal government guaranteed over $92 billion in student loans in 1996 and is
expected to guarantee loans at comparable levels in the future. State, local
and private funds for career-oriented training are also available.
Several national economic, demographic and social trends are converging to
contribute to growing demand for career-oriented school education:
Changes in Workplace Demands. The workplace is becoming increasingly
knowledge-intensive. Rapid advances in technology have increased demands on
employers and their employees, requiring many new workers to have some form of
training or education beyond the high school level. The increasing
technological requirements of entry level jobs are spurring demand for
specialized training which, in many cases, is not provided by traditional two
and four year colleges. The U.S. Department of Labor projects that jobs
requiring some form of postsecondary training are expected to increase
approximately 11% between 1994 and 2005. Furthermore, career-oriented schools
generally have the ability to react quickly to the changing needs of the
nation's business and industrial communities. Additionally, to meet the new
workplace demands, many major companies are now using career-oriented
institutions to provide customized training for their employees on a
contractual basis. Small to medium-sized companies are also using proprietary
career-oriented schools to fill their needs for training to maintain or
increase the skill levels of their employees.
Increasing Numbers of High School Graduates. Currently, in the U.S., high
school graduates alone represent over 2.5 million new prospective
postsecondary students each year, the largest pool of potential enrollees.
Over the 18 years prior to 1993, the number of high school graduates had been
declining. However, this trend has
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changed favorably as children of the "baby boom" generation are entering their
high school years. These members of the "echo boom," as it is commonly known,
are expected to boost enrollment in postsecondary educational programs to as
high as 16.4 million students by 2006, an increase of 15.5% from approximately
14.2 million in the fall of 1995.
Growing Demand for Postsecondary Education. High school graduates and adults
are seeking postsecondary education in increasing numbers. According to the
U.S. Department of Commerce, approximately 63% of all 1995 high school
graduates continued their education that same year, compared with 53% a decade
earlier. The U.S. Department of Labor projects the number of jobs requiring at
least an associate degree or higher to grow by more than 20% between 1994 and
2005. In addition, enrollment in postsecondary programs is expected to
increase substantially as individuals seek to enhance their skills or re-train
for new job requirements. In part because of the recent trend toward corporate
downsizing, the NCES estimates that over the next several years initial
enrollments in postsecondary education institutions by working adults will
increase more rapidly than initial enrollments by recent high school
graduates. The number of adults enrolled in postsecondary education programs
in the United States is estimated by the NCES to reach 6.8 million by 1999, or
45% of the total number of people enrolled.
Recognition of the Value of Postsecondary Education. The Company believes
that prospective students are increasingly recognizing the income premium and
other improvements in career prospects associated with a postsecondary
education. The U.S. Census Bureau reported that, in 1995, a full-time male
worker with an associate degree earned an average of 37% more per year than a
comparable worker with only a high school diploma, while a full-time male
worker with a bachelor's degree earned an average of 72% more per year than a
comparable worker with only a high school diploma. Independent research
studies have demonstrated that prospective students consider these benefits in
making their education decisions.
Reduction in Public Education Funding. The reduction of federal, state or
provincial and local funding of public educational institutions in recent
years has forced educational institutions to cut back spending on general
operations. As a result, some schools have become underfunded and overcrowded.
This trend may provide an opportunity for proprietary institutions to serve,
at more competitive prices, the postsecondary education needs of certain
individuals who would have otherwise attended public schools.
Decreasing Size of Military Forces. Due to defense budget cuts and the
corresponding reduction in the U.S. armed forces, the U.S. military, a
traditional provider of technical and career-oriented training, is able to
provide fewer educational opportunities. According to the U.S. Department of
Defense, the aggregate number of U.S. military personnel has declined by 32%
since 1987, with the aggregate number of individuals on active duty in the
U.S. military services declining from 2.2 million in 1987 to 1.5 million in
1996. This has left an educational void to be filled by other sources,
including proprietary career-oriented schools.
The Company believes that private, for-profit, career-oriented schools are
uniquely positioned to take advantage of these national trends. The Company
also believes that similar factors are creating a favorable climate for
career-oriented postsecondary education in Canada and other international
markets.
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
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campuses); (ii) visual communication and design technologies (offered at eight
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 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
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the Company's schools continued participation in the Title IV Programs.
Accordingly, the Company considers student placement to be a high priority and
allocates a significant amount of time and resources to placement services.
Due, at least in part, to this emphasis, 87% of the 1996 graduates of the
Company's schools who were available for employment had found employment
relating to their fields of study within six months of graduation. The Company
is committed to maintaining or improving these graduate employment rates and
newly acquired schools will be expected to meet similar graduate employment
success standards.
Making Capital Investments. The Company makes substantial annual investments
in its facilities and equipment to attract, retain and prepare students for
the increasing technical demands of the workplace. The students at each of the
Company's campuses study in comfortable, modern facilities equipped with
current, industry-specific equipment and technology.
Emphasizing School Management Autonomy and Accountability. The Company
provides significant autonomy and appropriate performance-based incentives to
its campus-level managers, which the Company believes offers important
benefits for the organization. The Company believes these policies foster
among campus-level administrative personnel an important sense of personal
responsibility for achieving campus performance objectives. The Company also
believes its willingness to grant local autonomy provides the Company and its
schools with a significant advantage in recruiting and retaining highly-
motivated individuals with an entrepreneurial spirit. Management of each of
the Company's campuses is principally directed by a campus president and local
managers, who are accountable for the campuses' operations and profitability.
Business strategy, finance and consolidation accounting functions are,
however, centralized at the Company's executive offices in Hoffman Estates,
Illinois. When a new school is acquired, the Company evaluates the
capabilities of existing campus management personnel, and typically retains a
significant portion, which contributes to the Company's ability to rapidly
integrate acquired schools into its system. The Company also determines the
acquired school's needs for additional or stronger managers in key areas and,
where necessary, takes appropriate action by hiring new managers or assigning
experienced staff to the school's campuses.
GROWTH STRATEGY
The Company believes it can achieve superior long-term growth in revenue and
profitability by continuing to expand existing operations and acquire
additional schools in attractive North American markets. The Company believes
it can achieve additional growth in the future by establishing new campuses
and also by entering new service areas and expanding internationally.
Expanding Existing Operations. The Company believes that the Company's
existing 19 campuses can achieve significant internal growth in enrollment,
revenue and profitability. The Company is executing its business and operating
strategy, including all of the elements described above, to accomplish this
growth. The Company believes that expansion of operations at its existing
schools, along with acquisitions of new schools, will be the primary
generators of the Company's growth in the near term.
Acquiring Additional North American Schools. To date, the Company has grown
by acquiring new schools in the U.S. and Canada and then applying its
expertise in marketing and school management to increase enrollment, revenue
and profitability at those schools. The Company expects that this process will
continue to be one of the most important elements of its growth strategy. The
Company has an active acquisition program and from time to time engages in,
and is currently engaged in, evaluations of, and discussions with, possible
acquisition candidates, including evaluations and discussions relating to
acquisitions that may be material in size and/or scope. However, the Company
currently has no agreements or commitments with respect to any pending
acquisitions. See "Management's Discussion and Analysis of Financial
Conditions and Results of Operations-- Acquisitions."
The Company makes selective acquisitions of for-profit, career-oriented
schools which have a capable senior faculty and operations staff, as well as
quality educational programs which stand to benefit from the Company's
educational focus, marketing and operating strengths. The Company targets
schools which it believes
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have the potential to generate superior financial performance. Generally, such
schools demonstrate the following characteristics:
. Success--Demonstrating the ability to attract, retain and place students,
while meeting applicable federal and state regulatory criteria and
accreditation standards;
. "Schools of Choice"--Possessing leading reputations in career-oriented
disciplines within local, regional and national markets;
. Marketable Curricula--Offering programs with high value-added content and
relevant training to provide students with the skills necessary to obtain
attractive jobs and advance in their selected fields;
. Broad Marketability--Attracting students from each of the high school,
adult, foreign and contract training market segments; and
. Attractive Facilities and Geographic Locations--Providing geographically
desirable locations and modern facilities to attract students and
preparing them for the demands of the increasingly competitive work
place.
The Company believes that significant opportunities exist for growth through
acquisition. Some opportunities result from institutions having limited
resources to manage increasingly complex regulations or to fund the
significant cost of developing new educational programs necessary to meet
changing demands of the employment market. The Company believes that a
substantial number of schools exhibiting the characteristics described above
exist in the U.S. market and that such schools can be successfully integrated
into the Company's marketing and administrative structure.
The Company believes that there are also a significant number of potential
acquisition candidates and opportunities for growth in Canada. The Company
believes that favorable trends, similar to those occurring in the U.S., are
positively affecting the Canadian career-oriented postsecondary education
market, but that competition in Canada is not currently as intense as in the
United States. Few of the largest U.S. operators of postsecondary career-
oriented schools presently have a significant Canadian presence. The Company
believes that, given its existing Canadian operations, it is well-positioned
to take advantage of these opportunities.
The Company analyzes potential acquisition targets for their long-term
profit potential, enrollment potential and long-term demographic trends,
concentration of likely employers within the region, level of competition,
facility costs and availability and quality of management and faculty. The
Company carefully investigates any potential acquisition target for its
history of regulatory compliance, both as an indication of future regulatory
costs and compliance issues and as an indication of the school's overall
condition. Significant regulatory compliance issues in the school's past
generally will remove a school from the Company's consideration as an
acquisition candidate.
After the Company has completed an acquisition of one or more schools, the
Company immediately begins to apply its business strategy to boost enrollment
and improve the acquired schools' profitability. The Company assists acquired
schools in achieving their potential through a highly focused and active
management role, as well as through capital contributions. The Company
selectively commits resources to improve marketing, advertising,
administration and regulatory compliance at each acquired school. Further
resources may also be committed to enhance management depth. The Company
retains acquired schools' brand names to take advantage of their established
reputation in local, regional and/or national markets as "schools of choice."
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
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campuses will most likely be established as additional locations of existing
institutions, but also may be established as entirely separate, free-standing
institutions. Opening new campuses would enable the Company to capitalize on
new markets or geographic locations that exhibit strong enrollment potential
and/or the potential to establish a successful operation in one of the
Company's core curricula areas. The Company believes that this strategy will
allow it to continue to grow rapidly even if appropriate acquisition
opportunities are not readily available. The Company has not yet developed
specific plans for any new campuses, nor made any determination as to when it
will first develop, open and operate a new campus.
Entering New Service Areas. While the Company expects that its current
career-oriented school operations will continue to provide the substantial
majority of its revenue in the near term, the Company plans to develop new
education-related services which the Company believes offer strong long-term
growth potential. Among the service areas being actively considered are
distance learning (offering educational products and services for working
adults through video, Internet and other distribution channels) and
educational publishing (producing and marketing educational publications). The
Company also plans to expand its contract training business (providing
customized training on a contract basis for business and government
organizations), currently a limited part of the operations of a few of its
schools. Though the Company has not yet actively targeted the growing market
for contract training services, the Company believes that contract training
can become a much more significant part of its business.
Expanding Internationally. Although all of the Company's current operations
are located in North America, the Company believes that trends similar to
those impacting the market for career-oriented postsecondary education in the
U.S. and Canada are occurring outside of North America. As a result, the
Company believes that there may be significant international opportunities in
private, for-profit postsecondary education. To take advantage of these
opportunities, the Company may at some time in the future elect to acquire or
establish operations outside North America.
STUDENT RECRUITMENT
The Company's schools seek to attract students with both the desire and
ability to complete their academic programs. Therefore, to produce interest
among potential students, each of the Company's schools engages in a wide
variety of marketing activities.
The Company believes that the reputation of its schools in local, regional
and national business communities and the recommendations of satisfied former
students are important factors contributing to success in recruiting new
students. CEC works to further enhance the qualities that make its schools
"schools of choice" within their geographic locations. Each school's
admissions office is charged with marketing its school's programs through a
combination of admissions representatives, direct mailings and radio,
television and print media advertising, in addition to providing the
information needed by prospective students to assist them in making their
enrollment decisions.
The Company's schools employ approximately 190 admissions representatives,
each of whom focuses his or her efforts solely on the following areas: (i)
out-of-area (correspondence) recruiting, (ii) high school recruiting or (iii)
in-house (adult) recruiting. Correspondence representatives work with students
who live outside of the immediate school area to generate interest through
correspondence with potential enrollees who have learned of the school through
regional or national advertising. The Company believes it is able to
significantly boost enrollment by targeting students outside of the local
population. High school recruiting representatives conduct informational
programs at local secondary schools and follow up with interested students
outside of school, either at their homes or on the CEC school campus. The
interpersonal relationships formed with high school counselors and faculty may
have significant influence over a potential student's choice of school. CEC
believes that the relationships of its schools' representatives with the
counseling departments of high schools are good and that the brand awareness
and placement rates of its schools assist representatives in gaining access to
counselors. In-house representatives are also available to speak with
prospective students who visit campuses and to respond to calls generated
through the school's advertising campaigns. Representatives interview and
advise students
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interested in specific careers to determine the likelihood of their success in
completing their educational programs. The admissions representatives are
full-time, salaried employees of the schools. Regulations of the DOE prevent
the Company from giving its employees incentive compensation based, directly
or indirectly, upon the number of students recruited.
The Company also engages in significant direct mail campaigns. Mailing lists
are purchased from a variety of sources, and brochures are mailed regularly
during the course of the year, with frequency determined by the number of
school starts in a given year. The Company believes direct mailings offer a
fast and cost-effective way to reach a targeted population.
In addition, each school develops advertising for a variety of media,
including radio, television and the Internet, which is run locally, regionally
and sometimes nationally. While multi-media advertising is generally more
appropriate for local markets, certain initiatives have been successfully
utilized on a national basis. CEC has found infomercials to be a particularly
effective tool nationally because their length enables schools to convey a
substantial amount of information about their students, their faculty, their
facilities and, most importantly, their course offerings. The Company also
believes that the personal flavor of the presentation typical of infomercials
is well-suited to attracting potential applicants. As an additional marketing
tool, all of the Company's schools have established web sites, which can be
easily accessed for information about these schools and their educational
programs. Although the Company retains independent advertising agencies, the
Company designs and produces a portion of its direct marketing and multi-media
advertising and communications in-house, through Market Direct, Inc., a
wholly-owned subsidiary ("Market Direct"). While a majority of Market Direct's
operations involve designing and producing advertising for the Company, Market
Direct also provides these services to other businesses outside of the
postsecondary education industry as opportunities arise.
The Company closely monitors the effectiveness of its marketing efforts. The
Company estimates that, in 1997, admissions representatives were responsible
for attracting approximately 25% of student enrollments, direct mailings were
responsible for approximately 15%, television, radio and print media
advertising were responsible for approximately 40%, 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 1997, approximately 30% 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 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
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responsible for monitoring and coordinating the student retention efforts. In
addition, the Company's senior management regularly tracks retention rates at
each campus and provides feedback and support to appropriate local campus
administrators.
CURRICULUM DEVELOPMENT AND FACULTY
The Company believes that curriculum is the single most important component
of its operations, because students choose, and employers recruit from,
career-oriented schools based on the type and quality of technical education
offered. The curriculum development efforts of the Company's schools are a
product of their operating partnership with students and the business and
industrial communities.
The relationship of each of the Company's schools with the business
community plays a significant role in the development and adaptation of school
curriculum. Each school has one or more curriculum advisory boards comprised
of members of the local and/or regional business community who are engaged in
businesses directly related to the educational programs provided by the
school. These boards provide valuable input to the school's education
department, which allows the school to keep its curriculum current and provide
graduates with the training and skills that these employers seek.
CEC also endeavors to enhance and maintain the relevancy of its curriculum
by soliciting ideas through student and employer surveys and by requiring
students in selected programs to complete an internship during their school
experience. CEC has developed a number of techniques designed both to gain
valuable industry insight for ongoing curriculum development and enhance the
overall student experience. These techniques include (i) classroom discussions
with industry executives, (ii) part-time job placement within a student's
industry of choice, and (iii) classroom case studies that are based upon
actual industry issues.
CEC's schools are in continuous contact with employers through their
faculty, who are industry professionals. The schools hire a significant number
of part-time faculty holding positions in business and industry because
specialized knowledge is required to teach many of the schools' courses and to
provide students with current, industry-specific training. The schedules of
business and industry professionals often permit them to teach the many
evening courses offered by the Company's schools. Unlike traditional four-year
colleges, instructors in the Company's schools are not awarded tenure and are
evaluated, in part, based upon student evaluations. As of February 28, 1998,
the Company's schools employed approximately 950 faculty members, of which
approximately 25% were full-time employees of the Company and approximately
75% 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.
Business strategy, finance and consolidation accounting functions are
centralized at the Company's corporate headquarters. CEC's corporate staff
develops long-term and short-term operating strategies for the schools and
works closely with local administrators to accomplish their goals and ensure
adherence to Company strategy. CEC maintains stringent quality standards and
controls at both the corporate and individual school levels. Activities at the
corporate level include regular reporting processes which track the vital
statistics of each school's operations, including enrollments, placements,
leads, retention rates and financial data. These reports provide real-time
data which allow management to monitor the performance of each campus. Each
operating
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department at the campus level is also required to compile certain
quantitative reports at regular intervals, including reports on admissions,
financial aid, academic performance and placement.
CEC uses a number of quality and financial controls. Information is tracked
through an advanced, PC-based management information system, which currently
runs on a decentralized basis, but also allows centralized access to account
information.
TUITION AND FEES
Currently, total tuition for completion (on a full-time basis) of a 12-month
diploma program offered by the Company's schools ranges from $5,700 to
$14,270, for completion of an associate degree program ranges from $12,600 to
$22,770, and for completion of a bachelor's degree program ranges from $31,800
to $37,080. In addition to these tuition amounts, students at the Company's
schools typically must purchase textbooks and supplies as part of their
educational programs.
The Company's institutions bill students for their tuition and other
institutional charges based on the specific instructional format or formats of
the school's educational programs. Each institution's refund policies must
meet the requirements of the DOE and such institution's state and accrediting
agencies. Generally, under the DOE's requirements, if a first-time student
ceases attendance before the point in time that is 60% of the period of
enrollment for which the student has been charged, the institution will refund
institutional charges based on the amount of time for which the student paid
but did not attend. After a student has attended 60% or more of the term, the
institution will retain 100% of the institutional charges for that period of
enrollment. After the student's first enrollment period, the institution
refunds institutional charges for subsequent periods of enrollment based on
the number of weeks remaining in the period of enrollment in which the student
withdrew. Certain state refund requirements, where more beneficial to the
students, are applied when determining refunds for students.
GRADUATE EMPLOYMENT
The Company believes that employment of graduates of its schools in
occupations related to their fields of studies is critical to the reputation
of the schools and their ability to continue to recruit students successfully.
The Company believes that its schools' most successful form of recruiting is
through referrals from satisfied graduates. A strong placement office is
important to maintain and elevate the school's reputation, as well as managing
the rate at which former students default on their loans.
CEC devotes a significant amount of time and resources to student placement,
which the Company believes to be the ultimate indicator of its success. The
Company believes that its average placement rate (calculated according to the
criteria discussed below), which was in excess of 87% for calendar year 1997
graduates, is attractive to prospective students and provides a competitive
advantage. Student placement is a top priority of each CEC school beginning on
the first day of student enrollment. This approach heightens the students'
awareness of the placement department and keeps students focused on their
goal--job placement within their field of choice. Moreover, each CEC school
includes in its curriculum a career development course which provides
instruction in the preparation of resumes, cover letters, networking and other
essential job-search tools. Placement office resources are regularly available
to CEC school graduates. With such assistance, the Company's graduates find
employment with a wide variety of businesses located not only in the schools'
local markets but also regionally and nationally.
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.
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Based on information received from graduating students and employers (by
survey), the Company believes that of the 4,713 students graduating from its
schools during the fiscal year ended December 31, 1996 who are available
graduates (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), 87.5% obtained employment in fields related to their program
of study as of June 30 or earlier of the year following their graduation.
The reputation of the Gibbs schools allows them to charge fees to employers
upon placement of many of their students. The Company's other schools do not
currently receive such placement fees, nor, the Company believes, do any of
the Company's principal proprietary competitors. The Company believes that, as
an additional source of revenue, it may be able to replicate the Gibbs
placement fee program at other CEC schools.
TECHNOLOGY
CEC is committed to providing its students access to the technology
necessary for developing skills required to succeed in the careers for which
they are training. Through regular consultation with business representatives,
the Company ensures that all its schools provide their students with industry-
current computer hardware, computer software and equipment meeting industry-
specific technical standards. In each program, students use the types of
equipment that they will eventually use in their careers of choice. For
example, graphic animation students use sophisticated computer multimedia
animation and digital video editing equipment and supplies, and visual
communication and design technologies students make significant use of
technologies for computer-related design and layout and digital pre-press
applications.
EMPLOYEES
As of February 28, 1998, CEC and its schools had a total of approximately
1,040 full-time and 990 part-time employees. Neither the Company nor any of
its schools has any collective bargaining agreements with its employees. The
Company considers its relations with its employees to be good.
COMPETITION
The postsecondary education market, consisting in the U.S. of approximately
7,000 accredited universities, colleges and schools, is highly fragmented and
competitive, with no single institution having a significant market share.
CEC's schools compete with traditional public and private two-year and four-
year colleges and universities, other proprietary schools and alternatives to
higher education such as immediate employment and military service. Certain
private and public colleges and universities may offer courses of study
similar to those of the Company's schools. Some public institutions are able
to charge lower tuition than the Company's schools due in part to government
subsidies, government and foundation grants, tax-deductible contributions and
other financial sources not available to proprietary schools. However, tuition
at private, non-profit institutions is, on average, higher than the average
tuition rates of the Company's schools. Other proprietary career-oriented
schools also offer programs that compete with those of the Company's schools.
The Company believes that its schools compete with other educational
institutions principally based upon quality of their educational programs,
reputation in the business community, costs of programs and graduates' ability
to find employment. Some of the Company's competitors in both the public and
private sectors may have substantially greater financial and other resources
than the Company.
Changes in the regulatory environment have stimulated consolidation in the
postsecondary education industry. Regulations adopted in recent years have
tightened standards for educational content, established stricter permissible
student outcomes (i.e., completion, placement and federal loan default rates)
and created more stringent standards for the evaluation of a school's
financial responsibility and administrative capability. As a result, certain
career-oriented schools have been forced to close because they lacked
sufficient quality or financial resources or could not manage the increased
regulatory burden. At the same time, despite increasing demand, potential new
entrants face significant barriers to entry due to the highly regulated nature
of the industry and the considerable expense of start-up operations.
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FINANCIAL AID AND REGULATION
Accreditation. Accreditation is a non-governmental process through which an
institution submits itself to qualitative review by an organization of peer
institutions. The three types of accrediting agencies are (i) national
accrediting agencies, which accredit institutions on the basis of the overall
nature of the institutions without regard to their locations, (ii) regional
accrediting agencies, which accredit institutions located within their
geographic areas and (iii) programmatic accrediting agencies, which accredit
specific educational programs offered by an institution. Accrediting agencies
primarily examine the academic quality of the instructional programs of an
institution, and a grant of accreditation is generally viewed as certification
that an institution's programs meet generally accepted academic standards.
Accrediting agencies also review the administrative and financial operations
of the institutions they accredit to ensure that each institution has the
resources to perform its educational mission.
Pursuant to provisions of the Higher Education Act of 1965, as amended (the
"HEA"), the U.S. Department of Education (the "DOE") relies on accrediting
agencies to determine whether institutions' educational programs qualify them
to participate in the programs of federal student financial assistance
administered pursuant to Title IV of the HEA (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. Thirteen of the
Company's campuses are accredited by the Accrediting Council for Independent
Colleges and Schools ("ACICS"), three of the Company's campuses are accredited
by the Accrediting Commission of Career Schools and Colleges of Technology
("ACCSCT") and one of the Company's campuses is accredited by the Accrediting
Commission for Community and Junior Colleges of the Western Association of
Schools and Colleges ("WASC/ACCJC"). In addition, four of the campuses'
interior design programs are accredited by the Foundation for Interior Design
Education Research ("FIDER") and two of the campuses' culinary arts programs
are accredited by the American Culinary Federation Educational Institute
Accrediting Commission ("ACFEI"); FIDER and ACFEI are not recognized by the
DOE for Title IV Program eligibility purposes. The 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.
The HEA requires accrediting agencies recognized by the DOE to review many
aspects of an institution's operations to ensure that the education or
training offered by the institution is of sufficient quality to achieve, for
the duration of the accreditation period, the stated objective for which the
education or training is offered. Under the HEA, a recognized accrediting
agency must perform regular inspections and reviews of institutions of higher
education, including unannounced site visits to institutions that provide
career-oriented education and training. An accrediting agency may place an
institution on "reporting" status in order to monitor one or more specified
areas of the institution's performance. An institution placed on reporting
status is required to report periodically to its accrediting agency on that
institution's performance in the specified areas. Several of the Company's
institutions currently are on reporting status, requiring them regularly to
report their placement or retention results or both to their accrediting
agency. However, the Company expects all but three of these institutions,
IAMD-U.S. in Chicago, Brown and Collins, to be removed from such reporting
status in 1998. IAMD-U.S. in Chicago has also been and will continue to be on
financial reporting status to ACICS during 1998, based solely on the financial
status of IAMD-U.S. in Chicago under its previous ownership. While on
reporting status, an institution may be required to seek the permission of its
accrediting agency to open and commence instruction at new locations.
Student Financial Assistance. Students attending the Company's schools
finance their education through a combination of family contributions,
individual resources (including earnings from full or part-time employment)
and government-sponsored financial aid. The Company estimates that over 71% of
the students at its U.S. schools receive some government-sponsored (federal or
state) financial aid. For the 1996-97 award year (July 1, 1996 to June 30,
1997), approximately 81% of the Company's U.S. tuition and fee revenue (on a
cash basis) was derived from some form of such financial aid received by the
students of its schools. In addition, students attending IAMD-Canada receive
government-sponsored financial aid.
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To provide students access to financial assistance available through the
Title IV Programs, an institution, including its additional locations, must be
(i) authorized to offer its programs of instruction by the relevant agencies
of the state in which it and its additional campuses, if any, are located,
(ii) accredited by an accrediting agency recognized by the DOE and (iii)
certified as eligible by the DOE. In addition, the institution must ensure
that Title IV Program funds are properly accounted for and disbursed in the
correct amounts to eligible students.
Under the HEA and its implementing regulations, each of the Company's
campuses that participates in the Title IV Programs must comply with certain
standards on an institutional basis, as more specifically identified below.
For purposes of these standards, the regulations define an institution as a
main campus and its additional locations, if any. Under this definition, each
of the Company's U.S. campuses is a separate institution, except for The
Katharine Gibbs School in Piscataway, New Jersey, which is an additional
location of The Katharine Gibbs School in Montclair, New Jersey, and the
School of Computer Technology in Fairmont, West Virginia, which is an
additional location of the School of Computer Technology in Pittsburgh,
Pennsylvania.
Nature of Federal Support for Postsecondary Education in the U.S. While many
of the states support public colleges and universities primarily through
direct state subsidies, the federal government provides a substantial part of
its support for postsecondary education in the form of grants and loans to
students who can use this support at any institution that has been certified
as eligible by the DOE. The Title IV Programs have provided aid to students
for more than 30 years and, since the mid-1960's, the scope and size of such
programs have steadily increased. Since 1972, Congress has expanded the scope
of the HEA to provide for the needs of the changing national student
population by, among other things, (i) providing that students at proprietary
institutions, such as the Company's institutions, are eligible for assistance
under the Title IV Programs, (ii) establishing a program for loans to parents
of eligible students, (iii) opening the Title IV Programs to part-time
students, and (iv) increasing maximum loan limits and in some cases
eliminating the requirement that students demonstrate financial need to obtain
federally guaranteed student loans. Most recently, the William D. Ford Federal
Direct Loan ("FDL") program was enacted, enabling students to obtain loans
from the federal government rather than from commercial lenders.
The process of reauthorizing the HEA by the U.S. Congress, which takes place
approximately every five years, has begun and is expected to be completed in
1998. The Committee on Education and the Workforce of the U.S. House of
Representatives recently reported out of committee its reauthorization
legislation. This legislation proposes numerous amendments to the HEA. For
example, this legislation would amend the HEA as follows: (i) to establish the
authorized Pell maximum at $4,500 for academic year 1999-2000; (ii) to
eliminate from participation in all the Title IV Programs any institution that
loses its eligibility to participate in the guaranteed loan programs because
of high cohort default rates; (iii) to change the interest rate formula for
Federal Family Education Loan ("FFEL") program loans; (iv) to allow for the
single disbursement of an FFEL loan if the loan is for a period of time that
is only one semester, one trimester, one quarter or four months; (v) to
require the Secretary to discharge a student's liability on a loan if the
institution fails to make a refund owed to the student; and (vi) to require
the Secretary to notify the appropriate State and accrediting agency when
taking action against an institution.
Students at the Company's institutions receive grants, loans and work
opportunities to fund their education under several of the Title IV Programs,
of which the two largest are the FFEL program and the Federal Pell Grant
("Pell") program. The Company's institutions also participate in the Federal
Supplemental Educational Opportunity Grant ("FSEOG") program, and some of them
participate in the Federal Perkins Loan ("Perkins") program and the Federal
Work-Study ("FWS") program. One of the Company's institutions is an active
participant in the FDL program.
Most aid under the Title IV Programs is awarded on the basis of financial
need, generally defined under the HEA as the difference between the cost of
attending an educational program and the amount a student can reasonably
contribute to that cost. All recipients of Title IV Program funds must
maintain a satisfactory grade point average and progress in a timely manner
toward completion of their program of study.
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Pell. Pell grants are the primary component of the Title IV Programs under
which the DOE makes grants to students who demonstrate financial need. Every
eligible student is entitled to receive a Pell grant; there is no
institutional allocation or limit. For the 1997-98 award year, Pell grants
range from $400 to $2,700 per year. Amounts received by students enrolled in
the Company's U.S. institutions in the 1996-97 award year under the Pell
program equaled approximately 12% of the Company's U.S. tuition and fee
revenue.
FSEOG. FSEOG awards are designed to supplement Pell grants for the neediest
students. FSEOG grants generally range in amount from $100 to $4,000 per year;
however, the availability of FSEOG awards is limited by the amount of those
funds allocated to an institution under a formula that takes into account the
size of the institution, its costs and the income levels of its students. The
Company is required to make a 25% matching contribution for all FSEOG program
funds disbursed. Resources for this institutional contribution may include
institutional grants, scholarships and other eligible funds (i.e., funds from
foundations and other charitable organizations) and, in certain states,
portions of state scholarships and grants. During the 1996-97 award year, the
Company's required 25% institutional match was met by approximately $110,000
in funds from its institutions and approximately $177,000 in funds from state
scholarships and grants and from foundations and other charitable
organizations. Amounts received by students in the Company's institutions
under the federal share of the FSEOG programs in the 1996-97 award year
equaled approximately 1% of the Company's U.S. tuition and fee revenue.
FFEL and FDL. The FFEL program consists of two types of loans, Stafford
loans, which are made available to students, and PLUS loans, which are made
available to parents of students classified as dependents. Under the FDL
program, students may obtain loans directly from the DOE rather than
commercial lenders. The conditions on FDL loans are generally the same as on
loans made under the FFEL program. Certain of the Company's institutions have
been selected by the DOE to participate in the FDL program. Under the Stafford
loan program, a student may borrow up to $2,625 for the first academic year,
$3,500 for the second academic year and, in some educational programs, $5,500
for each of the third and fourth academic years. Students with financial need
qualify for interest subsidies while in school and during grace periods.
Students who are classified as independent can increase their borrowing limits
and receive additional unsubsidized Stafford loans. Such students can obtain
an additional $4,000 for each of the first and second academic years and,
depending upon the educational program, an additional $5,000 for each of the
third and fourth academic years. The obligation to begin repaying Stafford
loans does not commence until six months after a student ceases enrollment as
at least a half-time student. Amounts received by students in the Company's
institutions under the Stafford program in the 1996-97 award year equaled
approximately 44% of the Company's U.S. tuition and fee revenue (on a cash
basis). PLUS loans may be obtained by the parents of a dependent student in an
amount not to exceed the difference between the total cost of that student's
education (including allowable expenses) and other aid to which that student
is entitled. Amounts received by students in the Company's institutions under
the PLUS program in the 1996-97 award year equaled approximately 11% of the
Company's U.S. tuition and fee revenue (on a cash basis).
The Company's schools and their students use a wide variety of lenders and
guaranty agencies and have not experienced difficulties in identifying lenders
and guaranty agencies willing to make federal student loans. Additionally, the
HEA requires the establishment of lenders of last resort in every state to
ensure that students at any institution that cannot identify such lenders will
have access to the FFEL program loans.
Perkins. Eligible undergraduate students may borrow up to $3,000 under the
Perkins program during each academic year, with an aggregate maximum of
$15,000, at a 5% interest rate and with repayment delayed until nine months
after the borrower ceases to be enrolled on at least a half-time basis.
Perkins loans are made available to those students who demonstrate the
greatest financial need. Perkins loans are made from a revolving account, 75%
of which was initially capitalized by the DOE. Subsequent federal capital
contributions, with an institutional match in the same proportion, may be
received if an institution meets certain requirements. Each institution
collects payments on Perkins loans from its former students and loans those
funds to currently enrolled students. Collection and disbursement of Perkins
loans is the responsibility of each participating institution. During the
1996-97 award year, the Company collected approximately $543,000 from its
former students in repayment of Perkins loans. In the 1996-97 award year, the
Company's required matching contribution was
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approximately $47,000. The Perkins loans disbursed to students in the
Company's institutions in the 1996-97 award year equaled approximately 1% of
the Company's U.S. tuition and fee revenue. In 1995, the Gibbs institutions
voluntarily chose to discontinue participation in the Perkins program. IAMD-
U.S., SCT and Western Culinary also do not participate in the Perkins program.
FWS. Under the FWS program, federal funds are made available to pay up to
75% of the cost of part-time employment of eligible students, based on their
financial need, to perform work for the institution or for off-campus public
or non-profit organizations. During the 1996-97 award year, the Company's
institutions and other organizations provided matching contributions totaling
approximately $70,000. At least 5% of an institution's FWS allocation must be
used to fund student employment in community service positions. In general,
FWS earnings are not used for tuition and fees. However, in the 1996-97 award
year, the federal share of FWS earnings equalled 0.2% of the Company's U.S.
tuition and fee revenue.
Federal Oversight of the Title IV Programs. The substantial amount of
federal funds disbursed through the Title IV Programs coupled with the large
numbers of students and institutions participating in those programs have led
to instances of fraud, waste and abuse. As a result, the United States
Congress has required the DOE to increase its level of regulatory oversight of
institutions to ensure that public funds are properly used. Each institution
which participates in the Title IV Programs must annually submit to the DOE an
audit by an independent accounting firm of that institution's compliance with
the Title IV Program requirements, as well as audited financial statements.
The DOE also conducts compliance reviews, which include on-site evaluations,
of several hundred institutions each year, and directs student loan guaranty
agencies to conduct additional reviews relating to the FFEL programs. In
addition, the Office of the Inspector General of the DOE conducts audits and
investigations of institutions in certain circumstances. Under the HEA,
accrediting agencies and state licensing agencies also have responsibilities
for overseeing institutions' compliance with Title IV Program requirements. As
a result, each participating institution, including each of the Company's
institutions, is subject to frequent and detailed oversight and must comply
with a complex framework of laws and regulations or risk being required to
repay funds or becoming ineligible to participate in the Title IV Programs. In
addition, because the DOE periodically revises its regulations (e.g., in
November 1997, the DOE published new regulations with respect to financial
responsibility standards to take effect July 1, 1998) and changes its
interpretation of existing laws and regulations, there can be no assurance
that the DOE will agree with the Company's understanding of each Title IV
Program requirement. See "--Financial Responsibility Standards."
Largely as a result of this increased oversight, the DOE has reported that
more than 800 institutions have either ceased to be eligible for or have
voluntarily relinquished their participation in some or all of the Title IV
Programs since October 1, 1992. This has reduced competition among
institutions with respect to certain markets and educational programs.
