<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 26, 1998
REGISTRATION NO. 333-37601
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
AMENDMENT NO. 3
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
----------------
CAREER EDUCATION CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 610000 39-3932190
(STATE OR OTHER (PRIMARY STANDARD (I.R.S. EMPLOYER
JURISDICTION OF INDUSTRIAL IDENTIFICATION NO.)
INCORPORATION OR CLASSIFICATION CODE NO.)
ORGANIZATION)
2800 WEST HIGGINS ROAD, SUITE 790, HOFFMAN ESTATES, ILLINOIS 60195, (847) 781-
3600
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
----------------
JOHN M. LARSON
PRESIDENT AND CHIEF EXECUTIVE OFFICER
CAREER EDUCATION CORPORATION
2800 WEST HIGGINS ROAD, SUITE 790, HOFFMAN ESTATES, ILLINOIS 60195, (847) 781-
3600
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
COPIES TO:
LAWRENCE D. LEVIN, ESQ DENNIS V. OSIMITZ, ESQ.
MARK D. WOOD, ESQ. SIDLEY & AUSTIN
KATTEN MUCHIN & ZAVIS ONE FIRST NATIONAL PLAZA
525 WEST MONROE STREET, SUITE 1600 CHICAGO, ILLINOIS 60603
CHICAGO, ILLINOIS 60661 (312) 853-7000
(312) 902-5200
----------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box: [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering: [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering: [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box: [_]
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO
SECTION 8(A), MAY DETERMINE.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED JANUARY 26, 1998
2,850,000 Shares
LOGO
Common Stock
-----------
The 2,850,000 shares of Common Stock, $.01 par value (the "Common Stock"), of
Career Education Corporation ("CEC" or the "Company") offered hereby (the
"Offering") are being offered by the Company. Prior to the Offering,
there has been no public market for the Common Stock. It is anticipated
that the initial public offering price will be between $13.00 and
$15.00 per share. For information relating to the factors
considered in determining the initial offering price to the
public, see "Underwriting."
The Common Stock has been approved for listing on the Nasdaq National Market
under the symbol "CECO," subject to official notice of issuance.
FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED IN CONNECTION
WITH AN INVESTMENT IN THE COMMON STOCK, SEE "RISK FACTORS" ON PAGE 8 HEREIN.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS COMPANY(1)
---------- ------------- -----------
<S> <C> <C> <C>
Per Share.................................. $ $ $
Total (2).................................. $ $ $
</TABLE>
(1) Before deduction of expenses payable by the Company estimated at
$2,200,000.
(2) The Company has granted the Underwriters an option, exercisable for 30 days
from the date of this Prospectus, to purchase a maximum of 427,500
additional shares to cover over-allotments of shares. If the option is
exercised in full, the total Price to Public will be $ , Underwriting
Discounts and Commissions will be $ , and Proceeds to Company will be
$ .
The shares of Common Stock are offered by the several Underwriters when, as
and if delivered to and accepted by the Underwriters and subject to their right
to reject orders in whole or in part. It is expected that the shares of Common
Stock will be ready for delivery on or about , 1998, against payment in
immediately available funds.
CREDIT SUISSE FIRST BOSTON SALOMON SMITH BARNEY
Prospectus dated , 1998
<PAGE>
CAREER
EDUCATION
CORPORATION
BUILDING
THE FUTURE
OF PRIVATE
POST-
SECONDARY
EDUCATION
PHOTOGRAPH OF FIVE STUDENTS FROM ALLENTOWN BUSINESS SCHOOL WALKING ON CAMPUS.
COMPUTER TECHNOLOGIES
VISUAL COMMUNICATION
AND DESIGN TECHNOLOGIES
BUSINESS STUDIES
CULINARY ARTS
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE SECURITIES
OFFERED HEREBY, INCLUDING OVER-ALLOTMENT, STABILIZING TRANSACTIONS, SYNDICATE
SHORT COVERING TRANSACTIONS AND PENALTY BIDS. FOR A DESCRIPTION OF THESE
ACTIVITIES, SEE "UNDERWRITING."
2
<PAGE>
[FRONT COVER GATEFOLD--LEFT]
PICTURE OF THE FRONT OF AN OFFICE BUILDING BUSINESS STUDIES
("NUMBER 126") WHICH HOUSES THE KATHARINE
GIBBS SCHOOL IN BOSTON, MASSACHUSETTS.
The philosophy of our Business
Studies program is to provide
quality education that is
relevant to the job market,
implemented by an experienced
and dedicated staff, and geared
to those seeking a solid
foundation in knowledge and
skills. Our schools are driven
to developing people for career
positions using hands-on
teaching techniques, externship
positions and the latest
technologies in a variety of
fields, including the
following: Accounting, Business
Administration, Hotel and
Restaurant Management,
Marketing, Office Management,
Secretarial, Travel, and Legal
Executive Assistant.
PICTURE OF TWO STUDENTS AND ONE INSTRUCTOR
AT ONE OF THE COMPANY'S SCHOOLS. THEY ARE
ALL LOOKING AT A COMPUTER SCREEN.
PICTURE OF TWO PEOPLE AT A DESK IN A TRAVEL
AGENT'S OFFICE WHERE STUDENTS ARE TAUGHT
ABOUT TRAVEL-RELATED BUSINESS.
. Allentown Business School .
. The Katharine Gibbs School .
PICTURE OF A KITCHEN CLASSROOM AT WESTERN
CULINARY INSTITUTE, WITH SEVERAL CHEFS. IN
THE FOREGROUND A CHEF INSTRUCTOR IS TEACHING
A STUDENT.
PICTURE OF A STUDENT FROM WESTERN CULINARY
INSTITUTE DECORATING A CAKE.
CULINARY ARTS
The core of our Culinary Arts
program is the hands-on
teaching of cooking and
baking skills as well as the
theoretical knowledge that
must underlie competency in
both fields. It endeavors to
present students the
different styles and
experiences of the school's
chef instructors, and to
introduce students to a wide
variety of equipment, all of
which will prepare them for
the area of the food service
or hospitality industry they
choose to enter.
. Western Culinary
Institute .
. International Culinary
Academy .
(a division of School of
Computer Technology)
AN AERIAL PHOTO OF THE PORTLAND AREA WHERE
WESTERN CULINARY INSTITUTE IS LOCATED.
<PAGE>
[FRONT COVER GATEFOLD--RIGHT]
COMPUTER TECHNOLOGIES
PICTURE OF A BUILDING WHICH
HOUSES THE SCHOOL OF
COMPUTER TECHNOLOGY.
Our Computer Technologies
programs emphasize the
technical training,
development, and preparation
necessary for our graduates to
succeed in the various computer
technology fields. Whether it
is Computer Programming,
Computer Technical Support,
Computer Information
Management, Electronics,
Network Management, PC/LAN or
PC/Net, active learning and
real-time training are a
primary emphasis in our
facilities.
PICTURE OF A STUDENT IN A
COMPUTER TECHNOLOGIES
PROGRAM AT ONE OF THE
COMPANY'S SCHOOLS EXAMINING
SEVERAL CIRCUIT BOARDS,
WHILE AN INSTRUCTOR POINTS
TO AN AREA ON THE CIRCUIT
BOARD.
PICTURE OF TWO STUDENTS WHO
STUDY COMPUTER TECHNOLOGIES
AT ONE OF THE COMPANY'S
SCHOOLS AND AN INSTRUCTOR
IN FRONT OF COMPUTERS. THE
INSTRUCTOR IS POINTING AT A
COMPUTER SCREEN.
. Al Collins Graphic Design
School .
PICTURE OF A STUDENT IN A . Allentown Business School .
VISUAL COMMUNICATIONS
PROGRAM AT ONE OF THE
COMPANY'S SCHOOLS WORKING . Brooks College .
AT A DRAWING EASEL.
. Brown Institute .
. International Academy of
Merchandising and Design .
PICTURE OF A STUDENT IN A
VISUAL COMMUNICATIONS
PROGRAM AT ONE OF THE
COMPANY'S SCHOOLS BEHIND A
VIDEO CAMERA WITH OTHER
STUDENTS AND BROADCASTING
EQUIPMENT IN THE
BACKGROUND.
PICTURE OF AN OFFICE VISUAL COMMUNICATION AND
BUILDING WHICH HOUSES ONE DESIGN TECHNOLOGIES
OF THE INTERNATIONAL
ACADEMY OF MERCHANDISING &
DESIGN SCHOOLS
The fields of Visual
Communication and Design
Technologies, i.e., CADD,
Fashion Design and
Merchandising,
Interactive/Digital Media,
Interior Design, Internet,
Package Design, Print Media
and Broadcasting, are
pervasive in our society.
With a focus on providing
thorough knowledge of the
techniques used to create and
produce all forms of Visual
Communication, our schools
prepare today's graduates to
succeed in these creative
fields. What keeps our
students at the leading edge
of these technologies is
their own creativity and
imagination, coupled with the
solid training offered by our
schools.
. Al Collins Graphic Design
School .
. Allentown Business School .
. Brooks College .
. Brown Institute .
. International Academy of
Merchandising and Design .
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and the Company's Consolidated Financial Statements and Notes
thereto included elsewhere in this Prospectus. Prospective investors should
consider carefully, among other things, the information set forth under "Risk
Factors" in this Prospectus. Unless otherwise indicated, all information in
this Prospectus (i) reflects the consummation of the Transactions (as defined
under "The Transactions") and (ii) assumes no exercise of the Underwriters'
over-allotment option. See "The Transactions" and "Description of Capital
Stock." As used in this Prospectus, unless the context indicates otherwise, the
terms "Company" and "CEC" refer to Career Education Corporation and its
subsidiaries, including all of their schools and campuses; the term "school"
means a campus or group of campuses known by a single brand name (such as The
Katharine Gibbs Schools or Al Collins Graphic Design School); the term "campus"
means a single location of any school (such as the New York campus of The
Katharine Gibbs Schools or the Al Collins Graphic Design School in Tempe,
Arizona); and the term "institution" means a main campus and its additional
locations, as such are defined under regulations of the United States
Department of Education.
THE COMPANY
Career Education Corporation (the "Company" or "CEC") is one of the largest
providers of private, for-profit postsecondary education in North America, with
approximately 13,000 students enrolled as of October 31, 1997. CEC operates
nine schools, with 18 campuses located in 13 states and two Canadian provinces.
These schools enjoy long operating histories and offer a variety of bachelor's
degree, associate degree and non-degree programs in career-oriented disciplines
within the Company's core curricula of (i) computer technologies, (ii) visual
communication and design technologies, (iii) business studies and (iv) culinary
arts.
CEC was founded in January 1994 by John M. Larson, the Company's President
and Chief Executive Officer, who has over 23 years of experience in the career-
oriented education industry. The Company was formed to capitalize on
opportunities in the large and highly fragmented postsecondary school industry.
Since its inception, CEC has completed nine acquisitions. The Company has
acquired schools that it believes possess strong curricula, leading reputations
and broad marketability but have been undermanaged from a marketing and
financial standpoint. The Company seeks to apply its expertise in operations,
marketing and curricula development, as well as its financial strength, to
improve the performance of these schools. The schools acquired by the Company
and their improved populations are summarized in the following table:
<TABLE>
<CAPTION>
STUDENT POPULATION
AT OCTOBER 31,
YEAR DATE ------------------
SCHOOL FOUNDED ACQUIRED 1996 1997 % INCREASE
------ ------- -------- --------- --------- ----------
<S> <C> <C> <C> <C> <C>
AL COLLINS GRAPHIC DESIGN SCHOOL
("Collins") 1978 1/94 891 1,008 13%
BROOKS COLLEGE ("Brooks") 1970 6/94 960 1,112 16
ALLENTOWN BUSINESS SCHOOL
("Allentown") 1869 7/95 781 927 19
BROWN INSTITUTE ("Brown") 1946 7/95 1,452 1,575 8
WESTERN CULINARY INSTITUTE
("Western Culinary") 1983 10/96 453 467 3
SCHOOL OF COMPUTER TECHNOLOGY
("SCT") (2 campuses) 1967 2/97 940 1,053 12
THE KATHARINE GIBBS SCHOOLS
("Gibbs") (7 campuses) 1911 5/97 2,982 3,556 19
INTERNATIONAL ACADEMY OF MER-
CHANDISING & DESIGN (U.S.)
("IAMD-U.S.") (2 campuses) 1977 6/97 1,202 1,518 26
INTERNATIONAL ACADEMY OF MER-
CHANDISING & DESIGN (CANADA)
("IAMD-Canada") (2 campuses) 1983 6/97 1,228 1,776 45
</TABLE>
3
<PAGE>
The Company's success in completing acquisitions and improving the financial
performance of acquired schools has enabled it to achieve rapid growth. Net
revenue has increased from $7.5 million in 1994 to $33.6 million in 1996. For
the first nine months of 1997, net revenue was $50.8 million. 1996 pro forma
net revenue, reflecting the results of operations of schools the Company
acquired in 1997, would have been $87.5 million.
BUSINESS AND OPERATING STRATEGY
The Company was founded based upon a business and operating strategy which it
believes has enabled it to achieve significant improvements in the performance
of its acquired schools. The Company believes this strategy will enable it to
continue to capitalize on favorable economic, demographic and social trends
which are driving demand for career-oriented education. These trends include
increasing technological requirements for entry-level jobs, growing numbers of
high school students and greater recognition of the value of higher education.
The key elements of this strategy are as follows:
. Focusing on Core Curricula. The Company's schools offer educational
programs principally in four career-related fields of study identified by
the Company as areas with highly interested and motivated students,
strong entry-level employment opportunities and ongoing career and salary
advancement potential.
. Adapting and Expanding Educational Programs. Each of the Company's
schools strives to meet the changing needs of its students and the
employment markets by regularly refining and adapting its existing
educational programs, selectively duplicating successful programs from
other CEC schools and introducing entirely new programs of study.
. Direct Response Marketing. The Company seeks to increase school
enrollment and profitability through intensive local, regional and
national direct response marketing programs specifically crafted for each
school to maximize that school's market penetration.
. Improving Student Retention. The Company focuses substantial attention on
student retention, as modest improvements in student retention rates can
result in meaningful increases in school revenue and profitability. The
Company strives to improve retention by treating students as valued
customers.
. Emphasizing Employment of Graduates. The Company devotes significant
resources to graduate placement efforts because it believes that
maintaining high employment rates for graduates of its schools enhances
the overall reputation of the schools and their ability to attract new
students.
. Making Capital Investments. The Company makes substantial investments in
its facilities and equipment to attract, retain and prepare students for
the increasing technical demands of the workplace.
. Emphasizing School Management Autonomy and Accountability. The Company
provides significant operational autonomy and appropriate performance-
based incentives to its campus-level managers. The Company believes these
policies foster among these managers an important sense of personal
responsibility for achieving campus performance objectives and provide
the Company with a significant advantage in recruiting and retaining
highly-motivated, entrepreneurial individuals.
The Company believes that its application of this strategy has been a major
factor in improving operations at the four schools owned by the Company as of
July 1995: Allentown, Brooks, Brown and Collins. At these schools, the
aggregate student population has increased over 38% over the past two years,
from 3,347 at October 31, 1995 to 4,622 at October 31, 1997. In addition,
approximately 88% of the available 1996 graduates of these four schools
obtained employment related to their program of study within six months of
graduation.
4
<PAGE>
GROWTH STRATEGY
The Company believes it can achieve superior long-term growth in revenue and
profitability through:
. Expanding Existing Operations. Through the execution of its business and
operating strategy, the Company intends to achieve continued growth at
its existing campuses.
. Acquiring Additional North American Schools. The Company intends to
continue to acquire schools in the U.S. and Canada that have, among other
things, leading reputations, broad marketability and demonstrated
compliance with regulatory requirements and accreditation standards. The
Company plans to acquire schools which it believes have been undermanaged
and will benefit from the implementation of the Company's business and
operating strategy.
. Establishing New Campuses. The Company expects to open new campuses, most
likely as additional locations of existing institutions, to capitalize on
new markets or geographic regions that exhibit strong enrollment
potential and/or the opportunity to establish a successful school
operation in one of the Company's core curricula areas.
. Entering New Service Areas. The Company plans to develop new services,
such as distance learning (offering educational products and services for
working adults through video, Internet and other distribution channels)
and educational publishing (producing and marketing educational
publications), which the Company believes offer strong long-term growth
potential. Additionally, the Company plans to expand its contract
training operations (providing customized training on a contract basis
for business and government organizations).
. Expanding Internationally. The Company may also acquire or establish
operations outside North America where the Company believes significant
opportunities exist.
CEC was incorporated in Delaware on January 5, 1994. CEC's principal
executive offices are located at 2800 West Higgins Road, Suite 790, Hoffman
Estates, Illinois 60195 and its telephone number is (847) 781-3600. The address
of the Company's web site is http://www.careered.com. Web sites for most of the
Company's schools can be accessed through hyperlinks at the Company's web site.
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered............... 2,850,000 shares
Common Stock to be outstanding
after the Offering................ 6,729,775 shares (1)
Use of proceeds.................... Repayment of certain indebtedness. See "Use
of Proceeds."
Proposed Nasdaq National Market
symbol............................ CECO
</TABLE>
- --------
(1) Assumes an initial public offering price of $14.00 per share and excludes
(i) 26,262 shares of Common Stock issuable upon exercise of a warrant
issued to The Provident Bank, a former lender to the Company (the
"Provident Warrant"), (ii) 498,746 shares of Common Stock issuable upon the
exercise of outstanding options (including 257,100 shares of Common Stock
issuable upon the exercise of options granted on the date of this
Prospectus to certain directors, officers and employees) and (iii) an
aggregate of 1,050,306 shares of Common Stock reserved for issuance under
the Career Education Corporation 1995 Stock Option Plan, the Career
Education Corporation 1998 Employee Incentive Compensation Plan, the Career
Education Corporation 1998 Non-Employee Directors' Stock Option Plan and
the Career Education Corporation 1998 Employee Stock Purchase Plan
(collectively, the "Stock Plans"). See "Management--Stock Plans" and
"Description of Capital Stock."
5
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL AND OTHER DATA
The following table sets forth certain consolidated financial and other
operating data for the Company. This information should be read in conjunction
with the Consolidated Financial Statements and Notes thereto appearing
elsewhere in this Prospectus. See "Unaudited Pro Forma Condensed Consolidated
Financial Data" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, DECEMBER 31, 1996 SEPTEMBER 30, SEPTEMBER 30, 1997
----------------------------- ------------------ ------------------- -------------------
PRO PRO
FORMA AS FORMA AS
PRO ADJUSTED PRO ADJUSTED
1994(1) 1995 1996 FORMA(2) (2)(3) 1996 1997 FORMA(2) (2)(3)
---------- -------- -------- -------- -------- -------- --------- --------- --------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Revenue:
Tuition and
registration fees,
net................... $ 5,794 $ 16,330 $ 29,269 $79,640 $79,640 $ 19,299 $ 45,615 $ 68,172 $68,172
Other, net............. 1,692 3,066 4,311 7,836 7,836 3,130 5,152 6,464 6,464
-------- -------- -------- ------- ------- -------- --------- -------- -------
Total net revenue.... 7,486 19,396 33,580 87,476 87,476 22,429 50,767 74,636 74,636
Depreciation and
amortization (4)....... 980 1,330 2,134 10,517 10,517 1,481 5,000 8,199 8,199
Income (loss) from
operations............. (1,455) 404 2,420 (437) (437) 393 (354) (1,034) (1,034)
Income (loss) before
extraordinary item..... (1,589) 69 1,495 (5,041) (2,269) 21 (1,392) (4,431) (2,360)
Extraordinary loss (5).. -- -- -- -- -- -- (418) -- --
-------- -------- -------- ------- ------- -------- --------- -------- -------
Net income (loss)....... (1,589) 69 1,495 (5,041) (2,269) 21 (1,810) (4,431) (2,360)
======== ======== ======== ======= ======= ======== ========= ======== =======
Income (loss) before
extraordinary item
attributable to common
stockholders (6)....... (1,982) (804) 137 (5,041) (2,269) (995) (3,563) (4,460) (2,389)
======== ======== ======== ======= ======= ======== ========= ======== =======
Net income (loss)
attributable to common
stockholders (6)....... (1,982) (804) 137 (995) (3,981)
======== ======== ======== ======== =========
Pro forma income (loss)
before extraordinary
item attributable to
common stockholders
(7).................... $ 1,495 $(5,041) $(2,269) $ 21 $ (1,421) $ (4,460) $(2,389)
======== ======= ======= ======== ========= ======== =======
Pro forma income (loss)
before extraordinary
item per share
attributable to common
stockholders (7)(8).... $ (0.40) $ (0.42)
======= =======
OTHER DATA:
EBITDA (9).............. $ (475) $ 1,734 $ 4,554 $10,080 $10,080 $ 1,874 $ 4,646 $ 7,165 $ 7,165
EBITDA margin (9)....... (6.3)% 8.9% 13.6% 11.5% 11.5% 8.4% 9.2% 9.6% 9.6%
Cash flow provided by
(used in):
Operating activities... (1,000) 235 5,275 600 (6,274)
Investing activities... (2,372) (3,478) (9,518) (952) (39,733)
Financing activities... 6,014 4,566 8,076 (509) 43,650
Capital expenditures,
net.................... 153 897 1,231 915 2,010
Student population (10). 1,131 3,347 4,537 10,889 3,533 10,951 10,951
Number of campuses (11). 2 4 5 18 4 18 18
<CAPTION>
SEPTEMBER 30, 1997
------------------------------
PRO
FORMA AS
PRO ADJUSTED
ACTUAL FORMA(12) (12)(13)
--------- --------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents..................................................... $ 5,448 $ 5,448 $ 9,670
Working capital............................................................... 1,402 1,402 5,624
Total assets.................................................................. 103,369 103,369 107,591
Long-term debt, net of current maturities..................................... 46,892 46,892 16,207
Redeemable preferred stock and warrants....................................... 34,027 289 289
Total stockholders' investment................................................ (1,774) 31,964 66,871
</TABLE>
6
<PAGE>
- --------
(1) Commencing January 5, 1994, the date of the Company's incorporation.
(2) Gives effect to the Company's acquisitions of Western Culinary, SCT, Gibbs,
IAMD-U.S. and IAMD-Canada and the Transactions as if they had occurred at
the beginning of each period presented. See "Unaudited Pro Forma Condensed
Consolidated Financial Data."
(3) Gives effect to the sale of 2,850,000 shares of Common Stock offered
hereby, at an assumed initial public offering price of $14.00 per share,
and the application of the estimated net proceeds therefrom as described in
"Use of Proceeds," as if they had occurred as of the beginning of each
period presented. See "Unaudited Pro Forma Condensed Consolidated Financial
Data."
(4) Amount includes depreciation of property and equipment, amortization of
goodwill, student contracts and covenants not to compete and excludes the
amortization of debt discount and deferred financing costs.
(5) Represents the extraordinary loss of $651, net of a $233 tax benefit,
resulting from the early extinguishment of debt during the nine months
ended September 30, 1997. See Note 4 of the Notes to the Company's
Consolidated Financial Statements.
(6) Includes reductions to income (loss) before extraordinary item for
dividends paid or added to the redemption value of preferred stock, and the
accretion to redemption value of preferred stock and warrants. See Note 2
of the Notes to the Company's Consolidated Financial Statements.
(7) For the year ended December 31, 1996 and the nine months ended September
30, 1996 and 1997, pro forma income (loss) before extraordinary item is
derived by eliminating the effect of dividends paid or accrued on preferred
stock and the accretion to redemption value of preferred stock and warrants
(to be converted or exercised in connection with the Offering) from
historical income (loss) before extraordinary item attributable to common
stockholders.