Cohort Default Rates. A significant component of the Congressional
initiative aimed at reducing fraud, waste and abuse was the imposition of
limitations on participation in the Title IV Programs by institutions whose
former students defaulted on the repayment of federally guaranteed or funded
student loans at an "excessive" rate. Since the DOE began to impose sanctions
on institutions with cohort default rates above certain levels, the DOE has
reported that more than 600 institutions have lost their eligibility to
participate in some or all of the Title IV Programs. However, many
institutions, including all of the Company's institutions, have responded by
implementing aggressive student loan default management programs aimed at
reducing the likelihood of students failing to repay their loans in a timely
manner. An institution's cohort default rates under the FFEL and FDL programs
are calculated on an annual basis as the rate at which student borrowers
scheduled to begin repayment on their loans in one federal fiscal year default
on those loans by the end of the next federal fiscal year. An institution that
participates in both the FFEL and FDL programs, including one of the Company's
institutions, receives a single "weighted average" cohort default rate in
place of an FFEL or FDL cohort default rate. Any institution whose cohort
default rate equals or exceeds 25% for any one of the three most recent
federal fiscal years may be found by the DOE to lack administrative capability
and, on that basis, placed on provisional certification status for up to four
years. Provisional certification status does not limit an institution's access
to Title IV Program funds but does subject that institution to closer review
by the DOE and possible summary
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adverse action if that institution commits violations of the Title IV Program
requirements. Any institution whose cohort default rates equal or exceed 25%
for three consecutive years will no longer be eligible to participate in the
FFEL or FDL programs for the remainder of the federal fiscal year in which the
DOE determines that such institution has lost its eligibility and for the two
subsequent federal fiscal years. In addition, an institution whose cohort
default rate for any federal fiscal year exceeds 40% may have its eligibility
to participate in all of the Title IV Programs limited, suspended or
terminated. Since the calculation of cohort default rates involves the
collection of data from many non-governmental agencies (i.e., lenders, private
guarantors or servicers), as well as the DOE, the HEA provides a formal
process for the review and appeal of the accuracy of cohort default rates
before the DOE takes any action against an institution based on such rates.
None of the Company's institutions has had a published FFEL or FDL cohort
default rate of 25% or greater for three consecutive federal fiscal years. For
federal fiscal year 1995, the published cohort default rates for the Company's
institutions ranged from a low of 10.7% to a high of 27.4%. The average cohort
default rates for proprietary institutions nationally were 23.9%, 21.1% and
19.9% in federal fiscal years 1993, 1994 and 1995, respectively. Gibbs-Norwalk
is the only one of the Company's institutions that received a cohort default
rate for federal fiscal year 1995 that exceeds 25%, which rate, after
adjustment by the DOE, is 27.0%. In addition, two of the Company's
institutions, including Gibbs-Norwalk, have had an FFEL cohort default rate
exceeding 25% in one of the last three federal fiscal years for which such
rates have been published. To date, neither of these institutions has been
placed on provisional certification status as a result of FFEL cohort default
rates in excess of 25%.
The following table sets forth the cohort default rates for the Company's
institutions which receive funds under Title IV Programs for federal fiscal
years 1993, 1994 and 1995, based on the most recent determination received
from the DOE:
<TABLE>
<CAPTION>
COHORT DEFAULT
RATE
-----------------
SCHOOL 1995 1994 1993
------ ----- ----- -----
<S> <C> <C> <C>
AL COLLINS GRAPHIC DESIGN SCHOOL
Tempe, AZ............................................ 13.8% 19.3% 28.4%
ALLENTOWN BUSINESS SCHOOL
Allentown, PA........................................ 10.7% 7.1% 14.9%
BROOKS COLLEGE
Long Beach, CA....................................... 18.4% 18.4% 16.2%
BROWN INSTITUTE
Mendota Heights, MN.................................. 18.1% 19.6% 18.6%
WESTERN CULINARY INSTITUTE
Portland, OR......................................... 14.3% 11.4% 14.3%
SCHOOL OF COMPUTER TECHNOLOGY
Pittsburgh, PA and Fairmont, WV...................... 11.2% 9.3% 14.6%
THE KATHARINE GIBBS SCHOOLS
Boston, MA........................................... 16.9% 16.7% 18.6%
Melville, NY......................................... 16.0% 17.7% 18.2%
Montclair, NJ and Piscataway, NJ..................... 16.3% 16.0% 19.2%
New York, NY......................................... 14.5% 18.9% 17.5%
Norwalk, CT.......................................... 27.4% 17.7% 24.0%
Providence, RI....................................... 14.8% 13.1% 17.3%
INTERNATIONAL ACADEMY OF MERCHANDISING & DESIGN (U.S.)
Chicago, IL.......................................... 15.5% 13.3% 15.0%
Tampa, FL............................................ 13.3% 15.0% 17.3%
</TABLE>
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
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<PAGE>
students who were scheduled to begin repayment in the 1995-96 federal award
year, the most recent year for which such rates have been calculated. These
institutions are Allentown, Brown, Collins, Gibbs-Boston, Gibbs-Melville,
Gibbs-Montclair, Gibbs-New York, Gibbs-Norwalk and Gibbs-Providence. The
Perkins program cohort default rates for these nine institutions ranged from
20.7% to 64.3%. Thus, these institutions could be placed on provisional
certification status, which would subject them to closer review by the DOE and
possible summary adverse action if they commit any violation of the Title IV
Program requirements. However, to date, none of these institutions has been
placed on such status for this reason. In 1995, the Gibbs institutions
voluntarily chose to discontinue their participation in the Perkins program.
Each of the Company's institutions has adopted a student loan default
management plan. Those plans emphasize the importance of students 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
were required to undergo such a recertification review by the DOE by 1997 and
are required to undergo such a recertification review 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, and a similar repeal is proposed in
language adopted by the House Committee on Education and the Workforce.
Financial Responsibility Standards. All institutions participating in the
Title IV Programs must satisfy a series of specific standards of financial
responsibility. Institutions are evaluated for compliance with those
requirements in several circumstances, including as part of the DOE's
quadrennial recertification process and also annually as each institution
submits its audited financial statements to the DOE. One standard requires
each institution to demonstrate an acid test ratio (defined as the ratio of
cash, cash equivalents and current accounts receivable to current liabilities)
of at least 1:1 at the end of each fiscal year. Another standard requires that
each institution have a positive tangible net worth at the end of each fiscal
year. A third standard prohibits any institution from having a cumulative net
operating loss during its two most recent fiscal years that results in a
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<PAGE>
decline of more than 10% of that institution's tangible net worth as measured
at the beginning of that two-year period. The DOE may measure an institution's
financial responsibility on the basis of the financial statements of the
institution itself or the financial statements of the institution's parent
company, and may also consider the financial condition of any other entity
related to the institution.
An institution that is determined by the DOE not to meet any one of the
standards of financial responsibility is nonetheless entitled to participate
in the Title IV Programs if it can demonstrate to the DOE that it is
financially responsible on an alternative basis. An institution may do so by
posting surety either in an amount equal to 50% (or greater, as the DOE may
require) of the total Title IV Program funds received by students enrolled at
such institution during the prior year or in an amount equal to 10% (or
greater, as the DOE may require) of such prior year's funds if the institution
also agrees to transfer to the reimbursement system of payment for its Title
IV Program funds. The DOE has interpreted this surety condition to require the
posting of an irrevocable letter of credit in favor of the DOE.
In November 1997, the DOE published new regulations regarding financial
responsibility to take effect on July 1, 1998. The regulations provide a
transition year alternative which will permit institutions to have their
financial responsibility for the 1998 fiscal year measured on the basis of
either the new regulations or the current regulations, whichever are more
favorable. Under the new regulations, the DOE will calculate three financial
ratios for an institution, each of which will be scored separately and which
will then be combined to determine the institution's financial responsibility.
If an institution's composite score is below the minimum requirement for
unconditional approval but above a designated threshold level, such
institution may take advantage of an alternative that allows it to continue to
participate in the Title IV Programs for up to three years under additional
monitoring and reporting procedures. If an institution's composite score falls
below this threshold level or is between the minimum for unconditional
approval and the threshold for more than three consecutive years, the
institution will be required to post a letter of credit in favor of the DOE.
The Company does not believe that these new regulations will have a material
effect on the Company's compliance with the DOE's financial responsibility
standards.
Company Compliance with Financial Responsibility Standards. In reviewing the
Company's acquisitions since September 1996, it has been the DOE's practice to
measure financial responsibility on the basis of the financial statements of
both the institutions and the Company. In its review of the Company's annual
financial statements and interim balance sheets, as filed with the DOE in
connection with the Company's applications for DOE certification of
institutions acquired subsequent to September 1996 to allow such institutions
to participate in the Title IV Programs, the DOE has questioned the Company's
accounting for certain direct marketing costs and its valuation of courseware
and other instructional materials of the Company's recently acquired
institutions. The audited financial statements prior to 1997 have been
restated to expense as incurred all direct marketing and advertising costs
which had previously been deferred. The DOE also previously asserted that the
Company did not satisfy the 1:1 acid test ratio based on its fiscal 1996
financial statements, but, after reviewing additional materials submitted by
the Company, the DOE has indicated that the Company did in fact satisfy this
test.
As a result of the DOE's concerns regarding the Company's accounting for
direct marketing costs and courseware and instructional materials, the DOE has
offered the Company the alternative of posting an irrevocable letter of credit
in favor of the Secretary of Education with respect to each institution the
Company has acquired since September 1996 in a sum sufficient to secure the
DOE's interest in the Title IV Program funds administered by the applicable
institution. While the Company continues to disagree with the position taken
by the DOE, in order to obtain certification of the institutions to resume
participation in the Title IV Programs in a timely fashion, and thus to avoid
any material interruption in Title IV Program funding for the acquired
institutions, the Company has posted, and currently has outstanding, a letter
of credit in the amount of $1.9 million, which expires on September 30, 1998,
with respect to Western Culinary; a letter of credit in the amount of $12.0
million, which expires on October 31, 1998, with respect to Gibbs; a letter of
credit in the amount of $1.2 million, which expires on October 31, 1998, with
respect to SCT; and a letter of credit in the amount of $5.3 million, which
expires on October 31, 1998, with respect to IAMD-U.S.
20
<PAGE>
The original letters of credit for Western Culinary and SCT represented 50%
of each institution's Title IV Program funding in the prior award year.
Subsequently, the DOE increased the level of surety for SCT to, and
established the level of surety of Gibbs and IAMD-U.S. at, 75% of the Title IV
Program funds that students enrolled at each such institution received in the
previous award year. The DOE also has stated that, prior to a determination
that the Company satisfies the standards of financial responsibility, the DOE
will not consider applications to resume Title IV Program participation on
behalf of any institutions that the Company may acquire in the future or
applications that seek approval of any action that would expand the Title IV
Program participation of any of the Company's U.S. institutions that already
is certified for such participation.
Beginning in October 1997, the DOE imposed a condition that, through
September 30, 1998, SCT, Gibbs and IAMD-U.S. may not disburse Title IV Program
funds in excess of the total Title IV Program funds that students enrolled at
each institution received in the most recent award year for which data are
available to the DOE. The DOE has calculated this amount to be $1.6 million in
the case of SCT, $16.0 million in the case of Gibbs and $7.0 million in the
case of IAMD-U.S. In subsequent discussions, the DOE has agreed to consider
potential increases in the Title IV Program funding available to students at
the affected institutions, if the Company so requests and with the
understanding that the Company would secure any such increase in Title IV
Program funding by increasing the applicable letter of credit in an amount
commensurate with the additional Title IV Program funding utilized by such
students. The DOE has advised the Company that the DOE does not include
William D. Ford Federal Direct Loan ("FDL") funds in calculating the amount of
any letter of credit and that FDL funds are not considered in determining the
total Title IV Program funding available to an affected institution. SCT
currently participates in the FDL program, the Gibbs schools are eligible to
participate in the FDL program, and the IAMD-U.S. schools are applying for
such eligibility.
The Company has determined that the Title IV funding disbursed to students
enrolled at each of SCT, Gibbs and IAMD-U.S. is approaching the funding
limitation imposed by the DOE for each such school. The Company believes it
can stay within such limitation at Gibbs and IAMD-U.S. for at least the next
calendar quarter by utilizing Federal Direct Loans at such schools. Based on
current trends, the Company believes SCT could reach its Title IV funding
limitation within the next quarter, but, if that occurs, the Company believes
it can provide alternative sources of financial aid to students at SCT. The
Company has initiated discussions with the DOE, as referenced in the preceding
paragraph, to consider an increase in the Title IV funding limitation for SCT,
Gibbs and IAMD-U.S., at least until the DOE can conclude its next financial
review of the Company, based on the Company expanding the letters of credit
that it has posted on behalf of each such school. If IAMD-U.S. cannot begin
participation in the FDL program early in the next quarter, it could
significantly reduce the Company's ability to provide financial assistance to
additional students at IAMD-U.S., which in turn could reduce the Company's
ability to enroll such additional students. If the Company were unable to
increase aggregate enrollment at SCT, Gibbs and IAMD-U.S. and unable for an
extended period to file applications with the DOE for other newly acquired
U.S. institutions to seek Title IV Program participation, it could have a
material adverse effect on the Company's business, results of operations and
financial condition and on its ability to generate sufficient liquidity to
continue to fund growth in its operations and purchase other institutions. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
In accordance with applicable law, the DOE will be required to rescind the
letters of credit and related requirements if the Company and its U.S.
institutions demonstrate that they satisfy the standards of financial
responsibility, using accounting treatments that are acceptable to the DOE.
After discussions with the DOE, the Company changed its accounting to
eliminate deferred direct marketing costs from its financial statements. In
the course of further discussions with the DOE, the Company provided
additional information regarding the valuation of courseware and instructional
materials at one of the recently acquired institutions where such valuation
was questioned by the DOE. Based upon these discussions, the Company believes
its valuation of courseware and instructional materials to be presented in its
1997 financial statements will not impair a determination by the DOE that the
Company is financially responsible. Further, the DOE agreed that in the
conduct of its next review of the financial responsibility of the Company and
its U.S. institutions, the DOE will
21
<PAGE>
consider financial information reflecting the results of the Company's 1998
initial public offering (the "Offering"), as well as the 1997 audited
financial statements of each entity. The Company received net proceeds from
the Offering of approximately $45.9 million. The Company believes, based on
its audited 1997 financial statements, that it satisfies each of the DOE's
standards of financial responsibility, except for the tangible net worth
ratio. However, the Company believes that based upon the DOE's review of its
audited 1997 financial statements and the Company's audited post-Offering
balance sheet, the Company will also satisfy the tangible net worth ratio. At
the institutional level, the Company believes that each institution that it
owned and operated for the entire 1997 fiscal year will satisfy each of the
DOE's standards of financial responsibility, based on the DOE's review of the
institution's financial position as of December 31, 1997 and the post-Offering
balance sheet. Certain of the institutions the Company acquired during 1997
(IAMD-U.S. and four of the Gibbs schools) will show an operating loss for the
portion of the 1997 fiscal year that they were owned and operated by the
Company. In the event that the DOE considers a part-year operating loss
material, and if the DOE does not measure the financial responsibility of such
institutions on the basis of the financial position of CEC, the DOE may
require the Company to post letters of credit on behalf of such institutions,
but management does not believe there would be any basis for the DOE to impose
a further Title IV funding limitation on such institutions. Such letters of
credit, which would be calculated on an institution-specific basis, would be
in amounts substantially less than the letters of credit the Company currently
has outstanding. Accordingly, the Company intends to seek the DOE's review of
the Company's and its U.S. institutions' audited 1997 financial statements and
the Company's post-Offering balance sheet on an expedited basis in April 1998.
However, there can be no assurance that the DOE will expedite its review or of
the outcome of such review.
Under a separate standard of financial responsibility, if an institution has
made late Title IV Program refunds to students in its prior two years, the
institution is required to post a letter of credit in favor of the DOE in an
amount equal to 25% of the total Title IV Program refunds paid by the
institution in its prior fiscal year. 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.
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
22
<PAGE>
300 but less than 600 clock hours of instruction, are eligible only for FFEL
funding and only if they have been offered for a year and the institution can
demonstrate, based on an attestation by its independent auditor, that 70% of
all students who enroll in such programs complete them within a prescribed
time and 70% of those students who graduate from such programs obtain
employment in the recognized occupation for which they were trained within a
prescribed time. Certain of the Gibbs institutions offer such short-term
programs, but students enrolled in such programs represent a small percentage
of the total enrollment of the Company's schools. To date, the applicable
institutions have been able to establish that their short-term educational
programs meet the required completion and placement percentages. In the event
that an institution erroneously determines that an educational program is
eligible for purposes of the Title IV Programs without the DOE's express
approval, the institution would likely be liable for repayment of Title IV
Program funds provided to students in that educational program. The Company
does not believe that the DOE's regulations will create significant obstacles
to its plans to add new programs.
Certain of the state authorizing agencies and accrediting agencies with
jurisdiction over the Company's campuses also have requirements that may, in
certain instances, limit the ability of the Company to open a new campus,
acquire an existing campus or establish an additional location of an existing
institution or begin offering a new educational program. The Company does not
believe that those standards will have a material adverse effect on the
Company or its expansion plans.
The "85/15 Rule." Under a provision of the HEA commonly referred to as the
"85/15 Rule," a proprietary institution, such as each of the Company's U.S.
institutions, would cease being eligible to participate in the Title IV
Programs if, on a cash accounting basis, more than 85% of its revenue for the
prior fiscal year was derived from the Title IV Programs. Any institution that
violates the 85/15 Rule immediately becomes ineligible to participate in the
Title IV Programs and is unable to apply to regain its eligibility until the
following fiscal year. The Company has calculated that, since this requirement
took effect in 1995, none of the Company's U.S. institutions has derived more
than 83% of its revenue from the Title IV Programs for any fiscal year, and
that for 1997 the range for the Company's U.S. institutions was from
approximately 46% to approximately 82%. In conjunction with the preparation of
the Company's audited 1997 financial statements, its independent auditors have
audited the Company's calculation of the percentage of revenues derived from
the Title IV Programs at each CEC institution that participates in the Title
IV Programs. 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.
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<PAGE>
Canadian Regulation. 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.
Students from the province of Ontario receive financial assistance under both
the CSL program and the Ontario Student Loans Plan ("OSLP") program. CSL
program loans are made by the Canadian federal government. IAMD-Canada in
Toronto has two buildings, each of which must be registered under the Private
Vocational Schools Act (Ontario) ("PVSA") but which the Company operates
together as a single campus.
With respect to students who reside in the province of Ontario, the Ontario
Ministry of Education and Training ("OMET") provides financial assistance to
eligible students through the Ontario Student Assistance Plan ("OSAP"), which
includes two main components, the CSL program and the OSLP program. To
maintain its right to administer OSAP, an institution, such as the IAMD-Canada
campus in Toronto, must, among other things, be registered and in good
standing under the PVSA and abide by the rules, regulations and administrative
manuals of the CSL, OSLP and other OSAP-related programs. In order to attain
initial eligibility, an institution must establish, among other things, that
it has been in good standing under the PVSA for at least 12 months, that it
has offered an eligible program for at least 12 months, and that it has
graduated at least one class in an eligible program that satisfies specific
requirements with respect to class size and graduation rate. During the first
two years of initial eligibility, the institution must have its administration
of OSAP independently audited, and full eligibility will not be granted unless
these audits establish that the institution has properly administered OSAP.
The institution can only administer CSL funds, and cannot administer OSLP
funds, until it has gained full eligibility. Once an institution has gained
OSAP eligibility, the institution must advise OMET before it takes any
material action that may result in its failure or inability to meet any rules,
regulations or requirements related to OSAP.
In order for an OSAP-eligible institution to establish a new branch of an
existing eligible institution, it must obtain an OSAP-designation from OMET,
either as a separate institution if the branch administers OSAP without the
involvement of the main campus or as part of the same institution if OSAP is
administered through the main campus of the institution. The Company does not
believe that OSAP's requirements will create significant obstacles to its
plans to acquire additional institutions or open new branches in Ontario.
Institutions participating in OSAP, such as the IAMD-Canada campus in
Toronto, cannot submit applications for loans to students enrolled in
educational programs that have not been designated as OSAP-eligible by OMET.
To be eligible, among other things, a program must be registered with the
Private Vocational Schools Unit of the OMET, must be of a certain minimum
length and must lead to a diploma or certificate. The Company does not
anticipate that these program approval requirements will create significant
problems with respect to its plans to add new educational programs.
An institution cannot automatically acquire OSAP-designation through
acquisition of other OSAP-eligible institutions. When there is a change of
ownership, including a change in controlling interest, in a non-incorporated
OSAP-eligible institution, OMET will require evidence of the institution's
continued capacity to properly administer the program before extending OSAP
designation to the new owner. Given that OMET periodically revises its
regulations and other requirements and changes its interpretations of existing
laws and regulations, there can be no assurance that OMET will agree with the
Company's understanding of each OMET requirement.
IAMD-Canada, in Toronto, is required to audit its OSAP administration
annually and OMET is authorized to conduct its own audits of the
administration of the OSAP programs by any OSAP-eligible institution. The
Company has complied with these requirements on a timely basis. Based on its
most recent annual compliance audits, IAMD-Canada, in Toronto has been found
to be in substantial compliance with the requirements of OSAP and the Company
believes that they continue to be in substantial compliance with these
requirements. OMET has the authority to take any measures it deems necessary
to protect the integrity of the administration of OSAP. If OMET deems a
failure to comply to be minor, OMET will advise the institution of the
deficiency and provide
24
<PAGE>
the institution with the opportunity to remedy the asserted deficiency. If
OMET deems the failure to comply to be serious in nature, OMET has the
authority to: (i) condition the institution's continued OSAP designation upon
the institution's meeting specific requirements during a specific time frame;
(ii) refuse to extend the institution OSAP eligibility to the OSLP program;
(iii) suspend the institution's OSAP designation or (iv) revoke the
institution's OSAP designation. In addition, when OMET determines that any
non-compliance in an institution's OSAP administration is serious, OMET has
the authority to contract with an independent auditor, at the expense of the
institution, to conduct a full audit in order to quantify the deficiencies and
to require repayment of all loan amounts. In addition, OMET may impose a
penalty up to the amount of the damages assessed in the independent audit.
As noted above, IAMD-Canada, in Toronto, is subject to the PVSA. The Company
may not operate a private vocational school in the province of Ontario unless
such school is registered under the PVSA. Upon payment of the prescribed fee
and satisfaction of the conditions prescribed by the regulations under the
PVSA and by the Private Vocational Schools Unit of the OMET, an applicant or
registrant such as IAMD-Canada, in Toronto, is entitled to registration or
renewal of registration to conduct or operate a private vocational school
unless: (1) it cannot reasonably be expected to be financially responsible in
the conduct of the private vocational school; (2) the past conduct of the
officers or directors provides reasonable grounds for belief that the
operations of the campus will not be carried on in accordance with relevant
law and with integrity and honesty; (3) it can reasonably be expected that the
course or courses of study or the method of training offered by the private
vocational school will not provide the skill and knowledge requisite for
employment in the vocation or vocations for which the applicant or registrant
is offering instruction; or (4) the applicant is carrying on activities that
are, or will be, if the applicant is registered, in contravention of the PVSA
or the regulations under the PVSA. An applicant for registration to conduct or
operate a private vocational school is required to submit with the application
a bond in an amount determined in accordance with the regulations under the
PVSA. IAMD-Canada, in Toronto, is currently registered under the PVSA at both
of its buildings, and the Company does not believe that there will be any
impediment to renewal of such registrations on an annual basis.
The PVSA provides that a "registration" is not transferable. However, the
Private Vocational Schools Unit of OMET takes the position that a purchase of
shares of a private vocational school does not invalidate the school's
registration under the PVSA.
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 Act Respecting Private
Education ("ARPE"). In accordance with the ARPE, the Company may not operate a
private educational institution without holding a permit issued by the Quebec
Minister of Education (the "QME") for the institution itself and for the
educational services to be provided. The QME will issue the permit after
consulting with the Commission Consultative de l'Enseignement Prive (the
"Commission") concerning the particular institution and the educational
services to determine if such institution and services meet certain
conditions. Permits cannot be transferred without the written authorization of
the QME, and any entity holding a permit must advise the QME of any
amalgamation, sale or transfer affecting such entity. The QME, after
consultation with the Commission, has the authority to modify or revoke a
permit where the holder of the permit, among other things: (i) does not comply
with the conditions, restrictions or prohibitions relating to the institution
or (ii) is, or is about to become, insolvent. The QME must provide the
institution with a chance to present its views before revoking a permit. Given
that the QME periodically revises its regulations and other requirements and
changes its interpretations of existing laws and regulations, there can be no
assurance that the QME will agree with the Company's understanding of each
requirement of the QME.
The Company does not believe that the QME's requirements will create
significant obstacles to its plans to acquire additional institutions, or open
new branches in Quebec or that the QME's requirements will create significant
obstacles to its plans to add new educational programs at IAMD-Canada, in
Quebec. The Company does not believe that there will be any impediment to
renewal of the permit issued to IAMD-Canada, in Quebec, under the ARPE.
25
<PAGE>
The legislative, regulatory and other requirements relating to student
financial assistance programs in Ontario and Quebec are currently in the
process of being changed 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.
ITEM 2. PROPERTIES
CEC's corporate headquarters are located in Hoffman Estates, Illinois, near
Chicago, and its 19 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.
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 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.
ITEM 3. LEGAL PROCEEDINGS
CEC is subject to occasional lawsuits, investigations and claims arising out
of the ordinary conduct of its business, including the following:
On February 24, 1997, 30 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. There are currently 38 plaintiffs, who
are seeking to recover their tuition, interest and costs. Brown has answered
the complaint, asserted defenses and the parties have exchanged written
discovery. Brown believes that all of these claims are frivolous and without
merit and is vigorously contesting the allegations. If Brown's pending motion
for summary judgment is not granted, the case is set for jury trial in the
summer of 1998.
Although outcomes cannot be predicted with certainty, the Company does not
believe that the above-described matter or any other legal proceeding to which
the Company is a party will have a material adverse effect on the Company's
financial performance, results of operations or liquidity.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of 1997.
26
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock has been quoted on the Nasdaq National Market
(the "National Market") under the symbol CECO since January 29, 1998.
The closing price of the Company's Common Stock as reported on the National
Market on March 25, 1998 was $21.50 per share. As of March 25, 1998, there
were 29 holders of record of the Company's Common Stock.
On January 28, 1998, the Company's Registration Statement on Form S-1 (333-
37601) (the "Registration Statement") relating to the Offering was declared
effective by the Commission. The Registration Statement registered an amount
of Common Stock having an aggregate offering price of $52.44 million. The
Offering was consummated on February 4, 1998 and the Company issued 3,277,500
shares of Common Stock at $16.00 per share (for an aggregate offering amount
of $52.44 million). The managing underwriters of the Offering were Credit
Suisse First Boston Corporation and Smith Barney, Inc. In connection with the
Offering, the Company paid underwriting discounts and commissions of
approximately $3.67 million and approximately $2.9 million of other expenses.
After deducting such total expenses, the Company's net proceeds from the
Offering were approximately $45.9 million. The Company used approximately
$41.8 million of the net proceeds to repay outstanding borrowings under the
Credit Agreement and approximately $4.1 million to repay the outstanding
indebtedness on notes payable to the former shareholders of IAMD-U.S. and
IAMD-Canada.
The Company intends to retain its future earnings to finance the continuing
development of its business. Accordingly, the Company does not anticipate
paying any cash dividends on its Common Stock in the foreseeable future. The
payment of any future dividends will be at the discretion of the Company's
Board of Directors and will depend upon, among other things, future earnings,
the success of the Company's development activities, capital requirements,
restrictions in financing arrangements, the general financial condition of the
Company and general business conditions. At present, the Company's has no
ability to pay dividends under the provisions of the Credit Agreement (as
defined hereafter, see "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources"). The
Company is currently in the process of renegotiating certain provisions of the
Credit Agreement.
27
<PAGE>
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following selected historical consolidated financial and other data are
qualified by reference to, and should be read in conjunction with, the
Company's consolidated financial statements and the related notes thereto
appearing elsewhere herein and "Management's Discussion and Analysis of
Financial Condition and Results of Operations." The selected statement of
operations data set forth below for the Company for the years ended December
31, 1997, 1996 and 1995 and the balance sheet data as of December 31, 1997,
1996 and 1995 are derived from the audited consolidated financial statements
of the Company.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------
1997 1996 1995
-------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue:
Tuition and registration fees, net................ $ 74,842 $29,269 $16,330
Other, net........................................ 7,756 4,311 3,066
-------- ------- -------
Total net revenue............................... 82,598 33,580 19,396
Operating Expenses:
Educational services and facilities............... 34,620 14,404 8,565
General and administrative........................ 37,542 14,622 9,097
Depreciation and amortization..................... 8,121 2,134 1,330
-------- ------- -------
Total operating expenses........................ 80,283 31,160 18,992
-------- ------- -------
Income from operations............................. 2,315 2,420 404
Interest expense................................... 3,108 717 311
-------- ------- -------
Income (loss) before provision for taxes and
extraordinary item................................ (793) 1,703 93
Provision (benefit) for income taxes............... (331) 208 24
-------- ------- -------
Income (loss) before extraordinary item............ (462) 1,495 69
Extraordinary loss on early extinguishment of debt
(net of taxes of $233)............................ (418) -- --
-------- ------- -------
Net income (loss).................................. $ (880) $ 1,495 $ 69
======== ======= =======
Income (loss) attributable to common stockholders:
Income (loss) before extraordinary item, as
reported......................................... $ (462) $ 1,495 $ 69
Accrued dividends on preferred stock (1).......... (2,159) (1,128) (777)
Accretion to redemption value of preferred stock
and warrants (2)................................. (6,268) (230) (96)
-------- ------- -------
Income (loss) before extraordinary item,
attributable to common stockholders............... (8,889) 137 (804)
Extraordinary loss, net............................ (418) -- --
-------- ------- -------
Net income (loss) attributable to common
stockholders...................................... $ (9,307) $ 137 $ (804)
======== ======= =======
OTHER DATA:
EBITDA (3)......................................... 10,436 4,554 1,734
EBITDA margin (3).................................. 12.6% 13.6% 8.9%
Capital expenditures, net.......................... 3,822 1,231 897
Student population (4)............................. 11,500 4,537 3,347
<CAPTION>
DECEMBER 31,
--------------------------
1997 1996 1995
-------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash............................................... $ 18,906 $ 7,798 $ 3,965
Working capital.................................... 13,806 1,379 1,314
Total assets....................................... 117,617 36,208 23,584
Long-term debt, net of current maturities.......... 60,147 13,783 6,725
Redeemable preferred stock and warrants............ 40,160 14,561 13,628
Total stockholders' investment..................... (7,404) (2,589) (2,756)
</TABLE>
- --------
(1) 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.
(2) See Note 2 of the Notes to the Company's Consolidated Financial
Statements.
(3) For any period, EBITDA equals earnings before interest expense, taxes,
depreciation and amortization (including amortization of debt discount and
deferred financing costs), and EBITDA margin equals EBITDA as a percentage
of net revenue. EBITDA and EBITDA margin are presented because the Company
believes they allow for a more complete analysis of the Company's results
of operations. EBITDA and EBITDA margin should not be considered as
alternatives to, nor is there any implication that they are more
meaningful than, any measure of performance or liquidity as promulgated
under GAAP.
(4) Represents the approximate total student population at the Company's
schools as of December 31, 1997.
28
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The discussion below contains certain forward-looking statements (as such
term is defined in Section 21E of the Securities Exchange Act of 1934) that
are based on the beliefs of the management of Career Education Corporation and
its subsidiaries (collectively, the "Company" or "CEC"), as well as
assumptions made by, and information currently available to, the Company's
management. The Company's actual growth, results, performance and business
prospects and opportunities in 1998 and beyond could differ materially from
those expressed in, or implied by, any such forward-looking statements. See
"Special Note Regarding Forward-Looking Statements" on page 35 for a
discussion of risks and uncertainties that could cause or contribute to such
material differences.
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 herein.
BACKGROUND AND OVERVIEW
CEC is one of the largest providers of private, for-profit postsecondary
education in North America, with approximately 12,500 students enrolled as of
February 28, 1998. CEC operates 10 schools, with 19 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 to $82.6 million in 1997, from
$7.5 million in 1994; EBITDA increased to $10.4 million in 1997, from a loss
of $0.5 million in 1994; and the net loss decreased to $0.9 million in 1997,
from a loss of $1.6 million in 1994. Student population at the Company's
schools increased 248%, from 3,300 students at December 31, 1995 to 11,500
students at December 31, 1997. During the period 1994 to 1997, the Company
acquired nine schools (Allentown, Brooks, Brown, Collins, Gibbs, IAMD-Canada,
IAMD-U.S., SCT 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.
29
<PAGE>
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 during 1997 represented an average
increase of approximately 5% over tuition during 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.
The Company categorizes its expenses as educational services and facilities,
general and administrative and depreciation and amortization. Educational
services and facilities expense generally consists of expense directly
attributable to the educational activity of the schools, including salaries
and benefits of faculty, academic administrators and student support
personnel. Educational services and facilities expense also includes costs of
educational supplies and facilities (including rents on school leases),
certain costs of establishing and maintaining computer laboratories, costs of
student housing (Brooks and SCT only) and all other physical plant and
occupancy costs, with the exception of costs attributable to the Company's
corporate offices.
General and administrative expense includes salaries and benefits of
personnel in recruitment, admissions, accounting, personnel, compliance, and
corporate and school administration. Costs of promotion and development,
advertising and production of marketing materials, and occupancy of the
corporate offices are also included in this expense category.
Depreciation and amortization includes costs associated with the
depreciation of purchased computer laboratories, equipment, furniture and
fixtures, courseware, owned facilities, capitalized equipment leases and
amortization of intangible assets, primarily goodwill and non-competition
agreements with previous owners of the schools.
ACQUISITIONS
In 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 $4.9 million. 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 $19.0 million. 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.
On March 13, 1998, the Company acquired all of the outstanding capital stock
of Southern California School of Culinary Arts ("SCSCA"). The acquisition of
SCSCA will be accounted for as a purchase. The purchase price was
approximately $1.1 million, subject to adjustment. In addition, the Company
paid $150,000 to the former owner of SCSCA pursuant to a non-competition
agreement.
30
<PAGE>
COMPENSATION EXPENSE
As of October 20, 1997, certain option agreements between the Company and
two of its executive officers and directors were amended to fix, upon the
consummation of the Offering, the number of shares of Common Stock issuable
upon exercise of the stock options provided under these agreements. Under the
amended options, which fully vested upon the consummation of the Offering, the
holders are entitled to purchase an aggregate of 122,615 shares of Common
Stock at an exercise price of $0.01 per share. Additionally, during 1997 the
Company issued options to one of these executive officers entitling such
officer to purchase an aggregate of 8,579 shares of Common Stock at an
exercise price of $0.01 per share, under a supplemental option agreement with
such officer. As a result, the Company will record a related one-time, non-
cash compensation expense of approximately $2.0 million in the first quarter
of 1998, substantially reducing operating and net income in such period and
for the year ending December 31, 1998. See "Management--Executive
Compensation," "Certain Relationships and Related Transactions" and Note 9 to
the Notes to the Company's Consolidated Financial Statements.
RESULTS OF OPERATIONS
The following table summarizes the Company's operating results as a
percentage of net revenue for the period indicated.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
REVENUE:
Tuition and registration, net................. 90.6 % 87.2% 84.2%
Other, net.................................... 9.4 12.8 15.8
------- ------- -------
Net revenue................................. 100.0 100.0 100.0
OPERATING EXPENSES:
Educational services and facilities........... 41.9 42.9 44.2
General and administrative.................... 45.5 43.5 46.8
Depreciation and amortization................. 9.8 6.4 6.9
------- ------- -------
Total operating expenses.................... 97.2 92.8 97.9
------- ------- -------
Income from operations........................ 2.8 7.2 2.1
Interest expense................................ 3.8 2.1 1.6
------- ------- -------
Income (loss) before provision for taxes and
extraordinary item........................... (1.0) 5.1 0.5
Provision (benefit) for income taxes............ (0.4) 0.6 0.1
------- ------- -------
Income (loss) before extraordinary item......... (0.6) 4.5 0.4
Extraordinary loss on early extinguishment of
debt (net of taxes)............................ (0.5) -- --
------- ------- -------
Net income (loss)............................... (1.1) 4.5 0.4
======= ======= =======
Net income (loss) attributable to common
stockholders .................................. (11.3)% 0.4% (4.1)%
======= ======= =======
</TABLE>
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
Revenue. Net tuition revenue increased 156% from $29.3 million in 1996 to
$74.8 million in 1997, due to an approximately 18% increase in the average
number of students attending the schools which were owned by the Company
during 1996 and tuition increases effective in 1997 for these schools, as well
as added net tuition revenue of $34.2 million for schools acquired after 1996.