(8) Pro forma as adjusted weighted average number of common and common stock
equivalent shares outstanding totalling 5,649,336 and 5,641,861 at December
31, 1996 and September 30, 1997, respectively, includes (i) 2,200,000 and
2,191,786 shares, for the respective periods, of Common Stock issued in the
Offering at an assumed initial public offering price of $14.00 in order to
repay indebtedness as described in "Use of Proceeds," as if the Offering
had occurred as of January 1, 1996 and (ii) 2,521,857 shares, for both
periods, of Common Stock to be issued upon the Preferred Stock Conversion,
assuming an initial public offering price of $14.00 per share. See "The
Transactions" and "Use of Proceeds."
(9) For any period, EBITDA equals earnings before interest expense, taxes,
depreciation and amortization (including amortization of debt discount and
deferred financing costs), and EBITDA margin equals EBITDA as a percentage
of net revenue. EBITDA and EBITDA margin are presented because the Company
believes they allow for a more complete analysis of the Company's results
of operations. EBITDA and EBITDA margin should not be considered as
alternatives to, nor is there any implication that they are more meaningful
than, any measure of performance or liquidity as promulgated under
Generally Accepted Accounting Principles ("GAAP").
(10) Represents the total number of students attending the Company's schools
(a) in the case of each full year, as of October 31, or (b) for the nine
months ended September 30, 1996 and 1997, as of September 30.
(11) Represents the total number of campuses operated by the Company as of the
end of the period.
(12) Gives effect to the Transactions.
(13) As adjusted to give effect to the sale of 2,850,000 shares of Common Stock
offered hereby at an assumed initial public offering price of $14.00 per
share, after deducting estimated underwriting discounts and commissions
and offering expenses, and the application of the net proceeds therefrom
as described in "Use of Proceeds."
7
<PAGE>
RISK FACTORS
In addition to the other information contained in this Prospectus, the
following risk factors should be considered carefully in evaluating the
Company and its business before purchasing any shares of Common Stock offered
hereby. This Prospectus contains certain forward-looking statements that are
based on the beliefs of, as well as assumptions made by and information
currently available to, the Company's management. The words "believe,"
"anticipate," "intend," "estimate," "expect" and similar expressions are
intended to identify such forward-looking statements, but are not the
exclusive means of identifying such statements. Such statements reflect the
current views of the Company or its management and are subject to certain
risks, uncertainties and assumptions, including, but not limited to, those set
forth in the following Risk Factors. Should one or more of these risks or
uncertainties materialize, or should underlying assumptions prove incorrect,
the Company's actual results, performance or achievements in 1998 and beyond
could differ materially from those expressed in, or implied by, such forward-
looking statements. The Company undertakes no obligation to release publicly
any revisions to any such forward-looking statements that may reflect events
or circumstances after the date of this Prospectus.
SUBSTANTIAL DEPENDENCE ON STUDENT FINANCIAL AID; POTENTIAL ADVERSE EFFECTS OF
REGULATION
Students attending the Company's schools finance their education through a
combination of family contributions, individual resources (including earnings
from full or part-time employment) and government-sponsored financial aid. The
Company estimates that over 71% of the students at its U.S. schools receive
some government-sponsored (federal or state) financial aid. For the 1996-97
award year (July 1, 1996 to June 30, 1997), approximately 81% of the Company's
U.S. tuition and fee revenue (on a cash basis) was derived from some form of
such financial aid received by the students of its schools. In addition,
students attending IAMD-Canada receive government-sponsored financial aid. A
reduction in U.S. or Canadian government funding levels could lead to lower
enrollments at the Company's schools and require the Company to seek
alternative sources of financial aid for students enrolled at its schools. If
student enrollments are lowered or such alternative sources cannot be
arranged, the Company's business, results of operations and financial
condition would be adversely affected.
Potential Adverse Effects of Failure to Comply with U.S. Financial Aid
Regulatory Requirements
The Company and its U.S. schools are subject to extensive regulation by
federal and state governmental agencies and accrediting bodies. In particular,
the Higher Education Act of 1965, as amended (the "HEA"), and the regulations
promulgated thereunder by the United States Department of Education (the
"DOE") subject the Company's U.S. schools to significant regulatory scrutiny
on the basis of numerous standards that schools must satisfy in order to
participate in the various federal student financial assistance programs under
Title IV of the HEA (the "Title IV Programs"). Under the HEA and its
implementing regulations, certain of these standards must be complied with on
an institutional basis. For purposes of these standards, the regulations
define an institution as a main campus and its additional locations, if any.
Under this definition, each of the Company's U.S. campuses is a separate
institution, except for The Katharine Gibbs School in Piscataway, New Jersey,
which is an additional location of The Katharine Gibbs School in Montclair,
New Jersey ("Gibbs-Montclair"), and the School of Computer Technology in
Fairmont, West Virginia, which is an additional location of the School of
Computer Technology in Pittsburgh, Pennsylvania. Among other things, the
standards under the HEA and its implementing regulations with which the
Company's U.S. institutions must comply: (i) require each institution to
maintain a rate of default by its students on federally guaranteed or funded
student loans that is below a specified rate, (ii) limit the proportion of an
institution's revenue that may be derived from the Title IV Programs, (iii)
establish certain financial responsibility and administrative capability
standards, (iv) restrict the ability of an institution or its parent
corporation to engage in certain types of transactions that would result in a
change in ownership and control of that institution or corporation, (v)
prohibit the payment of certain incentives to personnel engaged in student
recruiting and admissions activities related to educational programs eligible
for Title IV Program funds and (vi) require certain short-term educational
programs to achieve stringent completion and placement outcomes in order to be
eligible for Title IV Program funds. Under the rule concerning the
8
<PAGE>
limitation on the amount of revenue that may be derived from the Title IV
Programs, commonly referred to as the "85/15 Rule," an institution would be
disqualified from participation in those programs if more than 85% of its
revenue (on a cash basis) in any fiscal year was derived from the Title IV
Programs. The Company has calculated that, since this requirement took effect
in 1995, none of the Company's U.S. institutions has derived more than 83% of
its revenue (on a cash basis) from the Title IV Programs for any fiscal year,
and that for 1996 the range for the Company's U.S. institutions was from
approximately 52% to approximately 82%. The Company is required to engage an
independent auditor to conduct a compliance review of each U.S. institution's
Title IV Program operations and to submit the results of such audits to the DOE
on an annual basis. The Company has complied with its obligations in this
regard on a timely basis. Based upon the most recent annual compliance audits
of the Company's U.S. institutions and upon other reviews and audits by
independent and governmental entities relating to compliance with the
requirements established by the HEA and the regulations thereunder, the
Company's institutions have been found to be in substantial compliance with the
requirements for participating in the Title IV Programs, and the Company
believes that its institutions continue to be in substantial compliance with
those requirements. However, the DOE has asserted that the Company and certain
of its institutions are not in compliance with certain financial responsibility
requirements, as further discussed in "--Potential Loss of Student Financial
Aid Due to Failure to Meet Financial Responsibility Standards" below.
The HEA mandates specific regulatory responsibilities for each of the
following components of the higher education regulatory triad: (i) the federal
government through the DOE; (ii) the non-governmental accrediting agencies
recognized by the DOE (see "--Potential Loss of Student Financial Aid Due to
Failure to Maintain Accreditations"); and (iii) state postsecondary education
regulatory bodies (see "--Potential Loss of Student Financial Aid Due to
Failure to Maintain State Licenses or Authorizations"). As in the case of the
HEA and its implementing regulations, the regulations, standards and policies
of the accrediting and state education regulatory bodies frequently change, and
changes in, or new interpretations of, applicable laws, regulations, standards
or policies could have a material adverse effect on the schools' accreditation,
authorization to operate in various states, permissible activities, receipt of
funds under the Title IV Programs or costs of doing business. The Company's
failure to maintain or renew any required regulatory approvals, accreditations
or authorizations could have a material adverse effect on the Company's
business, results of operations and financial condition. See "Financial Aid and
Regulation--Federal Oversight of the Title IV Programs--Increased Regulatory
Scrutiny."
In the event of a determination by the DOE that one of the Company's
institutions had improperly disbursed Title IV Program funds, the affected
institution could be required to repay those funds and could be assessed an
administrative fine of up to $25,000 per violation of the Title IV Program
requirements. In addition, the DOE could transfer that institution from the
"advance" system of payment of Title IV Program funds, under which an
institution requests and receives funding from the DOE in advance based on
anticipated needs, to the "reimbursement" system of payment, under which an
institution must disburse funds to students and document their eligibility for
Title IV Program funds before receiving funds from the DOE or from Federal
Family Education Loan ("FFEL") program lenders. Violations of the Title IV
Program requirements could also subject an institution or the Company to
sanctions under the False Claims Act as well as other civil and criminal
penalties. The failure by any of the Company's institutions to comply with
applicable federal, state or accrediting agency requirements could result in
the limitation, suspension or termination of that institution's ability to
participate in the Title IV Programs or the loss of state licensure or
accreditation. Any such event could have a material adverse effect on the
Company's business, results of operations and financial condition. There are no
proceedings for any such purposes pending against any of the Company's
institutions, and the Company has no reason to believe that any such proceeding
is contemplated. See "Financial Aid and Regulation--Federal Oversight of the
Title IV Programs."
Risk That Legislative Action Will Reduce Financial Aid Funding or Increase
Regulatory Burden
The Title IV Programs are subject to significant political and budgetary
pressures. The process of reauthorizing the HEA by the U.S. Congress, which
takes place approximately every five years, has begun and is expected to be
completed in 1998. It is not possible to predict the outcome of the
reauthorization process. Although there is no present indication that the
Congress will decline to reauthorize the Title IV Programs, there can be no
assurance that government funding for the Title IV Programs will continue to be
available or
9
<PAGE>
maintained at current levels. A reduction in government funding levels could
lead to lower enrollments at the Company's schools and require the Company to
seek alternative sources of financial aid for students enrolled in its
schools. Given the significant percentage of the Company's revenue that is
indirectly derived from the Title IV Programs, the loss of or a significant
reduction in Title IV Program funds available to students at the Company's
schools could have a material adverse effect on the Company's business,
results of operations and financial condition.
In addition, there can be no assurance that current requirements for student
and institutional participation in the Title IV Programs will be unchanged or
that one or more of the present Title IV Programs will not be replaced by
other programs with materially different student or institutional eligibility
requirements. Numerous changes to the HEA have been proposed by the DOE and
other parties. Thus, the reauthorization process could result in revisions to
the HEA that increase the compliance burden on the Company's institutions. If
the Company cannot comply with the provisions of the HEA, as revised during
the reauthorization process, or if the cost of such compliance is excessive,
the Company's business, results of operations and financial condition would be
materially adversely affected. The DOE has also circulated proposals that
would impact guaranty agencies and lenders which could impact the access of
the Company's institutions and their students to FFEL program loans. See
"Financial Aid and Regulation--Nature of Federal Support for Postsecondary
Education in the U.S." There can be no assurance that any legislation will not
include statutory language that is different from, or in addition to, that
which is currently being proposed by the DOE or that in the future there will
not be enacted other different legislation amending the HEA or otherwise
impacting institutions, guaranty agencies or lenders.
POTENTIAL LOSS OF STUDENT FINANCIAL AID DUE TO FAILURE TO MEET FINANCIAL
RESPONSIBILITY STANDARDS
The HEA and its implementing regulations establish specific standards of
financial responsibility that must be satisfied in order to qualify for
participation in the Title IV Programs. Under such standards, an institution
must: (i) have an acid test ratio (defined as the ratio of cash, cash
equivalents and current accounts receivable to current liabilities) of at
least 1:1 at the end of each fiscal year, (ii) have a positive tangible net
worth at the end of each fiscal year and (iii) not have a cumulative net
operating loss during its two most recent fiscal years that results in a
decline of more than 10% of the institution's tangible net worth at the
beginning of that two-year period. In order to make this determination, the
DOE requires an institution annually to submit audited financial statements
prepared on an accrual basis.
An institution that is determined by the DOE not to meet any one of the
standards of financial responsibility is nonetheless entitled to participate
in the Title IV Programs if it can demonstrate that it is financially
responsible on an alternative basis. An institution may do so by posting
surety, either in an amount equal to 50% (or greater, as the DOE may require)
of the total Title IV Program funds received by students enrolled at such
institution during the prior year or in an amount equal to 10% (or greater, as
the DOE may require) of such prior year's funds if the institution also agrees
to transfer to the reimbursement system of payment for its Title IV Program
funds. The DOE has interpreted this surety condition to require the posting of
an irrevocable letter of credit in favor of the DOE. In November 1997, the DOE
published new regulations regarding financial responsibility to take effect on
July 1, 1998. See "Financial Aid and Regulation--Federal Oversight of the
Title IV Programs--Financial Responsibility Standards."
In reviewing the Company's acquisitions in the last 14 months, it has been
the DOE's practice to measure financial responsibility on the basis of the
financial statements of both the acquired institutions and the Company. In its
review of the Company's financial statements as filed with the DOE in
connection with the Company's applications for DOE certification of
institutions acquired subsequent to September 1996, the DOE has questioned the
Company's accounting for certain direct marketing costs and its valuation of
courseware and other instructional materials of the Company's recently
acquired institutions.
10
<PAGE>
As a result of the DOE's concerns regarding the Company's accounting for
direct marketing costs and courseware, the DOE has offered the Company the
alternative of posting a letter of credit in favor of the DOE with respect to
each institution the Company has acquired since September 1996. While the
Company continues to disagree with the position taken by the DOE, in order to
obtain certification of the institutions to resume participation in the Title
IV Programs in a timely fashion, the Company has posted and currently has
outstanding letters of credit in the amount of $1.9 million with respect to
Western Culinary, expiring on September 30, 1998; $1.2 million with respect to
SCT, expiring on October 31, 1998; $12.0 million with respect to Gibbs,
expiring on October 31, 1998; and $5.3 million with respect to IAMD-U.S.,
expiring on October 31, 1998.
Further, beginning in October 1997, the DOE has imposed a condition that,
through September 30, 1998, SCT, Gibbs and IAMD-U.S. may not disburse Title IV
Program funds in excess of the total Title IV Program funds that students
enrolled at each institution received in the most recent award year for which
data are available to the DOE, which the DOE has calculated as $1.6 million in
the case of SCT, $16.0 million in the case of Gibbs, and $7.0 million in the
case of IAMD-U.S. In subsequent discussions, the DOE has agreed to consider
potential increases in the Title IV Program funding available to students at
the affected institutions, if the Company so requests and with the
understanding that the Company would secure any such increase in Title IV
Program funding by increasing the applicable letter of credit in an amount
commensurate with the additional Title IV Program funding utilized by such
students. The DOE has advised the Company that the DOE does not include
William D. Ford Federal Direct Loan ("FDL") funds in calculating the amount of
any letter of credit and that FDL funds are not considered in determining the
total Title IV Program funding available to an affected institution. SCT
disburses significant amounts of FDL funds to students enrolled in its
educational programs. The DOE also has stated that, prior to a determination
that the Company satisfies the standards of financial responsibility, the DOE
will not consider applications to resume Title IV Program participation on
behalf of any institutions that the Company may acquire in the future or
applications that seek approval of any action that would expand the Title IV
Program participation of any of the Company's U.S. institutions that already
is certified for such participation. See "--Reliance on and Risks of
Acquisition Strategy," "Business--Growth Strategy" and "Financial Aid and
Regulation--Federal Oversight of the Title IV Programs--Financial
Responsibility Standards."
In accordance with applicable law, the DOE will be required to rescind the
letters of credit and related requirements if the Company and its U.S.
institutions demonstrate that they satisfy the standards of financial
responsibility using accounting treatments that are acceptable to the DOE.
After discussions with the DOE, the Company changed its accounting to
eliminate deferred direct marketing costs from its financial statements. In
the course of further discussions with the DOE, the Company provided
additional information regarding the valuation of courseware and instructional
materials at one of the recently acquired institutions where such valuation
was questioned by the DOE. Based upon these discussions, the Company believes
its valuation of courseware and instructional materials as will be presented
in its 1997 audited financial statements will not impair a determination by
the DOE that the Company is financially responsible. Further, the DOE agreed
that in the conduct of its next review of the financial responsibility of the
Company and its U.S. institutions, the DOE will consider financial information
reflecting the results of the Offering, as well as the 1997 audited financial
statements of each entity. The Company expects to receive net proceeds from
the Offering of approximately $34.9 million. See "Use of Proceeds." The
Company believes that such proceeds and the cash generated from operations
during 1997 will enable the Company and each of its U.S. institutions to
satisfy each of the DOE's standards of financial responsibility, based on
their 1997 audited financial statements and the Company's post-Offering
financial information. Accordingly, the Company intends to seek the DOE's
review of the Company's and its U.S. institutions' audited 1997 financial
statements and the Company's post-Offering financial information on an
expedited basis in the spring of 1998. However, there can be no assurance that
the DOE will expedite its review or of the outcome of such review.
As a result of the DOE's requirement that the Company provide the letters of
credit discussed above, the Company has utilized approximately $20.4 million
of availability under its credit agreement. In addition, the DOE limitation on
the aggregate dollar value of the Title IV Program participation of SCT, Gibbs
and IAMD-
11
<PAGE>
U.S. could significantly reduce the Company's ability to provide financial
assistance to additional students at those institutions, which in turn could
reduce the Company's ability to enroll such additional students. The inability
of the Company to significantly increase aggregate enrollment at SCT, Gibbs or
IAMD-U.S. or to file applications with the DOE for other newly acquired U.S.
institutions to seek Title IV Program participation, could have a material
adverse effect on the Company's business, results of operations and financial
condition and on its ability to generate sufficient liquidity to continue to
fund growth in its operations and purchase other institutions. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operation--Liquidity and Capital Resources."
Under a separate standard of financial responsibility, if an institution has
made late Title IV Program refunds to students in its prior two years, the
institution is required to post a letter of credit in favor of the DOE in an
amount equal to 25% of the total Title IV Program refunds paid by the
institution in its prior fiscal year. Based on this standard, since July 1,
1997, the Company has posted a total of $310,000 in additional letters of
credit with respect to Brown, Collins, Gibbs-Montclair, SCT, Western Culinary
and The Katharine Gibbs School in New York, New York ("Gibbs-New York"). See
"Financial Aid and Regulation--Federal Oversight of the Title IV Programs--
Financial Responsibility Standards."
POTENTIAL LOSS OF STUDENT FINANCIAL AID DUE TO HIGH STUDENT LOAN DEFAULT RATES
The Company is substantially dependent on continued participation by its
institutions in the student loan programs included in the Title IV Programs.
For the 1996-97 award year (July 1, 1996 to June 30, 1997), federally
guaranteed or funded student loans represented approximately 56% of the
Company's U.S. tuition and fee revenue (on a cash basis). Under the HEA, an
institution could lose its eligibility to participate in some or all of the
Title IV Programs if the defaults of its students on their FFEL or FDL loans
exceed specified rates for specified periods of time. An institution's annual
cohort default rate on FFEL or FDL loans, including a "weighted average" cohort
default rate for institutions that participate in both loan programs, is
calculated as the rate at which borrowers scheduled to begin repayment on such
loans in one year default on those loans by the end of the following year. If
an institution's cohort default rate is 25% or greater in any one of the three
most recent federal fiscal years, the DOE may determine that the institution
lacks administrative capability and may place that institution on "provisional
certification" status for up to four years. Provisional certification does not
limit an institution's access to Title IV Program funds, but does subject that
institution to closer review by the DOE and possible summary adverse action if
that institution commits violations of the Title IV Program requirements. If an
institution has cohort default rates of 25% or greater for three consecutive
federal fiscal years, that institution will no longer be eligible to
participate in the FFEL or FDL programs for the remainder of the federal fiscal
year in which the determination of ineligibility is made and for the two
subsequent federal fiscal years. An institution whose cohort default rate for
any federal fiscal year exceeds 40% may have its eligibility to participate in
all of the Title IV Programs limited, suspended or terminated. In addition, if
an institution's cohort default rate for loans under the Federal Perkins Loan
("Perkins") program exceeds 15% for any federal award year, the DOE may
determine that the institution lacks administrative capability and place the
institution on provisional certification status for up to four years. See
"Financial Aid and Regulation--Federal Oversight of the Title IV Programs--
Cohort Default Rates."
None of the Company's institutions has published FFEL or FDL cohort default
rates of 25% or greater for three consecutive federal fiscal years. One of the
Company's institutions, The Katharine Gibbs School, Norwalk, Connecticut
("Gibbs-Norwalk"), has a cohort default rate of 27.4% for federal fiscal year
1995, which is the most recent year for which rates have been published. Two of
the Company's institutions, including Gibbs-Norwalk, have had a cohort default
rate exceeding 25% in one of the last three federal fiscal years for which such
rates have been published. Nine of the Company's institutions have Perkins
cohort default rates in excess of 15% for students who were scheduled to begin
repayment in the 1996-1997 federal award year, the most recent year for which
such rates have been calculated. See "Financial Aid and Regulation--Federal
Oversight of the Title IV Programs--Cohort Default Rates." These nine
institutions collectively accounted for
12
<PAGE>
approximately 59% of the Company's 1996 pro forma net revenue, reflecting the
Company's acquisitions of Western Culinary, SCT, Gibbs, IAMD-U.S. and IAMD-
Canada as if they had occurred as of January 1, 1996 ("1996 Pro Forma Net
Revenue"). The Perkins program cohort default rates for these nine institutions
ranged from 20.7% to 64.3%. Thus, these institutions could, for this reason, be
placed on provisional certification status for all Title IV Program purposes,
which would subject them to closer review by the DOE and possible summary
adverse action if they commit any violation of the Title IV Program
requirements. To date, none of these institutions has been placed on such
status solely for this reason. The Perkins loans disbursed to students in the
Company's institutions in the 1996-97 award year equaled approximately 1% of
the Company's U.S. tuition and fee revenue (on a cash basis). In 1995, the
Gibbs institutions voluntarily chose to discontinue participation in the
Perkins program. IAMD-U.S., SCT and Western Culinary also do not participate in
the Perkins program. The loss of eligibility to participate in any or all of
the Title IV Programs by any of the Company's institutions could have a
material adverse effect on the Company's business, results of operations and
financial condition.
POTENTIAL ADVERSE REGULATORY CONSEQUENCES OF A CHANGE OF OWNERSHIP OR CONTROL
When the Company expands through the acquisition of an institution that is
eligible to participate in the Title IV Programs, that institution undergoes a
"change of ownership" that results in a "change of control," as defined in the
HEA and applicable regulations. In such event, that institution becomes
ineligible to participate in the Title IV Programs and may receive and disburse
only certain previously committed Title IV Program funds to its students until
it has applied for and received from the DOE recertification under the
Company's ownership. Approval of an application for recertification must be
based upon a determination by the DOE that the institution under its new
ownership is in compliance with the requirements of institutional eligibility.
The time required to act on such an application can vary substantially and may
take several months. If an institution is recertified following a change of
ownership, it will be on a provisional basis. Provisional certification does
not limit an institution's access to Title IV Program funds, but does subject
that institution to closer review by the DOE and possible summary adverse
action if that institution commits violations of the Title IV Program
requirements.
Each of the U.S. institutions acquired by the Company has undergone a
recertification review under the Company's ownership and has been recertified
to participate in the Title IV Programs in accordance with the DOE's change of
ownership requirements and procedures. The DOE recertified such institutions
within periods ranging from two and one-half months to five months from the
dates of their respective acquisitions. Of the U.S. institutions that have been
recertified, 13 are presently participating in the Title IV Programs under
provisional certification.
Under the HEA and its implementing regulations, a change of ownership
resulting in a change in control would occur upon the transfer of a controlling
interest in the voting stock of an institution or such institution's parent
corporation. For a corporation such as the Company that is, prior to the
Offering, neither publicly traded nor closely held (as defined under the HEA),
a change of ownership resulting in a change in control would occur if any
person either acquires or ceases to hold at least 25% of such corporation's
total outstanding voting stock and that person gains or loses actual control of
the corporation. With respect to a publicly-traded corporation, which the
Company will be following consummation of the Offering, a change of ownership
resulting in a change in control occurs when there is an event that would
obligate that corporation to file a Current Report on Form 8-K with the
Securities and Exchange Commission (the "Commission") disclosing a change of
control. A change of ownership and control also could require an institution to
reaffirm its state authorization and accreditation. The requirements of state
and accrediting agencies with jurisdiction over the Company's schools vary
widely in this regard. See "Financial Aid and Regulation--Federal Oversight of
the Title IV Programs--Restrictions on Acquiring or Opening Additional Schools
and Adding Educational Programs."