Other net revenue increased 80%, from $4.3 million in 1996 to $7.8 million in
1997, due to an increase in student population for schools owned during 1996
and the addition of $2.0 million from schools acquired after 1996.
Educational Services and Facilities Expense. Educational services and
facilities expense increased 140%, from $14.4 million in 1996 to $34.6 million
in 1997. Of this increase, $5.2 million was attributable to the increase in
student population and associated facility costs for schools owned during 1996
and $15.0 million was attributable to the addition of educational services and
facilities for schools acquired after 1996.
31
<PAGE>
General and Administrative. General and administrative expense increased
157%, from $14.6 million in 1996 to $37.5 million in 1997. The increase was
primarily attributable to costs totaling $1.1 million related to increased
personnel at the corporate level to enhance the Company's infrastructure and
increased advertising and marketing (including admissions) of $1.9 million for
schools owned during 1996, as well as the addition of $17.9 million of
expenses for schools acquired after 1996. The increase in advertising and
marketing expenses reflected, in part, the fact that the former owners of the
acquired schools had reduced their expenditures in these areas prior to their
acquisition by the Company.
Depreciation and Amortization. Depreciation and amortization expense
increased 281%, from $2.1 million in 1996 to $8.1 million in 1997. The
increase was due to increased capital expenditures for schools owned during
1996 and related increased depreciation expense of $0.2 million in 1997.
Additionally, depreciation expense increased $2.3 million due to the
depreciation expense for schools acquired after 1996. Amortization expense
increased from an immaterial amount in 1996 to $3.5 million in 1997, primarily
due to additional amortization of non-competition agreements for the
acquisition of schools after 1996.
Interest Expense. Interest expense increased 333% from $0.7 million in 1996
to $3.1 million in 1997. The increase was primarily due to interest expense on
borrowings used to finance the acquisition of schools after 1996.
Provision (Benefit) for Income Taxes. The benefit for income taxes increased
from a provision in 1996 of $0.2 million to a benefit of $0.3 million benefit
in 1997.
Income (Loss) before Extraordinary Item. Net income (loss) before
extraordinary item decreased to a net loss of $0.5 million in 1997 from net
income before extraordinary item of $1.5 million in 1996.
Extraordinary Item. During 1997, the Company recorded an extraordinary
expense of $0.4 million, net of tax, due to the early retirement of debt
related to a credit facility which was terminated and replaced by the
Company's current facility.
Net Income (Loss). Net income (loss) decreased to a net loss of $0.9 million
in 1997 from net income of $1.5 million in 1996.
Net Income (Loss) Attributable to Common Stockholders. Net income
attributable to common stockholders decreased from $0.1 million in 1996 to a
loss of $9.3 million in 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 an 18% 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.
32
<PAGE>
General and Administrative. General and administrative expense increased
61%, from $9.1 million in 1995 to $14.6 million in 1996. The increase was
attributable to costs totalling $0.7 million related to increased personnel at
the corporate level to enhance the infrastructure and increased advertising
and marketing of $4.3 million for schools owned during 1995, as well as the
addition of $0.5 million of expense for schools acquired in 1996. The increase
in advertising and marketing expenses reflected, in part, the fact that the
former owners of the acquired schools had reduced their expenditures in these
areas prior to their acquisition by the Company.
Depreciation and Amortization. Depreciation and amortization expense
increased 61%, from $1.3 million in 1995 to $2.1 million in 1996. The increase
was due to increased capital expenditures for schools owned during 1995 and
related increased depreciation expense of $0.6 million in 1996. Additionally,
depreciation expense increased $0.1 million due to the depreciation expense
for schools acquired in 1996. Amortization expense increased 14%, from $0.4
million in 1995 to $0.5 million in 1996, primarily due to additional
amortization of non-competition agreements for the acquisition of schools in
1996.
Interest Expense. Interest expense increased 131%, from $0.3 million in 1995
to $0.7 million in 1996. The increase was primarily due to interest expense on
borrowings used to finance the acquisition of schools in 1996.
Provision for Income Taxes. The provision for income taxes increased to $0.2
million in 1996 from an immaterial amount in 1995.
Net Income. Net income increased from an immaterial amount in 1995 to $1.5
million in 1996, due to the factors discussed above.
Net Income (Loss) Attributable to Common Stockholders. In 1996, net income
attributable to common stockholders was $0.1 million, as compared to a net
loss attributable to common stockholders of $0.8 million in 1995. This change
was attributable to the factors discussed above, offset in part by increased
dividends on preferred stock and increased accretion in the redemption value
of preferred stock and warrants.
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 (used in) operating activities decreased to $(0.2)
million in 1997 from $5.3 million in 1996 and $0.2 million in 1995.
Significant components of net cash provided by (used in) operating activities
are changes in receivables, depreciation and amortization expense and net
income.
Capital expenditures increased to $3.8 million in 1997 from $1.2 million in
1996 and $0.9 million in 1995. 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.
33
<PAGE>
The Company's net receivables as a percentage of net revenue increased to
15% in 1997 from 9% in 1996 and 14% in 1995. 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, 1995, 1996 and 1997 was 3%, 2% and 2%,
respectively.
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 a term loan, and
obtain up to $30 million in outstanding letters of credit. Outstanding letters
of credit reduce the revolving credit facility availability under the Credit
Agreement. The Credit Agreement matures on May 30, 2002; however, availability
under the revolving credit facility is reduced by $10 million on May 30, 2001.
The term loan is payable in equal quarterly installments of $0.75 million,
commencing September 30, 1997. The Company's borrowings under the Credit
Agreement bear interest, payable quarterly, at either (i) a base rate equal to
the greater of the (a) bank's prime rate plus .75% or (b) the federal funds
rate plus .50%, or (ii) LIBOR plus 2.00%, at the election of the Company.
Under the Credit Agreement, the Company is required, among other things, to
maintain certain financial ratios with respect to debt to EBITDA, interest
coverage and fixed coverage and to maintain a specified level of net worth.
The Company is also subject to restrictions on, among other things, payment of
dividends, disposition of assets and incurrence of certain additional
indebtedness. The Company has pledged the stock of its subsidiaries as
collateral for the repayment of obligations under the Credit Facility. At
March 27, 1998, the Company did not have any outstanding borrowings under its
Credit Facility. Additionally, the Company had approximately $22.7 million of
outstanding letters of credit as of such date.
The Company used approximately $41.8 million of its net proceeds from the
Offering to repay outstanding indebtedness under the Credit Agreement. The
Company also used approximately $4.1 million of its net proceeds from the
Offering to repay the outstanding indebtedness on notes payable to the former
shareholders of IAMD-U.S. and IAMD-Canada.
On January 22, 1998, The Provident Bank ("Provident") notified the Company
that it was exercising its right to cause the Company to repurchase the
Provident Warrant. The Company has determined that the appropriate purchase
price for the Provident Warrant is approximately $525,000 and intends to offer
to pay such amount to Provident. Provident has not yet accepted the Company's
valuation of the Provident Warrant. To the extent that the Company is required
to purchase the Provident Warrant for an amount in excess of $525,000, such
excess amount would be reflected as additional accretion to the redemption
value of the Provident Warrant when calculating the Company's earnings per
share attributable to the common stockholders.
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 December 31, 1997, the Company
holds nominal amounts of such funds in separate accounts. The restrictions on
any cash held in these accounts have not significantly affected the Company's
ability to fund daily operations.
The HEA and its implementing regulations require each higher education
institution to meet an acid test ratio (defined as the ratio of cash, cash
equivalents, restricted cash and current accounts receivable to total current
liabilities) of at least 1:1, calculated at the end of the institution's
fiscal year.
As of February 28, 1998, the Company's remaining credit availability under
the Credit Agreement was approximately $55.1 million. In discussions with the
Company, the DOE has agreed to consider financial information reflecting the
results of the Offering, as well as the 1997 audited financial statements in
the DOE's
34
<PAGE>
next review of the financial responsibility of the Company and its U.S.
institutions. The Company believes, based upon their 1997 audited financial
statements and the Company's post-Offering financial information, the Company
and each of its U.S. institutes continue to satisfy each of the DOE's
standards of financial responsibility. The Company intends to seek the DOE's
review of the Company's and its U.S. institutions' audited 1997 financial
statements and the Company's post-Offering financial information on an
expedited basis in the spring of 1998. To the extent the letters of credit are
reduced or eliminated, the Company will have additional availability under the
Credit Agreement. The Company believes that it will have sufficient liquidity
to increase the letters of credit should the DOE so require. However, there
can be no assurance that, if required, the Company will be able to maintain or
increase its letters of credit in the future. The Company believes, based on
its audited 1997 financial statements, that each of its U.S. institutions
satisfies each of the DOE's applicable standards of financial responsibility
and that the Company satisfies each of the DOE's standards of financial
responsibility, except for the tangible net worth ratio. However, the Company
believes that based upon the DOE's review of its audited 1997 financial
statements and the Company's audited post-Offering balance sheet, the Company
will also satisfy the tangible net worth ratio.
NEW ACCOUNTING STANDARDS
Recent pronouncements of the Financial Accounting Standards Board ("FASB"),
which are not required to be adopted at this date, include Statement of
Financial Accounting Standards ("SFAS") No. 131, "Disclosure about Segments of
an Enterprise and Related Information" ("SFAS No. 131"), SFAS No. 130,
"Reporting Comprehensive Income" ("SFAS No. 130"), SFAS No. 129, "Disclosure
of Information about Capital Structure" ("SFAS No. 129") and SFAS No. 128,
"Earnings Per Share" ("SFAS No. 128"). SFAS No. 131 requires that a public
business enterprise report financial and descriptive information about its
reporting segments on the same basis that it uses internally for evaluating
segment performance and deciding how to allocate resources to segments. SFAS
No. 130 establishes standards for reporting and display of comprehensive
income and its components in a full set of general-purpose financial
statements. SFAS Nos. 129 and 128 specify guidelines as to the method of
computation of, as well as presentation and disclosure requirements for,
earnings per share. SFAS No. 128 was adopted in the fourth quarter of 1997 and
the Company has retroactively restated all periods as prescribed by SFAS No.
128. The other Statements discussed above are effective for fiscal years
beginning after December 15, 1997 and earlier application is not permitted.
The adoption of these Statements is not expected to have a material effect on
the Company's consolidated financial statements.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Form 10-K contains certain statements which reflect the Company's
expectations regarding its future growth, results of operation, performance
and business prospects and opportunities. Wherever possible, words such as
"anticipate," "believe," "plan," "expect" and similar expressions have been
used to identify these "forward-looking" statements. These statements reflect
the Company's current beliefs and are based on information currently available
to the Company. Accordingly, these statements are subject to risks and
uncertainties which could cause the Company's actual growth, results,
performance and business prospects and opportunities to differ from those
expressed in, or implied by, these statements. These risks and uncertainties
include implementation of the Company's operating and growth strategy, risks
inherent in operating private for-profit postsecondary education institutions,
risks associated with general economic and business conditions, charges and
costs related to acquisitions, and the Company's ability to: successfully
integrate its acquired institutions and continue its acquisition strategy,
attract and retain students at its institutions, meet regulatory and
accrediting agency requirements, compete with enhanced competition and new
competition in the education industry, and attract and retain key employees
and faculty. The Company is not obligated to update or revise these forward-
looking statements to reflect new events or circumstances.
35
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated balance sheets are as of December 31, 1997 and 1996 and the
consolidated statements of operations, cash flows and stockholders' investment
are for each of the years ended December 31, 1997, 1996 and 1995:
Report of Independent Public Accountants, page F-1.
Consolidated Balance Sheets, page F-2.
Consolidated Statements of Operations, page F-5.
Consolidated Statements of Cash Flows, page F-6.
Consolidated Statements of Stockholders' Investment, page F-7.
Notes to Consolidated Financial Statements, page F-9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth certain information with respect to the
Company's executive officers and directors:
<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
Thomas B. Lally......... 54 Director
Wallace O. Laub......... 73 Director
Keith K. Ogata.......... 43 Director
Patrick K. Pesch........ 41 Director
</TABLE>
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,
36
<PAGE>
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.
Thomas B. Lally has been a director of the Company since January 28, 1998.
Mr. Lally was designated to be a director of the Company by HECC. He has been
the President of HECC since 1996 and an Executive Vice President of HFI since
1994, with direct responsibility for the asset quality oversight of HFI's
portfolio of loan and equity investments. Mr. Lally joined HFI in 1974 and is
currently a director of Kroy Holding Company.
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.
Keith K. Ogata has been a director of the Company since January 28, 1998.
Since 1995, Mr. Ogata has served as President of National Education Centers,
Inc., a subsidiary of National Education Corporation. From 1991 to June 1997,
he served as Vice President, Chief Financial Officer and Treasurer of National
Education Corporation, with responsibility for finance, accounting, treasury,
tax, mergers and acquisitions, human resources, investor and public relations
and information systems. In June 1997, National Education Corporation was
acquired by Harcourt General Inc.
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.
Todd H. Steele was a director of the Company from its inception in January
1994 until March, 1998, when he resigned as a director of the Company and
became the Company's Director of Strategic Planning and Development.
BOARD OF DIRECTORS
The Company's Board of Directors is divided into three classes with
staggered three-year terms. The terms of Messrs. Dowdell and Pesch expire at
the annual meeting of the Company's stockholders in 1999, the terms of Messrs.
Laub and Ogata expire at the annual meeting of the Company's stockholders in
2000, and the terms of Messrs. Lally and Larson expire at the annual meeting
of the Company's stockholders in 2001. 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
The Company and HECC have entered into an agreement pursuant to which HECC
is 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 is 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 are the initial designees of Heller.
37
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth information with respect to all compensation
paid by the Company for services rendered during the fiscal year ended
December 31, 1997, to its Chief Executive Officer and the other executive
officer of the Company (each, a "Named Executive Officer").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL LONG TERM
COMPENSATION COMPENSATION
------------------ ------------
SECURITIES
UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITIONS SALARY($) BONUS($) OPTIONS(#) COMPENSATION
---------------------------- --------- -------- ------------ ------------
<S> <C> <C> <C> <C>
John M. Larson................... $229,167 $143,000 21,106 $17,018(1)
President and Chief Executive
Officer
William A. Klettke............... $152,500 $ 47,580 9,844 $ 6,771(2)
Senior Vice President and Chief
Financial Officer
</TABLE>
- -------
(1) Includes $8,594 in 401(k) matching contributions by the Company and $8,424
in term life insurance premium payments by the Company.
(2) Includes $6,100 in 401(k) matching contributions by the Company and $671
in term life insurance premium payments by the Company.
OPTION GRANTS IN 1997
The following table contains information concerning the grant of stock
options by the Company to the Named Executive Officers during 1997.
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE VALUE
NUMBER OF PERCENTAGE OF AT ASSUMED ANNUAL RATES OF
SHARES TOTAL OPTIONS EXERCISE FAIR MARKET STOCK PRICE APPRECIATION
UNDERLYING GRANTED TO OR BASE VALUE ON FOR OPTION TERM(1)
OPTIONS EMPLOYEES IN PRICE DATE OF EXPIRATION --------------------------
NAME GRANTED (#) FISCAL YEAR ($/SH) GRANT($/SH) DATE 0% 5% 10%
---- ----------- ------------- -------- ----------- ---------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
John M. Larson.......... 8,579(2) 11.1% $0.01 $16.00(3) 1/31/2004 $137,178 $193,055 $267,400
1,838(4)(5) 2.4% $13.85(6) $13.85 2/27/2007 $ 3,952 $ 22,444 $ 50,814
10,689(4) 13.8% $14.71(6) $14.71 6/29/2007 $ 13,789 $121,310 $286,317
William A. Klettke...... 1,378(4)(5) 1.8% $13.85(6) $13.85 2/27/2007 $ 2,963 $ 16,833 $ 38,111
8,467(4) 10.9% $14.71(6) $14.71 6/29/2007 $ 10,922 $ 96,090 $226,793
</TABLE>
- -------
(1) Potential realizable value is presented net of the option exercise price,
but before any federal or state income taxes associated with exercise, and
is calculated assuming that the fair market value on the date of the grant
appreciates at the indicated annual rates (set by the Securities and
Exchange Commission (the "Commission")), compounded annually, for the term
of the option. The 0%, 5% and 10% assumed rates of appreciation are
mandated by the rules of the Commission and do not represent the Company's
estimate or projection of future increases in the price of the Common
Stock. Actual gains are dependent on the future performance of the Common
Stock and the option holder's continued employment throughout the vesting
periods. The amounts reflected in the table may not necessarily be
achieved.
(2) These options were granted under a supplemental option agreement, dated as
of July 31, 1995, between the Company and Mr. Larson. These options were
60% vested on the grant date and vest an additional 20% on each of January
31, 1998 and January 31, 1999.
(3) Assumes for this purpose that the fair market value on the date of grant
equals the initial public offering price of the Common Stock of $16.00 per
share.
(4) These options were granted under the Career Education Corporation 1995
Stock Option Plan. Each of these options is an incentive stock option and
vests in five equal annual installments on each of the first five
anniversaries of the grant date. See "--Stock Plans--Career Education
Corporation 1995 Stock Option Plan."
(5) These options became exercisable in full upon consummation of the
Offering.
(6) The exercise price of each of these options equals the fair market value
of the option shares on the date of grant, as determined by the Company's
Board of Directors based on the most recent price prior to the grant date
at which the Company sold or agreed to sell Preferred Stock in capital
raising transactions.
38
<PAGE>
FISCAL YEAR-END OPTION VALUES
The following table contains information regarding the Named Executive
Officers' unexercised options as of December 31, 1997. Neither of the Named
Executive Officers exercised any options during 1997.
<TABLE>
<CAPTION>
NUMBER OF SHARES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED IN-
OPTIONS AS OF THE-MONEY OPTIONS AS OF
DECEMBER 31, 1997(#) DECEMBER 31, 1997($)(2)
------------------------- -------------------------
NAME EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
---- ------------------------- -------------------------
<S> <C> <C>
John M. Larson ...... 30,335/32,747(1) $435,447/$307,969
William A. Klettke .. 328/25,550(1) $ 3,977/$204,203
</TABLE>
- --------
(1) Options issued under the Career Education Corporation 1995 Stock Option
Plan prior to May 30, 1997, fully vested upon consummation of the
Offering.
(2) The value per option is calculated by subtracting the exercise price of
the option from the initial public offering price of the Common Stock of
$16.00 per share.
EMPLOYMENT AGREEMENT
The Company has entered into an Employment and Non-Competition Agreement
with Mr. Larson, dated as of October 9, 1997 (the "Larson Employment
Agreement"), which has an initial term ending July 31, 2000. The Larson
Employment Agreement is subject to successive, automatic employer extensions
if the Company gives written notice at least 90 days prior to the expiration
date. The Larson Employment Agreement provides for an initial base salary of
$250,000 plus bonus compensation established by the Company's Board of
Directors. The Larson Employment Agreement provides for continuation of
salary, bonus and benefits for one year following Mr. Larson's termination of
employment with the Company, other than termination by the Company for "Cause"
(as defined in the Larson Employment Agreement) or termination by Mr. Larson
without "Good Reason" (as defined in the Larson Employment Agreement). Good
Reason includes a Change of Control (as defined in the Larson Employment
Agreement) of the Company. The Larson Employment Agreement also prohibits Mr.
Larson from disclosing confidential information and prohibits him from
engaging in activities competitive with the Company for a period which
includes the term of his employment with the Company or service as a director
of the Company and continues for two years thereafter. However, if Mr.
Larson's employment with the Company is terminated by the Company without
"Cause" or by Mr. Larson for "Good Reason," the non-competition period will
expire on the later of the termination of Mr. Larson's service as a director
with the Company or six months after the termination of his employment. In
such case, the Company may extend the non-competition period up to an
additional 18 months if it pays Mr. Larson's base salary, a portion of his
bonus and benefits during this additional period. If the term of the Larson
Employment Agreement expires and the Company refuses its renewal or Mr. Larson
refuses its renewal for Good Reason, the non-competition period will expire on
the later of the termination of Mr. Larson's employment or the termination of
his service as a director. In such case, the Company may extend the non-
competition period for up to an additional two years if it pays Mr. Larson's
base salary, a portion of his bonus and benefits during this additional
period.
COMPENSATION OF DIRECTORS
All directors who are not employees of the Company are paid an annual fee of
$6,000 and are paid $1,000 for each Board meeting attended and $500 for each
Board committee meeting attended. Non-employee directors are also reimbursed
for their reasonable out-of-pocket expenses incurred in attending Board and
committee meetings. The Company has adopted the Career Education Corporation
1998 Non-Employee Directors' Stock Option Plan, providing for annual option
grants to each director who is not an employee of the Company. See "--Stock
Plans--Career Education Corporation 1998 Non-Employee Directors' Stock Option
Plan."
39
<PAGE>
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Wallace O. Laub, Patrick K. Pesch ("Pesch") and Scott D. Steele, who
resigned as a director of the Company on January 23, 1998, served as the
members of the Compensation Committee during 1997. Scott Steele resigned as a
director due to time constraints imposed by his work for Electra Fleming, Inc.
("Electra Fleming"), of which Mr. Steele serves as a principal, and because of
a general policy of Electra Fleming against its principals serving on the
boards of publicly-held corporations in which Electra Fleming (or an
affiliate) has an equity interest.
Prior to the consummation of the Offering, the Company's outstanding capital
stock consisted of (i) four classes of common stock: Class A Voting Common
Stock, $.01 par value (the "Class A Common Stock"); Class B Voting Common
Stock, $.01 par value (the "Class B Common Stock"); Class C Non-voting Common
Stock, $.01 par value (the "Class C Common Stock"); and Class E Non-voting
Common Stock, $.01 par value (the "Class E Common Stock") (the Class A Common
Stock, Class B Common Stock, Class C Common Stock and Class E Common Stock are
collectively referred to as the "Existing Common Stock"); and (ii) three
classes of Preferred Stock: Preferred Stock, Series A, $.01 par value (the
"Series A Preferred Stock"); Preferred Stock, Series C, $.01 par value (the
"Series C Preferred Stock"); and Series D Preferred Stock, $.01 par value (the
"Series D Preferred Stock") (the Series A Preferred Stock, Series C Preferred
Stock and Series D Preferred Stock are collectively referred to as the
"Existing Preferred Stock").
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 following transactions effected immediately prior to the
consummation of the Offering: (i) the Amended and Restated Certificate of
Incorporation of the Company was 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 9.376 shares of Common Stock for
every share of Existing Common Stock, and (c) the conversion (the "Preferred
Stock Conversion") of all Existing Preferred Stock (including all accrued
paid-in-kind dividends thereon) into Common Stock at a rate determined by
dividing the liquidation value of the Existing Preferred Stock (including the
liquidation value of the accrued paid-in-kind dividends) by the initial public
offering price of the Common Stock in the Offering (converting into 2,423,481
shares of Common Stock); and then (ii) all outstanding warrants (other than
the Provident Warrant) to purchase Class D Non-Voting Common Stock, $.01 par
value (the "Class D Common Stock"), and Class E Common Stock were exercised
for an aggregate of 624,062 shares of Common Stock.
As of February 28, 1997, the Company entered into a Securities Purchase
Agreement (the "February 1997 Agreement") with HECC, which as of December 31,
1997 beneficially owned 70.1% of the outstanding Common Stock of the Company;
Electra, which as of December 31, 1997 owned 25.5% of the Common Stock of the
Company; John M. Larson, the President and Chief Executive Officer and a
director of the Company ("Larson"); William A. Klettke, the Senior Vice
President, Chief Financial Officer and Treasurer of the Company ("Klettke");
Robert E. Dowdell, a director of the Company; and Mr. Laub and Constance L.
Laub (collectively, "Laub"). Pesch is an officer of HECC and a Senior Vice
President of HFI (collectively with HECC, "Heller"), the parent of HECC, and
was designated as a director of the Company by HECC. Todd H. Steele ("Todd
Steele"), who served as a Vice President of HFI and HECC from May 1990 to
November 1996, was also designated as a director of the Company by Heller.
Scott Steele is a principal of Electra Fleming Inc, an affiliate of EIT and
EAP, and was designated as a director of the Company by EIT.
On February 28, 1997, pursuant to the February 1997 Agreement, the Company
issued (i) 1,391 shares of Series D Preferred Stock and Warrants to purchase
1,655 shares of Class E Common Stock to HECC in exchange for total
consideration of $1,391,000, (ii) 468 shares of Series D Preferred Stock and
Warrants to purchase 558 shares of Class E Common Stock to Electra in exchange
for total consideration of $468,000, (iii) 84 shares of Series D Preferred
Stock and Warrants to purchase 99 shares of Series E Common Stock to Dowdell
in exchange for total consideration of $84,000, (iv) 16 shares of Series D
Preferred Stock and Warrants to purchase 19 shares of Class E Common Stock to
Larson in exchange for total consideration of $16,000, (v) 15 shares of Series
D
40
<PAGE>
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") was subject to adjustment in
certain events described therein. The Warrants had an exercise price of $.01
per share and an expiration date of July 31, 2005. The holders of the Warrants
were required to exercise them concurrently with the consummation of the
Offering. The exercise price of each of the Warrants was paid by surrender of
a portion of such Warrant. The Series D Preferred Stock issued pursuant to the
1997 Agreements (including all accrued paid-in-kind dividends thereon) was
converted into shares of Common Stock at a rate determined by dividing the
liquidation value of such Series D Preferred Stock by the initial public
offering price of the Common Stock in the Offering ($16 per share).
The Company and Electra are parties to a Registration Rights Agreement,
dated as of July 31, 1995, as amended (the "Electra Registration Rights
Agreement"). Under the Electra Registration Rights Agreement, Electra is
entitled, subject to certain exceptions, to demand that the Company register
shares of Common Stock held by Electra on up to two occasions (plus, in
certain circumstances, one additional occasion) and to cause the Company to
register such shares in any registration by the Company for its own account or
for the account of other security holders. Additionally, at any time that the
Company is eligible to use Commission Form S-3 for registration of securities
(expected to initially occur on the first anniversary of this Prospectus),
Electra will be entitled, subject to certain exceptions, to cause the Company
to register shares held by Electra on a registration statement on Form S-3.
The Company is required to pay certain expenses relating to any registration
effected pursuant to the Electra Registration Rights Agreement and to
indemnify Electra against certain liabilities, including liabilities under the
Securities Act.
The Company and Heller entered into a Registration Rights Agreement (the
"Heller Registration Rights Agreement") prior to the consummation of the
Offering. Under the Heller Registration Rights Agreement, Heller is entitled,
subject to certain exceptions, to demand that the Company register shares of
Common Stock held by Heller on up to three occasions and to cause the Company
to register such shares 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
41
<PAGE>
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 was required to pay Electra an annual
portfolio administration fee in the amount of $75,000. This obligation
terminated upon the consummation of the Offering.
SECTION 16(A)--BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Because the Company did not have a class of securities registered pursuant
to the Securities Exchange Act of 1934, as amended (the "Exchange Act") during
1997, there were no filings required pursuant to Section 16 of the Exchange
Act in 1997.
ITEM 12. 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 March
1, 1998. 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
BENEFICIALLY OWNED(1)
----------------------------
NAME NUMBER PERCENT
---- ------------- -----------
<S> <C> <C>
Heller Equity Capital Corporation (2)........ 2,549,944 38.0%
Electra Investment Trust P.L.C. and Electra
Associates, Inc. (3)......................... 982,510 14.7
John M. Larson (4)........................... 147,510 2.2
Robert E. Dowdell (5)........................ 126,549(6) 1.9
William A. Klettke (7)....................... 45,113 *
Wallace O. Laub.............................. 29,483(6) *
Keith K. Ogata............................... 17,666(6) *
Patrick K. Pesch............................. 5,066(6) *
Thomas B. Lally.............................. 3,666(6) *
All directors and executive officers as a
group (7 persons)............................ 413,606 5.7
</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 February 20, 1998 (including
options that became exercisable upon consummation of the Offering).
(2) The address of HECC is 500 West Monroe Street, Chicago, Illinois 60661.
(3) EIT and Electra Associates, Inc. ("EAI") are affiliated entities, and
their address is c/o EIT, 65 Kingsway, London, England WC2B 6QT.
(4) Includes 131,878 shares of Common Stock which may be acquired by Mr.
Larson upon the exercise of currently exercisable stock options.
(5) Includes 2,034 shares of Common Stock held by Mr. Dowdell, as Custodian
for Brian M. Dowdell under the Uniform Transfers to Minors Act; 2,034
shares of Common Stock held by Mr. Dowdell, as Custodian for Sharon T.
Dowdell under the Uniform Transfers to Minors Act; 3,825 shares of Common
Stock held by Robert E. Dowdell Defined Benefit Plan and Trust, under
Agreement dated 12/9/96; 3,336 shares of Common Stock held by Robert E.
Dowdell and Grace C. Dowdell, as Trustees under Trust Agreement dated July
1, 1991; 12,776 shares of Common Stock held by Delaware Charter Guarantee
and Trust Co., Custodian for Robert E. Dowdell Individual Retirement
Account; and 41,980 shares of Common Stock which may be acquired by Mr.
Dowdell upon the exercise of currently exercisable stock options.
(6) Includes 2,666 shares of Common Stock which may be acquired upon the
exercise of currently exercisable stock options granted to this non-
employee director under the Directors' Plan.
(7) Includes 17,410 shares of Common Stock which may be acquired by Mr.
Klettke upon the exercise of currently exercisable stock options.
42
<PAGE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In addition to the transactions described under "Item 11. Executive
Compensation Compensation Committee Interlocks and Insider Participation," the
Company has entered into the following arrangements with one of its executive
officers:
In December 1996, the Company issued 824 shares of Class E Common Stock and
70 shares of Series A Preferred Stock to William A. Klettke, the Company's
Senior Vice President, Chief Financial Officer and Treasurer, in exchange for
total consideration of $99,982. At that time, the Company made an interest-
free loan in the amount of $99,982 to Mr. Klettke to be used to purchase these
shares. This loan was repaid by Mr. Klettke in full in January 1997.
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.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this Form 10-K:
1. Financial Statements of the Company and its subsidiaries.
Report of Independent Public Accountants, page F-1.
Consolidated Balance Sheets at December 31, 1997 and 1996, page F-2.
Consolidated Statements of Operations for the years ended December 31,
1997, 1996 and 1995, page F-5.
Consolidated Statements of Cash Flows for the years ended December 31,
1997, 1996 and 1995, page F-6.
Consolidated Statements of Stockholders' Investment for the years ended
December 31, 1997, 1996 and 1995, page F-7.
Notes to Consolidated Financial Statements, page F-9.
2. Financial Statement Schedule:
Report of Independent Public Accountants, page S-1.
Valuation and Qualifying Accounts, page S-2.
3. Exhibits:
<TABLE>
<CAPTION>
<C> <S> <C>
*2.1 Asset Purchase Agreement dated as of September 30, 1996,
among the Registrant, WCI Acquisition, Ltd., Phillips Edu-
cational Group of Portland, Inc., and Phillips Colleges,
Inc. Schedules and exhibits to this Asset Purchase Agree-
ment have not been included herewith, but will be fur-
nished 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 ex-
hibits to this Stock Purchase Agreement have not been in-
cluded herewith but will be furnished supplementally to
the Commission upon request.
</TABLE>
43
<PAGE>
<TABLE>
<CAPTION>
<C> <S> <C>
*2.4 Share Purchase Agreement dated as of June 30, 1997, among
the Registrant and Clem Stein, Jr., Leonard Rutstein, Bar-
bara 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 Amended and Restated Certificate of Incorporation of the
Registrant.
3.2 Amended and Restated By-laws of the Registrant.
*4.1 Form of specimen stock certificate representing Common
Stock.
*4.2 Credit Agreement dated as of May 30, 1997 among the Regis-
trant, as borrower, the lenders named therein and LaSalle
National Bank, as agent, as amended.
*10.1 Career Education Corporation 1995 Stock Option Plan, as
amended.
*10.2 Form of Option Agreement under the Registrant's 1995 Stock
Option Plan.
*10.3 Career Education Corporation 1998 Employee Incentive Com-
pensation Plan.
*10.5 Career Education Corporation 1998 Non-Employee Directors'
Stock Option Plan.
*10.6 Form of Option Agreement under the Registrant's 1998 Non-
Employee Directors' Stock Option Plan.
*10.7 Career Education Corporation 1998 Employee Stock Purchase
Plan.
*10.8 Amended and Restated Option Agreement dated as of July 31,
1995, between the Registrant and John M. Larson, and
Amendment thereto dated as of October 20, 1997.
*10.9 Supplemental Option Agreement dated July 31, 1995, between
the Registrant and John M. Larson.
*10.10 Amended and Restated Option Agreement dated as of July 31,
1995, between the Registrant and Robert E. Dowdell, and
Amendment thereto dated as of October 20, 1997.
*10.11 Employment and Non-Competition Agreement dated as of Octo-
ber 9, 1997, between the Registrant and John M. Larson.
*10.12 Form of Indemnification Agreement for Directors and Execu-
tive Officers.
*10.13 Career Education Corporation Amended and Restated Stock-
holders' Agreement dated as of July 31, 1995, as amended
on February 28, 1997 and May 30, 1997.
*10.14 Registration Rights Agreement dated as of July 31, 1995,
between the Registrant, Electra Investment Trust P.L.C.
and Electra Associates, Inc., and form of Amendment Agree-
ment relating thereto.
*10.15 Warrant Agreement dated as of July 31, 1995, between the
Registrant and The Provident Bank, and related Warrant
Certificate.
*10.16 Securities Purchase Agreement dated as of July 31, 1995
among the Registrant, Electra Investment Trust P.L.C. and
Electra Associates, Inc. (the "Electra 1995 Agreement").
*10.17 Form of Warrant Certificate issued pursuant to the Electra
1995 Agreement.
*10.18 Securities Purchase Agreement dated as of February 28,
1997, among the Registrant, Heller Equity Capital Corpora-
tion, 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").
</TABLE>
44
<PAGE>
<TABLE>
<CAPTION>
<C> <S> <C>
*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 Febru-
ary 1997 Agreement and the May 1997 Agreement.
*10.21 Form of Management Fee Agreement between the Registrant
and each of its subsidiaries.
*10.22 Form of Tax Sharing Agreement between the Registrant and
each of its subsidiaries.
10.23 Registration Rights Agreement between the Registrant and
Heller Equity Capital Corporation.
10.24 Agreement between the Registrant and Heller Equity Capital
Corporation, regarding designation of directors of the
Registrant.
21 Subsidiaries of the Registrant.
27 Financial Data Schedule.
</TABLE>
- --------
* Incorporated herein by reference to the Exhibit of the same number to the
Company's Registration Statement on Form S-1, effective as of January 28,
1998
(b) Reports on Form 8-K:
Because the Company did not have a class of securities registered
pursuant to the Exchange Act during the last quarter of the period covered
by this Form 10-K, the Company filed no Current Reports on Form 8-K during
such time.
45
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED
ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, ON THE 27TH DAY
OF MARCH, 1998.
Career Education Corporation
/s/ William A. Klettke
By: _________________________________
William A. Klettke
Chief Financial Officer
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS IN THE CAPACITIES AND ON
THE DATES INDICATED.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ John M. Larson President, Chief Executive March 27, 1998
____________________________________ Officer (Principal
John M. Larson Executive Officer) and a
Director
/s/ William A. Klettke Senior Vice President and March 27, 1998
____________________________________ Chief Financial Officer
William A. Klettke (Principal Financial and
Accounting Officer)
/s/ Robert E. Dowdell Director March 27, 1998
____________________________________
Robert E. Dowdell
/s/ Thomas B. Lally Director March 27, 1998
____________________________________
Thomas B. Lally
/s/ Wallace O. Laub Director March 27, 1998
____________________________________
Wallace O. Laub
/s/ Keith K. Ogata Director March 27, 1998
____________________________________
Keith K. Ogata
/s/ Patrick K. Pesch Director March 27, 1998
____________________________________
Patrick K. Pesch
</TABLE>
46
<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, 1997 and 1996 and the related consolidated statements of operations,
stockholders' investment and cash flows for each of the three years in the
period ended December 31, 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 consolidated financial position of Career
Education Corporation and Subsidiaries as of December 31, 1997 and 1996 and
the consolidated results of their operations and their cash flows for each of
the three years in the period ended December 31, 1997 in conformity with
generally accepted accounting principles.