After a review of a description of the Offering submitted by the Company, the
DOE issued a letter stating its determination that the Offering will not
constitute a change of ownership resulting in a change in control under the HEA
or the DOE's regulations. However, if the Offering were determined to
constitute a change of
13
<PAGE>
ownership resulting in a change in control under state and/or accrediting
agency standards, the Company would be required to reestablish the state
authorization and accreditation of each of the affected U.S. campuses. Based
upon its review of applicable state and accrediting agency standards, the
Company does not believe that the Offering will constitute a change of
ownership resulting in a change of control for state authorization or
accreditation purposes, except as identified immediately below. The Offering
will constitute a change of ownership under the standards of the Accrediting
Council for Independent Colleges and Schools ("ACICS"), which provide that a
change from a privately owned corporation to a publicly traded corporation is
considered a change of ownership. As a result, 10 of the Company's U.S.
institutions will be subject to review by ACICS to reaffirm their
accreditation. In addition, the Accrediting Commission of Career Schools and
Colleges of Technology ("ACCSCT") is still considering whether it will treat
the Offering as a change of ownership and may choose to view the Offering as a
substantive change in the existing accreditation of the affected institutions
which would require review by ACCSCT or a change of ownership that would
require the Company to reaffirm the accreditation of the affected institutions.
The Company has been advised that certain states will consider the Offering to
constitute a change of ownership. Therefore, the Company will be required to
reaffirm the state approvals of the institutions operating in those states. A
significant delay in reobtaining or the failure to reobtain state authorization
or accreditation for any or all of the Company's institutions could have a
material adverse effect on the Company's business, results of operations and
financial condition.
Once the Company is deemed to be publicly traded, the potential adverse
implications of a change of ownership resulting in a change in control could
influence future decisions by the Company and its stockholders regarding the
sale, purchase, transfer, issuance or redemption of the Company's capital
stock.
POTENTIAL LOSS OF STUDENT FINANCIAL AID DUE TO FAILURE TO MAINTAIN STATE
LICENSES OR AUTHORIZATIONS
In order to operate and award degrees, diplomas and certificates and to
participate in the Title IV Programs, a campus must be licensed or authorized
to offer its programs of instruction by the relevant agencies of the state in
which such campus is located. Each state has its own standards and requirements
for licensure or authorization, which vary substantially among the states.
Typically, state laws require that a campus demonstrate that it has the
personnel, resources and facilities appropriate to its instructional programs.
Each of the Company's U.S. campuses is licensed or authorized by the relevant
agencies of the state in which such campus is located. If any of the Company's
campuses were to lose its state license or authorization, such campus would
lose its eligibility to participate in the Title IV Programs, which could have
a material adverse effect on the Company's business, results of operations and
financial condition. See "Financial Aid and Regulation--State Authorization."
POTENTIAL LOSS OF STUDENT FINANCIAL AID DUE TO FAILURE TO MAINTAIN
ACCREDITATIONS
In order to participate in the Title IV Programs, an institution must be
accredited by an accrediting agency recognized by the DOE. Accreditation is a
non-governmental process through which an institution submits to qualitative
review by an organization of peer institutions, based on the standards of the
accrediting agency and the stated aims and purposes of the institution. See
"Financial Aid and Regulation--Accreditation." Certain states require
institutions to maintain accreditation as a condition of continued
authorization to grant degrees. Each of the Company's U.S. institutions is
accredited by an accrediting agency recognized by the DOE, namely, ACICS,
ACCSCT, and the Accrediting Commission for Community and Junior
Colleges/Western Association of Schools and Colleges ("WASC/ACCJC"). The HEA
requires accrediting agencies recognized by the DOE to review and monitor many
aspects of an institution's operations and to take appropriate disciplinary
action when the institution fails to comply with the accrediting agency's
standards. Several of the Company's institutions were on reporting status,
requiring them regularly to report their placement or retention results or both
to their accrediting agency, during 1997. However, the Company expects all but
two of these institutions, IAMD-U.S. in Chicago and Brown, to be removed from
such reporting status in 1998. IAMD-U.S. in Chicago has also been and will
continue to be on financial reporting to ACICS during 1998, based solely on the
financial status of IAMD-U.S. in Chicago under its previous ownership. If any
of the Company's campuses were to lose its
14
<PAGE>
accreditation, such campus would lose its eligibility to participate in the
Title IV Programs, which could have a material adverse effect on the Company's
business, results of operations and financial condition. See "Financial Aid
and Regulation--Accreditation."
DEPENDENCE ON CANADIAN FINANCIAL AID; POTENTIAL ADVERSE EFFECTS OF CANADIAN
REGULATION
A substantial majority of the students attending IAMD-Canada receive student
financial assistance from Canadian federal and/or provincial financial aid
programs. Specifically, Canadian students, other than those who reside in the
province of Quebec, are eligible to receive loans under the Canada Student
Loan ("CSL") program. Students who are residents of the province of Quebec are
eligible to receive loans from the Quebec Loans and Bursaries Program
("QLBP"). Students who are residents of the province of Ontario receive
financial assistance under both the CSL program and the Ontario Student Loans
Plan ("OSLP").
To enable its students to receive such financial aid, a Canadian institution
must meet certain eligibility standards to administer these programs and must
comply with extensive statutes, rules, regulations and requirements. In
particular, to maintain its right to administer Ontario student financial
assistance programs, an institution, such as the IAMD-Canada campus in
Toronto, must, among other things, be registered and in good standing under
the Private Vocational Schools Act ("PVSA") and must be approved by the
Ontario Ministry of Education and Training as an eligible institution.
Similarly, among other requirements, IAMD-Canada's institution and programs in
Quebec must continue to be designated by the Quebec Minister of Education (the
"QME") in order for the institution's students to be eligible for financial
aid. Any failure of IAMD-Canada to meet the eligibility standards or comply
with the applicable statutes, rules, regulations and requirements could have a
material adverse effect on the Company's business, results of operations and
financial condition. See "Financial Aid and Regulation--Canadian Regulation."
Additionally, the Company may not operate a private vocational school in the
province of Ontario unless such school is registered under the PVSA. IAMD-
Canada, in Quebec, is subject to the Act Respecting Private Education
("ARPE"). In accordance with ARPE, a company may not operate a private
educational institution without holding a permit issued by the QME for the
institution itself and for the educational services to be provided.
The legislative, regulatory and other requirements relating to student
financial assistance programs in Ontario and Quebec are subject to change by
applicable governments due to political and budgetary pressures, and any such
change may affect the eligibility for student financial assistance of the
students attending IAMD-Canada which, in turn, could materially adversely
affect the Company's business, results of operations and financial condition.
LIMITED OPERATING HISTORY; RISKS OF INTEGRATING ACQUISITIONS
The Company was incorporated in January 1994 and has grown rapidly since
that date. Although all the Company's current schools have been in existence
for substantial periods of time, the Company itself has only a limited
operating history upon which to evaluate the Company and its prospects.
Particularly since 13 of the Company's 18 campuses have been acquired in 1997,
the Company's campuses have operated together, as parts of a combined entity,
for a very limited period of time. Although comprised of individuals with
substantial education industry experience, the Company's senior executive team
has somewhat limited experience in managing the Company's schools. In
addition, the Company's rapid growth could place a strain on the Company's
management, operations, employees and resources. There can be no assurance
that the Company will be able to maintain or accelerate its current growth
rate, effectively manage its expanding operations or achieve planned growth on
a timely or profitable basis. If the Company is unable to manage its growth
effectively, its business, results of operations, financial condition and
regulatory compliance could be materially adversely affected.
15
<PAGE>
The anticipated benefits of the Company's most recent acquisitions may not
be achieved unless the Company successfully integrates these schools into its
operations and is able to effectively manage, market and apply its business
strategy to these schools. The difficulties of integration may initially be
increased by the necessity of integrating personnel with disparate business
backgrounds and corporate cultures. Management's focus on the integration of
acquired companies and on the application of the Company's business strategy
to these schools could interrupt, or cause loss of momentum in, other ongoing
activities of the Company, which could have a material adverse effect on the
Company's business, results of operations, financial condition and regulatory
compliance. See "Business--Overview."
HISTORY OF LOSSES; UNCERTAINTY OF FUTURE PROFITABILITY
Since its inception in 1994, the Company has experienced an operating loss
and net loss for 1994 and the first nine months of 1997; and a net loss
attributable to common stockholders for 1994, 1995 and the first nine months
of 1997. For the year ended December 31, 1996, on a pro forma basis reflecting
the results of operations of schools the Company acquired in 1997, the Company
would have incurred an operating loss, net loss and net loss attributable to
common stockholders. To the extent that the Company earned operating income,
net income or income attributable to common stockholders for any prior
periods, the amounts earned were not substantial. The Company anticipates that
it will report a net loss and a net loss attributable to common stockholders
for the year ending December 31, 1997. See "Selected Historical Consolidated
Financial and Other Data," "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the Company's Consolidated Financial
Statements and the related notes thereto appearing elsewhere in this
Prospectus. The Company may continue to incur losses, and there can be no
assurance as to if or when the Company will be profitable in the future or, if
profitability is achieved, that it can be sustained or that earnings will be
substantial. The Company's future operating results will depend upon a number
of factors, including the other factors discussed in these "Risk Factors."
RELIANCE ON AND RISKS OF ACQUISITION STRATEGY
The Company expects to continue to rely on acquisitions as a key component
of its strategy for growth. The Company from time to time engages in, and is
currently engaged in, evaluations of, and discussions with, possible
acquisition candidates, including evaluations and discussions relating to
acquisitions that may be material in size and/or scope. However, the Company
currently has no agreements or commitments with respect to any acquisitions.
There can be no assurance that the Company will continue to be able to
identify educational institutions that provide suitable acquisition
opportunities or to acquire any such institutions on favorable terms. The
Company's acquisition strategy may also be adversely affected by the DOE's
request that the Company not submit additional applications to resume Title IV
Program participation on behalf of any other institutions that the Company may
acquire prior to a determination by the DOE that the Company satisfies the
standards of financial responsibility. See "--Potential Loss of Student
Financial Aid Due to Failure to Meet Financial Responsibility Standards."
Furthermore, there can be no assurance that any acquired institutions can be
successfully integrated into the Company's operations or be operated
profitably. Acquisitions involve a number of special risks and challenges,
including the diversion of management's attention, assimilation of the
operations and personnel of acquired companies, adverse short-term effects on
reported operating results, possible loss of key employees and difficulty of
presenting a unified corporate image. Continued growth through acquisition may
also subject the Company to unanticipated business or regulatory uncertainties
or liabilities. No assurance can be given that any potential acquisition will
succeed in enhancing the Company's business and will not ultimately have a
material adverse effect on the Company. See "Business--Growth Strategy."
When the Company acquires an existing school, a significant portion of the
purchase price for such school typically will be allocated to goodwill and
intangibles (e.g., non-competition agreements). The Company amortizes goodwill
over a period of 40 years and intangible assets over periods of three to five
years. In addition, the Company's acquisition of a school would constitute a
change in ownership, resulting in a change of control with respect to such
school for purposes of eligibility to participate in the Title IV Programs.
Generally, the
16
<PAGE>
Company intends to acquire schools subject to the condition that they be
recertified promptly for such eligibility by the DOE. The failure of the
Company to manage its acquisition program effectively could have a material
adverse effect on the Company's business, results of operations, financial
condition and regulatory compliance. See "--Potential Adverse Regulatory
Consequences of a Change of Ownership or Control," "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and "Financial
Aid and Regulation--Federal Oversight of the Title IV Programs--Restrictions
on Acquiring or Opening Additional Schools and Adding Educational Programs."