Arthur Andersen LLP
Chicago, Illinois
February 13, 1998 (except
with respect to the matter
discussed in the last
paragraph of Note 16, as to
which the date is March 13,
1998)
F-1
<PAGE>
CAREER EDUCATION CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1997
------------------
PRO FORMA
(NOTES 2
ACTUAL AND 15) 1996
-------- --------- -------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash.............................................. $ 18,906 $ 21,199 $ 7,798
Receivables--
Students, net of allowance for doubtful accounts
of $1,516 and $455 at December 31, 1997 and
1996, respectively............................. 10,812 10,812 2,159
From former owners of acquired businesses....... -- -- 523
Stockholder..................................... -- -- 100
Other........................................... 1,346 1,346 120
Inventories....................................... 634 634 213
Prepaid expenses and other current assets......... 1,598 1,598 725
Deferred offering costs........................... 2,900 -- --
Deferred income tax assets........................ 406 406 194
-------- -------- -------
Total current assets.......................... 36,602 35,995 11,832
-------- -------- -------
PROPERTY AND EQUIPMENT, net of accumulated
depreciation
and amortization................................... 45,555 45,555 19,560
-------- -------- -------
INTANGIBLE ASSETS, net.............................. 33,579 33,579 3,407
-------- -------- -------
OTHER ASSETS........................................ 1,881 1,881 1,409
-------- -------- -------
TOTAL ASSETS........................................ $117,617 $117,010 $36,208
======== ======== =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-2
<PAGE>
CAREER EDUCATION CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS--(CONTINUED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1997
-----------------
PRO FORMA
(NOTES 2
ACTUAL AND 15) 1996
------- --------- -------
(UNAUDITED)
<S> <C> <C> <C>
LIABILITIES AND STOCKHOLDERS' INVESTMENT
CURRENT LIABILITIES:
Current maturities of long-term debt............... $ 3,888 $ 3,888 $ 2,676
Book overdraft..................................... -- -- 683
Accounts payable................................... 3,580 3,580 502
Accrued expenses--
Payroll and related benefits..................... 1,605 1,605 678
Accrued offering costs........................... 2,447 -- --
Other............................................ 3,800 3,800 1,658
Deferred tuition revenue........................... 7,476 7,476 4,256
------- ------- -------
Total current liabilities...................... 22,796 20,349 10,453
------- ------- -------
LONG TERM DEBT, net of current maturities shown
above............................................... 60,147 16,112 13,783
------- ------- -------
OTHER LONG-TERM LIABILITIES.......................... 703 703 --
------- ------- -------
DEFERRED INCOME TAX LIABILITIES...................... 1,215 1,215 --
------- ------- -------
COMMITMENTS AND CONTINGENCIES
REDEEMABLE PREFERRED STOCK AND WARRANTS
Redeemable Series A preferred stock, $0.01 par
value; 50,000 shares authorized; 7,852 shares
outstanding at December 31, 1997, and 1996,
respectively, at liquidation value (stated value
plus accumulated dividends)....................... 10,112 -- 9,432
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, 1997 and 1996, at
liquidation value (stated value plus accumulated
dividends)........................................ 4,784 -- 4,259
Redeemable Series D preferred stock, $0.01 par
value; 25,000 shares authorized; 22,500 shares
outstanding at December 31, 1997, and no shares
outstanding at December 31, 1996, at liquidation
value (stated value plus accumulated dividends)... 22,175 -- --
Warrants exercisable into 202,297 shares of Class D
common stock at December 31, 1997, and 257,690
shares of Class D common stock at December 31,
1996, at an exercise price of $0.01 per share, at
estimated redemption value........................ 2,659 -- 870
Warrants exercisable into 32,947 shares of Class E
common stock at December 31, 1997, at an exercise
price of $0.01 per share, at estimated redemption
value............................................. 430 430 --
------- ------- -------
Total redeemable preferred stock and warrants.. 40,160 430 14,561
------- ------- -------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE>
CAREER EDUCATION CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS--(CONTINUED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
1997
-------------------
PRO FORMA
(NOTES 2
ACTUAL AND 15) 1996
-------- --------- -------
(UNAUDITED)
<S> <C> <C> <C>
STOCKHOLDERS' INVESTMENT:
Class A common stock, $0.01 par value; 5,625,600
shares authorized; 49,224 shares issued and
outstanding at December 31, 1997 and 1996...... 1 -- 1
Class B common stock, $0.01 par value; 937,600
shares authorized; 47,818 shares issued and
outstanding at December 31, 1997 and 1996...... 1 -- --
Class C common stock, $0.01 par value; 937,600
shares authorized; 655,382 shares issued and
outstanding at December 31, 1997 and 1996...... 7 -- 7
Class D common stock, $0.01 par value; 937,600
shares authorized; no shares issued and
outstanding at December 31, 1997 and 1996...... -- -- --
Class E common stock, $0.01 par value; 1,875,200
shares authorized; 16,380 and 15,452 shares
issued and outstanding at December 31, 1997 and
1996, respectively............................. -- -- --
Common stock, $0.01 par value; 50,000,000 shares
authorized; 7,042,995 shares issued and
outstanding at December 31, 1997............... -- 70 --
Warrants........................................ 4,777 -- --
Additional paid-in capital...................... 71 90,392 60
Foreign currency translation.................... (297) (297) --
Accumulated deficit............................. (11,964) (11,964) (2,657)
-------- -------- -------
Total stockholders' investment.............. (7,404) 78,201 (2,589)
-------- -------- -------
TOTAL LIABILITIES AND STOCKHOLDERS'
INVESTMENT....................................... $117,617 $117,010 $36,208
======== ======== =======
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-4
<PAGE>
CAREER EDUCATION CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
-------------------------
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
REVENUE:
Tuition and registration fees, net................. $74,842 $29,269 $16,330
Other, net......................................... 7,756 4,311 3,066
------- ------- -------
Total net revenue.............................. 82,598 33,580 19,396
OPERATING EXPENSES:
Educational services and facilities................ 34,620 14,404 8,565
General and administrative......................... 37,542 14,622 9,097
Depreciation and amortization...................... 8,121 2,134 1,330
------- ------- -------
Total operating expenses....................... 80,283 31,160 18,992
------- ------- -------
Income from operations......................... 2,315 2,420 404
INTEREST EXPENSE.................................... 3,108 717 311
------- ------- -------
Income (loss) before provision for income taxes
and extraordinary item........................ (793) 1,703 93
PROVISION (BENEFIT) FOR INCOME TAXES................ (331) 208 24
------- ------- -------
Income (loss) before extraordinary item............ (462) 1,495 69
EXTRAORDINARY LOSS ON EARLY EXTINGUISHMENT OF DEBT,
net of taxes of $233............................... (418) -- --
------- ------- -------
NET INCOME (LOSS)................................... $ (880) $ 1,495 $ 69
======= ======= =======
INCOME (LOSS) ATTRIBUTABLE TO COMMON STOCKHOLDERS:
Income (loss) before extraordinary item............ $ (462) $ 1,495 $ 69
Dividends on preferred stock....................... (2,159) (1,128) (777)
Accretion to redemption value of preferred stock
and warrants...................................... (6,268) (230) (96)
------- ------- -------
Income (loss) before extraordinary item
attributable to common stockholders........... (8,889) 137 (804)
Extraordinary loss................................. (418) -- --
------- ------- -------
Net income (loss) attributable to common
stockholders.................................. $(9,307) $ 137 $ (804)
======= ======= =======
INCOME (LOSS) PER SHARE ATTRIBUTABLE TO COMMON
STOCKHOLDERS:
Basic--
Income (loss) before extraordinary item.......... $(11.58) $ 0.18 $ (1.06)
Extraordinary loss............................... $ (0.54) $ -- $ --
------- ------- -------
Net income (loss).............................. $(12.12) $ 0.18 $ (1.06)
======= ======= =======
Diluted--
Income (loss) before extraordinary item.......... $(11.58) $ 0.13 $ (1.06)
Extraordinary loss............................... $ (0.54) $ -- $ --
------- ------- -------
Net income (loss).............................. $(12.12) $ 0.13 $ (1.06)
======= ======= =======
WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic.............................................. 768 761 755
======= ======= =======
Diluted............................................ 768 1,030 755
======= ======= =======
PRO FORMA (UNAUDITED):
Income (loss) attributable to common
stockholders--
Income (loss) before extraordinary item
attributable to common stockholders, as
reported........................................ $(8,889) $ 137 $ (804)
Dividends on preferred stock..................... 2,159 1,128 777
Accretion to redemption value of preferred stock
and warrants.................................... 6,100 230 96
------- ------- -------
Pro forma income (loss) before extraordinary item
attributable to common stockholders............... $ (630) $ 1,495 $ 69
Extraordinary loss................................. (418) -- --
------- ------- -------
Pro forma net income (loss) attributable to
common stockholders........................... $(1,048) $ 1,495 $ 69
======= ======= =======
Pro forma diluted income (loss) per share
attributable to common stockholders--
Income (loss) before extraordinary item.......... $ (0.20) $ 0.78 $ 0.05
Extraordinary item............................... $ (0.14) $ -- $ --
------- ------- -------
Net income (loss)................................ $ (0.34) $ 0.78 $ 0.05
======= ======= =======
Pro forma diluted weighted average number of
common and common stock equivalent shares
outstanding....................................... 3,048 1,909 1,529
======= ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-5
<PAGE>
CAREER EDUCATION CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31
-------------------------
1997 1996 1995
-------- ------- ------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)................................. $ (880) $ 1,495 $ 69
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities--
Depreciation, amortization and debt discount.... 8,239 2,188 1,351
Warrants issued to a bank....................... 180 -- --
Deferred income taxes........................... (1,013) (208) --
Extraordinary loss on early extinguishment of
debt........................................... 418 -- --
Changes in operating assets and liabilities, net
of acquisitions--
Receivables, net.............................. (5,208) 385 (869)
Inventories, prepaid expenses and other
current assets............................... (3,959) (237) (213)
Accounts payable.............................. 4,808 (138) 118
Accrued expenses and other liabilities........ 392 752 (233)
Deferred tuition revenue...................... (3,171) 1,038 12
-------- ------- ------
Net cash provided by (used in) operating
activities.................................. (194) 5,275 235
-------- ------- ------
CASH FLOWS FROM INVESTING ACTIVITIES:
Business acquisitions, net of cash................ (39,855) (8,250) (1,622)
Acquisition and organizational costs.............. (1,516) -- (959)
Purchase of property and equipment, net........... (3,822) (1,231) (897)
Other assets...................................... (21) (37) --
-------- ------- ------
Net cash used in investing activities........ (45,214) (9,518) (3,478)
-------- ------- ------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of common stock.......................... 30 -- 30
Issuance of warrants.............................. 4,789 -- --
Issuance of redeemable preferred stock and
warrants......................................... 17,556 -- 5,070
Redemption of preferred stock..................... -- -- (200)
Dividends paid on preferred stock................. (495) (495) (207)
Equity and debt financing costs................... (1,021) (553) (535)
Book overdraft.................................... (683) 683 --
Payments of long-term debt........................ (513) (1,309) (6,363)
Net (payments on) proceeds from revolving credit
facility......................................... (8,239) 1,500 6,771
Proceeds from term loan facility.................. 3,400 8,250 --
Repayments of term loan facility.................. (11,650) -- --
Net proceeds from revolving loans under Credit
Agreement........................................ 39,985 -- --
Proceeds from issuance of term loans under Credit
Agreement........................................ 15,000 -- --
Payments on term loans under Credit Agreement..... (1,500) -- --
-------- ------- ------
Net cash provided by financing activities.... 56,659 8,076 4,566
-------- ------- ------
EFFECT OF EXCHANGE RATE CHANGES ON CASH............ (143) -- --
-------- ------- ------
NET INCREASE IN CASH............................... 11,108 3,833 1,323
CASH, BEGINNING OF YEAR............................ 7,798 3,965 2,642
-------- ------- ------
CASH, END OF YEAR.................................. $ 18,906 $ 7,798 $3,965
======== ======= ======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for--
Interest........................................ $ 3,008 $ 407 $ 327
Taxes........................................... 2,446 80 --
======== ======= ======
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Accretion to redemption value of preferred stock
and warrants..................................... $ 6,268 $ 230 $ 96
Dividends on preferred stock added to liquidation
value............................................ 1,663 632 570
======== ======= ======
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-6
<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
---------------- ---------------- ----------------- ---------------- ----------------
5,625,600 $0.01 937,600 $0.01 937,600 $0.01 937,600 $0.01 1,875,200 $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, December 31,
1994.................. 49,224 $492 47,818 $478 655,382 $6,554 -- $ -- -- $ -- $7,524
Issuance of stock..... -- -- -- -- -- -- -- -- 7,726 78 78
Dividends paid........ -- -- -- -- -- -- -- -- -- -- --
Dividends on preferred
stock for the year... -- -- -- -- -- -- -- -- -- -- --
Preferred stock and
warrant accretion.... -- -- -- -- -- -- -- -- -- -- --
Net income............ -- -- -- -- -- -- -- -- -- -- --
------ ---- ------ ---- ------- ------ --- ----- ------ ----- ------
BALANCE, December 31,
1995.................. 49,224 492 47,818 478 655,382 6,554 -- -- 7,726 78 7,602
Issuance of stock..... -- -- -- -- -- -- -- -- 7,726 77 77
Dividends paid........ -- -- -- -- -- -- -- -- -- -- --
Dividends on preferred
stock for the year... -- -- -- -- -- -- -- -- -- -- --
Preferred stock and
warrant accretion.... -- -- -- -- -- -- -- -- -- -- --
Net income............ -- -- -- -- -- -- -- -- -- -- --
------ ---- ------ ---- ------- ------ --- ----- ------ ----- ------
BALANCE, December 31,
1996.................. 49,224 492 47,818 478 655,382 6,554 -- -- 15,452 155 7,679
Issuance of warrants.. -- -- -- -- -- -- -- -- -- -- --
Exercise of warrants.. -- -- -- -- -- -- -- -- 928 9 9
Dividends paid........ -- -- -- -- -- -- -- -- -- -- --
Dividends on preferred
stock for the period. -- -- -- -- -- -- -- -- -- -- --
Preferred stock and
warrant accretion.... -- -- -- -- -- -- -- -- -- -- --
Net loss.............. -- -- -- -- -- -- -- -- -- -- --
------ ---- ------ ---- ------- ------ --- ----- ------ ----- ------
BALANCE, December 31,
1997.................. 49,224 $492 47,818 $478 655,382 $6,554 -- $ -- 16,380 $164 $7,688
====== ==== ====== ==== ======= ====== === ===== ====== ===== ======
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-7
<PAGE>
CAREER EDUCATION CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' INVESTMENT (CONTINUED)
<TABLE>
<CAPTION>
WARRANTS
---------- FOREIGN
CLASS E ADDITIONAL CURRENCY TOTAL
COMMON PAID-IN TRANSLATION ACCUMULATED STOCKHOLDERS'
STOCK CAPITAL ADJUSTMENT DEFICIT INVESTMENT
---------- ---------- ----------- ------------ -------------
<S> <C> <C> <C> <C> <C>
BALANCE, December 31,
1994................... $ -- $ -- $ -- $ (1,989,477) $(1,981,953)
Issuance of stock..... -- 29,904 -- -- 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................... -- 29,904 -- (2,793,833) (2,756,327)
Issuance of stock..... -- 29,905 -- -- 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................... -- 59,809 -- (2,656,959) (2,589,471)
Issuance of warrants.. 4,788,563 -- -- -- 4,788,563
Exercise of warrants.. (11,136) 11,127 -- -- --
Dividends paid........ -- -- -- (495,400) (495,400)
Dividends on preferred
stock for the Period. -- -- -- (1,663,137) (1,663,137)
Preferred stock and
warrant accretion.... -- -- -- (6,268,478) (6,268,478)
Net loss.............. -- -- -- (879,608) (879,608)
Foreign currency
translation.......... -- -- (296,602) -- (296,602)
---------- ------- --------- ------------ -----------
BALANCE, December 31,
1997................... $4,777,427 $70,936 $(296,602) $(11,963,582) $(7,404,133)
========== ======= ========= ============ ===========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-8
<PAGE>
CAREER EDUCATION CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 AND 1995
1. DESCRIPTION OF THE COMPANY
Career Education Corporation (the "Company") was incorporated in January
1994, for the purpose of acquiring operations of various for-profit
postsecondary schools. The Company manages and operates the educational
institutions acquired through its wholly-owned subsidiaries, Al Collins
Graphic Design School, Ltd. ("Collins"), Brooks College, Ltd. ("Brooks"),
Allentown Business School, Ltd. ("Allentown"), Brown Institute, Ltd.
("Brown"), Western Culinary Institute, Inc. ("Western Culinary"), School of
Computer Technology, Inc. ("SCT"), The Katharine Gibbs Schools, Inc.
("Gibbs"), IAMD, Limited and Subsidiaries ("IAMD-U.S.") and 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, located in Long Beach, California, 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 Mendota Heights,
Minnesota, and offers certificates and/or associate degrees in visual
communications, business administration, information systems management,
computer programming, electronics technology and radio/television
broadcasting. The Western Culinary campus, located in Portland, Oregon, 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 has campuses located in various cities
through-out New York, New Jersey, and New England and offers associate degrees
in secretarial arts, business administration and PC TEC. 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. INITIAL PUBLIC OFFERING
On February 4, 1998, the Company sold 3,277,500 shares of its common stock
at $16.00 per share pursuant to an initial public offering ("IPO"). The net
proceeds from the offering of $45.9 million were used to repay borrowings
under the Credit Agreement (Note 5) totaling $41.8 million and amounts owed to
former owners of acquired businesses of $4.1 million (Note 5) which were
outstanding at that time. Prior to the consummation of the IPO, all
outstanding shares of all series of preferred stock and accumulated dividends
were converted into 2,423,485 shares of common stock and warrants (except for
redeemable warrants exercisable into 32,947 shares of Class E common stock) to
purchase 624,320 shares of common stock were exercised. Subsequent to December
31, 1997 and prior to the consummation of the IPO, the Company also formed one
class of common stock, increased the number of authorized shares of common
stock to 50,000,000 and completed a 9.376-for-1 stock split The effect of the
split has been retroactively reflected for all periods presented in the
accompanying consolidated financial statements.
3. SIGNIFICANT ACCOUNTING POLICIES
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.
F-9
<PAGE>
CAREER EDUCATION CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1997, 1996 AND 1995
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 the Higher Education Act of 1965, as amended
("Title IV Programs"). The following table presents the amount and percentage
of the Company's U.S. institutions' cash receipts collected from Title IV
Programs for the years ended December 31, 1997, 1996 and 1995 (such amounts
were determined based upon each U.S. institution's cash receipts for the
twelve-month period ended December 31, pursuant to the regulations of the
United States Department of Education ("DOE") at 34 C.F.R. (S) 600.5):
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
-----------------------------------
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Total Title IV funding............... $54,963,232 $26,931,030 $17,885,111
Total cash receipts.................. $85,046,951 $38,036,509 $26,380,681
Total Title IV funding as a
percentage of total cash receipts... 65% 71% 68%
</TABLE>
The Company generally completes and approves the financial aid packet of each
student who qualifies for financial aid prior to the student's 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 DOE requirements. Changes in DOE funding of federal student financial aid
programs could impact the Company's ability to attract students.
c. Marketing and Advertising Costs
Marketing and advertising costs are expensed as incurred. Marketing and
advertising costs included in general and administrative expenses were
$10,640,000, $3,494,000 and $2,715,000 for the years ended December 31, 1997,
1996 and 1995, respectively.
d. 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.
e. Property and Equipment
Property and equipment are stated at cost. Depreciation and amortization are
recognized utilizing the straight-line method over the useful lives of the
related assets. Leasehold improvements and assets recorded under 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, 1997 and 1996, are as follows (dollars in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
---------------
1997 1996 LIFE
------- ------- ----------
<S> <C> <C> <C>
Buildings..................................... $ 1,190 $ 350 31 years
Classroom equipment, courseware and other
instructional materials...................... 38,882 17,905 3-15 years
Furniture, fixtures and equipment............. 8,888 2,926 3-10 years
Leasehold improvements........................ 3,841 1,296 1-7 years
Vehicles...................................... 17 40 5 years
------- -------
52,818 22,517
Less--Accumulated depreciation and
amortization................................. 7,263 2,957
------- -------
$45,555 $19,560
======= =======
</TABLE>
F-10
<PAGE>
CAREER EDUCATION CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1997, 1996 AND 1995
The gross cost of assets recorded under capital leases included above
amounted to $2,075,000 and $39,000 at December 31, 1997 and 1996,
respectively.
f. Intangible Assets
Intangible assets include the excess of cost over fair market value of
identifiable assets acquired through the business purchases described in Note
4. Goodwill and student contracts are being amortized on a straight-line basis
over their estimated useful lives. Covenants not-to-compete entered into
before 1997 are being amortized on a straight-line basis over their useful
lives. Those entered into after 1996 are being amortized on an accelerated
method over their estimated useful lives. At December 31, 1997 and 1996, the
cost basis and useful lives of intangible assets consist of the following
(dollars in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------- ESTIMATED
1997 1996 LIVES
------- ------ ---------
<S> <C> <C> <C>
Goodwill......................................... $24,358 $3,470 40 years
Covenants not-to-compete......................... 13,250 500 3-5 years
Student contracts................................ -- 1,107 1 year
------- ------
37,608 5,077
Less--Accumulated amortization................... 4,029 1,670
------- ------
$33,579 $3,407
======= ======
</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.
g. 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.
h. 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.
F-11
<PAGE>
CAREER EDUCATION CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1997, 1996 AND 1995
i. 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.
j. Fair Value of Financial Instruments
The carrying value of 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 their fair value as the
stated interest rate approximates current market interest rates of debt with
similar terms.
k. 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, which is being accreted 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.
l. Income (Loss) Per Share Attributable to Common Stockholders
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 to basic earnings per share and diluted earnings
per share. The calculations primarily differ by excluding dilutive common
stock equivalents and convertible securities (such as stock options, warrants,
and convertible preferred stock) using the treasury method, when computing
basic earnings per share. The Company adopted SFAS No. 128 in December 1997
and has retroactively restated all periods presented. The weighted average
number of common shares used in determining basic and diluted income (loss)
per share attributable to common stockholders for the years ended December 31,
1997, 1996 and 1995 is as follows (in thousands):
<TABLE>
<CAPTION>
FOR THE YEARS
ENDED DECEMBER
31,
---------------
1997 1996 1995
---- ----- ----
<S> <C> <C> <C>
Common shares outstanding (basic)......................... 769 761 755
Common stock equivalents.................................. -- 269 --
--- ----- ---
Diluted................................................... 769 1,030 755
=== ===== ===
</TABLE>
For the years ending December 31, 1997 and 1995, antidilutive options and
warrants excluded from diluted weighted average number of common shares
outstanding were 568,332 and 112,906, respectively.
Supplemental pro forma diluted income (loss) before extraordinary item and
net loss per share attributable to common stockholders, had the debt
retirement in connection with the consummation of the IPO occurred at the
beginning of the year, would have been $(2.59) and $ (2.73) for the year ended
December 31, 1997. This earnings per share data is computed based upon the pro
forma loss before extraordinary item and after the extraordinary item
attributable to common stockholders adjusted for the reduction in interest
expense resulting
F-12
<PAGE>
CAREER EDUCATION CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1997, 1996 AND 1995
from the application of net proceeds from the IPO to reduce indebtedness of
the Company and pro forma weighted average number of shares of common stock
outstanding which reflect the assumed sale by the Company of approximately
2,314,688 shares of common stock in the offering resulting in net proceeds
sufficient to pay indebtedness as described in Note 2 (after considering
certain cash on hand) in 1997.
m. Pro Forma Diluted Loss per Share Attributable to Common Stockholders
Pro forma diluted loss before extraordinary item and net loss per share
attributable 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 (i) stock splits described in Notes 2 and 6 for
all periods presented, (ii) shares of redeemable preferred stock converted
into shares of common stock (determined by dividing the liquidation value,
including paid-in-kind dividends, by the initial public offering price of
$16.00 per share), (iii) the exercise of warrants to purchase shares of common
stock, (iv) the conversion of all existing classes of common stock into a
single new class of common stock and (v) common stock equivalents (if
dilutive). Common stock equivalents represent stock options and warrants using
the treasury stock method for all periods presented.
Supplemental pro forma diluted loss before extraordinary item and net loss
per share attributable to common stockholders, had the debt retirement in
connection with the consummation of the IPO occurred at the beginning of the
year and after considering the conversion of preferred stock and exercise of
warrants, would have been $(1.49) and $(1.57) for the year ended December 31,
1997.
n. Stock-Based Compensation
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-
Based Compensation" ("SFAS No. 123"), was issued in October, 1995 by the
Financial Accounting Standards Board. SFAS No. 123 provides an alternative
method of accounting for stock-based compensation arrangements, based on fair
value of the stock-based compensation utilizing various assumptions regarding
the underlying attributes of the options and stock, rather than the existing
method of accounting for stock-based compensation which is provided in
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" ("APB No. 25"). The Financial Accounting Standards Board encourages
entities to adopt the fair-value based method but does not require adoption of
this method. The Company will continue its current accounting policy and has
adopted the disclosure-only provisions of SFAS No. 123 for options and
warrants issued to employees and directors. Expense associated with stock
options and warrants issued to non-employees/non-directors is recorded in
accordance with SFAS No. 123.
o. Accounting Pronouncements to Be Adopted During 1998
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 December 31, 1997, the impact of adopting this
pronouncement has not been determined; however, the Company will be affected
by it because it maintains a subsidiary that has operations in Canada.
F-13
<PAGE>
CAREER EDUCATION CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1997, 1996 AND 1995
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 December 31, 1997, the impact of this pronouncement has not been
determined.
p. Foreign Currency Translation
The Company acquired IAMD-Canada, an entity with operations in Canada, on
June 30, 1997. At December 31, 1997, revenues and expenses related to these
operations have been translated at average exchange rates in effect at the
time the underlying transactions occurred. Transaction gains or losses are
included in income. Assets and liabilities of this subsidiary have been
translated at the year-end exchange rate, with gains and losses resulting from
such translation being included in stockholders' investment at December 31,
1997.
4. BUSINESS ACQUISITIONS
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, as adjusted, of approximately $7,477,000 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 with funds
obtained through bank financing, 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.
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
purchase price, as adjusted, of approximately $4,944,000 exceeded the
estimated fair market value of net assets acquired and liabilities assumed,
resulting in goodwill of approximately $3,111,000. 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.
F-14
<PAGE>
CAREER EDUCATION CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1997, 1996 AND 1995
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
note, secured by letters of credit, bears interest payable quarterly at 7% per
annum and is due February 28, 2001.
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, as adjusted, of approximately
$19,029,000 exceeded the fair market value of net assets acquired and
liabilities assumed, resulting in goodwill of approximately $8,434,000. In
connection with the purchase, the former owner of the schools also entered
into a covenant not-to-compete agreement with the Company in exchange for
$7,000,000. The covenant not-to-compete restricts the former owners' ability
to own or operate certain types of for-profit postsecondary schools for five
years.
At closing, the Company paid $5,400,000 to the former owner and deposited
$18,850,000 into escrow with borrowings of $12,500,000 from its new bank
financing arrangement and $15,000,000 which was raised through the issuance of
Series D preferred stock.
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. 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 and liabilities assumed, resulting in
goodwill of approximately $3,695,000.
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 were paid upon the consummation of the IPO
(Note 2).
F-15
<PAGE>
CAREER EDUCATION CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1997, 1996 AND 1995
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 and liabilities assumed,
resulting in goodwill of approximately $5,648,000.
In connection with the purchase, the former owners of the school entered
into covenant not-to-compete agreements with the Company in exchange for
$2,000,000. The covenant not-to-compete restricts the former owners' ability
to own or operate certain types of postsecondary vocational schools for four
years.
On June 30, 1997, the Company paid $3,820,000 to the former owners,
deposited $2,120,000 into escrow, and issued $2,550,000 in notes payable to
the former owners to consummate these transactions. The funds to consummate
these transactions were obtained through the issuance of Series D preferred
stock and warrants and bank borrowings. The notes are secured by letters of
credit, bear interest payable quarterly at 7% per annum, and were paid upon
consummation of the IPO (Note 2).
PRO FORMA RESULTS OF OPERATIONS
The following unaudited pro forma results of operations (in thousands) for
the years ended December 31, 1997 and 1996, assume that the business
acquisitions subsequent to January 1, 1996 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, include
adjustments for depreciation, amortization, interest and taxes and do not
necessarily reflect actual results that would have occurred.
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31
--------------------------
1997 1996 1995
-------- ------- -------
(UNAUDITED)
<S> <C> <C> <C>
Net revenue................................... $106,467 $87,476 $32,175
Income (loss) before extraordinary item....... (3,506) (5,051) 1,137
Net income (loss)............................. (3,924) (5,051) 1,137
Income (loss) before extraordinary item
attributable to common stockholders.......... (11,933) (6,409) 264
Net income (loss) attributable to common
stockholders................................. (12,351) (6,409) 264
======== ======= =======
Basic income (loss) per share attributable to
common stockholders--
Income (loss) before extraordinary item..... $ (15.53) $ (8.42) $ 0.35
======== ======= =======
Net income (loss)........................... $ (16.08) $ (8.42) $ 0.35
======== ======= =======
Diluted income (loss) per share attributable
to common stockholders--
Income (loss) before extraordinary item..... $ (15.53) $ (8.42) $ 0.30
======== ======= =======
Net income (loss)........................... $ (16.08) $ (8.42) $ 0.30
======== ======= =======
</TABLE>
F-16
<PAGE>
CAREER EDUCATION CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1997, 1996 AND 1995
5. DEBT
Long term debt of the Company at December 31, 1997 and 1996, consists of the
following:
<TABLE>
<CAPTION>
DECEMBER 31
---------------
1997 1996
------- -------
(IN THOUSANDS)
<S> <C> <C>
Borrowings under Credit Agreement with a syndicate of banks as
discussed below--
Revolving loans.............................................. $39,985 $ --
Term loans................................................... 13,500 --
Revolving credit notes with a bank, as discussed below, net of
debt discount of $57,000 as of December 31, 1996.............. -- 8,182
Bank term loan, as discussed below............................. -- 8,250
Notes payable to former owners of SCT, secured by bank letters
of credit, bearing annual interest of 7%, interest only
payable quarterly, principal due February 28, 2001............ 1,800 --
Notes payable to former owners of IAMD-U.S., secured by bank
letters of credit, bearing annual interest of 7%, interest
only payable quarterly, repaid in connection with the
consummation of the IPO....................................... 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, secured by bank
letters of credit, bearing annual interest of 7%, interest
only payable quarterly, repaid in connection with the
consummation of the IPO....................................... 2,550 --
Equipment under capital leases, secured by related equipment,
discounted at a weighted average interest rate of 9.58%....... 1,279 27
Other.......................................................... 21 --
------- -------
64,035 16,459
Less--Current portion.......................................... 3,888 2,676
------- -------
$60,147 $13,783
======= =======
</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 $30,000,000 in
outstanding letters of credit. Outstanding letters of credit reduce the
revolving credit facility availability under the amended Credit Agreement. The
amended Credit Agreement matures on May 30, 2002; however, availability under
the revolving credit facility is reduced by $10,000,000 on May 30, 2001. The
Term Loan is payable in equal quarterly installments of $750,000. The
Company's borrowings under the amended Credit Agreement bear interest, payable
quarterly, at the Base Rate (defined as the greater of the bank's prime rate
plus 0.75%, 9.25% at December 31, 1997, or the Federal Funds Rate plus 0.50%,
7.00% at December 31, 1997) or at LIBOR plus 2% (7.84% at December 31, 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 December 31, 1997, the Company had outstanding, under the amended Credit
Agreement, $39,985,000 in revolving credit borrowings and a $13,500,000 term
loan and had issued various letters of credit totaling
F-17
<PAGE>
CAREER EDUCATION CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1997, 1996 AND 1995
approximately $25,005,000 (to meet certain Department of Education financial
responsibility requirements and to guarantee certain purchase price payments).
At December 31, 1997, borrowings totaling $17,485,000 were at the bank's prime
rate plus 0.75%, and borrowings totaling $36,000,000 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
20,618 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 year ended December 31, 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. 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 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 December 31, 1997, the Company was either in
compliance with or had obtained a waiver for the covenants of the Credit
Agreement, as amended.
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 December 31, 1997, future annual principal payments of long-term debt are
as follows (in thousands):
<TABLE>
<S> <C>
1998............................. $ 3,888
1999............................. 3,300
2000............................. 3,070
2001............................. 8,869
2002............................. 44,908
-------
$64,035
=======
</TABLE>
F-18
<PAGE>
CAREER EDUCATION CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1997, 1996 AND 1995
6. STOCKHOLDERS' INVESTMENT
In connection with the consummation of the IPO, on February 4, 1998, the
Company authorized 50,000,000 shares of common stock and converted all classes
of common stock described below into one class of common stock ("Common
Stock"), with a par value of $0.01, at a rate of 9.376 shares of Common Stock
for every share of existing common stock. The shares of common stock disclosed
in these financial statements and notes hereto retroactively reflect this
stock split. In addition, the Company amended and restated its certificate of
incorporation to provide for two classes of capital stock (Common Stock and
Preferred Stock).
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.
PREFERRED STOCK
In connection with the IPO consummated on February 4, 1998, all classes of
redeemable preferred stock described in Note 7 were converted into 2,423,485
shares of common stock by dividing the liquidation value on that date
(including all accrued paid-in-kind dividends) of preferred stock by $16.00,
the initial public offer price of the common stock. The Company also
authorized 1,000,000 shares of Preferred Stock with a par value of $0.01 per
share.
7. REDEEMABLE PREFERRED STOCK
Subsequent to year-end, all shares of redeemable preferred stock described
below were converted into Common Stock in connection with the IPO, as
discussed in Notes 2 and 6.
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 ($1,000 per share plus dividends 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.
F-19
<PAGE>
CAREER EDUCATION CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1997, 1996 AND 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 December 31, 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 ($1,000 per share plus undeclared dividends 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 December 31, 1997 on Series C preferred stock.
In July 1995, the Company issued shares of Series C preferred stocks and
redeemable warrants described in Note 8. 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 ($1,000 per share plus dividends, 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.
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 the stockholders 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
83,671 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
22,315 shares of Class E common stock to existing stockholders in connection
with the acquisition of SCT. On May 30, 1997, the Company issued the remaining
5,500 shares of Series D preferred stock and warrants to purchase 61,357
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 339,280 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 339,280
shares of Class E common stock to existing stockholders in
F-20
<PAGE>
CAREER EDUCATION CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1997, 1996 AND 1995
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.
8. REDEEMABLE WARRANTS
In connection with the issuance of Series C preferred stock during 1995, the
Company issued warrants exercisable into 237,072 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 92,766 shares. Based upon the results of operations through December
31, 1997, the total number of shares of Class D common stock into which these
warrants are exercisable was adjusted to be 202,297. Subsequent to year-end,
these warrants were exercised in connection with the IPO (Note 2). The Company
is accreting the difference between the value of the warrants at the date of
issuance and the IPO date using the effective interest method.
In connection with the Company's previous credit agreement entered into
during 1995 (Note 5), the Company issued warrants exercisable into 20,618
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. Based
upon the terms and provisions of the credit and warrant agreements, the
Company assigned a value (based upon the relative fair market value of the
debt and warrants) of $79,997 to these warrants. The fair market value of the
warrants was determined with reference to the exercise price of the warrants,
the fair market value of the Company's common stock at the date the warrants
were issued (considering its recent sale of stock to third parties) and the
period the warrants can be exercised. In connection with the sales of Series D
preferred stock through the various securities purchase agreements, the
outstanding warrants to purchase 20,618 shares of Class D common stock were
exchanged for warrants (with similar put and call features) to purchase 20,618
shares of Class E common stock and also increased to include additional
warrants to purchase 12,329 shares of Class E common stock. The value of these
additional warrants, totaling approximately $180,000 (based upon a Black-
Scholes option pricing model with assumptions as described in Note 9) was
recorded as interest expense in 1997.
On January 22, 1998, the holder of warrants to purchase 32,947 shares of
Common Stock notified the Company that it was exercising its right to cause
the Company to repurchase the warrants. The Company has determined that the
appropriate purchase price for the warrants is approximately $525,000 and has
offered to pay such amount to the holder of the warrants. This offer has not
yet been accepted. To the extent that the Company is required to purchase the
warrants for an amount in excess of $525,000, such excess amount would be
reflected as additional accretion to the redemption value of these warrants
when calculating the Company's earnings per share attributable to the common
stockholders. The difference between the value of the warrants at the date of
issuance and its currently estimated value is being accreted using the
effective interest method.
9. STOCK OPTIONS AND WARRANTS
STOCK OPTIONS
During 1994, certain stockholders were granted options to purchase shares of
common stock of the Company up to a total of approximately 13.5% of the
outstanding shares of common stock. These options, which have an exercise
price of $.10 per share, are earned and become exercisable based upon certain
financial returns earned and realized in a cash payment by certain
stockholders and are subject to other conditions. In July 1995,
F-21
<PAGE>
CAREER EDUCATION CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1997, 1996 AND 1995
the option agreements were amended to reduce the total number of shares of
common stock for which the options could be exercised to 11.5% of the
outstanding shares, and a supplemental option agreement was entered into
entitling one of these stockholders to purchase 20,618 shares of common stock
at $0.01 per share. The supplemental option vests over a five year period.
Under the supplemental option agreement, additional options to purchase a
total of 8,579 shares of common stock at an exercise price of $0.01 per share
were issued in 1997. These options vest over the same period as the initial
supplemental option. At December 31, 1997, and 1996, 17,514 and 8,251 of the
supplemental options, respectively, had vested.
On October 20, 1997, the original option agreements were further amended to
fix the number of shares that the stockholders may exercise only upon
completion of the IPO. Under these amended agreements, in addition to the
options issued under the supplemental option agreement, the stockholders may
purchase an aggregate of 122,615 shares of common stock of the Company at any
time after the IPO closing, but prior to January 1, 2004. The options (other
than the supplemental options) fully vested upon the IPO closing. The Company
will record related compensation expense of approximately $2.0 million in
February 1998.
During 1995, the Company adopted the 1995 Stock Option Plan. The plan
provides for the Company to grant up to 160,568 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. Options issued under the 1995
Stock Option Plan to purchase 92,101 shares of common stock were fully vested
upon the consummation of the IPO.
Stock option activity for the Company's 1995 Stock Option Plan for the years
ended December 31, 1995, 1996 and 1997, was as follows:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
EXERCISE
SHARES PRICE RANGE PRICE
------- ------------ --------
<S> <C> <C> <C>
Outstanding as of January 1, 1995 -- $ -- $ --
Granted...................................... 63,672 3.88 3.88
Cancelled.................................... (9,338) 3.88 3.88
-------
Outstanding as of December 31, 1995............ 54,334 3.88 3.88
Granted...................................... 30,922 3.88 3.88
-------
Outstanding as of December 31, 1996............ 85,256 3.88 3.88
Granted...................................... 68,782 13.85-14.71 14.59
Cancelled.................................... (2,672) 3.88 3.88
-------
Outstanding as of December 31, 1997............ 151,366 $ 3.88-14.71 $8.75
======= ============ =====
Stock options exercisable at
December 31, 1997............................ 26,853 $3.88 $3.88
======= ============ =====
December 31, 1996............................ 10,332 $3.88 $3.88
======= ============ =====
</TABLE>
F-22
<PAGE>
CAREER EDUCATION CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1997, 1996 AND 1995
The following table summarizes information about all stock options
outstanding as of December 31, 1997:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------------- --------------------------------
NUMBER WEIGHTED NUMBER
OUTSTANDING WEIGHTED AVERAGE EXERCISABLE WEIGHTED
AS OF AVERAGE REMAINING AT AVERAGE
EXERCISE PRICE RANGES DECEMBER 31, 1997 EXERCISE PRICE CONTRACTUAL LIFE DECEMBER 31, 1997 EXERCISE PRICE
- --------------------- ----------------- -------------- ---------------- ----------------- --------------
<S> <C> <C> <C> <C> <C>
$0.01-$0.10............. 29,197 $ 0.01 6.1 17,514 $0.01
$3.88-$3.88............. 82,584 3.88 8.0 26,853 3.88
$13.85-$14.71........... 68,782 14.59 9.5 -- --
------- ------ --- ------ -----
$0.01-$14.71............ 180,563 $ 7.33 8.2 44,367 $2.35
======= ====== === ====== =====
</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, 1997 and 1996, was approximately
$2.58 and $1.80, respectively.
On January 29, 1998, the Company issued options to employees for the
purchase of 207,100 shares of Common Stock at an exercise price of $16.00 per
share.
WARRANTS
During 1997, in connection with the issuance of Class D preferred stock
through the various securities purchase agreements, the Company issued
warrants exercisable into a total of 422,951 shares of Class E common stock.
These warrants, which are exercisable at any time, have an exercise price of
$.01 per share and expire in July 2005. The holders of these warrants
exercised them in connection with the consummation of the IPO (Note 2).
A summary of warrant activity, including redeemable warrants, for the years
ended December 31, 1995, 1996 and 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....................................... 257,690 0.01 -- --
------- -------
Outstanding as of December 31, 1995............ 257,690 0.01 -- --
Issued....................................... -- -- -- --
------- -------
Outstanding as of December 31, 1996............ 257,690 0.01 -- --
Issued....................................... -- -- 435,281 0.01
Cancelled.................................... (34,776) 0.01 -- --
Exercised.................................... -- -- (928) 0.01
Exchanged.................................... (20,618) 0.01 20,618 0.01
------- -------
Outstanding as of December 31, 1997............ 202,296 0.01 454,971 0.01
======= ===== ======= =====
Warrants exercisable at December 31, 1997...... 202,296 $0.01 454,971 $0.01
======= ===== ======= =====
Warrants exercisable at December 31, 1996...... 257,690 $0.01 -- $ --
======= ===== ======= =====
</TABLE>
F-23
<PAGE>
CAREER EDUCATION CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1997, 1996 AND 1995
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 $3.88. As of
December 31, 1997, the remaining contractual life of these warrants was
approximately 7.6 years. The weighted average fair value of warrants to
purchase Class E common stock issued for the year ended December 31, 1997 was
approximately $14.67. As of December 31, 1997, the remaining contractual life
of these warrants was approximately 7.6 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 and net income (loss),
and pro forma income (loss) before extraordinary item and net income (loss)
attributable to common stockholders would have been as follows (in thousands,
except per share data):
<TABLE>
<CAPTION>
DECEMBER 31
-----------------------
1997 1996 1995
------- ------- ------
<S> <C> <C> <C>
Pro forma income (loss) before extraordinary
item........................................... $ (505) $ 1,475 $ 64
Pro forma net income (loss)..................... (923) 1,475 64
Pro forma income (loss) before extraordinary
item attributable to common stockholders....... (8,932) 117 (809)
Pro forma net income (loss) attributable to
common stockholders............................ (9,350) 117 (809)
======= ======= ======
Pro forma diluted income (loss) before
extraordinary item per share attributable to
common stockholders............................ $(11.63) $ 0.11 $(1.07)
======= ======= ======
Pro forma diluted net income (loss) per share
attributable to common stockholders............ $(12.17) $ 0.11 $(1.07)
======= ======= ======
</TABLE>
Pro forma basic amounts per share attributable to common stockholders are
the same as diluted disclosed above except in 1996, where basic income before
extraordinary item and net income attributable to common stockholders was
$0.15.
The pro forma disclosure is not likely to be indicative of pro forma results
which may be expected in future years because of the fact that options vest
over several years, pro forma compensation expense is recognized as the
options vest and additional awards may also be granted. At December 31, 1997,
the unamortized compensation expense under FASB No. 123 to be recognized for
options that vested upon the IPO is approximately $192,000.
F-24
<PAGE>
CAREER EDUCATION CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1997, 1996 AND 1995
10. INCOME TAXES
The provision (benefit) for income taxes for the years ended December 31,
1997, 1996 and 1995, consists of the following (in thousands):
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31
--------------------
1997 1996 1995
------- ---- -----
<S> <C> <C> <C>
Current--
Federal........................................... $ 685 $150 $ --
State and local................................... (3) 260 24
Foreign........................................... -- -- --
------- ---- -----
Total current................................... 682 410 24
------- ---- -----
Deferred--
Federal........................................... (578) (172) --
State and local................................... (76) (30) --
Foreign........................................... (359) -- --
------- ---- -----
Total deferred.................................. (1,013) (202) --
------- ---- -----
Total provision (benefit) for income taxes.......... $ (331) $208 $ 24
======= ==== =====
</TABLE>
A reconciliation of the statutory U.S. federal income tax rate to the
effective income tax rate for the years ended December 31, 1997, 1996 and
1995, is as follows:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31
---------------------
1997 1996 1995
----- ----- -----
<S> <C> <C> <C>
Statutory U.S. Federal
income tax rate........ (34.0)% 34.0 % 34.0 %
Foreign taxes........... (8.7)% -- % -- %
State income taxes, net
of Federal benefit..... (6.6)% 10.0 % 17.0 %
Permanent differences
and other.............. 7.6 % 4.8 % (11.2)%
Valuation allowance..... -- % (36.6)% (14.0)%
----- ----- -----
Effective income tax
rate................... (41.7)% 12.2 % 25.8 %
===== ===== =====
</TABLE>
Components of deferred income tax assets and liabilities consist of the
following at December 31, 1997 and 1996 (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31
------------
1997 1996
------ ----
<S> <C> <C>
Deferred income tax assets:
Tax net operating loss carryforwards............................ $ 891 $281
Allowance for doubtful accounts................................. 285 182
Amortization on covenants not to compete........................ 926 --
Other........................................................... 121 49
------ ----
Total deferred income tax assets.............................. 2,223 512
------ ----
Deferred income tax liabilities:
Depreciation and amortization................................... 3,032 86
Other........................................................... -- 37
------ ----
Total deferred income tax liabilities......................... 3,032 123
Valuation allowance............................................. -- --
------ ----
Net deferred income tax (liability) asset..................... $ (809) $389
====== ====
</TABLE>
F-25
<PAGE>
CAREER EDUCATION CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1997, 1996 AND 1995
The Company has generated a tax net operating loss carryforward and also
purchased certain tax net operating loss carryforwards in connection with its
business acquisitions. At December 31, 1997, such tax net operating loss
carryforwards totaled $2,123,000 and begin to expire in 2010. The Company has
not recorded a valuation allowance as it believes that deferred income tax
assets will be realized in the future.
11. COMMITMENTS AND CONTINGENCIES
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 March 2009. 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, 1997, 1996 and 1995 was approximately $8,049,000, $2,649,000,
$1,589,000, respectively.
Future minimum lease payments under these leases as of December 31, 1997,
are as follows (in thousands):
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES TOTAL
------- --------- -------
<S> <C> <C> <C>
1998........................................... $1,018 $11,678 $12,696
1999........................................... 345 10,650 10,995
2000........................................... 68 9,627 9,695
2001........................................... 20 8,069 8,089
2002........................................... 5 5,751 5,756
2003 and thereafter............................ -- 20,248 20,248
------ ------- -------
1,456 $66,023 $67,479
======= =======
Less--Portion representing interest at a
weighted average rate of 9.58%................ 177
------
Principal payments............................. 1,279
Less--Current portion.......................... 868
------
$ 411
======
</TABLE>
12. 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
F-26
<PAGE>
CAREER EDUCATION CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1997, 1996 AND 1995
its implementing regulations, certain financial responsibility and other
regulatory standards must be complied with in order to qualify to participate
in the Title IV Programs. Under such standards, each institution must, among
other things, (i) have an acid test ratio (defined as the ratio of cash, cash
equivalents, and current accounts receivable to current liabilities) of at
least 1:1 at the end of each fiscal year, (ii) have a positive tangible net
worth at the end of each fiscal year, (iii) not have a cumulative net
operating loss during its two most recent fiscal years that results in a
decline of more than 10% of the institution's tangible net worth at the
beginning of that two-year period, (iv) collect 85% or less of its education
revenues from Title IV Program funds in any fiscal year, and (v) not have
cohort default rates on federally funded or federally guaranteed student loans
of 25% or greater for three consecutive federal fiscal years. The DOE may
measure the financial responsibility standards on a school-by-school basis or
on a corporate consolidated basis. Any regulatory violation could be the basis
for the initiation of a suspension, limitation or termination proceeding
against the Company or any of its U.S. institutions. To minimize risks
associated with noncompliance with DOE requirements, the Company conducts
periodic financial and compliance reviews of its subsidiaries.
An institution that is determined by the DOE not to meet any one of the
standards of financial responsibility is nonetheless entitled to participate
in the Title IV Programs if it can demonstrate to the DOE that it is
financially responsible on an alternative basis. An institution may do so by
posting surety either in an amount equal to 50% (or greater, as the DOE may
require) of the total Title IV Program funds received by students enrolled at
such institution during the prior year or in an amount equal to 10% (or
greater, as the DOE may require) of such prior year's funds if the institution
also agrees to transfer to the reimbursement system of payment for its Title
IV Program funds. The DOE has interpreted this surety condition to require the
posting of an irrevocable letter of credit in favor of the DOE.
In November 1997, the DOE published new regulations regarding financial
responsibility to take effect on July 1, 1998. The regulations provide a
transition year alternative which will permit institutions to have their
financial responsibility for the 1998 fiscal year measured on the basis of
either the new regulations or the current regulations, whichever are more
favorable. Under the new regulations, the DOE will calculate three financial
ratios for an institution, each of which will be scored separately and which
will then be combined to determine the institution's financial responsibility.
If an institution's composite score is below the minimum requirement for
unconditional approval but above a designated threshold level, such
institution may take advantage of an alternative that allows it to continue to
participate in the Title IV Programs for up to three years under additional
monitoring and reporting procedures. If an institution's composite score falls
below this threshold level or is between the minimum for unconditional
approval and the threshold for more than three consecutive years, the
institution will be required to post a letter of credit in favor of the DOE.
The Company does not believe that these new regulations will have a material
effect on the Company's compliance with the DOE's financial responsibility
standards.
The process of reauthorizing the HEA by the U.S. Congress, which takes place
approximately every five years, has begun and is expected to be completed by
1998. It is not possible to predict the outcome of the reauthorization
process. Although there is no present indication that the Congress will
decline to reauthorize the Title IV Programs, there can be no assurance that
government funding for the Title IV Programs will continue to be available or
maintained at current levels, nor can there be assurance that current
requirements for student and institutional participation in the Title IV
Programs will be unchanged. Thus, the reauthorization process could result in
revisions to the HEA that increase the compliance burden on the Company's
institutions. A reduction in funding levels for federal student financial
assistance programs could impact the Company's ability to attract students.
F-27
<PAGE>
CAREER EDUCATION CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1997, 1996 AND 1995
In order to operate and award degrees, diplomas and certificates and to
participate in the Title IV Programs, a campus must be licensed or authorized
to offer its programs of instruction by the relevant agencies of the state in
which such campus is located. Each of the Company's U.S. campuses is licensed
or authorized by the relevant agencies of the state in which such campus is
located. In addition, in order to participate in the Title IV Programs, an
institution must be accredited by an accrediting agency recognized by the DOE.
Each of the Company's U.S. campuses is accredited by an accrediting agency
recognized by the DOE.
With each acquisition of an institution that is eligible to participate in
the Title IV Programs, that institution undergoes a change of ownership that
results in a change of control, as defined in the HEA and applicable
regulations. In such event, that institution becomes ineligible to participate
in the Title IV Programs and may receive and disburse only previously
committed Title IV Program funds to its students until it has applied for and
received from the DOE recertification under the Company's ownership.
In reviewing the Company's acquisitions since September 1996, it has been
the DOE's practice to measure financial responsibility on the basis of the
financial statements of both the institutions and the Company. In its review
of the Company's 1996 annual financial statements and interim 1997 balance
sheets, as filed with the DOE in connection with the Company's applications
for DOE certification of institutions acquired subsequent to September 1996 to
allow such institutions to participate in the Title IV Programs, the DOE has
questioned the Company's accounting for certain direct marketing costs and its
valuation of courseware and other instructional materials of the Company's
recently acquired institutions. The audited financial statements included
herein have been restated to expense as incurred all direct marketing and
advertising costs which had previously been deferred.
As a result of the DOE's concerns regarding the Company's accounting for
direct marketing costs and courseware and instructional materials, the DOE has
offered the Company the alternative of posting an irrevocable letter of credit
in favor of the Secretary of Education with respect to each institution the
Company has acquired since September 1996 in a sum sufficient to secure the
DOE's interest in the Title IV Program funds administered by the applicable
institution. While the Company continues to disagree with the position taken
by the DOE, in order to obtain certification of the institutions to resume
participation in the Title IV Programs in a timely fashion, and thus, to avoid
any material interruption in Title IV Program funding for the acquired
institutions, the Company has posted, and currently has outstanding, a letter
of credit in the amount of $1.9 million, which expires on September 30, 1998,
with respect to Western Culinary; a letter of credit in the amount of $12.0
million, which expires on October 31, 1998, with respect to Gibbs; a letter of
credit in the amount of $1.2 million, which expires on October 31, 1998, with
respect to SCT; and a letter of credit in the amount of $5.3 million, which
expires on October 31, 1998, with respect to IAMD-U.S.
The original letters of credit for Western Culinary and SCT represented 50%
of each institution's Title IV Program funding in the prior award year.
Subsequently, the DOE increased the level of surety for SCT to, and
established the level of surety of Gibbs and IAMD-U.S. at, 75% of the Title IV
Program funds that students enrolled at each such institution received in the
previous award year. The DOE also has stated that, prior to a determination
that the Company satisfies the standards of financial responsibility, the DOE
will not consider applications to resume Title IV Program participation on
behalf of any institutions that the Company may acquire in the future or
applications that seek approval of any action that would expand the Title IV
Program participation of any of the Company's U.S. institutions that already
is certified for such participation.
Beginning in October 1997, the DOE has imposed a condition that, through
September 30, 1998, SCT, Gibbs and IAMD-U.S. may not disburse Title IV Program
funds in excess of the total Title IV Program funds that students enrolled at
each institution received in the most recent award year for which data are
available to
F-28
<PAGE>
CAREER EDUCATION CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1997, 1996 AND 1995
the DOE. The DOE has calculated this amount to be $1.6 million in the case of
SCT, $16.0 million in the case of Gibbs and $7.0 million in the case of IAMD-
U.S. In subsequent discussions, the DOE has agreed to consider potential
increases in the Title IV Program funding available to students at the
affected institutions, if the Company so requests and with the understanding
that the Company would secure any such increase in Title IV Program funding by
increasing the applicable letter of credit in an amount commensurate with the
additional Title IV Program funding utilized by such students. The DOE has
advised the Company that the DOE does not include William D. Ford Federal
Direct Loan ("FDL") funds in calculating the amount of any letter of credit
and that FDL funds are not considered in determining the total Title IV
Program funding available to an affected institution. SCT currently
participates in the FDL Program, the Gibbs schools are eligible to participate
in the FDL Program, and the IAMD-U.S. schools are applying for such
eligibility.
The Company has determined that the Title IV funding disbursed to students
enrolled at each of SCT, Gibbs and IAMD-U.S. is approaching the funding
limitation imposed by the DOE for each such school. The Company believes it
can stay within such limitation at Gibbs and IAMD-U.S. for at least the next
calendar quarter by utilizing Federal Direct Loans at such schools. Based on
current trends, the Company believes SCT could reach its Title IV funding
limitation in the second quarter of 1998, but, if that occurs, the Company
believes it can provide alternative sources of financial aid to students at
SCT. The Company has initiated discussions with the DOE to consider an
increase in the Title IV funding limitation for SCT, Gibbs and IAMD-U.S., at
least until the DOE can conclude its next financial review of the Company,
based on the Company expanding the letters of credit that it has posted on
behalf of each such school. If IAMD-U.S. cannot begin participation in the FDL
program early in the next quarter, it could significantly reduce the Company's
ability to provide financial assistance to additional students at IAMD-U.S.,
which in turn could reduce the Company's ability to enroll such additional
students. If the Company were unable to increase aggregate enrollment at SCT,
Gibbs and IAMD-U.S. and unable for an extended period to file applications
with the DOE for other newly acquired U.S. institutions to seek Title IV
Program participation, it 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.
In accordance with applicable law, the DOE will be required to rescind the
letters of credit and related requirements if the Company and its U.S.
institutions demonstrate that they satisfy the standards of financial
responsibility, using accounting treatments that are acceptable to the DOE.
The Company changed its accounting to eliminate deferred marketing costs from
its financial statements and, during discussions with the DOE, provided
additional information regarding the valuation of courseware and instructional
materials at one of the recently acquired institutions where such valuation
was questioned by the DOE. The DOE agreed that in the conduct of its next
review of the financial responsibility of the Company and its U.S.
institutions, the DOE will consider financial information reflecting the
results of the IPO, as well as the 1997 audited financial statements of each
entity. Accordingly, the Company intends to seek the DOE's review of the
Company's and its U.S. institutions' audited 1997 financial statements and the
Company's audited post-IPO balance sheet on a expedited basis in April 1998.
At December 31, 1997, the Company believes, based on its audited 1997
financial statements, that the Company satisfies each of the DOE's standards
of financial responsibility, except for the tangible net worth ratio. However,
the Company believes that based upon the DOE's review of its audited 1997
financial statements and the Company's audited post-IPO balance sheet, the
Company will also satisfy the tangible net worth ratio. Certain of the
institutions the Company acquired during 1997 (IAMD-U.S. and four of the Gibbs
schools) will show an operating loss for the portion of 1997 fiscal year that
they were owned and operated by the Company. In the event that the DOE
considers a part-year operating loss material, and if the DOE does not measure
the
F-29
<PAGE>
CAREER EDUCATION CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1997, 1996 AND 1995
financial responsibility of such institutions on the basis of the financial
position of CEC, the DOE may require the Company to post letters of credit on
behalf of such institutions, but management does not believe there would be
any basis for the DOE to impose a further Title IV funding limitation on such
institutions. Such letters of credit, which would be calculated on an
institution-specific basis, would be in amounts substantially less than the
letters of credit the Company currently has outstanding. To the extent the
outstanding letters of credit are reduced or eliminated based upon the DOE's
review, the Company will have additional availability under the Credit
Agreement. After considering the IPO proceeds and use thereof, the Company has
unused availability under its Credit Agreement of approximately $55.1 million
which provides it with liquidity to increase the letters of credit should the
DOE so require.
In Canada, there are several government programs which provide students
attending eligible institutions with government funding. The provisions
governing an eligible institution vary by province and generally require an
institution's programs qualifying for funding to meet certain rules and
regulations and also to have the administration of the program independently
audited.
13. RELATED-PARTY TRANSACTIONS
The Company maintains short-term employment and consulting agreements with
certain stockholders. Total expenses under these agreements were approximately
$367,000, $298,000, $292,000 for the years ended December 31, 1997, 1996 and
1995, 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 $75,000, $75,000, and $31,000 for the
years ended December 31, 1997, 1996 and 1995. The agreement was terminated
upon the consummation of the IPO.
The Company has also entered into a stock subscription agreement with an
employee, as discussed in Note 6.
14. EMPLOYEE BENEFIT PLAN
The Company maintains a contributory profit sharing plan established
pursuant to the provisions of Section 401(k) of the Internal Revenue Code that
provides retirement benefits for eligible employees of the Company. This plan
requires matching contributions to eligible employees. The Company's matching
contributions were $400,000, $279,000, and $89,000 for the years ended
December 31, 1997, 1996 and 1995, respectively.
15. PRO FORMA DATA (UNAUDITED)
The unaudited pro forma consolidated balance sheet information gives effect
to the transactions discussed in Note 2 as if they had occurred on December
31, 1997 and therefore would have resulted in the repayment of outstanding
indebtedness totaling $44,035,000 which existed at that time.
16. SUBSEQUENT EVENTS
On February 4, 1998, the Company approved the 1998 Non-Employee Directors'
Stock Option Plan. The plan provides for the Company to grant an option to
purchase shares of common stock to directors. Each person who is a non-
employee director on the effective date shall become a participant and shall
be granted an option to purchase 8,000 shares of common stock. On an annual
basis, as long as such director continues to serve as a
F-30
<PAGE>
CAREER EDUCATION CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONCLUDED)
DECEMBER 31, 1997, 1996 AND 1995
director, he shall receive an option to purchase 3,000 shares of common stock.
Each person who is subsequently elected as a director shall become a
participant and shall, on his date of election, be granted an option to
purchase 8,000 shares of common stock. Each participant shall receive
additional grants in subsequent years. Each option becomes exercisable in
three equal annual installments and expires ten years from the date of grant.
The Company has reserved 200,000 shares of common stock for issuance under the
plan.
On February 4, 1998, the Company approved the 1998 Employee Incentive
Compensation Plan. The plan provides for the Company to grant stock options,
stock appreciation rights, restricted stock, deferred stock and other awards
(including stock bonus and performance awards) which are exercisable into
shares of common stock to directors, officers, employees and consultants of
the Company. The plan shall be administered by a committee of the board of
directors which shall have the authority to determine the persons to receive
awards, the type of awards to be issued, the number of shares of common stock
to be covered by each award, and the terms and conditions. The option period
of each stock option and the term of the stock appreciation right shall be
fixed by the Company, provided that no stock option or appreciation right
shall be exercisable more than ten years after the date of grant. Stock
options may be either incentive stock options or nonqualified stock options.
The Company has reserved 600,000 shares of common stock for distribution
pursuant to awards issued under the plan.
On February 4, 1998, the Company approved the 1998 Employee Stock Purchase
Plan, which is effective April 1, 1998. The plan provides for the issuance of
up to 500,000 shares of common stock to be purchased by eligible employees of
the Company through periodic offerings. Employees of the Company may purchase
common stock through payroll deductions (not to exceed $20,000 per person
within any calendar year) at 85% of the fair market value.
On March 13, 1998, the Company purchased 100% of the outstanding shares of
capital stock of Southern California School of Culinary Arts for $1,100,000.
The acquisition will be accounted for as a purchase and based upon preliminary
estimates, the purchase price (subject to adjustment) in excess of the fair
value of assets acquired and liabilities assumed is anticipated to be
approximately $850,000. In connection with the acquisition, the former owners
of the school entered into covenant not-to-compete agreements with the Company
for a total price of $150,000.
F-31
<PAGE>
CAREER EDUCATION CORPORATION AND SUBSIDIARIES
FINANCIAL STATEMENT SCHEDULE
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders of Career Education Corporation:
We have audited, in accordance with generally accepted auditing standards,
the consolidated financial statements of Career Education Corporation and
Subsidiaries and issued our unqualified opinion thereon dated February 13,
1998, except with respect to the matter discussed in the last paragraph of
Note 16, as to which the date is March 13, 1998. Our audits were 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 audits 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
February 13, 1998
S-1
<PAGE>
CAREER EDUCATION CORPORATION AND SUBSIDIARIES
FINANCIAL STATEMENT SCHEDULE
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
BALANCE AT CHARGES TO INCREASE DUE BALANCE AT
BEGINNING OPERATING TO AMOUNTS END OF
OF PERIOD EXPENSES ACQUISITIONS WRITTEN-OFF PERIOD
---------- ---------- ------------ ----------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Student receivable
allowance activity for
the year ended
December 31, 1995..... $533 $ 479 $ 158 $ (912) $ 258
Student receivable
allowance activity for
the year ended
December 31, 1996..... 258 760 30 (593) 455
Student receivable
allowance activity for
the year ended
December 31, 1997..... 455 1,400 1,040 (1,379) 1,516
</TABLE>
S-2
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
SEQUENTIAL
EXHIBIT PAGE
NUMBER DOCUMENT DESCRIPTION NUMBER
------- -------------------- ----------
<C> <S> <C>
3.1 Amended and Restated Certificate of Incorporation of
the Registrant.
3.2 Amended and Restated By-laws of the Registrant.
10.23 Registration Rights Agreement between the Registrant
and Heller Equity Capital Corporation.
10.24 Agreement between the Registrant and Heller Equity Cap-
ital Corporation, regarding designation of directors of
the Registrant.
21 Subsidiaries of the Registrant.
27 Financial Data Schedule.
</TABLE>
<PAGE>
Exhibit 3.1
AMENDED AND RESTATED CERTIFICATE OF INCORPORATION
OF
CAREER EDUCATION CORPORATION
----------------------------
(originally incorporated on January 5, 1994)
Career Education Corporation (the "Corporation"), a corporation organized
and existing under and by virtue of the General Corporation Law of the State of
Delaware (the "DGCL"), does hereby certify that this Amended and Restated
Certificate of Incorporation of the Corporation set forth below has been duly
adopted in accordance with Sections 242 and 245 of the DGCL:
ARTICLE I
---------
The name of the corporation is Career Education Corporation (the
"Company").
ARTICLE II
----------
The address of the Corporation's registered office in the State of Delaware
is 1209 Orange Street, Corporation Trust Center, Wilmington, County of New
Castle, Delaware 19801. The name of the Corporation's registered agent at such
address is The Corporation Trust Company.
ARTICLE III
-----------
The nature of the business to be conducted or promoted is to engage in any
lawful act or activity for which corporations may be organized under the DGCL.
ARTICLE IV
----------
A. Capital Stock.
-------------
1. Authorized Stock.
----------------
Immediately prior to the filing of this Amended and Restated
Certificate of Incorporation, the total numbers of shares of capital stock
of all classes which the Company had authority to issue was 1,181,000
shares, including (i) 600,000 shares of Class A Voting Common Stock, par
value $.01 per share ("Class A Common"), (ii) 100,000 shares of Class B
Voting Common Stock, par value $.01 per share ("Class B
<PAGE>
Common"), (iii) 100,000 shares of Class C Non-voting Common Stock, par
value $.01 per share ("Class C Common"), (iv) 100,000 shares of Class D
Non-voting Common Stock par value $.01 per shares ("Class D Common"), (v)
200,000 shares of Class E Non-voting Common Stock, par value $.01 per share
("Class E Common" and, collectively with the Class A Common, Class B
Common, Class C Common and Class D Common, "Old Common Stock"), (vi) 50,000
shares of Preferred Stock, Series A, par value $.01 per share ("Series A
Preferred"), (vii) 1,000 shares of Preferred Stock, Series B, par value
$.01 per share, (viii) 5,000 shares of Preferred Stock, Series C, par value
$.01 per share ("Series C Preferred"), and (ix) 25,000 shares of Series D
Preferred Stock, par value $.01 per share ("Series D Preferred" and,
collectively with the Series A Preferred and Series C Preferred, "Preferred
Stock"). Effective upon the filing of this Amended and Restated
Certificate of Incorporation with the Secretary of State of the State of
Delaware, the Corporation shall have authority to issue the following
classes of stock, in the number of shares and at the par value as indicated
opposite the name of the class:
<TABLE>
<CAPTION>
NUMBER OF
SHARES PAR VALUE
CLASS AUTHORIZED PER SHARE
- --------------- ---------- ------------
<S> <C> <C>
Common Stock 50,000,000 $0.01
Preferred Stock 1,000,000 $0.01
</TABLE>
2. Conversion of Common Stock and Preferred Stock.
----------------------------------------------
At the time of the filing of this Amended and Restated Certificate of
Incorporation with the Secretary of State of the State of Delaware, (a)
each outstanding whole share of Old Common Stock shall automatically,
without the necessity of any further action on the part of the holder
thereof, be changed and reclassified into 9.376061 shares of Common Stock,
and (b) each outstanding whole share of Preferred Stock shall
automatically, without the necessity of further action on the part of the
holder thereof, be changed and reclassified into such number of shares of
Common Stock as shall be determined by dividing the book value of such
share of Preferred Stock (i.e., the book value of such share plus, in the
case of Series A Preferred or Series D Preferred, all accrued dividends
previously added to the liquidation value pursuant to the terms thereof) by
the initial price per share to the public in the Company's initial public
offering of Common Stock. Upon the occurrence of the reclassifications
effected by this Section A.2. (the "Conversions"), each certificate for
outstanding shares of Old Common Stock or Preferred Stock dated prior to
the effective date of the Conversions shall evidence, and be deemed to
evidence, the number of shares of Common Stock into which the shares
previously evidenced by such certificate shall have been reclassified in
accordance with this Section A.2., and the Conversions shall become
effective in accordance with the terms hereof, whether or not any or all of
the certificates evidencing Old Common Stock and Preferred Stock shall have
been surrendered or new certificates evidencing the number of shares of
Common Stock into which such shares have been reclassified have been issued
in accordance with Section A.3. hereof.
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<PAGE>
3. Subsequent Reissuance of Certificates.
-------------------------------------
Following the occurrence of the Conversions, each holder of shares of
Old Common Stock or Preferred Stock shall either (a) surrender each
certificate evidencing any such shares at the office of the Corporation or
(b) notify the Corporation that such certificate has been lost, stolen or
destroyed and execute an agreement satisfactory to the Corporation to
indemnify the Corporation from any loss incurred by it in connection with
the reissuance of such lost, stolen or destroyed certificate. The
Corporation shall thereupon issue and deliver to such holder a certificate
or certificates, in the name shown on such certificate evidencing Old
Common Stock or Preferred Stock, for the number of whole shares of Common
Stock into which the shares of Old Common Stock or Preferred Stock
evidenced by the surrendered (or lost, stolen or destroyed) certificate
have been reclassified, dated as of the date on which the Conversions
become effective. The Corporation shall not be obligated to issue any
certificate evidencing shares of Common Stock in connection with the
Conversions except in accordance with this Section A.3.
4. Fractional Shares.
-----------------
Notwithstanding the foregoing, no fraction of a share of Common Stock
shall be issued by virtue of the Conversions, but in lieu thereof, each
holder of shares of Preferred Stock who would otherwise be entitled to a
fraction of a share of Common Stock (after aggregating all fractional
shares of Common Stock to be received by such holder) shall receive from
the Corporation an amount in cash (rounded to the nearest whole cent) equal
to the product of (i) such fraction multiplied by (ii) the initial price
per share to the public in the Company's initial public offering of Common
Stock.
B. Designations and Rights.
-----------------------
The designations and the powers, preferences and relative,
participating, optional or other rights of the capital stock and the
qualifications, limitations or restrictions thereof are as follows:
1. Common Stock.
------------
a. Voting Rights: Except as otherwise required by law or
-------------
expressly provided herein, the holders of shares of Common Stock shall
be entitled to one vote per share on each matter submitted to a vote
of the stockholders of the Corporation.
b. Dividends: Subject to the rights of the holders, if any, of
---------
Preferred Stock, the holders of Common Stock shall be entitled to
receive dividends at such times and in such amounts as may be
determined by the Board of Directors of the Corporation.
c. Liquidation Rights: In the event of any liquidation,
------------------
dissolution or winding up of the Corporation, whether voluntary or
involuntary, after payment or provision for payment of the debts and
other liabilities of the Corporation and
-3-
<PAGE>
the preferential amounts to which the holders of any outstanding
shares of Preferred Stock shall be entitled upon dissolution,
liquidation or winding up, the assets of the Corporation available for
distribution to stockholders shall be distributed ratably among the
holders of the shares of Common Stock.
2. Preferred Stock.
---------------
Preferred Stock may be issued from time to time in one or more series.
Subject to the other provisions of this Certificate of Incorporation and
any limitations prescribed by law, the Board of Directors is authorized to
provide for the issuance of and issue shares of the Preferred Stock in
series and, by filing a certificate pursuant to the laws of the State of
Delaware, to establish from time to time the number of shares to be
included in each such series and to fix the designation, powers,
preferences and rights of the shares of each such series and any
qualifications, limitations or restrictions thereof. The number of
authorized shares of Preferred Stock may be increased or decreased (but not
below the number of shares thereof then outstanding) by the affirmative
vote of the holders of a majority of the Common Stock, without a vote of
the holders of any Preferred Stock, or of any series thereof, unless a vote
of any such holders is required pursuant to the certificate or certificates
establishing such series of Preferred Stock.
ARTICLE V
---------
The business and affairs of the Corporation shall be managed by or under
the direction of a board of directors consisting of not less than five (5) nor
more than nine (9) directors. The exact number shall be determined from time to
time by resolution adopted by the affirmative vote of a majority of the
directors in office at the time of adoption of such resolution. Initially, the
number of directors shall be seven (7) and shall consist of the following
persons: Robert E. Dowdell, Wallace O. Laub, Thomas B. Lally, John M. Larson,
Keith K. Ogata, Patrick K. Pesch and Todd H. Steele.