RISKS ASSOCIATED WITH EXPANSION PLANS
Although to date the Company has added new schools only through
acquisitions, in the future the Company expects to develop, open and operate
new schools, most likely as additional locations of existing schools, but
possibly also as entirely separate, freestanding institutions. Establishing
new schools would pose unique challenges and require the Company to make
investments in management, capital expenditures, marketing expenses and other
resources different, and in some cases greater, than those required with
respect to the operation of acquired schools. In addition, in order to open a
new school, the Company would be required to obtain appropriate state or
provincial and accrediting agency authorizations and approvals. In addition,
to be eligible for Title IV Program funding, such schools would need federal
authorization and approvals. In the case of entirely separate, freestanding
U.S. institutions, a minimum of two years' operating history would be required
for them to be eligible for Title IV Program funding. Because the Company has
not yet established a new school, there can be no certainty as to the
Company's ability to be successful in any such endeavor or as to the ultimate
profitability of any such school. Additionally, while the Company expects that
its career-oriented school business will continue to provide the substantial
majority of its revenue in the near term, the Company plans to expand its
contract training business, currently only offered to a limited extent by a
few of the Company's schools, and may also decide to provide other education-
related services, such as distance learning or educational publishing. There
can be no assurance as to what, if any, new service areas the Company will
decide to enter nor as to the Company's ability to succeed in markets beyond
its current career-oriented school business. Any failure of the Company to
effectively manage the operations of newly established schools or service
areas, or any diversion of management's attention from the Company's core
career-oriented school operating activities, could have a material adverse
effect on the Company's business, results of operations, financial condition
and regulatory compliance. See "Business--Growth Strategy" and "Financial Aid
and Regulation--Federal Oversight of the Title IV Programs--Restrictions on
Acquiring or Opening Additional Schools and Adding Educational Programs." The
Company may also consider acquiring or establishing operations outside of the
United States and Canada. See "--Risks of International Operations."
RISK ASSOCIATED WITH CHANGES IN MARKET NEEDS AND TECHNOLOGY
Prospective employers of graduates of the Company's schools increasingly
demand that their entry-level employees possess appropriate technological
skills. Educational programs at these schools, particularly programs in
computer technologies and visual communications, must keep pace with such
shifting requirements. The inability of the Company to adequately respond to
changes in industry requirements for whatever reason could have a material
adverse effect on the Company's business, results of operations and financial
condition. See "Business--Technology."
SEASONALITY
The Company's results of operations fluctuate primarily as a result of
changes in the level of student enrollment at the Company's schools. The
Company's schools experience a seasonal increase in new enrollments in the
fall, traditionally when the largest numbers of new high school graduates
begin postsecondary education. Furthermore, although the Company encourages
year-round attendance at all schools, Brooks has a traditional summer break
for its fashion design, interior design and fashion merchandising students. As
a result of these factors, total student enrollment and net revenue are
typically highest in the fourth quarter (October through
17
<PAGE>
December) and lowest in the second quarter (April through June) of the
Company's fiscal year. The Company's costs and expenses do not, however,
fluctuate as significantly on a quarterly basis. The Company anticipates that
these seasonal trends at its schools will continue. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Seasonality."
HIGHLY COMPETITIVE MARKET
The postsecondary education market is highly competitive. The Company's
schools compete with traditional public and private two-year and four-year
colleges and universities and other proprietary schools. Certain public and
private colleges and universities, as well as other private career-oriented
schools, may offer programs similar to those of the Company's schools.
Although tuition at private nonprofit institutions is, on average, higher than
tuition at CEC's schools, some public institutions are able to charge lower
tuition than CEC's schools, due in part to government subsidies, government
and foundation grants, tax-deductible contributions and other financial
sources not available to proprietary schools. Some of the Company's
competitors in both the public and private sectors have substantially greater
financial and other resources than the Company. See "Business--Competition."
RISKS OF INTERNATIONAL OPERATIONS
Although the Company's operations have thus far been limited to the U.S. and
Canada, the Company intends to explore opportunities outside those markets.
There may be difficulties and complexities associated with any expansion by
the Company into international markets, and there can be no assurance that the
Company's strategies will succeed beyond the U.S. and Canada. International
operations present inherent risks, including currency fluctuations, varying
political and economic conditions, unanticipated changes in regulation, trade
barriers, staffing and management problems and adverse tax consequences. Also,
in expanding internationally, the Company would be required to comply with
different, and potentially more onerous, regulatory requirements. There can be
no assurance that such factors will not have a material adverse effect on the
Company's business, results of operations or financial condition in the
future. See "Business--Growth Strategy."
SIGNIFICANT OWNERSHIP AND INFLUENCE OF PRINCIPAL STOCKHOLDERS
After consummation of the Offering, Heller Equity Capital Corporation
("Heller"), Electra Investment Trust P.L.C. and Electra Associates, Inc.
(collectively, "Electra"), and the current executive officers and directors of
the Company (including persons joining the Company's Board of Directors on the
date of this Prospectus), collectively, will beneficially own approximately
57.2% of the outstanding shares of Common Stock (approximately 53.9% if the
Underwriters' over-allotment option is exercised in full). As a result of such
concentration of ownership, if Heller, Electra and the current executive
officers and directors of the Company or some combination thereof vote
together, they will have the ability to control the policies and affairs of
the Company and corporate actions requiring stockholder approval, including
the election of all members of the Company's Board of Directors. This
concentration of ownership could have the effect of delaying, deferring or
preventing a change of control of the Company, including any business
combination with an unaffiliated party, and could also affect the price that
investors might be willing to pay in the future for shares of Common Stock.
See "Management--Arrangements for Nomination as Director," "Security Ownership
of Certain Beneficial Owners and Management" and "Description of Capital
Stock."
POSSIBLE NEED FOR ADDITIONAL FINANCING TO IMPLEMENT GROWTH STRATEGY
The Company believes that funds from operations, cash on hand and
investments, and borrowings under the $80 million credit agreement, dated as
of May 30, 1997 and amended as of September 25, 1997 (the "Credit Agreement"),
among the Company, as borrower, the lenders named therein and LaSalle National
Bank, as agent, together with the net proceeds of the Offering, will be
adequate to fund the Company's current operating plans for the foreseeable
future. However, the Company may need additional debt or equity financing in
order to carry out its strategy of growth through acquisition. The amount and
timing of financing which the Company may need will vary principally depending
on the timing and size of acquisitions and the sellers' willingness to provide
18
<PAGE>
financing themselves. To the extent that the Company requires additional
financing in the future and is unable to obtain such additional financing, it
may not be able to implement fully its growth strategy. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Liquidity and Capital Resources."
RESTRICTIONS UNDER THE CREDIT AGREEMENT
The Credit Agreement restricts the Company and its subsidiaries' ability to
take certain actions, including incurring additional indebtedness, paying
dividends or making other restricted payments or investments, acquiring new
businesses, issuing subordinated debt, entering new business areas or
substantially altering the Company's current method of conducting business.
Accordingly, the Company may also be restricted in its ability to take certain
actions which the Company's management believes would be desirable and in the
best interests of the Company and its stockholders. The Credit Agreement
additionally requires the Company to maintain specified financial ratios and
satisfy certain financial tests. A breach of any covenants contained in the
Credit Agreement could result in an event of default thereunder and allow the
lenders to accelerate the indebtedness. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources."
DEPENDENCE ON KEY PERSONNEL
The Company's success to date has depended in large part on the skills and
efforts of John M. Larson, the Company's co-founder, President and Chief
Executive Officer, William A. Klettke, the Company's Senior Vice President and
Chief Financial Officer, and the Company's other key personnel. Additionally,
the Company's success depends, in large part, upon its ability to attract and
retain highly qualified faculty, school presidents and administrators and
corporate management. Due to the nature of the Company's business, it may be
difficult to locate and hire qualified personnel, and to retain such personnel
once hired. None of the Company's employees is subject to an employment or
noncompetition agreement other than Mr. Larson and Lawrence Gross, the
Company's Managing Director of Operations--Canadian School Group. The Company
does not maintain key man life insurance on Mr. Larson, Mr. Klettke or any of
its other employees. The loss of the services of Mr. Larson, Mr. Klettke or
any of the Company's other key personnel, or the failure of the Company to
attract and retain other qualified and experienced personnel on acceptable
terms, could have a material adverse effect on the Company's business, results
of operations and financial condition. See "Management."
NO PRIOR PUBLIC MARKET FOR COMMON STOCK
Prior to the Offering, there has been no public market for the Common Stock
and there can be no assurance that an active trading market will develop or be
sustained after the Offering. The initial public offering price for the Common
Stock will be determined by negotiations between the Company and the
Underwriters, based upon several factors, and may not be indicative of the
price that will prevail in the public market. There can be no assurance that
the market price of the Common Stock will not decline from the initial public
offering price. After consummation of the Offering, the market price of the
Common Stock will be subject to fluctuations in response to a variety of
factors, including quarterly variations in the Company's operating results,
announcements of acquisitions by the Company or its competitors, new
regulations or interpretations of regulations applicable to the Company's
schools, changes in accounting treatments or principles and changes in
earnings estimates by securities analysts, as well as general political
economic and market conditions. The market price for the Common Stock may also
be affected by the Company's ability to meet or exceed analysts' or "street"
expectations, and any failure to meet such expectations, even if minor, could
have a material adverse effect on the market price of the Common Stock. In
addition, the stock market has from time to time experienced significant price
and volume fluctuations that have particularly affected the market prices of
equity securities of certain companies and that have often been unrelated to
the operating performance of such companies. In the past, following periods of
volatility in the market price of a company's securities, securities class
action litigation has often been instituted against such a company. Any such
litigation initiated against the Company could result in substantial costs and
a diversion of management's attention and resources, which could have a
material adverse effect on the Company's business, results of operations and
financial condition. See "Underwriting."
19
<PAGE>
ANTITAKEOVER EFFECTS OF CERTIFICATE OF INCORPORATION AND BYLAW PROVISIONS
Upon consummation of the Offering, the Company's Board of Directors will have
the authority to issue up to 1,000,000 shares of undesignated preferred stock
and to determine the price, rights, preferences, privileges and restrictions,
including voting rights, of those shares without any further vote or action by
the Company's stockholders. The rights of the holders of Common Stock will be
subject to, and may be adversely affected by, the rights of the holders of any
preferred stock that may be issued in the future. The issuance of preferred
stock, while providing desirable flexibility in connection with possible
financings, acquisitions and other corporate purposes, could have the effect of
making it more difficult for a third party to acquire a majority of the
outstanding voting stock of the Company. The Company has no present plans to
issue such shares of preferred stock. Further, certain provisions of the
Company's Amended and Restated Certificate of Incorporation and Amended and
Restated Bylaws and of Delaware law could delay or make more difficult a
merger, tender offer or proxy contest involving the Company. See "Description
of Capital Stock."
SHARES ELIGIBLE FOR FUTURE SALE
The sale of a substantial number of shares of Common Stock, or the perception
that such sales could occur, could adversely affect prevailing market prices
for the Common Stock. Upon consummation of the Offering, the Company will have
a total of approximately 6,729,775 shares of Common Stock outstanding, of which
the 2,850,000 shares offered hereby will be eligible for immediate sale in the
public market without restriction unless such shares are held by "affiliates"
of the Company within the meaning of Rule 144 under the Securities Act of 1933,
as amended (the "Securities Act"). The remaining 3,879,775 shares of Common
Stock outstanding upon completion of the Offering will be "restricted
securities" within the meaning of Rule 144 under the Securities Act (the
"Restricted Shares"), all of which Restricted Shares will be subject to lock-up
agreements (the "Lock-Up Agreements") under which the holders of such shares
agree that they will not, directly or indirectly, sell or otherwise dispose of
any shares of Common Stock, or securities or other rights convertible into or
exchangeable or exercisable for any shares of Common Stock, for 180 days after
the date of the Offering without the prior written consent of Credit Suisse
First Boston Corporation. An additional 498,746 shares of Common Stock are
issuable at various dates upon exercise of options heretofore granted or being
granted on the date of this Prospectus to certain employees, officers,
directors and consultants of the Company pursuant to stock option agreements.