The directors shall be divided into three classes, Class I, Class II and
Class III with each class having either two or three members. Class I shall
initially consist of the following directors: Messrs. Dowdell and Pesch. Class
II shall initially consist of the following directors: Messrs. Laub, Ogata and
Steele. Class III shall initially consist of the following directors: Messrs.
Lally and Larson. The initial term of office of the Class I, Class II and Class
III directors shall expire at the annual meeting of stockholders in 1999, 2000
and 2001, respectively. Beginning in 1999, at each annual meeting of
stockholders, successors to the class of directors whose term expires at that
annual meeting shall be elected for a three-year term. If the number of
directors is changed, any increase or decrease shall be apportioned among the
classes by the Board of Directors so as to maintain the number of directors in
each class as nearly equal as is reasonably possible, and any additional
director of any class elected to fill a vacancy resulting from an increase in
such class shall hold office for a term that shall coincide with the remaining
term of that class. In no case will a decrease in the number of directors,
shorten the term of any incumbent director, even though such decrease may result
in an inequality of the classes until the expiration of such term. A director
shall hold office until the annual meeting of stockholders in the year in which
his or her term expires and until his or her
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<PAGE>
successor shall be elected and qualified subject, however, to prior death,
resignation, retirement or removal from office. Directors may only be removed
for cause, except as otherwise provided by law, by the holders of at least
sixty-six and two-thirds percent (66 2/3%) of the shares entitled to vote at an
election of directors. Except as required by law or the provisions of this
Certificate of Incorporation, all vacancies on the Board of Directors and newly-
created directorships shall be filled by the Board of Directors. Any director
elected to fill a vacancy not resulting from an increase in the number of
directors shall have the same remaining term as that of his or her predecessor.
Notwithstanding the foregoing, whenever the holders of any one or more
classes or series of Preferred Stock issued by the Corporation shall have the
right, voting separately by class or series, to elect directors at an annual or
special meeting of stockholders, the election, term of office, filling of
vacancies and other features of such directorships shall be governed by the
terms of this Certificate of Incorporation and any resolutions of the Board of
Directors applicable thereto, and such directors so elected shall not be divided
into classes pursuant to this Article V. Notwithstanding anything to the
contrary contained in this Certificate of Incorporation, the affirmative vote of
the holders of at least eighty percent (80%) of the voting power of the shares
entitled to vote generally in the election of directors shall be required to
amend, alter or repeal, or to adopt any provision inconsistent with, this
Article V.
ARTICLE VI
----------
A. Written Consent. Any action required or permitted to be taken by the
---------------
stockholders of the Corporation shall be effected only at a duly called annual
or special meeting of stockholders of the Corporation and shall not be effected
by consent in writing by the holders of outstanding stock pursuant to Section
228 of the DGCL or any other provision of the DGCL.
B. Special Meetings. Special meetings of stockholders of the Corporation
----------------
may be called upon not less than ten (10) nor more than sixty (60) days' written
notice by the Board of Directors, pursuant to a resolution approved by a
majority of the Board of Directors.
C. Amendment. Notwithstanding anything contained in this Certificate of
---------
Incorporation to the contrary, the affirmative vote of the holders of at least
eighty percent (80%) of the shares entitled to vote generally in the election of
directors shall be required to amend, alter or repeal, or to adopt any provision
inconsistent with, this Article VI.
ARTICLE VII
-----------
In furtherance and not in limitation of the power conferred by statute, the
Board of Directors is expressly authorized to make, alter, amend or repeal the
By-laws of the Corporation. The By-laws of the Corporation may be altered,
amended, or repealed, or new By-laws may be adopted, by the Board of Directors
in accordance with the preceding sentence or by the vote of the holders of at
least eighty percent (80%) of the voting power of the shares of the Corporation
entitled to vote generally in the election of directors at an annual or special
meeting of stockholders, provided that, if such alteration, amendment, repeal or
adoption of new
-5-
<PAGE>
By-laws is effected at a duly called special meeting, notice of such alteration,
amendment, repeal or adoption of new By-laws is contained in the notice of such
special meeting.
ARTICLE VIII
------------
A director of the Corporation shall not, in the absence of fraud, be
disqualified by his office from dealing or contracting with the Corporation
either as a vendor, purchaser or otherwise, nor in the absence of fraud shall a
director of the Corporation be liable to account to the Corporation for any
profit realized by him from or through any transaction or contract of the
Corporation by reason of the fact that such director, or any firm of which such
director is a member or any corporation of which such director is an officer,
director or stockholder, was interested in such transaction or contract if such
transaction or contract has been authorized, approved or ratified in a manner
provided in the DGCL for authorization, approval or ratification of transactions
or contracts between the Corporation and one or more of its directors or
officers or between the Corporation and any other corporation, partnership,
association or other organization in which one or more of its directors or
officers are directors or officers or have a financial interest.
ARTICLE IX
----------
Meetings of stockholders may be held within or without the State of
Delaware as the By-laws of the Company may provide. The books of the
Corporation may be kept outside the State of Delaware at such place or places as
may be designated from time to time by the Board of Directors of the Corporation
or in the By-laws of the Corporation. Election of directors need not be by
written ballot unless the By-laws of the Corporation so provide.
ARTICLE X
---------
Whenever a compromise or arrangement is proposed between the Corporation
and its creditors or any class of them and/or between the Corporation and its
stockholders or any class of them, any court of equitable jurisdiction within
the State of Delaware may, on the application in a summary way of the
Corporation or of any creditor or stockholder thereof or on the application of
any receiver or receivers appointed for the Corporation under the provisions of
Section 291 of the DGCL or on the application of trustees in dissolution or of
any receiver or receivers appointed for the Corporation under the provisions of
Section 279 of the DGCL, order a meeting of the creditors or class of creditors
and/or the stockholders or class of stock of the Corporation, as the case may
be, to be summoned in such manner as said court directs. If a majority in
number representing three-fourths (3/4) of the value of the creditors or class
of creditors and/or the stockholders or class of stockholders of the
Corporation, as the case may be, agree to any compromise or arrangement or to
any reorganization of the Corporation as a consequence of such compromise or
arrangement, said compromise or arrangement of said reorganization shall, if
sanctioned by the Court to which said application has been made, be binding on
all the creditors or class of creditors and/or on all the stockholders or class
of stockholders, of the Corporation, as the case may be, and also on the
Corporation.
-6-
<PAGE>
ARTICLE XI
----------
The Board of Directors of the Corporation may adopt a resolution proposing
to amend, alter, change or repeal any provision contained in this Certificate of
Incorporation, in the manner now or hereafter prescribed by statute.
ARTICLE XII
-----------
A. Indemnification of Officers and Directors: The Corporation shall:
-----------------------------------------
1. indemnify, to the fullest extent permitted by the DGCL, any
present or former director of the Corporation and any present or former
officer, employee or agent of the Corporation selected by the Board of
Directors for indemnification, such selection to be evidenced by an
indemnification agreement, who was or is a party or is threatened to be
made a party to any threatened, pending or completed action, suit or
proceeding, whether civil, criminal, administrative or investigative (other
than an action by or in the right of the Corporation) by reason of the fact
that such person is or was a director, or is or was serving at the request
of the Corporation as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise, or if
such person has previously been designated for indemnification by a
resolution of the Board of Directors, is or was an officer, employee or
agent of the Corporation, against expenses (including attorneys' fees),
judgments, fines and amounts paid in settlement actually and reasonably
incurred by such person in connection with such action, suit or proceeding
if such person acted in good faith and in a manner such person reasonably
believed to be in or not opposed to the best interests of the Corporation,
and, with respect to any criminal action or proceeding, had no reasonable
cause to believe such person's conduct was unlawful. The termination of
any action, suit or proceeding by judgment, order, settlement or
conviction, or upon a plea of nolo contendere or its equivalent, shall not,
of itself, create a presumption that the person did not act in good faith
and in a manner which such person reasonably believed to be in, or not
opposed to, the best interests of the Corporation, and, with respect to any
criminal action or proceeding, had reasonable cause to believe that such
person's conduct was unlawful; and
2. indemnify any present or former director of the Corporation and
any present or former officer, employee or agent of the Corporation
selected by the Board of Directors for indemnification, such selection to
be evidenced by an indemnification agreement, who was or is a party or is
threatened to be made a party to any threatened, pending or completed
action or suit by or in the right of the Corporation to procure a judgment
in its favor by reason of the fact that such person is or was a director,
or is or was serving at the request of the Corporation as a director,
officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, or if such person has previously been
designated for indemnification by a resolution of the Board of Directors,
is or was an officer, employee or agent of the Corporation, against
expenses (including attorneys' fees) actually and reasonably incurred by
him in connection with the defense or settlement of such action or suit if
such person acted in good faith and in a manner such person reasonably
believed to be in or not opposed to
-7-
<PAGE>
the best interests of the Corporation and except that no indemnification
shall be made in respect of any claim, issue or matter as to which such
person shall have been adjudged to be liable to, the Corporation, unless
and only to the extent that the Court of Chancery or the court in which
such action or suit was brought shall determine upon application that,
despite the adjudication of liability but in view of all the circumstances
of the case, such person is fairly and reasonably entitled to indemnity for
such expenses which the Court of Chancery or such other court shall deem
proper; and
3. indemnify any present or former director or officer or any present
or former employee or agent of the Corporation selected by the Board of
Directors for indemnification, such selection to be evidenced by an
indemnification agreement, against expenses (including attorneys' fees)
actually and reasonably incurred by such person in connection therewith, to
the extent that such person has been successful on the merits or otherwise
in defense of any action, suit or proceeding referred to in Article
XII.A.1. and 2., or in defense of any claim, issue or matter therein; and
4. make any indemnification under Article XII.A.1. and 2. (unless
ordered by a court) only as authorized in the specific case upon a
determination that indemnification of the present or former director,
officer, employee or agent is proper in the circumstances because such
director, officer, employee or agent has met the applicable standard of
conduct set forth in Article XII.A.1. and 2. Such determination shall be
made, with respect to a person who is an officer or director at the time of
such determination, (a) by a majority vote of the directors who are not
parties to such action, suit or proceeding, even if less than a quorum, or
(b) by a committee of such directors designated by a majority vote of such
directors , even if less than a quorum, or (c) if there are no such
directors, or if such directors so direct, by independent legal counsel in
a written opinion, or (d) by the stockholders of the Corporation; and
5. pay expenses incurred by a director or officer in defending a
civil or criminal action, suit or proceeding in advance of the final
disposition of such action, suit or proceeding upon receipt of an
undertaking by or on behalf of such director or officer to repay such
amount if it shall ultimately be determined that such director or officer
is not entitled to be indemnified by the Corporation as authorized in this
Article XII. Notwithstanding the foregoing, the Corporation shall not be
obligated to pay expenses incurred by a director or officer with respect to
any threatened, pending, or completed claims, suits or actions, whether
civil, criminal, administrative, investigative or otherwise
("Proceedings"), initiated or brought voluntarily by such director or
officer and not by way of defense (other than Proceedings brought to
establish or enforce a right to indemnification under the provisions of
this Article XII, unless a court of competent jurisdiction determines that
each of the material assertions made by such director or officer in such
Proceedings were not made in good faith or were frivolous). The
Corporation shall not be obligated to indemnify such director or officer
for any amount paid in settlement of a Proceeding covered hereby without
the prior written consent of the Corporation to such settlement; and
6. not deem the indemnification and advancement of expenses provided
by, or granted pursuant to, the other subsections of this Article XII as
exclusive of any other
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<PAGE>
rights to which those seeking indemnification or advancement of expenses
may be entitled under any By-law, agreement or vote of stockholders or
disinterested directors, or otherwise, both as to action in such director's
or officer's official capacity and as to action in another capacity while
holding such office; and
7. have the right, authority and power to purchase and maintain
insurance on behalf of any person who is or was a director, officer,
employee or agent of the Corporation, or is or was serving at the request
of the Corporation as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise against
any liability asserted against such person and incurred by such person in
any such capacity, or arising out of such person's status as such, whether
or not the Corporation would have the power to indemnify such person
against such liability under the provisions of this Article XII; and
8. deem the provisions of this Article XII to be a contract between
the Corporation and each director, or appropriately designated officer,
employee or agent who serves in such capacity at any time while this
Article XII is in effect, and any repeal or modification of this Article
XII shall not affect any rights or obligations then existing with respect
to any state of facts then or theretofore existing or any action, suit or
proceeding theretofore or thereafter brought or threatened based in whole
or in part upon such state of facts. The provisions of this Article XII
shall not be deemed to be a contract between the Corporation and any
directors, officers, employees or agents of any other corporation (the
"Second Corporation") which shall merge into or consolidate with the
Corporation when the Corporation shall be the surviving or resulting
corporation, and any such directors, officers, employees or agents of the
Second Corporation shall be indemnified to the extent required under the
DGCL only at the discretion of the board of Directors of the Corporation;
and
9. continue the indemnification and advancement of expenses provided
by, or granted pursuant to, this Article XII, unless otherwise provided
when authorized or ratified, as to a person who has ceased to be a
director, officer, employee or agent of the Corporation, and the
indemnification and advancement of expenses provided by, or granted
pursuant to, this Article XII shall inure to the benefit of the heirs,
executors and administrators of such a person.
B. Elimination of Certain Liability of Directors: No director of the
---------------------------------------------
Corporation shall be personally liable to the Corporation or its stockholders
for monetary damages for breach of fiduciary duty as a director, except for
liability (i) for any breach of the director's duty of loyalty to the
Corporation or its stockholders, (ii) for acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation of law, (iii) under
Section 174 of the DGCL, as the same exists or hereafter may be amended, or (iv)
for any transaction from which the director derived an improper personal
benefit. If the DGCL is amended to authorize the further elimination or
limitation of liability of directors, then the liability of a director of the
Corporation, in addition to the limitation on personal liability provided
herein, shall be limited to the fullest extent permitted by the amended DGCL.
Any repeal or modification of this Article XII by the stockholders of the
Corporation shall be prospective only and shall not adversely
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<PAGE>
affect any limitation on the personal liability of a director of the Corporation
existing at the time of such repeal or modification.
IN WITNESS WHEREOF, the Corporation has caused this Amended and Restated
Certificate of Incorporation to be signed by its President and Secretary on
January 30, 1998.
CAREER EDUCATION CORPORATION
By: /s/ John M. Larson
----------------------------------
John M. Larson
President, Chief Executive Officer
and Secretary
Attest:
/s/ William A. Klettke
- ------------------------------
William A. Klettke
Senior Vice President, Chief
Financial Officer and Treasurer
-10-
<PAGE>
Exhibit 3.2
AMENDED AND RESTATED BY-LAWS
OF
CAREER EDUCATION CORPORATION
(Amended and Restated February 2, 1998)
ARTICLE I
---------
OFFICES
-------
Section 1.1. Registered Office. The registered office of Career Education
----------- -----------------
Corporation (the "Corporation") shall be in the City of Wilmington, County of
New Castle, State of Delaware.
Section 1.2. Other Offices. The Corporation may also have offices at such
----------- -------------
other places both within and without the State of Delaware as the Board of
Directors may from time to time determine or the business of the Corporation may
require.
ARTICLE II
----------
MEETINGS OF STOCKHOLDERS
------------------------
Section 2.1. Place of Meeting. All meetings of the stockholders for the
----------- ----------------
election of directors shall be held at such place either within or without the
State of Delaware as shall be designated from time to time by the Board of
Directors and stated in the notice of the meeting. Meetings of stockholders for
any other purpose may be held at such time and place, within or without the
State of Delaware, as shall be stated by the Board of Directors in its notice of
the meeting or in a duly executed waiver of notice thereof.
Section 2.2. Time of Annual Meeting. Annual meetings of stockholders
----------- ----------------------
shall be held on the third Thursday in May, if not a legal holiday, and if a
legal holiday, then on the next secular day following, at 10:00 A.M., or at such
other date and time as shall be designated from time to time by the Board of
Directors and stated in the notice of the meeting, at which stockholders shall
elect directors to hold office for the term provided in Section 3.2 of these By-
laws and conduct such other business as shall be considered.
Section 2.3. Notice of Annual Meetings. Except as otherwise required by
----------- -------------------------
law, written notice of the annual meeting stating the place, date and hour of
the meeting shall be given to each stockholder entitled to vote at such meeting
not fewer than ten (10) nor more than sixty (60) days before the date of the
meeting.
<PAGE>
Section 2.4. Director Nominations. Only persons who are nominated in
----------- --------------------
accordance with the following procedures shall be eligible to serve as
directors. Nominations of persons for election to the Board of Directors of the
Corporation at a meeting of stockholders may be made (i) by or at the direction
of the Board of Directors, or (ii) by any stockholder of the Corporation
entitled to vote in the election of directors at the meeting who complies with
the notice procedures set forth in this Article II, Section 2.4. Such
nominations, other than those made by or at the direction of the Board of
Directors, shall be made pursuant to timely notice in writing to the Secretary
of the Corporation. To be timely, a stockholder's notice must be delivered to,
or mailed and received by, the Secretary of the Corporation at the principal
executive offices of the Corporation not less than ninety (90) days prior to the
first anniversary of the date of the previous year's annual meeting of
stockholders; provided, however, that if no annual meeting of stockholders was
held in the previous year or if the date of the annual meeting is advanced by
more than thirty (30) days prior to, or delayed by more than sixty (60) days
after, such anniversary date, notice by the stockholder to be timely must be so
delivered, or mailed and received, not later than the close of business on the
later of (a) the sixtieth (60th) day prior to such annual meeting or (b) the
tenth (10th) day following the day on which the date of such meeting has been
first "publicly disclosed" (in the manner provided in the last sentence of this
Article II, Section 2.4) by the Corporation. Notwithstanding the foregoing, in
the event that the number of directors to be elected to the Board of Directors
is increased and the names of all of the nominees for director position are not
"publicly disclosed" by the Corporation at least seventy (70) days prior to the
date of the first anniversary of the prior year's annual meeting of
stockholders, a stockholder's notice pursuant to this Article II, Section 2.4
shall also be considered timely, but only with respect to nominees for any new
positions created by such increase, if it shall be delivered to, or mailed and
received by, the Secretary of the Corporation at the principal executive offices
of the Corporation not later than the close of business on the tenth (10th) day
following the day on which such names have been first "publicly disclosed" by
the Corporation. Any stockholder's notice pursuant to this Article II, Section
2.4 shall set forth (i) as to each person whom the stockholder proposes to
nominate for election or re-election as a director, all information relating to
such person that is required to be disclosed in solicitations of proxies for
election of directors, or is otherwise required, in each case pursuant to
Regulation 14A under the Securities Exchange Act of 1934, as amended (including
such person's written consent to being named in the proxy statement as a nominee
and to serving as director if elected); and (ii) as to the stockholder giving
notice (A) the name and address, as they appear on the Corporation's books, of
such stockholder and (B) the class and number of shares of the Corporation which
are beneficially owned by such stockholder. At the request of the Board of
Directors, any person nominated by the Board of Directors for election as a
director shall furnish to the Secretary of the Corporation that information
required to be set forth in a stockholder's notice of nomination which pertains
to the nominee. No person shall be eligible to serve as a director of the
Corporation unless nominated in accordance with the procedures set forth herein.
The presiding officer shall, if the facts so warrant, determine and declare to
the meeting that a nomination was not made in accordance with the procedures
prescribed by the By-laws, and if such officer should so determine, such officer
shall so declare to the meeting, and the defective nomination shall be
disregarded. For purposes of these By-laws, "publicly disclosed" or "public
disclosure" shall mean disclosure in a press release reported by the Dow Jones
News Service, Associated Press or a comparable national news service or in a
document publicly filed by the Corporation with the Securities and Exchange
Commission.
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Section 2.5. Annual Meeting Agenda Items. At an annual meeting of the
----------- ---------------------------
stockholders, only such business shall be conducted as shall have been brought
before the meeting (i) by or at the direction of the Board of Directors, or (ii)
by any stockholder of the Corporation who complies with the notice procedures
set forth in this Article II, Section 2.5, in the time herein provided. For
business to be properly brought before an annual meeting by a stockholder, the
stockholder must deliver written notice to, or mail such written notice so that
it is received by, the Secretary of the Corporation, at the principal executive
offices of the Corporation, not less than ninety (90) days prior to the first
anniversary of the date of the previous year's annual meeting of stockholders;
provided, however, that if no annual meeting of stockholders was held in the
previous year or if the date of the annual meeting is advanced by more than
thirty (30) days prior to, or delayed by more than sixty (60) days after, such
anniversary date, notice by the stockholder to be timely must be so delivered,
or mailed and received, not later than the close of business on the later of (a)
the sixtieth (60th) day prior to such annual meeting or (b) the tenth (10th) day
following the day on which the date of the meeting has been first "publicly
disclosed" (in the manner provided in Article II, Section 2.4 above) by the
Corporation. Any stockholder's notice pursuant to this Article II, Section 2.5
shall set forth as to each matter the stockholder proposes to bring before the
annual meeting (A) a brief description of the business desired to be brought
before the annual meeting and the reasons for conducting such business at the
annual meeting, (B) the name and address, as they appear on the Corporation's
books, of the stockholder proposing such business, (C) the class and number of
shares of the Corporation which are beneficially owned by the stockholder and
(D) any material interest of the stockholder in such business. At an annual
meeting, the presiding officer shall, if the facts warrant, determine and
declare to the meeting that business was not properly brought before the meeting
in accordance with the provisions of this Article, Section 2.5, and if such
officer should so determine, such officer shall so declare to the meeting, and
any such business not properly brought before the meeting shall not be
transacted. Whether or not the foregoing procedures are followed, no matter
which is not a proper matter for stockholder consideration shall be brought
before the meeting.
Section 2.6. Special Meetings of the Stockholders. Special meetings of
----------- ------------------------------------
the stockholders of the Corporation may be called only by the Board of Directors
pursuant to a resolution approved by a majority of the Board of Directors. The
business transacted at any special meeting of the stockholders shall be limited
to the purposes stated in the notice for the meeting transmitted to
stockholders.
Section 2.7. Notice of Special Meetings. Written notice of a special
----------- --------------------------
meeting stating the place, date and hour of the meeting and the purpose or
purposes for which the meeting is called, shall be given by the Secretary of the
Corporation, not fewer than ten (10) nor more than sixty (60) days before the
date of the meeting, to each stockholder entitled to vote at such meeting.
Section 2.8. Fixing of Record Date. In order that the Corporation may
----------- ---------------------
determine the stockholders entitled to notice of or to vote at any meeting of
stockholders or any adjournment thereof, or entitled to receive payment of any
dividend or other distribution or allotment of any rights, or entitled to
exercise any rights in respect of any change, conversion or exchange of stock or
for the purpose of any other lawful action, the Board of Directors may fix a
record date, which shall not precede the date upon which the resolution fixing
the record date is adopted and which shall be (i) not more than sixty (60) nor
less than ten (10) days before the date of a
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<PAGE>
meeting, and (ii) not more than sixty (60) days prior to any other action. A
determination of stockholders of record entitled to notice of, or to vote at, a
meeting of stockholders shall apply to any adjournment of the meeting; provided,
however, that the Board of Directors may fix a new record date for any adjourned
meeting.
Section 2.9. Voting Lists. The officer who has charge of the stock ledger
----------- ------------
of the Corporation shall prepare and make, at least ten (10) days before every
meeting of stockholders, a complete list of the stockholders entitled to vote at
the meeting, arranged in alphabetical order, and showing the address of each
stockholder and the number of shares registered in the name of each stockholder.
Such list shall be open to the examination of any stockholder, for any pur pose
germane to the meeting, during ordinary business hours, for a period of at least
ten (10) days prior to the meeting, either at a place within the city where the
meeting is to be held, which place shall be specified in the notice of the
meeting, or, if not so specified, at the place where the meeting is to be held.
The list shall also be produced and kept at the time and place of the meeting
during the whole time thereof and may be inspected by any stockholder who is
present.
Section 2.10. Quorum and Adjournments. The holders of a majority of the
------------ -----------------------
voting power of the stock issued and outstanding and entitled to vote thereat,
present in person or represented by proxy, shall constitute a quorum at all
meetings of the stockholders for the transaction of business, except as
otherwise provided by statute or by the Corporation's Certificate of
Incorporation. If, however, such quorum shall not be present or represented at
any such meeting of the stockholders, the stockholders entitled to vote thereat,
present in person or represented by proxy, shall have power to adjourn the
meeting from time to time, without notice other than announcement at the
meeting, until a quorum shall be present or represented; provided that if the
adjournment is for more than thirty (30) days, or if after the adjournment a new
record date is fixed by the directors for the adjourned meeting, a new notice
shall be transmitted to the stockholders of record entitled to vote at the
adjourned meeting. At such adjourned meeting at which a quorum shall be present
or represented, any business may be transacted which might have been transacted
at the meeting as originally notified.
Section 2.11. Vote Required. When a quorum is present at any meeting of
------------ -------------
all stockholders, the affirmative vote of the holders of a majority of the
voting power of the stock issued and outstanding and entitled to vote thereat,
present in person or represented by proxy, shall decide any question brought
before such meeting, unless the question is one upon which, by express provision
of statute or of the Corporation's Certificate of Incorporation, a different
vote is required, in which case such express provision shall govern and control
the decision of such question; provided, however, all elections of directors
shall be determined by a plurality of the votes cast.
Section 2.12. Voting Rights. Unless otherwise provided in the
------------ -------------
Corporation's Certificate of Incorporation, each stockholder having voting power
shall at every meeting of the stockholders be entitled to one (1) vote in person
or by proxy for each share of the capital stock having voting power held by such
stockholder, but no proxy shall be voted on after three (3) years from its date,
unless the proxy provides for a longer period. At any meeting of the
stockholders, every stockholder entitled to vote may vote in person or by proxy
authorized by an instrument in writing or by a transmission permitted by law
filed in accordance with the procedure established for the meeting. Any copy,
facsimile telecommunication or other reliable
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<PAGE>
reproduction of the writing or transmission created pursuant to this paragraph
may be substituted or used in lieu of the original writing or transmission for
any and all purposes for which the original writing or transmission could be
used; provided that such copy, facsimile telecommunication or other reproduction
shall be a complete reproduction of the entire original writing or transmission.
All voting, including on the election of directors, may (except where otherwise
required by law) be by a voice vote; provided, however, that upon demand
therefor by a stockholder entitled to vote or by his or her proxy, a stock vote
shall be taken. Every stock vote shall be taken by ballots, each of which shall
state the name of the stockholder or proxy voting and such other information as
may be required under the procedure established for the meeting. The
Corporation may, and to the extent required by law shall, in advance of any
meeting of stockholders, appoint one or more inspectors to act at the meeting
and make a written report thereof. The Corporation may designate one or more
persons as alternate inspectors to replace any inspector who fails to act. If
no inspector or alternate is able to act at a meeting of stockholders, the
person presiding at the meeting may, and to the extent required by law shall,
appoint one or more inspectors to act at the meeting. Each inspector, before
entering upon the discharge of his or her duties, shall take and sign an oath to
faithfully execute the duties of inspector with strict impartiality and
according to the best of his or her ability. Every vote taken by ballots shall
be counted by an inspector or inspectors appointed by the chairman of the
meeting.
Section 2.13. Presiding Over Meetings. The Chairman of the Board of
------------ -----------------------
Directors shall preside at all meetings of the stockholders. In the absence or
inability to act of the Chairman, the Vice Chairman, the President or a Vice
President (in that order) shall preside, and in their absence or inability to
act another person designated by one of them shall preside. The Secretary of
the Corporation shall act as Secretary of each meeting of the stockholders. In
the event of his or her absence or inability to act, the chairman of the meeting
shall appoint a person who need not be a stockholder to act as Secretary of the
meeting.
Section 2.14. Conducting Meetings. Meetings of the stockholders shall be
------------ -------------------
conducted in a fair manner but need not be governed by any prescribed rules of
order. The presiding officer of the meeting shall establish an agenda for the
meeting. The presiding officer's rulings on procedural matters shall be final.
The presiding officer is authorized to impose reasonable time limits on the
remarks of individual stockholders and may take such steps as such officer may
deem necessary or appropriate to assure that the business of the meeting is
conducted in a fair and orderly manner.
ARTICLE III
-----------
DIRECTORS
---------
Section 3.1. General Powers. The business and affairs of the Corporation
----------- --------------
shall be under the direction of, and managed by, a board comprised of directors,
which may exercise all such powers of the Corporation and do all such lawful
acts and things as are not required by statute, by the Corporation's Certificate
of Incorporation or by these By-laws to be done by the stockholders. Directors
need not be residents of the State of Delaware or stockholders of the
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<PAGE>
Corporation. The number of directors shall be determined in the manner provided
in the Corporation's Certificate of Incorporation.
Section 3.2. Election. Directors shall be elected by class for three (3)
----------- --------
year or other terms as specified in the Corporation's Certificate of
Incorporation, and each director elected shall hold office during the term for
which he or she is elected and until his or her successor is elected and
qualified, subject, however, to his or her prior death, resignation, retirement
or removal from office.
Section 3.3. Removal. Directors may only be removed for cause, except as
----------- -------
otherwise provided by law, by the holders of at least sixty-six and two-thirds
percent (66-2/3%) of the voting power of the shares entitled to vote at an
election of directors.
Section 3.4. Vacancies. Any vacancies occurring in the Board of Directors
----------- ---------
and newly created directorships shall be filled in the manner provided in the
Corporation's Certificate of Incorporation.
Section 3.5. Place of Meetings. The Board of Directors of the Corporation
----------- -----------------
may hold meetings, both regular and special, either within or without the State
of Delaware. The first meeting of each newly elected Board of Directors shall
be held immediately following the adjournment of the annual meeting of the
stockholders at the same place as such annual meeting and no notice of such
meeting shall be necessary to the newly elected directors in order to legally
constitute the meeting, provided a quorum shall be present. In the event such
meeting is not held at such time and place, the meeting may be held at such time
and place as shall be specified in a notice given as hereinafter provided for
special meetings of the Board of Directors, or as shall be specified in a
written waiver signed by all of the directors.
Section 3.6 Participation by Conference Telephone. Unless otherwise
----------- -------------------------------------
restricted by the Corporation's Certificate of Incorporation or these By-laws,
members of the Board of Directors, or any committee designated by the Board of
Directors, may participate in a meeting of the Board of Directors, or committee,
by means of conference telephone or similar communications equipment by means of
which all persons participating in the meeting can hear each other, and
participation by such means shall constitute presence in person at such meeting.
Section 3.7. Regular Meetings. Regular meetings of the Board of Directors
----------- ----------------
may be held, without notice, at such time and at such place as shall from time
to time be determined by the Board of Directors.
Section 3.8. Special Meetings. Special meetings of the Board of Directors
----------- ----------------
may be called by the Chairman of the Board, the Chief Executive Officer or the
President on at least one day's notice to each director, either personally, or
by courier, telephone, telefax, mail or telegram. Special meetings shall be
called by the Chairman, the Chief Executive Officer or the President in like
manner and on like notice at the written request of two or more of the directors
comprising the Board of Directors stating the purpose or purposes for which such
meeting is re quested. Notice of any meeting of the Board of Directors for
which a notice is required may be waived in writing signed by the person or
persons entitled to such notice, whether before or after the time of such
meeting, and such waiver shall be equivalent to the giving of such notice.
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<PAGE>
Attendance of a director at any such meeting shall constitute a waiver of notice
thereof, except where a director attends a meeting for the express purpose of
objecting to the transaction of any business because such meeting is not
lawfully convened. Neither the business to be transacted at, nor the purpose
of, any meeting of the Board of Directors for which a notice is required need be
specified in the notice, or waiver of notice, of such meeting. The Chairman
shall preside at all meetings of the Board of Directors. In the absence or
inability to act of the Chairman, then the Vice Chairman (if one shall have been
chosen by the Board), the Chief Executive Officer, the President or the Chief
Financial Officer (in that order) shall preside, and in their absence or
inability to act, another director designated by one of them shall preside.
Section 3.9. Quorum; No Action on Certain Matters. At all meetings of the
----------- ------------------------------------
Board of Directors, a majority of the then duly elected directors shall
constitute a quorum for the transaction of business, and the act of a majority
of the directors present at any meeting at which there is a quorum shall be the
act of the Board of Directors, except as may be otherwise specifically provided
by statute or by the Corporation's Certificate of Incorporation. If a quorum
shall not be present at any meeting of the Board of Directors, the directors
present thereat may adjourn the meeting from time to time, without notice other
than announcement at the meeting, until a quorum shall be present.
Section 3.10. Resignations. Any director of the Corporation may resign at
------------ ------------
any time by giving written notice to the Board of Directors, the Chairman or the
President. Such resignation shall take effect at the time specified therein
and, unless tendered to take effect upon acceptance thereof, the acceptance of
such resignation shall not be necessary to make it effective.
Section 3.11. Informal Action. Unless otherwise restricted by the
------------ ---------------
Corporation's Certificate of Incorporation or these By-laws, any action required
or permitted to be taken at any meeting of the Board of Directors or of any
committee thereof may be taken without a meeting, if all members of the Board of
Directors or committee consent thereto in writing and the writing or writings
are filed with the minutes of proceedings of the Board of Directors or
committee.
Section 3.12. Presumption of Assent. A director of the Corporation who is
------------ ---------------------
present at a meeting of the Board of Directors at which action on any corporate
matter is taken shall be conclusively presumed to have assented to the action
taken unless his or her dissent shall be entered in the minutes of the meeting
or unless he or she shall file his or her written dissent to such action with
the person acting as the Secretary of the meeting before the adjournment thereof
or shall forward such dissent by registered mail to the secretary of the
Corporation immediately after the adjournment of the meeting. Such right to
dissent shall not apply to a director who voted in favor of such action.
Section 3.13. Compensation of Directors. In the discretion of the Board
------------ -------------------------
of Directors, the directors may be paid their expenses, if any, of attendance at
each meeting of the Board of Directors or a committee thereof, may be paid a
stated salary or a fixed sum for attendance at each meeting of the Board of
Directors or a committee thereof and may be awarded other compensation for their
service as directors. No such payment or award shall preclude any director from
serving the Corporation in any other capacity and receiving compensation
therefor. Members of special or standing committees may be allowed like
compensation for attending committee meetings.
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<PAGE>
ARTICLE IV
----------
COMMITTEES OF DIRECTORS
-----------------------
Section 4.1. Appointment and Powers. The Board of Directors may designate
----------- ----------------------
one or more committees, each committee to consist of one or more of the
directors of the Corporation. The Board of Directors may designate one or more
directors as alternate members of any committee, who may replace any absent or
disqualified member at any meeting of the committee. In the absence or
disqualification of a member of a committee, the member or members thereof
present at any meeting and not disqualified from voting, whether or not such
member or members constitute a quorum, may unanimously appoint another member of
the Board of Directors to act at the meeting in the place of any such absent or
disqualified member. Any such committee, to the extent provided in the
resolution of the Board of Directors, shall have and may exercise all the powers
and authority of the Board of Directors in the management of the business and
affairs of the Corporation, and may authorize the seal of the Corporation to be
affixed to all papers which may require it; but no such committee shall have the
power or authority in reference to the following matters: (a) approving or
adopting, or recommending to the stockholders, any action or matter expressly
required by the Delaware General Corporation Law to be submitted to stockholders
for approval or (b) adopting, amending or repealing any of the By-laws.
Section 4.2. Committee Minutes. Each committee shall keep regular minutes
----------- -----------------
of its meetings and shall file such minutes and all written consents executed by
its members with the Secretary of the Corporation. Each committee may determine
the procedural rules for meeting and conducting its business and shall act in
accordance therewith, except as otherwise provided herein or required by law.
Adequate provision shall be made for notice to members of all meetings; one-
third of the members shall constitute a quorum unless the committee shall
consist of one or two members, in which event one member shall constitute a
quorum; and all matters shall be determined by a majority vote of the members
present. Action may be taken by any committee without a meeting if all members
thereof consent thereto in writing and the writing or writings are filed with
the minutes of the proceedings of such committee.
ARTICLE V
---------
NOTICES
-------
Section 5.1. Manner of Notice. Whenever, under applicable law or the
----------- ----------------
Corporation's Certificate of Incorporation or these By-laws, notice is required
to be given to any director or stockholder, unless otherwise provided in the
Corporation's Certificate of Incorporation or these By-laws, such notice may be
given in writing, by courier or mail, addressed to such director or stockholder,
at such director's or stockholder's address as it appears on the records of the
Corporation, with freight or postage thereon prepaid, and such notice shall be
deemed to be given at the time when the same shall have been deposited with such
courier or in the United States mail. Notice may be given orally if such notice
is confirmed in writing in a manner provided therein. Notice to directors may
also be given by telegram, mailgram, telex or telecopier.
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Section 5.2. Waiver. Whenever any notice is required to be given under
----------- ------
applicable law or the provisions of the Corporation's Certificate of
Incorporation or these By-laws, a waiver thereof in writing, signed by the
person or persons entitled to said notice, whether before or after the time
stated therein, shall be deemed equivalent thereto.
ARTICLE VI
----------
OFFICERS
--------
Section 6.1. Number and Qualifications. The officers of the Corporation
----------- -------------------------
shall be chosen by the Board of Directors and shall be a Chairman of the Board,
a Chief Executive Officer, a President, a Chief Financial Officer, one or more
Vice Presidents, a Secretary and a Treasurer. The Board of Directors may also
choose a Vice Chairman for the Board (or Vice Chairman), one or more Assistant
Secretaries and Assistant Treasurers and such additional officers as the Board
of Directors may deem necessary or appropriate from time to time. Membership on
the Board of Directors shall not be a prerequisite to the holding of any other
office. Any number of offices may be held by the same person, unless the
Corporation's Certificate of Incorporation or these By-laws otherwise provide.
Section 6.2. Election. The Board of Directors at its first meeting after
----------- --------
each annual meeting of stockholders shall elect a Chairman of the Board, a Chief
Executive Officer, a President, a Chief Financial Officer, one or more Vice
Presidents, a Secretary and a Treasurer, and may choose a Vice Chairman of the
Board, one or more Assistant Secretaries and Assistant Treasurers and such other
officers as the Board of Directors shall deem desirable.
Section 6.3. Other Officers and Agents'. The Board of Directors may
----------- --------------------------
choose such other officers and agents as it shall deem necessary, which officers
and agents shall hold their offices for such terms and shall exercise such
powers and perform such duties as shall be determined from time to time by the
Board of Directors.
Section 6.4. Salaries. The salaries or other compensation of the officers
----------- --------
and agents of the Corporation shall be fixed from time to time by the Board of
Directors, and no officer shall be prevented from receiving such salary or other
compensation by reason of the fact that such officer is also a director of the
Corporation.
Section 6.5. Term of Office. The officers of the Corporation shall hold
----------- --------------
office until their successors are chosen and qualified or until their earlier
resignation or removal. Any officer elected or appointed by the Board of
Directors may be removed at any time, either with or without cause, by the
affirmative vote of a majority of the directors then in office at any meeting of
the Board of Directors. If a vacancy shall exist in the office of the
Corporation, the Board of Directors may elect any person to fill such vacancy,
such person to hold office as provided in Section 6.1 of this Article VI.
Section 6.6. The Chairman of the Board. The Chairman of the Board (or
----------- -------------------------
Chairman) shall preside at all meetings of the stockholders and of the Board of
Directors and shall see that
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orders and resolutions of the Board of Directors are carried into effect. The
Chairman of the Board shall perform such duties as may be assigned to him by the
Board of Directors.
Section 6.7. The Chief Executive Officer. The Chief Executive Officer
----------- ---------------------------
shall be the principal executive officer of the Corporation and shall, in
general, supervise and control all of the business and affairs of the
Corporation, unless otherwise provided by the Board of Directors. In the
absence of the Chairman of the Board, the Chief Executive Officer shall preside
at all meetings of the stockholders and of the Board of Directors and shall see
that orders and resolutions of the Board of Directors are carried into effect.
The Chief Executive Officer may sign bonds, mortgages, certificates for shares
and all other contracts and documents, whether or not under the seal of the
Corporation, except in cases where the signing and execution thereof shall be
expressly delegated by law, by the Board of Directors or by these By-laws to
some other officer or agent of the Corporation. The Chief Executive Officer
shall have general powers of supervision and shall be the final arbiter of all
differences between officers of the Corporation, and the Chief Executive
Officer's decision as to any matter affecting the Corporation shall be final and
binding as between the officers of the Corporation, subject only to its Board of
Directors.
Section 6.8. The President. Unless another party has been designated as
----------- -------------
Chief Operating Officer, the President shall be the Chief Operating Officer of
the Corporation responsible for the day-to-day active management of the business
of the Corporation, under the general supervision of the Chief Executive
Officer. In the absence of the Chief Executive Officer, the President shall
perform the duties of the Chief Executive Officer, and when so acting, shall
have all the powers of and be subject to all the restrictions upon the Chief
Executive Officer. The President shall have concurrent power with the Chief
Executive Officer to sign bonds, mortgages, certificates for shares and other
contracts and documents, whether or not under the seal of the Corporation,
except in cases where the signing and execution thereof shall be expressly
delegated by law, by the Board of Directors or by these By-laws to some other
officer or agent of the Corporation. In general, the President shall perform
all duties incident to the office of the President and such other duties as the
Chief Executive Officer or the Board of Directors may from time to time
prescribe.
Section 6.9. The Chief Financial Officer. The Chief Financial Officer
----------- ---------------------------
shall be the principal financial and accounting officer of the Corporation. The
Chief Financial Officer shall: (a) have charge of and be responsible for the
maintenance of adequate books of account for the Corporation; (b) have charge
and custody of all funds and securities of the Corporation, and be responsible
therefor and for the receipt and disbursement thereof; and (c) perform all the
duties incident to the office of the Chief Financial Officer and such other
duties as from time to time may be assigned to him by the President or by the
Board of Directors. If required by the Board of Directors, the Chief Financial
Officer shall give a bond for the faithful discharge of the Chief Financial
Officer's duties in such sum and with such surety or sureties as the Board of
Directors may determine.
Section 6.10. The Vice Presidents. In the absence of the President, or in
------------ -------------------
the event of the President's inability or refusal to act, the Vice Presidents
(in the order designated, or in the absence of any designation, then in the
order of their election) shall perform the duties of the President, and when so
acting, shall have all the powers of, and be subject to all the restrictions
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<PAGE>
upon, the President. The Vice Presidents shall perform such other duties and
have such other powers as the Chief Executive Officer or the Board of Directors
may from time to time prescribe.
Section 6.11. The Secretary. The Secretary shall attend all meetings of
------------ -------------
the Board of Directors and all meetings of the stockholders and record all the
proceedings of the meetings of the Corporation and of the Board of Directors in
a book to be kept for that purpose and shall perform like duties for the
standing committees when required. The Secretary shall give, or cause to be
given, or cause to be given notice of all meetings of the stockholders and
special meetings of the Board of Directors and shall perform such other duties
as may be prescribed by the Board of Directors or the Chief Executive Officer,
under whose supervision the Secretary shall be. The Secretary shall have
custody of the corporate seal of the Corporation and the Secretary or an
Assistant Secretary, shall have authority to affix the same to any instrument
requiring it and when so affixed, it may be attested by the Secretary's
signature or by the signature of such Assistant Secretary. The Board of
Directors may give general authority to any other officer to affix the seal of
the Corporation and to attest the affixing by such officer's signature.
Section 6.12. The Treasurer. In the absence of the Chief Financial
------------ -------------
Officer or in the event of the Chief Financial Officer's inability or refusal to
act, the Treasurer shall perform the duties of the Chief Financial Officer, and
when so acting, shall have all the powers of and be subject to all the
restrictions upon the Chief Financial Officer. The Treasurer shall perform such
other duties and have such other powers as the Chief Executive Officer or the
Board of Directors may from time to time prescribe.
Section 6.13. The Assistant Secretary. The Assistant Secretary, or if
------------ -----------------------
there be more than one, the Assistant Secretaries in the order determined by the
Board of Directors (or if there be no such determination, then in the order of
their election), shall, in the absence of the Secretary or in the event of the
Secretary's inability or refusal to act, perform the duties and exercise the
powers of the Secretary and shall perform such other duties and have such other
powers as the Chief Executive Officer or the Board of Directors may from time to
time prescribe.
Section 6.14. The Assistant Treasurer. The Assistant Treasurer, or if
------------ -----------------------
there shall be more than one, the Assistant Treasurers in the order determined
by the Board of Directors (or if there be no such determination, then in the
order of their election), shall, in the absence of the Treasurer or in the event
of the Treasurer's inability or refusal to act, perform the duties and exercise
the powers of the Treasurer and shall perform such other duties and have such
other powers as the Chief Executive Officer or the Board of Directors may from
time to time prescribe.
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ARTICLE VII
-----------
CERTIFICATES OF STOCK, TRANSFERS AND RECORD DATES
-------------------------------------------------
Section 7.1. Form of Certificates. Every holder of stock in the
----------- --------------------
Corporation shall be entitled to have a certificate signed by, or in the name
of, the Corporation by (a) the Chairman of the Board, the Vice-Chairman of the
Board or the President of the Corporation, and (b) the Secretary, the Treasurer,
an Assistant Secretary or an Assistant Treasurer of the Corporation, certifying
the number of shares owned by such holder in the Corporation. If the
Corporation shall be authorized to issue more than one class of stock or more
than one series of any class, the powers, designations, preferences and
relative, participating, optional or other special rights of each class of stock
or series thereof and the qualifications, limitations or restrictions of such
preferences and/or rights shall be set forth in full or summarized on the face
or back of the certificate which the Corporation shall issue to represent such
class or series of stock; provided that, except as otherwise provided in Section
202 of the General Corporation Law of Delaware, in lieu of the foregoing
requirements, there may be set forth, on the face or back of the cer tificate
which the Corporation shall issue to represent such class or series of stock, a
statement that the Corporation will furnish without charge to each stockholder
who so requests the powers, designations, preferences and relative,
participating, optional or other special rights of each class of stock or series
thereof and the qualifications, limitations or restrictions of such preferences
and/or rights. Subject to the foregoing, certificates of stock of the
Corporation shall be in such form as the Board of Directors may from time to
time prescribe.
Section 7.2. Facsimile Signatures. Where a certificate is
----------- --------------------
countersigned (i) by a transfer agent other than the Corporation or its employee
or (ii) by a registrar other than the Corporation or its employee, any other
signatures on the certificate may be facsimile. In case any officer, transfer
agent or registrar who has signed, or whose facsimile signature has been placed
upon, a certificate shall have ceased to be such officer, transfer agent or
registrar before such certificate is issued, it may be issued by the Corporation
with the same effect as if such person were such officer, transfer agent or
registrar at the date of issue.
Section 7.3. Lost Certificates. The Board of Directors may direct a
----------- -----------------
new certificate or certificates to be issued in place of any certificate or
certificates theretofore issued by the Corporation alleged to have been lost,
stolen or destroyed, upon the making of an affidavit of that fact by the person
claiming the certificate of stock to be lost, stolen or destroyed. When
authorizing such issue of a new certificate or certificates, the Board of
Directors may, in its discretion and as a condition precedent to the issuance
thereof, require the owner of such lost, stolen or destroyed certificate or
certificates, or such owner's legal representative, to advertise the same in
such manner as the Corporation shall require and/or give the Corporation a bond
in such sum as it may direct as indemnity against any claim that may be made
against the Corporation or its transfer agent or registrar with respect to the
certificate alleged to have been lost, stolen or destroyed.
Section 7.4. Transfers of Stock. Upon surrender to the Corporation
----------- ------------------
or the transfer agent of the Corporation of a certificate for shares duly
endorsed or accompanied by proper evidence of succession, assignment or
authority to transfer, it shall be the duty of the
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<PAGE>
Corporation to issue a new certificate to the person entitled thereto, cancel
the old certificate and record the transaction upon its books.
Section 7.5. Registered Stockholders. The Corporation shall be
----------- -----------------------
entitled to recognize the exclusive right of a person registered on its books as
the owner of shares to receive dividends and to vote as such owner and to hold
liable for calls and assessments a person registered on its books as the owner
of shares, and shall not be bound to recognize any equitable or other claim to
or interest in such share or shares on the part of any other person, whether or
not the Corporation shall have express or other notice thereof, except as
otherwise provided by the laws of Delaware.
ARTICLE VIII
------------
CONFLICT OF INTERESTS
---------------------
Section 8.1. Contract or Relationship Not Void. No contract or
----------- ---------------------------------
transaction between the Corporation and one or more of its directors or
officers, or between the Corporation and any other corporation, partnership,
association or other organization in which one or more of its directors or
officers are directors or officers or have a financial interest shall be void or
voidable solely for this reason, or solely because such director or officer is
present at, or participates in, the meeting of the Board of Director's or
committee thereof which authorizes the contract or transaction, or solely
because such director's or officer's vote is counted for such purpose, if:
(i) The material facts as to such director's or officer's relationship or
interest and as to the contract or transaction are disclosed or are
known to the Board of Directors or the committee, and the board or
committee in good faith authorizes the contract or transaction by the
affirmative vote of a majority of the disinterested directors, even
though the disinterested directors be less than a quorum; or
(ii) The material facts as to such director's or officer's relationship or
interest and as to the contract or transaction are disclosed or are
known to the stockholders entitled to vote thereon, and the contract
or transaction is specifically approved in good faith by vote of the
stockholders; or
(iii) The contract or transaction is fair as to the Corporation as of the
time it is authorized, approved or ratified by the Board of Directors,
a committee thereof, or the stockholders.
Section 8.2. Quorum. Common or interested directors may be counted in
----------- ------
determining the presence of a quorum at a meeting of the Board of Directors or
of a committee which authorizes the contract or transaction.
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<PAGE>
ARTICLE IX
----------
GENERAL PROVISIONS
------------------
Section 9.1. Dividends. Dividends upon the capital stock of the
----------- ---------
Corporation, subject to the provisions of the Certificate of Incorporation, if
any, may be declared by the Board of Directors at any regular or special
meeting, pursuant to law. Dividends may be paid in cash, in property or in
shares of the capital stock or rights to acquire same, subject to the provisions
of the Corporation's Certificate of Incorporation. Before payment of any
dividend, there may be set aside out of any funds of the Corporation available
for dividends such sum or sums as the directors from time to time, in their
absolute discretion, think proper as a reserve or reserves to meet
contingencies, or for equalizing dividends, or for repairing or maintaining any
property of the Corporation, or for such other purpose as the directors shall
think conducive to the interest of the Corporation, and the directors may modify
or abolish any such reserve in the manner in which it was created.
Section 9.2. Checks. All checks or demands for money and notes of
----------- ------
the Corporation shall be signed by such officer or officers or such other person
or persons as the Board of Directors may from time to time designate.
Section 9.3. Fiscal Year. The fiscal year of the Corporation shall
----------- -----------
be fixed by resolution of the Board of Directors.
Section 9.4. Seal. The corporate seal shall have inscribed thereon
----------- ----
the name of the Corporation and the words "Corporate Seal, Delaware." The seal
may be used by causing it or a facsimile thereof to be impressed or affixed or
reproduced or otherwise.
Section 9.5. Stock in Other Corporations. Shares of any other
----------- ---------------------------
corporation which may from time to time be held by this Corporation may be
represented and voted at any meeting of stockholders of such corporation by the
Chairman, the Chief Executive Officer, the President, the Chief Financial
Officer or a Vice President of the Corporation, or by any proxy appointed in
writing by the Chairman, the Chief Executive Officer, the President, the Chief
Financial Officer or a Vice President of the Corporation, or by any other person
or persons thereunto authorized by the Board of Directors. Shares represented
by certificates standing in the name of the Corporation may be endorsed for sale
or transfer in the name of the Corporation by the Chairman, the Chief Executive
Officer, the President, the Chief Financial Officer or any Vice President of the
Corporation or by any other officer or officers thereunto authorized by the
Board of Directors. Shares belonging to the Corporation need not stand in the
name of the Corporation, but may be held for the benefit of the Corporation in
the individual name of the Chief Financial Officer or of any other nominee
designated for the purpose of the Board of Directors.
-14-
<PAGE>
ARTICLE X
---------
AMENDMENTS
----------
These By-laws may be altered, amended or repealed or new by-laws may
be adopted only in the manner provided in the Corporation's Certificate of
Incorporation.
-15-
<PAGE>
Exhibit 10.23
REGISTRATION RIGHTS AGREEMENT
-----------------------------
REGISTRATION RIGHTS AGREEMENT, dated as of February 3, 1998, between
Career Education Corporation, a corporation organized under the laws of
Delaware (the "Company"), and Heller Equity Capital Corporation, a corporation
organized under the laws of Delaware ("Stockholder").
W I T N E S S E T H:
WHEREAS, the Stockholder owns 2,549,944 shares (the "Shares") of Common
Stock, par value $.01 per share, of the Company (the "Common Stock"); and
WHEREAS, in connection with, and as consideration for Stockholder's
approval of, the consummation of an initial public offering, the Company has
agreed to provide the Stockholder certain registration rights pursuant to the
terms of this Agreement; and
WHEREAS, Electra Investment Trust P.L.C., a corporation organized under
the laws of England and Wales, and Electra Associates, Inc., a Delaware
corporation, are parties to that certain Registration Rights Agreements with
the Company dated as of July 31, 1995, as amended by Amendment No. 1 dated the
date hereof (as so amended, the "Electra Registration Rights Agreement");
NOW, THEREFORE, in consideration of the mutual covenants and
obligations hereinafter set forth, the parties hereto, intending to be legally
bound, hereby agree as follows:
1. Definitions. For purposes of this Agreement, capitalized terms used
-----------
herein shall have the meanings set forth in the preambles hereto and in this
Section 1.
- ---------
1.1. "Affiliate" shall mean a person who controls or is controlled
by or under common control with another person.
1.2. "Commission" shall mean the Securities and Exchange Commission
or any other federal agency at the time administering the Securities Act.
1.3. "Common Stock" shall mean the Common Stock of the character
authorized on the date hereof or, in the case of a conversion, reclassification
or exchange of such shares of such Common Stock, shares of the stock into or
for which such shares of Common Stock shall be converted, reclassified or
exchanged, and all provisions of this Agreement shall be applied appropriately
thereto and to any stock resulting from any subsequent conversion,
reclassification or exchange therefor.
<PAGE>
1.4. "Electra" shall mean collectively Electra Investment Trust
P.L.C., a corporation organized under the laws of England and Wales, and
Electra Associates, Inc., a Delaware corporation, together with their
respective successors and permitted assigns under the Electra Registration
Rights Agreement.
1.5. "Exchange Act" shall mean the Securities Exchange Act of 1934,
as amended, or any similar federal statute enacted hereafter, and the rules
and regulations of the Commission thereunder, all as the same shall be in
effect from time to time.
1.6. "Holder" shall mean any holder of Registrable Securities;
provided, however, that any Person who acquires any of the Registrable
- --------
Securities in a distribution pursuant to a registration statement filed by the
Company under the Securities Act or pursuant to a sale under Rule 144 under
the Securities Act shall not be considered a Holder.
1.7. "Initiating Holders" shall mean the Holders of Registrable
Securities representing (i) at least fifty-one percent (51%) of the
Registrable Securities then outstanding.
1.8. "IPO" shall mean (i) the time at which the Company becomes a
registered public company under 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 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 Commission pursuant to Section 13(a), 13(c), 14
------------- ----- --
or 15(d) of the Exchange Act. An Initial Public Offering will be deemed to be
-----
consummated (i) on the date such registration is declared effective by the
Commission and (ii) in the case of a merger, upon the effectiveness of the
merger.
1.9. "Person" shall mean any individual, firm, corporation,
partnership, trust, incorporated or unincorporated association, joint venture,
joint stock company, government (or an agency or political subdivision
thereof) or other entity of any kind.
1.10. "Register", "registered" and "registration" shall refer to a
registration effected by preparing and filing a registration statement with the
Commission in compliance with the Securities Act and applicable rules and
regulations thereunder, and the declaration or ordering of the effectiveness
of such registration statement by the Commission.
1.11. "Registrable Securities" shall mean the (i) the Shares and
(ii) any other shares of Common Stock acquired after the date of this Agreement
and held by the Stockholder from time to time; provided, however, that any such
--------
Registrable Securities shall cease to be included within the definition of
Registrable Securities when (a) a registration statement with respect to the
sale of such securities shall have become effective under the
-2-
<PAGE>
Securities Act and such securities shall have been disposed of in accordance
with such registration statement, (b) they shall have been sold as permitted by
Rule 144 (or any successor provision) under the Securities Act, (c) they shall
have been otherwise transferred, new certificates for them not bearing a legend
restricting further transfer shall have been delivered by the Company and
subsequent public distribution of them shall not require registration of them
under the Securities Act or (d) they shall have ceased to be outstanding.
1.12. "Registration Expenses" shall mean all expenses incurred by
the Company in compliance with this Agreement, excluding underwriters'
discounts and commissions but including, without limitation, all registration
and filing fees, printing expenses, fees and disbursements of counsel for the
Company, the compensation of regular employees of the Company and the fees and
expenses of one counsel for all Holders, all blue sky fees and expenses, and
the expense of any special audits incident to or required by any such
registration.
1.13. "Securities Act" shall mean the Securities Act of 1933, as
amended, or any similar federal statute enacted hereafter, and the rules and
regulations of the Commission thereunder, all as the same shall be in effect
from time to time.
1.14. "Selling Expenses" shall mean all underwriting discounts and
commissions applicable to the sale of Registrable Securities.
2. Requested Registration.
----------------------
2.1. Request for Registration. The Initiating Holders, by written
------------------------
request to the Company, may require the Company to effect a registration with
respect to Registrable Securities at any time after an IPO. If the Initiating
Holders elect to exercise their rights under this Section 2.1 the Company
-----------
shall:
(a) promptly give written notice of the proposed registration to all
other Holders (the "Demand Registration Notice"); and
(b) as soon as practicable but not later than sixty (60) days after
receipt of the request from the Initiating Holders, use its best
efforts and take all appropriate action to file such registration
statement with the Commission, and shall use its best efforts and take
all appropriate action to effect such registration as soon as possible
following such filing (including, without limitation, the execution of
an undertaking to file post-effective amendments, appropriate
qualification under the blue sky or other state securities laws
requested by Initiating Holders and appropriate compliance with
applicable regulations issued under the Securities Act) as may be so
requested and as would permit or facilitate the sale and distribution
of all or such Registrable Securities as are specified in such request,
together with all or such portion of the Registrable Securities of any
Holder or Holders joining in such request as are specified in a
written request given within thirty (30) days after receipt of the
Demand Registration Notice; provided, however, that the Company shall
-------- -------
not be obligated to
-3-
<PAGE>
effect any such registration pursuant to this Section 2 (i) if a
---------
registration pursuant to this Section 2 has been declared or ordered
---------
effective within the prior twelve months or (ii) after the third such
registration pursuant to this Section 2 has been declared or ordered
---------
effective; provided, further, however, that if with respect to the
last remaining demand registration right the Holders shall not be
permitted to include all of the Registrable Securities requested to be
so included therein pursuant to the operation of Section 2.5 below, the
-----------
Holders shall be granted an additional demand registration exercisable
in accordance with this Section 2.
2.2. Additional Shares to be Included. The registration statement
--------------------------------
filed pursuant to the request of the Initiating Holders may, subject to the
provisions of Section 2.5 below, include (a) other securities of the Company
-----------
(the "Additional Shares") which are held by officers or directors of the
Company or which are held by Persons who, by virtue of agreements with the
Company, are entitled to include their securities with the Holders referred to
in Section 2.1 above (collectively, the "Other Shareholders"), and (b)
-----------
securities of the Company being sold for the account of the Company (the
"Company Shares").
2.3. Withdrawal of Registration. If the Initiating Holders inform the
--------------------------
Company by written notice that they are withdrawing their registration request
made pursuant to Section 2.1 above and the Initiating Holders pay all of the
-----------
Company's Registration Expenses with respect to such registration incurred to
the date of such notice, then the registration statement need not be filed and
all efforts pursuant to this Agreement will not count as a registration (or an
exercise of rights) under this Section 2, provided, however, that if the
--------- -------- -------
Company decides to proceed with the registration on its own behalf, or on
behalf of any other shareholders, then the Initiating Holders shall not be
required to pay any of the Company's Registration Expenses and such
registration will not count as a registration (or an exercise of rights) under
this Section 2.
---------
2.4. Underwriting.
------------
(a) If the Initiating Holders intend to distribute the
Registrable Securities covered by their request by means of an
underwriting, they shall so advise the Company as a part of their
request made pursuant to this Section 2 and the Company shall include
---------
such information in the Demand Registration Notice, and such Demand
Registration Notice shall also state that any registration pursuant to
this Section 2 shall be conditioned upon such Holder's participation in
---------
such underwriting and the inclusion of such Holder's Registrable
Securities in the underwriting to the extent provided herein and
subject to the limitations provided herein. A Holder may elect to
include in such underwriting all or a part of the Registrable
Securities he holds.
(b) The Company shall (together with all Holders, officers,
directors and Other Shareholders proposing to distribute their
securities through such underwriting) enter into an underwriting
agreement in customary form with the representative of the
-4-
<PAGE>
underwriter or underwriters selected for such underwriting by a
majority in interest of the Initiating Holders.
2.5. Limitations on Shares to Included.
---------------------------------
Notwithstanding any other provision of this Section 2, if the representative of
---------
the underwriters advises the Company or the Initiating Holders in writing that
marketing factors require a limitation on the number of shares to be
underwritten or that the inclusion of Additional Shares or Company Shares may
adversely affect the sale price (of the shares to be registered) that may be
obtained, first the Additional Shares shall be excluded from such registration
to the extent so required by such limitation, then the Company Shares shall be
excluded from such registration to the extent so required by such limitation,
and if a limitation of the number of shares is still required, the number of
shares that may be included in the registration and underwriting shall be
allocated (i) first to the Holders, such that the Holders shall be entitled to
include a number of shares equal to seventy percent (70%) of the shares
requested for inclusion in such registration, and (ii) the remaining shares,
if any to the Holders and Electra, pro rata based on the number of Registrable
Securities or Additional Shares requested to be included in such registration
after excluding shares already included in such registration as provided in
clause (i) above. If the Company or any Holder of Registrable Securities,
officer, director or Other Shareholder who has requested inclusion in such
registration as provided above disapproves of the terms of any such
underwriting, such Person may elect to withdraw such Person's Registrable
Securities, Additional Shares or Company Shares, as the case may be, therefrom
by written notice to the Company, the underwriter and the Initiating Holders.
If the withdrawal of any Registrable Securities, Additional Shares or Company
Shares, as the case may be, would allow, within the marketing limitations set
forth above, the inclusion in the underwriting of a greater number of shares of
Registrable Securities, Company Shares or Additional Shares, then, to the
extent practicable and without delaying the underwriting, the Company shall
offer first to the Holders and/or Electra, as the case may be, second for the
Company's own account and third to the Other Shareholders an opportunity to
include additional shares of Registrable Securities, Company Shares or
Additional Shares, as the case may be, in the proportions discussed above.
3. Company Registration.
--------------------
3.1. If the Company shall determine to register any of its
securities either for its own account or the account of a security holder or
holders exercising any demand registration rights, other than a registration
relating solely to employee benefit plans, or a registration relating solely to
a Rule 145 (under the Securities Act) transaction, the Company will:
(a) promptly give to each Holder written notice thereof (which shall
include a list of the jurisdictions in which the Company intends to
attempt to qualify such securities under the applicable blue sky or
other state securities laws); and
-5-
<PAGE>
(b) include in such registration (and any related qualification
under blue sky laws or other compliance), and in any underwriting
involved therein, all the Registrable Securities specified in a written
request or requests made by any Holder within thirty (30) days after
receipt of the written notice from the Company described in clause (a)
above, except as set forth in Section 3.3 below. Such written request
-----------
may specify all or a part of a Holder's Registrable Securities.
3.2. Underwriting. If the registration of which the Company gives
------------
notice is for a registered public offering involving an underwriting, the
Company shall so advise the Holders as a part of the written notice given
pursuant to Section 3.1(a). The right of any Holder to require registration
--------------
pursuant to this Section 3 shall be conditioned upon such Holder's
---------
participation in such underwriting and the inclusion of such Holder's
Registrable Securities in the underwriting to the extent provided herein. All
Holders proposing to distribute their securities through such underwriting
shall (together with the Company and any officers, directors or Other
Shareholders distributing their securities through such underwriting) enter
into an underwriting agreement in customary form with the representative of the
underwriter or underwriters selected by the Company.
3.3. Limitations on Shares to be Included. With respect to Company
------------------------------------
registrations or registrations effected by the Company for the account of a
security holder or holders exercising any demand registration rights, not
withstanding any other provision of this Section 3, if the representative of
---------
the underwriters advises the Company in writing that marketing factors require
a limitation or elimination on the number of shares to be underwritten, the
representative may (subject to the allocation priority set forth below) limit
the number of Registrable Securities to be included in the registration and
underwriting. The Company shall so advise all Holders of securities requesting
registration, and the number of shares of securities that are entitled to be
included in the registration and underwriting shall be allocated first, to the
Company for securities being sold for its own account, second, if any among
Electra and Holders in the ratio of two-thirds (2/3) to Electra and one-third
to the Holders, until such time as Electra holds less than thirty-five percent
(35%) of the shares of Registrable Securities (as defined in the Electra
Registration Rights Agreement) held by Electra as of the date of this Agreement
(as such number may be adjusted for stock splits, dividends, recapitalizations,
reorganizations or similar events), third, if any, among the Holders and
Electra pro rata based upon the number of Registrable Securities or Additional
Shares, as the case may be, requested to be so included in such registration
after excluding shares already included in such registration as provided in
clause first and clause second, and fourth, among all officers, directors or
Other Shareholders (including those Shareholders other than Electra exercising
demand registration rights and on whose account the Company determined to
register its securities pursuant to the exercise of such demand registration
right, or otherwise), in each case in proportion, as nearly as practicable, to
the respective amounts of Registrable Securities or Additional Shares which
they had requested to be included in such registration at the time of filing
the registration statement; provided, however, that if such registration is
effected by the Company on behalf of Electra exercising any demand registration
rights pursuant to the Electra Registration Rights Agreement, the number of
-6-
<PAGE>
shares that are entitled to be included in the registration and underwriting
shall be allocated first, to Electra such that Electra shall be entitled
to include a number of shares equal to seventy-five percent (75%) of the
shares requested for inclusion in such registration, second, if any, among
the Holders and Electra, pro rata based on the number of Registratable
Securities or Additional Shares requested to be included in such registration
after excluding shares already included in such registration as provided
in clause first above, third, if any, to the Company for securities being
sold for its own account, and fourth, among all officers, directors or Other
Shareholders (including those shareholders (other than Electra) exercising
demand registration rights and on whose account the Company determined to
register its securities pursuant to the exercise of such demand registration
right, or otherwise). If any Holder of Registrable Securities or any officer,
director or Other Shareholder disapproves of the terms of any such
underwriting, he may elect to withdraw therefrom by written notice to the
Company and the underwriter.
3.4. Withdrawal from Registration. Any Holder requesting inclusion
----------------------------
of Registrable Securities pursuant to this Section 3 may, at any time prior to
---------
the effective date of the registration statement relating to such registration,
revoke such request by delivering written notice of such revocation to the
Company; provided, however, that if the Company, in consultation with its
-------- -------
financial and legal advisors, determines that such revocation would materially
delay the registration or otherwise require a recirculation of the prospectus
contained in the registration statement, then such Holder shall have no such
right to revoke its request. If the withdrawal of any Registrable Securities or
Additional Shares would allow, within the marketing limitations set forth
above, the inclusion in the underwriting of a greater number of shares of
Registrable Securities or Additional Shares, then, to the extent practicable
and without delaying the underwriting, the Company shall offer first to the
Holders and/or Electra and second to the Other Shareholders an opportunity to
include additional shares of Registrable Securities or Additional Shares, as
the case may be in the proportions discussed in Section 3.3 above.
-----------
3.5. Termination or Withdrawal by Company. The Company shall
------------------------------------
have the right to terminate or withdraw any registration initiated by it under
this Section 3 prior to the effectiveness of such registration whether or not
---------
any Holder has elected to include securities in such registration.
4. Registration on Form S-3. In addition to the their rights set
------------------------
forth in Sections 2 and 3 above, if at any time (i) Initiating Holders request
---------- -
that the Company file a registration statement on Form S-3 (or any successor
form thereto) for a public offering of all or any portion of the Registrable
Securities held by such requesting Holder or Holders, and (ii) the Company is a
registrant entitled to use Form S-3 (or any successor form thereto) to register
such securities, then the Company shall use its best efforts to register
(including by means of a shelf registration pursuant to Rule 415 under the
Securities Act if so requested in such request) under the Securities Act on
Form S-3 (or any successor form thereto), for public sale in accordance with
the method of disposition specified in such notice, the number of shares of
Registrable Securities specified in such notice.
-7-
<PAGE>
5. Expenses of Registration. Subject to Section 2.3, all Registration
------------------------ -----------
Expenses incurred in connection with the registration or qualification of, or
compliance with, any registration statement under Sections 2, 3 and 4 of this
------------- -
Agreement, shall be borne by the Company. All Selling Expenses shall be borne
pro rata by each Holder and each Other Shareholder in accordance with the
number of shares sold.