Upon expiration of the Lock-Up Agreements, 3,879,035 of the currently
outstanding Restricted Shares will be eligible for sale under Rule 144, subject
to volume and other limitations (other than the holding period requirement) of
such rule. Subject to the Lock-Up Agreements, the holders of 3,622,709 of such
Restricted Shares of Common Stock also have been accorded registration rights
under the Securities Act. No prediction can be made as to the effect, if any,
that future sales of shares, or the availability of shares for future sales,
will have on the market price of the Common Stock prevailing from time to time
or on the Company's ability to raise capital through an offering of its equity
securities. See "Description of Capital Stock," "Shares Eligible for Future
Sale" and "Underwriting."
IMMEDIATE AND SUBSTANTIAL DILUTION
The initial public offering price of the Common Stock offered hereby will be
substantially higher than the net book value of the currently outstanding
Common Stock. Therefore, assuming an initial public offering price of $14.00
per share, purchasers of the Common Stock offered hereby will experience
immediate and substantial dilution of $8.92 per share in the net tangible book
value of the Common Stock. See "Dilution."
ABSENCE OF DIVIDENDS
The Company has never declared or paid any cash dividends or distributions on
its common stock. The Company currently intends to retain its earnings to
finance future growth and therefore does not anticipate paying any cash
dividends on the Common Stock in the foreseeable future. The Company is
prohibited from paying any dividends on the Common Stock under the terms of the
Credit Agreement. See "Dividend Policy."
20
<PAGE>
THE TRANSACTIONS
The Company's outstanding capital stock currently consists of (i) four
classes of common stock: Class A Voting Common Stock, $.01 par value (the
"Class A Common Stock"); Class B Voting Common Stock, $.01 par value (the
"Class B Common Stock"); Class C Non-voting Common Stock, $.01 par value (the
"Class C Common Stock"); and Class E Non-voting Common Stock, $.01 par value
(the "Class E Common Stock") (the Class A Common Stock, Class B Common Stock,
Class C Common Stock and Class E Common Stock are collectively referred to as
the "Existing Common Stock"); and (ii) three classes of Preferred Stock:
Preferred Stock, Series A, $.01 par value (the "Series A Preferred Stock");
Preferred Stock, Series C, $.01 par value (the "Series C Preferred Stock");
and Series D Preferred Stock, $.01 par value (the "Series D Preferred Stock")
(the Series A Preferred Stock, Series C Preferred Stock and Series D Preferred
Stock are collectively referred to as the "Existing Preferred Stock").
Assuming an initial public offering price of $14.00 per share, prior to the
consummation of the Offering, (i) the Amended and Restated Certificate of
Incorporation of the Company shall be amended (the "Certificate Amendment") to
provide, among other things, for (a) only two classes of capital stock,
consisting of the Common Stock and Preferred Stock, $.01 par value, (b) the
conversion of all shares of Existing Common Stock into Common Stock at the
rate of 7.473 shares of Common Stock for every share of Existing Common Stock,
and (c) the conversion (the "Preferred Stock Conversion") of all Existing
Preferred Stock (including all accrued paid-in-kind dividends thereon) into
Common Stock at a rate determined by dividing the liquidation value of the
Existing Preferred Stock (including the liquidation value of the accrued paid-
in-kind dividends) by the initial public offering price of the Common Stock in
the Offering (converting into 2,769,693 shares of Common Stock); 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 (collectively, the "Warrants") will be exercised (the
"Warrant Exercise" and, together with the Certificate Amendment, the
"Transactions") for an aggregate of 497,633 shares of Common Stock. The
consummation of the Offering and the Transactions are conditioned upon one
another.
21
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the shares of Common Stock
offered by the Company hereby, after deduction of the estimated underwriting
discounts and commissions and offering expenses payable by the Company, are
estimated to be approximately $34.9 million, assuming an initial public
offering price of $14.00 per share (approximately $40.5 million if the
Underwriters exercise in full the over-allotment option granted to them by the
Company. The Company intends to use approximately $30.8 million of its net
proceeds from the Offering to repay outstanding revolving credit borrowings
under the Credit Agreement and approximately $4.1 million to repay the
outstanding indebtedness on notes payable to the former shareholders of IAMD-
U.S. and IAMD-Canada. After giving effect to the Offering and the application
of the net proceeds therefrom as described above, the Company's remaining
availability under the Credit Agreement would be approximately $40.6 million.
The outstanding revolving credit borrowings under the Credit Agreement
(including borrowings under a predecessor credit agreement refinanced through
borrowings under the Credit Agreement) were incurred by the Company in
connection with its acquisitions of Gibbs, IAMD-U.S. and IAMD-Canada. Interest
is payable by the Company on outstanding obligations under the Credit Agreement
at various rates, as defined in the Credit Agreement (see "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Liquidity and Capital Resources"), and these obligations are scheduled to
mature on May 31, 2002. The notes payable to the former shareholders of IAMD-
U.S. and IAMD-Canada were issued by the Company in connection with the
acquisitions of these schools, bear interest at a rate of 7% per annum and
mature on June 30, 2001. The notes payable to IAMD-U.S. and IAMD-Canada are
subject to mandatory repayment upon consummation of the Offering.
DIVIDEND POLICY
The Company has never declared or paid any cash dividends or distributions on
the Existing Common Stock. The Company does not anticipate paying cash
dividends or other distributions on the Common Stock in the foreseeable future,
but intends instead to retain any future earnings for reinvestment in its
business. Any future determination to pay cash dividends will be at the
discretion of the Company's Board of Directors and will be dependent upon the
Company's financial condition, results of operations, capital requirements and
such other factors as the Company's Board of Directors deems relevant. The
Company is prohibited from paying any dividends on the Common Stock under the
terms of the Credit Agreement.
22
<PAGE>
CAPITALIZATION
The following table sets forth the Company's cash and cash equivalents and
capitalization (long-term debt plus stockholders' investment) (i) as of
September 30, 1997, (ii) pro forma to reflect the Transactions and (iii) pro
forma as adjusted to reflect the Transactions and the sale by the Company of
2,850,000 shares of Common Stock offered hereby at an assumed initial public
offering price of $14.00 per share, after deducting estimated underwriting
discounts and commissions and offering expenses payable by the Company, and the
application of the net proceeds therefrom to repay certain indebtedness as
described under "Use of Proceeds." The information set forth below should be
read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the Company's financial statements and
the related notes thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
------- --------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Cash and cash equivalents....................... $ 5,448 $ 5,448 $ 9,670
======= ======= =======
Long-term debt, net of current maturities....... $46,892 $46,892 $16,207
Redeemable preferred stock:
Series A Preferred Stock, $.01 par value,
50,000 shares authorized,
7,852 shares outstanding, at redemption
value, including $2,084,736 of accumulated
dividends (1)................................ 9,937 -- --
Series C Preferred Stock, $.01 par value,
5,000 shares authorized,
4,954 shares outstanding, at redemption value
(1).......................................... 4,338 -- --
Series D Preferred Stock, $.01 per value,
25,000 shares authorized,
22,500 shares outstanding, at redemption
value, including $567,204 of accumulated
dividends (1)................................ 18,323 -- --
Redeemable warrants:
Exercisable into 21,576 shares of Class D
Common Stock................................. 1,140 -- --
Exercisable into 3,514 shares of Class E
Common Stock................................. 289 289 289
Stockholders' investment:
Common Stock, $.01 par value, 1,100,000 shares
authorized;
81,997 shares issued and outstanding,
including 5,250 shares of Class A Common
Stock, 5,100 shares of Class B Common Stock,
69,900 shares of Class C Common Stock, no
shares of Class D Common Stock and 1,747
shares of Class E Common Stock, actual;
6,671,715 shares issued and outstanding, pro
forma and as adjusted (2).................... 1 38 67
Warrants...................................... 4,777 -- --
Additional paid-in capital.................... 71 38,549 73,427
Foreign currency translation.................. 7 7 7
Accumulated deficit........................... (6,630) (6,630) (6,630)
------- ------- -------
Total stockholders' investment.............. (1,774) 31,964 66,871
------- ------- -------
Total capitalization........................ $79,145 $79,145 $83,367
======= ======= =======
</TABLE>
- --------
(1) The 35,306 shares of Preferred Stock (including accrued paid-in-kind
dividends thereon through September 30, 1997) would be converted into
2,711,281 shares of Common Stock (assuming an initial public offering price
of $14.00 per share).
(2) Does not include as of September 30, 1997 (i) 143,923 shares of Common
Stock issuable upon the exercise of outstanding options at a weighted
average exercise price of $9.20 per share and (ii) 7,406 shares of Common
Stock reserved for issuance under the 1995 Plan (as defined under
"Management--Stock Plans"). Upon consummation of the Offering, (i) 498,746
shares of Common Stock will be issuable upon the exercise of outstanding
options at a weighted average exercise price of $9.87 per share, and (ii)
1,050,306 shares of Common Stock will be reserved for issuance under the
Stock Plans. See "Management--Stock Plans," "Description of Capital Stock"
and Notes 8 and 15 of the Notes to the Company's Consolidated Financial
Statements.
23
<PAGE>
DILUTION
The net tangible book value of the Company as of September 30, 1997, after
giving effect to the Transactions, was approximately $(985,000), or $(0.26)
per share of Common Stock. Net tangible book value per share represents the
amount of total tangible assets of the Company reduced by the amount of its
total liabilities and divided by the total number of shares of Common Stock
outstanding. After giving effect to the sale of the 2,850,000 shares of Common
Stock offered hereby at an assumed initial public offering price of $14.00 per
share, and after deducting estimated underwriting discounts and commissions
and offering expenses payable by the Company, the pro forma net tangible book
value of the Company as of September 30, 1997 would have been approximately
$33,922,000, or $5.08 per share of Common Stock. This represents an immediate
increase in net tangible book value of $5.34 per share to existing
stockholders and an immediate and substantial dilution of $8.92 per share to
new stockholders. The following table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share........... $14.00
Net tangible book value per share as of September 30,
1997.................................................... $(56.66)
Increase per share attributable to pro forma adjustments. 56.41
-------
Pro forma net tangible book value per share as of
September 30, 1997....................................... (0.26)
Increase per share attributable to new stockholders....... 5.34
-------
Pro forma net tangible book value per share as of
September 30, 1997 after the Offering.................... 5.08
------
Dilution per share to new stockholders.................... $ 8.92
======
</TABLE>
The following table summarizes, on a pro forma basis as of September 30,
1997, the difference between the existing stockholders and new investors with
respect to the number of shares of Common Stock purchased from the Company,
the total consideration paid to the Company and the average price per share
paid (before deducting estimated underwriting discounts and commissions and
offering expenses payable by the Company):
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
----------------- ------------------- PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
--------- ------- ----------- ------- ---------
<S> <C> <C> <C> <C> <C>
Existing stockholders........ 3,821,715 57.3% $35,366,000 47.0% $ 9.25
New investors................ 2,850,000 42.7 39,900,000 53.0 $14.00
--------- ----- ----------- -----
Total.................... 6,671,715 100.0% $75,266,000 100.0%
========= ===== =========== =====
</TABLE>
The foregoing calculations do not give effect to, as of September 30, 1997,
143,923 shares of Common Stock issuable upon the exercise of outstanding
options at a weighted average exercise price of $9.20 per share. To the extent
any such options are exercised, there will be further dilution to new
investors. See "Capitalization," "Management--Stock Plans," "Description of
Capital Stock" and Notes 8 and 15 of the Notes to the Company's Consolidated
Financial Statements.
24
<PAGE>
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL DATA
The following unaudited pro forma condensed consolidated statements of
operations of the Company give effect to (1) the acquisitions of Western
Culinary, SCT, Gibbs, IAMD-U.S. and IAMD-Canada (the "Acquisitions"), (2) the
Transactions (as defined under "The Transactions") and (3) the sale by the
Company of 2,850,000 shares of Common Stock in the Offering and the
application of the estimated net proceeds therefrom to repay certain
indebtedness as set forth under "Use of Proceeds," as if they had occurred at
the beginning of each period presented.