6. Registration Procedures.
-----------------------
6.1. In the case of each registration to be effected by the Company
pursuant to this Agreement, the Company will keep each Holder advised in
writing as to the initiation of each registration and all amendments thereto
and as to the completion thereof, advise any such Holder, upon request, of the
progress of such proceedings, use its best efforts to effect the registration
of any Registrable Securities under the Securities Act, and will, at its
expense:
(a) Prepare and file with the Commission a registration statement
covering such Registrable Securities and use its best efforts to cause
such registration statement to be declared effective by the Commission
and to keep such registration effective for a period of one hundred
eighty (180) days or until the Holder or Holders have completed
the distribution described in the registration statement relating
thereto, whichever first occurs; provided, however, that the Company
-------- -------
shall keep such registration effective for longer than one hundred
and eighty (180) days if the costs and expenses associated with
such extended registration are borne by the selling Holders; provided,
--------
further, however, that in the case of any registration of Registrable
------- -------
Securities on Form S-3 which are intended to be offered on a continuous
or delayed basis, such 180-day period shall be extended, if necessary,
to keep the registration statement effective until all such Registrable
Securities are sold, provided that (1) Rule 415 under the Securities
Act, or any successor rule under the Securities Act, permits an
offering on a continuous or delayed basis, and (2) applicable rules
and regulations under the Securities Act governing the obligation
to file a post-effective amendment permit the incorporation by
reference into the registration statement of information contained
in periodic report filed pursuant to Section 13 or 15(d) of the
---------- -----
Exchange Act, in lieu of filing a post-effective amendment which
(y) includes any prospectus required by Section 10(a)(3) of the
----------------
Securities Act or (z) reflects facts or events representing a material
or fundamental change in the information set forth in the registration
statement;
(b) Subject to the provisions set forth in Section 6.1(a) above,
--------------
prepare and file with the Commission such amendments and supplements to
such registration statement and the prospectus used in connection
therewith as may be necessary to keep such registration statement
effective and to comply with the provisions of the Securities Act with
respect to the disposition of all Registrable Securities covered by
such registration statement until such time as all of such Registrable
Securities have
-8-
<PAGE>
been disposed of in accordance with the intended methods of disposition
by the seller or sellers thereof set forth in such registration
statement;
(c) Furnish to each seller of Registrable Securities covered by such
registration statement and each Holder two conformed copies of such
registration statement and of each such amendment and supplement
thereto (in each case including all exhibits), such number of copies of
the prospectus contained in such registration statement (including each
preliminary prospectus and any summary prospectus) and any other
prospectus filed under Rule 424 under the Securities Act, in conformity
with the requirements of the Securities Act, and such other documents,
as such seller or Holder, as the case may be, may reasonably request;
(d) Promptly notify each seller of Registrable Securities covered
by such registration statement and each Holder at any time when a
prospectus relating thereto is required to be delivered under the
Securities Act, of the happening of any event as a result of which the
prospectus included in such registration statement, as then in effect,
includes an untrue statement of a material fact or omits to state a
material fact required to be stated therein or necessary to make the
statements therein not misleading or incomplete in the light of the
circumstances then existing, and at the request of any such seller,
prepare and furnish to such seller a reasonable number of copies of a
supplement to or an amendment of such prospectus as may be necessary so
that, as thereafter delivered to the purchasers of such shares, such
prospectus shall not include an untrue statement of a material fact or
omit to state a material fact required to be stated therein or
necessary to make the statements therein not misleading or incomplete
in the light of the circumstances then existing;
(e) Use its best efforts (i) to register or qualify all Registrable
Securities and other securities covered by such registration statement
under such other securities or blue sky laws of such states of the
United States of America where an exemption is not available and as the
sellers of Registrable Securities covered by such registration
statement shall reasonably request, (ii) to keep such registration or
qualification in effect for so long as such registration statement
remains in effect and (iii) to take any other action which may be
reasonably necessary or advisable to enable such sellers to consummate
the disposition in such jurisdictions of the securities to be sold by
such sellers, except that the Company shall not for any such purpose be
required to (x) qualify generally to do business as a foreign
corporation in any jurisdiction wherein it would not but for the
requirements of this clause (e) be obligated to be so qualified, or
(y) subject itself to taxation in any such jurisdiction;
(f) Use its best efforts to cause all Registrable Securities covered
by such registration statement to be registered with or approved by
such other federal or state governmental agencies or authorities as may
be necessary in the opinion of counsel to the Company and counsel to
the seller or sellers of Registrable Securities to enable the seller or
sellers thereof to consummate the disposition of such Registrable
Securities;
-9-
<PAGE>
(g) Use its best efforts to list all such Registrable Securities
registered in such registration on each securities exchange or
automated quotation system on which the Common Stock of the Company is
then listed;
(h) Provide and cause to be maintained a transfer agent and
registrar for all Registrable Securities and a CUSIP number for all
such Registrable Securities, in each case not later than the effective
date of such registration;
(i) Enter into such customary agreements (including underwriting
agreements in customary form and reasonably acceptable to the Company)
and take all such other actions as the holders of a majority of the
Registration Securities being sold or the underwriters, if any,
reasonably request in order to expedite or facilitate the disposition
of such Registrable Securities;
(j) Make available for inspection by any seller of Registrable
Securities and each Holder, any underwriter participating in any
disposition pursuant to such registration statement, and any attorney
or accountant retained by any such seller, Holder or underwriter, all
financial and other records, pertinent corporate documents and
properties of the Company, and cause the Company's officers, directors,
employees and independent accountants to supply all information
reasonably requested by any such seller, Holder, underwriter, attorney
or accountant in connection with such registration statement, which
information shall be subject to reasonable restrictions concerning
confidentiality and non-disclosure;
(k) Furnish to each selling Holder upon request a signed
counterpart, addressed to the selling Holder, of
(i) an opinion of counsel for the Company, dated the effective
date of the registration statement and in form reasonably acceptable
to the Company and such Holder, and
(ii) "comfort" letters signed by the Company's independent public
accountants who have examined and reported on the Company's
financial statements included in the registration statement, to the
extent permitted by the standards of the American Institute of
Certified Public Accountants, in the case of (i) and (ii) covering
substantially the same matters with respect to the registration
statement (and the prospectus included therein) and (in the case of
the accountants' "comfort" letters) with respect to events
subsequent to the date of the financial statements, as are
customarily covered in opinions of issuer's counsel and in
accountants' "comfort" letters delivered to the underwriters in
underwritten public offerings of securities;
-10-
<PAGE>
(l) Furnish to each selling Holder a copy of all correspondence from or to
the Commission in connection with any such offering;
(m) In the event of the issuance of any stop order suspending the
effectiveness of a registration statement, or of any order suspending or
preventing the use of any related prospectus or suspending the qualification
of any Registrable Securities included in such registration statement for sale
in any jurisdiction, the Company will use its reasonable best efforts promptly
to obtain the withdrawal of such order; and
(n) Otherwise use its best efforts to comply with all applicable rules and
regulations of the Commission, and, if required, make available to its
security holders, as soon as reasonably practicable, an earnings statement
covering the period of at least twelve months, but not more than eighteen
months, beginning with the first month after the effective date of the
registration statement, which earnings statement shall satisfy the provisions
of Section 11(a) of the Securities Act and Rule 158 thereunder.
-------------
6.2 It shall be a condition precedent to the obligations of the Company to
take any action pursuant to this Agreement that the Holders proposing to
register Registrable Securities shall furnish to the Company such information
regarding them, the Registrable Securities held by them, and the intended
method of distribution of such Registrable Securities as the Company shall
reasonably request and as shall be required in connection with the action to
be taken by the Company.
6.3 In connection with the preparation and filing of each registration
statement under this Agreement, the Company will give the Holders on whose
behalf such Registrable Securities are to be registered and their
underwriters, if any, and their respective counsel and accountants, the
opportunity to participate in the preparation of such registration statement,
each prospectus included therein or filed with the Commission, and each
amendment thereof or supplement thereto, and will give each such Holder such
access to the Company's books and records and such opportunities to discuss
the business of the Company with its officers, its counsel and the independent
public accountants who have certified the Company's financial statements, as
shall be necessary, in the opinion of such Holders or such underwriters or
their respective counsel, in order to conduct a reasonable or diligent
investigation within the meaning of the Securities Act. Without limiting the
foregoing, each registration statement, prospectus, amendment, supplement or
any other document filed with respect to a registration under this Agreement
shall be subject to review and reasonable approval by the Holders registering
Registrable Securities in such registration and by their counsel.
7. Indemnification.
---------------
7.1 Indemnification by the Company. In the event of any registration of
------------------------------
any securities of the Company under the Securities Act, the Company will
indemnify and
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<PAGE>
hold harmless each Holder, each of its officers, directors, partners, employees,
agents, attorneys and consultants and each Person controlling such Holder, and
each underwriter, if any, and each Person who controls any underwriter, against
all claims, losses, damages and liabilities, joint and several (or actions,
proceedings or settlements in respect thereof) arising out of or based upon any
untrue settlement (or alleged untrue statement) of a material fact contained in
any prospectus, offering circular or other document (including any related
registration statement, notification or the like) incident to any registration,
qualification or compliance, or based upon 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, or any violation by the Company of the
Securities Act or any rule or regulation thereunder applicable to the Company
and relating to action or inaction required of the Company in connection with
any such registration, qualification or compliance, and will reimburse each such
Holder, each of its officers, directors, partners, employees, agents, attorneys
and consultants and each Person controlling such Holder, each such underwriter
and each Person who controls any such underwriter, for any legal and any other
expenses reasonably incurred in connection with investigating and defending or
settling any such claim, loss, damage, liability or action; provided, however,
-------- -------
that the Company will not be liable in any such case to the extent that any such
claim, loss, damage, liability, or expense arises out of or is based on any
untrue statement or omission made in reliance upon and based upon written
information furnished to the Company by such Holder or underwriter and expressly
stated to be specifically for use therein.
7.2. Indemnification by the Holders. Each Holder will, if Registrable
-------------------------------
Securities held by such Holder are included in the securities as to which such
registration, qualification or compliance is being effected, indemnify the
Company, each of its officers, directors, partners, employees, agents, attorneys
and consultants, and each underwriter, if any, of the Company's securities
covered by such a registration statement, each Person who controls the Company
(other than such Holder) or such underwriter within the meaning of the
Securities Act and the rules and regulations thereunder, each other such Holder
and each of their officers, directors, partners, employees, agents, attorneys
and consultants, and each Person controlling such Holder or other stockholder,
against all claims, losses, damages, expenses and liabilities, joint and several
(or actions in respect thereof) arising out of or based upon any untrue
statement) of a material fact contained in any such registration statement,
prospectus, offering circular or other document, or 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, and will reimburse the
Company, each of its officers, directors, partners, employees, agents, attorneys
and consultants, each underwriter or control Person, each other Holder and each
of their officers, directors, partners, employees, agents, attorneys and
consultants and each Person controlling such Holder or other shareholder for any
legal or any other expenses reasonably incurred in connection with investigating
or defending any such claim, loss, damage, liability or action, in each case to
the extent, but only to the extent, that such untrue statement (or alleged
untrue statement) or omission (or alleged omission) is made in such registration
statement,
-12-
<PAGE>
prospectus, offering circular or other document in reliance upon and in
conformity with written information furnished to the Company by such Holder with
respect to such Holder and expressly stated to be specifically for use therein;
provided, however, that the liability of any such Holder under this Section 7.2
- ----------------- -----------
shall be limited to the amount of proceeds received by such Holder in the
offering giving rise to such liability.
7.3 Notices of Claims Procedures etc. Each party entitled to
--------------------------------
indemnification under this Section 7 (the "Indemnified Party") shall give notice
---------
to the party required to provide indemnification (the "Indemnifying Party")
promptly after such Indemnified Party has actual knowledge of any claim as to
which indemnity may be sought, and shall permit the Indemnifying Party to assume
the defense of any such claim or any litigation resulting therefrom; provided,
--------
that counsel for the Indemnifying Party, who shall conduct the defense of such
claim or any litigation resulting therefrom, shall be approved by the
Indemnified Party (whose approval shall not unreasonably be withheld), and the
Indemnified Party may participate in such defense at the Indemnified Party's
sole expense, provided, further, that the failure of any Indemnified Party to
-----------------
give notice as provided herein shall not relieve the Indemnifying Party of its
obligations under this Section 7 unless such failure is prejudicial to the
---------
ability of Indemnifying Party to defend such claim or action. Notwithstanding
the foregoing, such Indemnified Party shall have the right to employ its own
counsel in any such litigation, proceeding or other action if (i) the employment
of such counsel has been authorized by the Indemnifying Party, in its sole and
absolute discretion, or (ii) the named parties in any such claims (including any
impleaded parties) include any such Indemnified Party and the Indemnified Party
and the Indemnifying Party shall have been advised in writing (in suitable
detail) by counsel to the Indemnified Party either (A) that there may be one or
more legal defenses available to such Indemnified Party which are different from
or additional to those available to the Indemnifying Party, or (B) that there is
a conflict of interest by virtue of the Indemnified Party and the Indemnifying
Party having common counsel, in any of which events, the legal fees and expenses
of a single counsel for all Indemnified Parties with respect to each such claim,
defense thereof, or counterclaims thereto, shall be borne by Indemnifying Party.
No Indemnifying Party, in the defense of any such claim or litigation, shall,
except with the consent of each Indemnified Party, consent to entry of any
judgment or enter into any settlement (x) which does not include as an
unconditional term thereof the giving by the claimant or plaintiff to such
Indemnified Party of a release from all liability in respect to such claim or
litigation, or (y) which requires action other than the payment of money by the
Indemnifying Party. Each Indemnified Party shall cooperate to the extent
reasonably required and furnish such information regarding itself or the claim
in question as an Indemnifying Party may reasonably request in writing and as
shall be reasonably required in connection with defense of such claim and
litigation resulting therefrom.
7.4 Contribution. If the indemnification provided for in this Section 7
------------ ---------
shall for any reason be held by a court to be unavailable to an Indemnified
Party under Section 7.1 or 7.2 hereof in respect of any loss, claim, damage or
----------- ---
liability, or any action in respect thereof, then, in lieu of the amount paid or
payable under Section 7.1 or 7.2, the Indemnified
----------- ---
-13-
<PAGE>
Party and the Indemnifying Party under Section 7.1 or 7.2 shall contribute to
----------- ---
the aggregate losses, claims, damages and liabilities (including legal or other
expenses reasonably incurred in connection with investigating the same), (i) in
such proportion as is appropriate to reflect the relative fault of the Company
and the prospective sellers of Registrable Securities covered by the
registration statement which resulted in such loss, claim, damage or liability,
or action or proceeding in respect thereof, with respect to the statements or
omissions which resulted in such loss, claim, damage or liability, or action or
proceeding in respect thereof, as well as any other relevant equitable
considerations or (ii) if the allocation provided by clause (i) above is not
permitted by applicable law, in such proportion as shall be appropriate to
reflect the relative benefits received by the Company and such prospective
sellers from the offering of the securities covered by such registration
statement; provided, that for purposes of this clause (ii), the relative
--------
benefits received by the prospective sellers shall be deemed not to exceed the
amount of proceeds received by such prospective sellers. No Person guilty of
fraudulent misrepresentation (within the meaning of Section 11(f) of the
-------------
Securities Act) shall be entitled to contribution from any Person who was not
guilty of such fraudulent misrepresentation. Such prospective sellers'
obligations to contribute as provided in this Section 7.4 are several in
-----------
proportion to the relative value of their respective Registrable Securities
covered by such registration statement and not joint. In addition, no Person
shall be obligated to contribute hereunder any amounts in payment for any
settlement of any action or claim effected without such Person's consent, which
consent shall not be unreasonably withheld.
8. Information by Holder. Each Holder of Registrable Securities shall
---------------------
furnish to the Company such information regarding such Holder and the
distribution proposed by such Holder as the Company may reasonably request in
writing and as shall be reasonably required in connection with any registration,
qualification or compliance referred to in this Agreement.
9. Transfer or Assignment of Registration Rights. The rights with respect
---------------------------------------------
to any Registrable Securities to cause the Company to register such securities
granted to a Holder by the Company under this Agreement may be transferred or
assigned by a Holder, in whole or in part, to a transferee or assignee of any
Registrable Securities, and, in such case, the Company shall be given written
notice stating the name and address of said transferee or assignee and
identifying the securities with respect to which such registration rights are
being transferred or assigned.
10. Rule 144 and Rule 144A. At such time as the Company becomes subject
----------------------
to the reporting requirements of the Exchange Act, the Company shall file the
reports required to be filed by it under the Securities Act and the Exchange Act
and the rules and regulations adopted by the Commission thereunder, and will
take all actions reasonably necessary to enable holders of Registrable
Securities to sell such securities without registration under the Securities Act
within the limitation of the provisions of (a) Rule 144 under the Securities
Act, as such Rule may be amended from time to time, (b) Rule 144A under the
Securities Act, as such Rule may be amended from time to time, if applicable or
(c) any similar rules or
-14-
<PAGE>
regulations hereafter adopted by the Commission. Upon the request of any holder
of Registrable Securities, the Company will deliver to such holder a written
statement as to whether it has complied with such requirements.
11. Liquidated Damages. In the event that the Company fails to comply with
------------------
any provision of Section 2, 3 or 4 hereof upon written request of the Holder(s)
------------ -
of Registrable Securities requesting registration thereunder, the Company
shall, within thirty (30) days after the date of receipt by the Company of a
demand from such Holder(s) for payment, pay to such Holder as liquidated
damages for its noncompliance an amount equal to the Current Market Price
multiplied by (x) the number of shares of Common Stock proposed to be sold
pursuant to the registration or qualification in question or (y) in the case of
a request in accordance with Section 4 hereof for a shelf registration pursuant
---------
to Rule 415 under the Securities Act, such lesser number of shares of Common
Stock as may be specified by the Holder(s) in such demand for payment;
provided, however, that the election of the Holder(s) to demand payment of
- -------- -------
liquidated damages with respect to less than all of the shares of Common Stock
proposed to be sold pursuant to such shelf registration shall not prevent the
Holder(s) from any subsequent exercise of registration rights under this
Agreement with respect to the shares of Common Stock for which payment was not
demanded. Payment of such amount at any closing shall be made in immediately
available funds. Upon payment to such Holder of such liquidated damages, such
Holder shall assign to the Company the Registrable Securities proposed to be
sold pursuant to the registration or qualification (or such lesser number of
shares of Registrable Securities as specified in the demand for payment) in
question without any representation or warranty (other than that the Holder has
not taken any action which would impair its ownership of or right to transfer
to the Company the Registrable Securities). At any such closing, the Holders of
the Registrable Securities shall deliver the certificates evidencing such
securities to the Company, accompanied by stock powers duly endorsed in blank
or duly executed instruments of transfer, any other documents that are
necessary to transfer to the Company good title to such of the securities to be
transferred, free and clear of all pledges, security interests, liens, charges,
encumbrances, equities, claims and options of whatever nature other than those
imposed hereunder. The Company agrees that the amount of actual damages that
would be sustained by the Holder as a result of the failure of the Company to
comply with any provisions of Section 2, 3 or 4 hereof is not capable of
------------ -
ascertainment on any other basis. The Holders hereby acknowledge that the
refusal of the Commission to declare effective any registration statement filed
by the Company or the inability of any Holder to sell any offered Registrable
Securities due to a lack of liquidity or marketability shall not, in and of
itself, be evidence of a failure by the Company to comply with Section 2, 3 or
------------
4 hereof.
- -
"Current Market Price" shall mean the average closing price per share of
Common Stock for the forty-five (45) consecutive trading days beginning on the
Determination Date. "Determination Date" shall mean, with respect to a
requested registration pursuant to Section 2 or 3 of this Agreement, the date
--------- -
which is thirty (30) days after the date of such request, and with respect to a
requested registration pursuant to Section 4 of this Agreement, the date which
---------
is fifteen (15) days after the date of such
-15-
<PAGE>
request. The closing price for each day shall be, as reported in The Wall Street
Journal or, if not reported therein, as reported in another newspaper of
national circulation chosen by the Board of Directors of the Corporation, the
closing sales price or, in case no such sale takes place on such day, the
average of the closing bid and asked prices regular way, on the New York Stock
Exchange Composite Tape, or if the Common Stock is not then listed or admitted
to trading on the New York Stock Exchange, on the largest principal national
securities exchange on which such stock is then listed or admitted to trading,
or if not listed or admitted to trading on any national securities exchange,
then the average of the last reported sales price for such shares in the
over-the-counter market, as reported on the National Association of Securities
Dealers Automated Quotation System, or, if such sales prices shall not be
reported thereon, the average of the closing bid and asked prices so reported,
or, if such bid and asked prices shall not be reported thereon, as the same
shall be reported by the National Quotation Bureau Incorporated, or, if such
firm at the time is not engaged in the business of reporting such prices, as
furnished by any similar firm then engaged in such business and selected by the
Company or, if there is no such firm, as furnished by any member of the National
Association of Securities Dealers, Inc., selected by the Company. If the Company
shall not have a class of equity securities registered under the Securities
Exchange Act of 1934, as amended, "Current Market Price" shall be determined as
follows: first, by an investment banking firm selected by the holders of a
-----
majority of the Registrable Securities requested to be included in such
registration, which determination shall be made within (30) days after the
delivery of the demand for payment, second, if such determination shall not be
------
satisfactory to the Company, as evidenced by a written objection by the Company
to the holders of the Registrable Securities requested to be included in such
registration, 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 holders of a majority of the Registrable
Securities requested to be included in such registration, the Current Market
Price 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 Registrable Securities requested to be
included in such registration. Any and all determinations made pursuant to this
Section 11 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 the fact that the shares of Common Stock are privately held or that
the Company has no class of equity securities registered under the Securities
Exchange Act of 1934, as amended, or to any discount relating to, or
reclassification because of, the right of any stockholder of the Company to sell
its shares of Common Stock to the Company.
-16-
<PAGE>
12. No Inconsistent Agreements. The Company will not hereafter enter into
--------------------------
any agreement with respect to its securities which is inconsistent with the
rights granted to the holders of Registrable Securities in this Agreement.
Without limiting the generality of the foregoing, the Company will not hereafter
enter into any agreement with respect to its securities which grants or modifies
any existing agreement with respect to its securities to grant to the holder of
its securities (a) in connection with an incidental registration of such
securities equal or higher priority to the rights granted to the Holders under
Section 2, 3 and 4 of this Agreement or (b) in connection with a demand
- ------------ -
registration the right to require registration of any of its securities before
the earlier of (i) the date on which the holders shall have exercised any demand
registration rights under Section 2 hereof or (ii) the Company shall have
---------
consummated an IPO and any lock-up period applicable to the Holders of the
Registrable Securities shall have terminated.
13. Benefits of Agreement; Successors and Assigns. This Agreement shall
---------------------------------------------
be binding upon and inure to the benefit of the parties and their respective
successors and permitted assigns, legal representative and heirs. This Agreement
does not create, and shall not be construed as creating any rights enforceable
by any other Person.
14. Transfer of Rights. All rights of Stockholder under this Agreement
------------------
shall be transferable by Stockholder to an Affiliate who executes an instrument
in form and substance satisfactory to the Company in which it agrees to be bound
by the terms of this Agreement as if an original signatory hereto, in which case
such Transferee shall thereafter be a "Stockholder" for all purposes of this
Agreement. Upon any transfer of the registration rights or benefits of this
Agreement, Stockholder shall give Company written notice prior to or promptly
following such transfer stating the name and address of the transferee and
identifying the securities with respect to which such rights are being assigned.
Such notice shall include or be accompanied by a written undertaking by the
transferee to comply with the obligations imposed hereunder.
15. Best Registration Rights. If the Company grants to any Person with
------------------------
respect to any security issued by the Company or any of its Affiliates
registration rights that provide for terms that are in any manner more favorable
to the holder of such registration rights than the terms granted to Stockholder
other than the number of demand registrations or the minimum amount of shares
required to exercise demand registration rights (or if the Company amends or
waives any provision of any agreement providing registration rights of others or
takes any other action whatsoever to provide for terms that are more favorable
to other holders than the terms provided to Stockholder other than the number of
demand registration rights), then this Agreement shall immediately be deemed
amended to provide the Stockholder with any (or all) of such more favorable
terms as Stockholder shall elect to include herein.
16. Complete Agreement. This Agreement constitutes the complete
------------------
understanding among the parties with respect to its subject matter and
supersedes all existing agreements and understandings, whether oral or written,
among them. No alteration or modification of any provisions of this Agreement
shall be valid unless made in writing and signed, on the one
-17-
<PAGE>
hand, by a majority of the Registrable Securities then outstanding and, on the
other, by the Company.
17. Section Headings. The Section headings contained in this Agreement
----------------
are for reference purposes only and shall no affect in any way the meaning or
interpretation of this Agreement.
Notices. All notices, offers, acceptances and other communications
-------
required or permitted to be given or to otherwise be made to any party to this
Agreement shall be deemed to be sufficient if contained in a written instrument
delivered by hand, first class mail (registered or certified, return receipt
requested), telex, telecopier or overnight air courier guaranteeing next day
delivery, if to the Company, to it at 2800 West Higgins Road, Suite 790, Hoffman
Estates, Illinois 60195, Attention: President, and if to any Holder, to the
address of such Holder as set forth in the stock transfer books of the
Corporation. All such notices and communications shall be deemed to have been
duly given; at the time delivered by hand, if personally delivered; five
business days after being deposited in the mail, postage prepaid, if mailed;
when answered back, if telexed; when receipt acknowledged, if telecopied; and
the next business day after timely delivery to the courier, if sent by overnight
air courier guaranteeing next day delivery. Any part may change the address to
which each such notice or communication shall be sent by giving written notice
to the other parties of such new address in the manner provided herein for
giving notice.
18. Governing Law. This Agreement shall be governed by, and construed and
-------------
enforced in accordance with, the laws of the State of Illinois without giving
effect to the provisions, policies or principles thereof respecting conflict or
choice of laws.
19. CONSENT TO JURISDICTION AND SERVICE OF PROCESS. ANY LEGAL ACTION OR
----------------------------------------------
PROCEEDING WITH RESPECT TO THIS AGREEMENT OR ANY MATTERS ARISING OUT OF OR IN
CONNECTION WITH THIS AGREEMENT, AND ANY ACTION FOR ENFORCEMENT OF ANY JUDGMENT
IN RESPECT THEREOF SHALL BE BROUGHT EXCLUSIVELY IN THE STATE OF FEDERAL COURTS
LOCATED IN THE STATE OF ILLINOIS, AND, BY EXECUTION AND DELIVERY OF THIS
AGREEMENT, THE COMPANY AND STOCKHOLDER EACH IRREVOCABLY CONSENT TO 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, OR BY RECOGNIZED INTERNATIONAL EXPRESS CARRIER OR DELIVERY SERVICE, TO
THE COMPANY OR STOCKHOLDER AT THEIR RESPECTIVE ADDRESSES REFERRED TO IN THIS
AGREEMENT. THE COMPANY AND THE STOCKHOLDER EACH HEREBY IRREVOCABLY WAIVES ANY
OBJECTION WHICH IT MAY NOW OR HEREAFTER HAVE TO THE LAYING OF VENUE OF ANY OF
THE AFORESAID ACTIONS OR PROCEEDINGS ARISING OUT OF OR IN CONNECTION WITH THIS
AGREEMENT BROUGHT IN THE COURTS REFERRED TO ABOVE AND HEREBY
-18-
<PAGE>
FURTHER IRREVOCABLY WAIVES AND AGREES, TO THE EXTENT PERMITTED BY APPLICABLE
LAW, NOT TO PLEAD OR CLAIM IN ANY SUCH COURT THAT ANY SUCH ACTION OR PROCEEDING
BROUGHT IN ANY SUCH COURT HAS BEEN BROUGHT IN AN INCONVENIENT FORUM. NOTHING IN
THIS AGREEMENT SHALL AFFECT THE RIGHT OF ANY PARTY HERETO TO SERVE PROCESS IN
ANY OTHER MANNER PERMITTED BY LAW.
20. Counterparts. This Agreement may be executed in one or more
------------
counterparts each of which shall be deemed an original but all of which taken
together shall constitute one and the same agreement.
21. Severability. Any provision of this Agreement which is determined to
------------
be illegal, prohibited or unenforceable in any jurisdiction shall, as to such
jurisdiction, be ineffective to the extent of such illegality, prohibition or
unenforceability without invalidating the remaining provisions hereof which
shall be severable and enforceable according to their terms and any such
prohibition or unenforceability in any jurisdiction shall not invalidate or
render unenforceable such provision in any other jurisdiction.
-19-
<PAGE>
IN WITNESS WHEREOF, the parties have signed this Agreement as of the date
first set forth above.
CAREER EDUCATION CORPORATION
By: /s/ William A. Klettle
--------------------------------
Name: William A. Klettle
Title: Senior Vice President CEO
HELLER EQUITY CAPITAL CORPORATION
By: /s/ Patrick Pesch
--------------------------------
Name: Patrick Pesch
Title: Senior Vice President
-20-
<PAGE>
Exhibit 10.24
Heller Equity Capital Corporation
500 West Monroe Street
Chicago, Illinois 60661
312-441-7000
- --------------------------------------------------------------------------------
Heller Equity Capital Corporation
January 27, 1998
Career Education Corporation
2800 West Higgins Road
Hoffman Estates, Illinois 60195
Attention: John M. Larson, Chairman
and Chief Executive Officer
Ladies and Gentlemen:
The purpose of this letter is set forth the agreement of Career Education
Corporation (the "Company") and Heller Equity Capital Corporation ("Heller")
regarding representation of Heller on the Company's Board of Directors (the
"Board") following an initial public offering by the Company of its common
stock, $0.01 par value per share, pursuant to a registration statement on Form
S-1, Registration No. 333-38545 filed with the U.S. Securities Exchange
Commission (the "IPO"), and certain related matters.
1. Heller Directors. Subject to approval by the Company's stockholders,
----------------
in connection with the IPO, the Company agrees that Article V of the Company's
Amended and Restated Certificate of Incorporation (the "Certificate") as filed
with the secretary of the State of Delaware prior to the consummation of the IPO
shall designate a person nominated by Heller for one (1) Class I director's
position (the "Heller I Director") and an additional person nominated by Heller
for one (1) Class III director's position (the "Heller III Director") on the
Company's initial post-IPO board of directors. (Collectively, the Heller I
Director and the Heller III Director are sometimes referred to herein as the
"Heller Directors.") Heller hereby designates Patrick K. Pesch as the initial
Heller I Director and Thomas B. Lally as the initial Heller III Director.
Subject to Sections 3 and 5 below, for each annual meeting at which the term of
any Heller Director expires, the Company shall (a) cause such Heller Director
(or any replacement therefor designated in writing by Heller prior to the last
day for nomination by stockholders of directors for consideration at such
meeting, as set forth in the Company's By-laws) to be nominated for the term
applicable to the Class of the Heller Director proposed for re-election at such
meeting, (b) solicit proxies ("Management Proxies") from the Company's
stockholders to vote in favor of the election of such Heller Director, (c) cause
the shares represented by Management Proxies which are duly executed and
returned to the Company to appear for purposes of a quorum at such annual
meeting and (d) vote the shares represented by such Management Proxies which are
duly executed and returned to the Company in favor of such Heller Director.
Notwithstanding the foregoing, the Company shall not be required to vote any
Management
<PAGE>
Proxy in favor of a Heller Director where (i) stockholder granting such
Management Proxy appears at such meeting to vote or otherwise revokes such
Management Proxy or (ii) where the stockholder granting such Management Proxy
withholds authority to vote for the election of the Heller Director. Whenever a
person then designated as a Heller Director shall cease to serve as a director
of the Company for any reason prior to the expiration of the term for which such
Heller Director was elected, the Company shall cause the resulting vacancy (and
the resulting vacancies in committees of the Board of Directors) to be filled by
another person designated by Heller for the remainder of the term of the Heller
Director who ceased to serve as a director.
2. Committees. At all time during the tenure of one or more Heller
----------
Directors on the Board of Directors of the Company, the Company shall cause a
Heller Director to be appointed to each of the audit and compensation
committees, and the nominating committee (if established as Board), of the Board
of Directors (and any successor committees). Notwithstanding the foregoing, if a
Heller Director appointed to the compensation committee of the Board of
Directors fails at any time to qualify as an "outside director," as defined in
the regulations promulgated by the Internal Revenue Service under Section 162
(m) ("Section 162(m)") of the Internal Revenue Code of 1986, as amended, then,
to the extent of stock option and other compensation awards to any of the
Company's executive officers are intended to qualify as "performance-based"
compensation under Section 162 (m), such Heller Director will excuse himself
from any determinations with respect to such awards and will not be considered
part of the compensation committee for purposes thereof.
3. Reduction in Number of Heller Directors. Notwithstanding any provision
---------------------------------------
of Sections 1 or 2 to the contrary, in the event that Heller and its Approved
Transferees (as defined in paragraph 6 below), if any, cease to own,
collectively, securities representing (or converting into other securities
representing) at least 25% of the aggregate voting power of the Company's
outstanding capital stock, the rights of Heller pursuant to Sections 1 and 2
----------------
shall terminate with respect to the Heller Director whose then current term is
the later to expire following the date on which Heller's ownership falls below
such 25% threshold; provided, that such Heller Director shall serve out the
--------
balance of his or her then current term on the Board of Directors in accordance
with the Certificate and the Company's current term on the Board of Directors in
accordance with the Certificate and the Company's By-Laws. Following any such
termination, Heller's rights hereunder with respect to the remaining Heller
Director shall remain in full force and effect, subject only to termination in
accordance with Section 5 below.
---------
4. Heller Representative. So long as this Agreement remains in effect,
---------------------
Heller shall also have the right to have one other person (as such person may be
designated or redesignated from time to time, the "Heller Representative")
present (whether in person or by telephone) at all meetings of the Company's
Board of Directors and at all meetings of committees thereof which are attended
by a Heller Director. The Heller Representative shall not be entitled to vote at
any such meetings. The Company shall send to the Heller Representative all of
the notices, information and other materials that are distributed to
-2-
<PAGE>
directors of the Company at the same time, and in the same manner, as the same
are distributed to the directors of the Company. The Heller Representative will
be subject to the Company's insider trading and similar policies and will
execute reasonable confidentiality and other agreements intended to protect the
interests of the Company and the Board of Directors.
5. Termination. Upon Heller and its Approved Transferees, if any, ceasing
-----------
to own, collectively, securities representing (or convertible into other
securities representing) at least 10% of the aggregate voting power of the
Company's outstanding capital stock, this Agreement will terminate, and Heller
and its Approved Transferees, if any, will have no continuing rights hereunder.
6. General. The agreement set forth in this letter will be governed and
-------
enforced in accordance with the laws of the State of Delaware, without having
effect to that State' principles of conflicts of laws. The rights granted to
Heller hereunder may not be assigned, transferred or sold in connection with the
sale of voting securities of the Company, other than Heller Financial, Inc., a
Delaware corporation ("HFI"), or to a wholly-owned subsidiary of Heller or HFI
(collectively, the "Approved Transferees"), but shall be solely for the benefit
of Heller (or any Approved Transferee in the event of a transfer thereto) so
long as Heller and its Approved Transferees hold, collectively, not less than
the requisite amount of such securities described in Section 5 above.
---------
7. This letter agreement may be executed in any number of counterparts,
each of which shall constitute an original and all of which together shall
constitute one and the same agreement.
[Signature page follows]
-3-
<PAGE>
The Company's execution of this letter will confirm its acceptance of this
letter as the agreement between the Company and Heller regarding the matters set
forth herein.
Very truly yours,
HELLER EQUITY CAPITAL CORPORATION
By: /s/ Patrick Pesch
-------------------------------------
Name: Patrick Pesch
-----------------------------------
Title: Senior Vice President
----------------------------------
Accepted and agreed to as of the date of this letter.
CAREER EDUCTION CORPORATION
By: /s/ William A. Klettle
-------------------------------------
Name: William A. Klettle
-----------------------------------
Title: Senior Vice President CEO
----------------------------------
-4-
<PAGE>
Exhibit 21
Career Education Corporation
List of Subsidiaries:
1- CEC Management, Inc., an Illinois corporation
2- Market Direct, Inc., an Illinois corporation, d/b/a Market Direct
3- Al Collins Graphic Design School, Ltd., a Delaware corporation, d/b/a/ Al
Collins Graphic Design School
4- Allentown Business School, Ltd., a Delaware corporation, d/b/a/ Allentown
Business School
5- Brooks College, Ltd., a Delaware corporation, d/b/a Brooks College
6- Brown Institute, Ltd., a Delaware corporation, d/b/a Brown Institute
7- International Academy of Merchandising & Design, Ltd., an Illinois
corporation, d/b/a IAMD Chicago
8- International Academy of Merchandising & Design, Inc., a Florida
corporation, d/b/a IAMD-Tampa
9- IAMD, Limited (holding company), a Delaware corporation
10- International Academy of Design - Toronto, an Ontario corporation, d/b/a
IAOD-Toronto
11- International Academy of Design - Montreal, a Quebec corporation, d/b/a
IAOD-Montreal
12- International Academy of Merchandising and Design, (Canada), Ltd., an
Ontario corporation
13- The Katharine Gibbs School of Norwalk, Inc., a Connecticut corporation,
d/b/a Gibbs College
14- K-III KG Corporation - Massachusetts, a Massachusetts corporation, d/b/a
Katharine Gibbs School-Massachusetts
15- The Katharine Gibbs School of Montclair, Inc., a New Jersey corporation,
d/b/a Katharine Gibbs School-Montclair
16- The Katharine Gibbs School of Piscataway, Inc., a New Jersey corporation,
d/b/a Katharine Gibbs School-Piscataway
17- The Katharine Gibbs Corporation - Melville, a New York corporation, d/b/a/
Katharine Gibbs-Melville
18- The Katharine Gibbs Corporation - New York, New York corporation, d/b/a
Katharine Gibbs School-New York
19- The Katharine Gibbs School of Providence, Inc., a Rhode Island corporation,
d/b/a Katharine Gibbs School-Providence
20- The Katharine Gibbs Schools, Inc., a Delaware corporation
21- School of Computer Technology, Inc., a Delaware corporation, d/b/ Computer
Tech & International Culinary Academy
22- SCSCA Acquisition, Ltd., a Delaware corporation
23- Western Culinary Institute, Inc., a Delaware corporation, d/b/a Western
Culinary Institute
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND> This schedule contains summary financial information extracted from
consolidated financial statements and is qualified in its entirety by reference
to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> YEAR YEAR
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1996
<PERIOD-START> JAN-01-1997 JAN-01-1996
<PERIOD-END> DEC-31-1997 DEC-31-1996
<CASH> 18906 7798
<SECURITIES> 0 0
<RECEIVABLES> 10812 2159
<ALLOWANCES> 1516 455
<INVENTORY> 634 213
<CURRENT-ASSETS> 36602 11832
<PP&E> 52818 22517
<DEPRECIATION> 7263 2957
<TOTAL-ASSETS> 117617 36208
<CURRENT-LIABILITIES> 22796 10453
<BONDS> 0 0
37071 13691
0 0
<COMMON> 9 8
<OTHER-SE> (7413) (2597)
<TOTAL-LIABILITY-AND-EQUITY> 117617 36208
<SALES> 0 0
<TOTAL-REVENUES> 82598 33580
<CGS> 0 0
<TOTAL-COSTS> 80283 31160
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 1400 760
<INTEREST-EXPENSE> 3108 717
<INCOME-PRETAX> (793) 1703
<INCOME-TAX> (331) 208
<INCOME-CONTINUING> (462) 1495
<DISCONTINUED> 0 0
<EXTRAORDINARY> (418) 0
<CHANGES> 0 0
<NET-INCOME> (880) 1495
<EPS-PRIMARY> (12.12) 0.18
<EPS-DILUTED> (12.12) 0.13
</TABLE>