The unaudited pro forma condensed consolidated statement of operations for
the year ended December 31, 1996 reflects the audited statements of operations
of the Company and Gibbs, the unaudited historical statement of operations of
SCT, IAMD-U.S. and IAMD-Canada for the year then ended and the audited
historical statement of operations of Western Culinary for the nine months and
21 days ended October 21, 1996. The results of Western Culinary's operations
from the date of its acquisition, October 21, 1996, have been included in the
Company's historical financial statements. The unaudited pro forma condensed
consolidated statement of operations for the nine months ended September 30,
1997 includes the audited statements of operations of the Company and the
unaudited historical statements of operations of IAMD-U.S. and IAMD-Canada for
the six months ended June 30, 1997, of SCT for the two months ended February
28, 1997 and of Gibbs for the five months ended May 31, 1997. The historical
results of operations of SCT, Gibbs, IAMD-U.S. and IAMD-Canada have been
included in the Company's financial statements subsequent to the dates of
their acquisition. For the purpose of preparing the unaudited pro forma
condensed consolidated statements of operations only, the historical
statements of operations for IAMD-Canada described above were translated from
Canadian dollars (IAMD-Canada's functional currency) to U.S. dollars at the
approximate average exchange rate for the respective periods.
The unaudited pro forma financial data are a presentation of historical
results with accounting and other adjustments. The unaudited pro forma
financial data do not reflect the effects of any of the anticipated changes to
be made by the Company in its operations from the historical operations, are
presented for informational purposes only and should not be construed to be
indicating (i) the results of operations or the financial position of the
Company that actually would have occurred had the Acquisitions, the
Transactions and the Offering been consummated as of the dates indicated or
(ii) the results of operations or the financial position of the Company in the
future.
The unaudited pro forma financial data reflect the Acquisitions using the
purchase method of accounting. The acquired assets and liabilities of Western
Culinary, SCT, Gibbs, IAMD-U.S. and IAMD-Canada are stated at values
representing a preliminary allocation of the purchase cost based upon
estimated fair market values at the dates of acquisition. The final purchase
accounting allocations will be determined based upon final appraised values
and are not expected to differ significantly from the estimates used herein.
The following unaudited pro forma financial data and accompanying notes are
qualified in their entirety by reference to, and should be read in conjunction
with, "Management's Discussion and Analysis of Financial Condition and Results
of Operations," the financial statements and notes thereto of CEC, Gibbs,
Western Culinary, IAMD-U.S. and IAMD-Canada and the other historical financial
information included elsewhere in this Prospectus.
25
<PAGE>
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE TWELVE MONTHS ENDED DECEMBER 31, 1996
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
HISTORICAL
----------------------------------------------------
WESTERN
CULINARY
(THROUGH
OCTOBER 21, IAMD- IAMD- PRO FORMA OFFERING
CEC 1996) SCT GIBBS U.S. CANADA ADJUSTMENTS PRO FORMA ADJUSTMENTS
------- ----------- ------ ------- ------ ------- ----------- --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue:
Tuition and
registration
fees, net........ $29,269 $4,297 $6,206 $25,831 $6,404 $7,633 $ -- $79,640 $ --
Other, net........ 4,311 304 9 2,932 226 54 -- 7,836 --
------- ------ ------ ------- ------ ------ ------- ------- ------
Total net
revenue........ 33,580 4,601 6,215 28,763 6,630 7,687 -- 87,476 --
Operating Expenses: --
Educational
services and
facilities....... 14,404 697 2,063 6,427 2,970 2,479 29,040 --
General and
administrative... 14,622 3,476 3,807 19,388 3,508 4,566 (1,011)(1) 48,356 --
Depreciation and
amortization..... 2,134 18 205 2,235 478 430 5,017 (2)(3) 10,517 --
------- ------ ------ ------- ------ ------ ------- ------- ------
Total operating
expenses....... 31,160 4,191 6,075 28,050 6,956 7,475 4,006 87,913 --
------- ------ ------ ------- ------ ------ ------- ------- ------
Income (loss)
from
operations..... 2,420 410 140 713 (326) 212 (4,006) (437) --
Interest expense... 717 1 55 1,038 107 145 2,541 (4) 4,604 (2,772)(8)
------- ------ ------ ------- ------ ------ ------- ------- ------
Income (loss)
before
provision
(benefit) for
income taxes... 1,703 409 85 (325) (433) 67 (6,547) (5,041) 2,772
Provision (benefit)
for income taxes.. 208 164 34 -- (173) 27 (260)(5) -- --
------- ------ ------ ------- ------ ------ ------- ------- ------
Net Income (Loss).. 1,495 245 51 (325) (260) 40 (6,287) (5,041) 2,772
Dividends paid or
accrued on
preferred stock.. (1,128) -- -- -- -- -- 1,128 (6) -- --
Accretion to
redemption value
of preferred
stock and
warrants......... (230) -- -- -- -- -- 230 (6) -- --
------- ------ ------ ------- ------ ------ ------- ------- ------
Net income (loss)
attributable to
common
stockholders...... $ 137 $ 245 $ 51 $ (325) $ (260) $ 40 $(4,929) $(5,041) $2,772
======= ====== ====== ======= ====== ====== ======= ======= ======
Net income (loss)
per share
attributable to
common
stockholders...... $ (1.46)
=======
Weighted average
number of shares
outstanding....... 3,449(7) 2,200(9)
======= ======
<CAPTION>
PRO FORMA
AS ADJUSTED
FOR THE
OFFERING
---------------
<S> <C>
Revenue:
Tuition and
registration
fees, net........ $79,640
Other, net........ 7,836
---------------
Total net
revenue........ 87,476
Operating Expenses:
Educational
services and
facilities....... 29,040
General and
administrative... 48,356
Depreciation and
amortization..... 10,517
---------------
Total operating
expenses....... 87,913
---------------
Income (loss)
from
operations..... (437)
Interest expense... 1,832
---------------
Income (loss)
before
provision
(benefit) for
income taxes... (2,269)
Provision (benefit)
for income taxes.. --
---------------
Net Income (Loss).. (2,269)
Dividends paid or
accrued on
preferred stock.. --
Accretion to
redemption value
of preferred
stock and
warrants......... --
---------------
Net income (loss)
attributable to
common
stockholders...... $(2,269)
===============
Net income (loss)
per share
attributable to
common
stockholders...... $ (0.40)
===============
Weighted average
number of shares
outstanding....... 5,649(7)(9)
===============
</TABLE>
26
<PAGE>
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
HISTORICAL
------------------------------------------------
IAMD- IAMD-
SCT GIBBS U.S. CANADA
(THROUGH (THROUGH (THROUGH (THROUGH
FEBRUARY 28, MAY 31, JUNE 30, JUNE 30, PRO FORMA OFFERING
CEC 1997) 1997) 1997) 1997) ADJUSTMENTS PRO FORMA ADJUSTMENTS
------- ------------ -------- -------- -------- ----------- --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue:
Tuition and
registration fees,
net................... $45,615 $1,155 $11,606 $4,119 $5,677 $ -- $68,172 $ --
Other, net............ 5,152 -- 1,222 63 27 -- 6,464 --
------- ------ ------- ------ ------ ------- ------- -------
Total net revenue... 50,767 1,155 12,828 4,182 5,704 -- 74,636 --
Operating Expenses:
Educational services
and facilities........ 22,269 408 3,029 1,966 2,177 -- 29,849 --
General and
administrative........ 23,852 1,071 8,043 2,091 2,565 -- 37,622 --
Depreciation and
amortization.......... 5,000 6 901 387 470 1,435 (2)(3) 8,199 --
------- ------ ------- ------ ------ ------- ------- -------
Total operating
expenses............ 51,121 1,485 11,973 4,444 5,212 1,435 75,670 --
------- ------ ------- ------ ------ ------- ------- -------
Income (loss) from
operations.......... (354) (330) 855 (262) 492 (1,435) (1,034) --
Interest expense....... 2,046 7 242 103 235 764 (4) 3,397 (2,071)(8)
------- ------ ------- ------ ------ ------- ------- -------
Income (loss) before
provision for income
taxes............... (2,400) (337) 613 (365) 257 (2,199) (4,431) 2,071
Provision (benefit) for
income taxes........... (1,008) (135) -- (146) 103 1,186(5) -- --
------- ------ ------- ------ ------ ------- ------- -------
Income (Loss) before
extraordinary item..... (1,392) (202) 613 (219) 154 (3,385) (4,431) 2,071
Dividends on
preferred stock....... (1,444) -- -- -- -- 1,444 (6) -- --
Accretion to
redemption value of
preferred stock and
warrants.............. (727) -- -- -- -- 698 (6) (29) --
------- ------ ------- ------ ------ ------- ------- -------
Income (loss) before
extraordinary item
attributable to common
stockholders........... $(3,563) $ (202) $ 613 $ (219) $ 154 $(1,243) $(4,460) $ 2,071
======= ====== ======= ====== ====== ======= ======= =======
Income (loss) before
extraordinary item per
share attributable to
common stockholders.... $ (1.29)
=======
Weighted average number
of shares outstanding.. 3,450(7) 2,192(9)
======= =======
<CAPTION>
PRO FORMA
AS ADJUSTED
FOR THE
OFFERING
---------------
<S> <C>
Revenue:
Tuition and
registration fees,
net................... $68,172
Other, net............ 6,464
---------------
Total net revenue... 74,636
Operating Expenses:
Educational services
and facilities........ 29,849
General and
administrative........ 37,622
Depreciation and
amortization.......... 8,199
---------------
Total operating
expenses............ 75,670
---------------
Income (loss) from
operations.......... (1,034)
Interest expense....... 1,326
---------------
Income (loss) before
provision for income
taxes............... (2,360)
Provision (benefit) for
income taxes........... --
---------------
Income (Loss) before
extraordinary item..... (2,360)
Dividends on
preferred stock....... --
Accretion to
redemption value of
preferred stock and
warrants.............. (29)
---------------
Income (loss) before
extraordinary item
attributable to common
stockholders........... $(2,389)
===============
Income (loss) before
extraordinary item per
share attributable to
common stockholders.... $ (0.42)
===============
Weighted average number
of shares outstanding.. 5,642(7)(9)
===============
</TABLE>
27
<PAGE>
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
AS OF SEPTEMBER 30, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
PRO FORMA
AS ADJUSTED
HISTORICAL PRO FORMA OFFERING FOR THE
CEC (10) ADJUSTMENTS PRO FORMA ADJUSTMENTS OFFERING
---------- ----------- --------- ----------- -----------
ASSETS
------
<S> <C> <C> <C> <C> <C>
Current assets.......... $ 22,642 $ -- $ 22,642 4,222 (8) $ 26,864
Property and equipment,
net of accumulated
depreciation and
amortization........... 46,944 -- 46,944 -- 46,944
Other assets:
Goodwill, net......... 20,509 -- 20,509 -- 20,509
Covenants not to
compete, net......... 11,422 -- 11,422 -- 11,422
Other noncurrent
assets............... 1,852 -- 1,852 -- 1,852
-------- -------- -------- ------- --------
Total other assets.. 33,783 -- 33,783 -- 33,783
-------- -------- -------- ------- --------
Total assets........ $103,369 $ -- $103,369 $ 4,222 $107,591
======== ======== ======== ======= ========
<CAPTION>
LIABILITIES AND
STOCKHOLDERS' INVESTMENT
- ------------------------
<S> <C> <C> <C> <C> <C>
Current liabilities..... $ 21,240 $ -- $ 21,240 -- 21,240
Long-term debt, net of
current maturities..... 46,892 -- 46,892 (30,685)(8) 16,207
Deferred income tax
liabilities............ 2,984 -- 2,984 -- 2,984
-------- -------- -------- ------- --------
Total liabilities... 71,116 -- 71,116 (30,685) 40,431
Redeemable preferred
stock and warrants..... 34,027 (33,738)(11) 289 -- 289
Stockholders'
investment............. (1,774) 33,738 (11) 31,964 34,907 66,871
-------- -------- -------- ------- --------
Total liabilities
and stockholders'
investment......... $103,369 $ -- $103,369 $ 4,222 107,591
======== ======== ======== ======= ========
</TABLE>
28
<PAGE>
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
FINANCIAL DATA
The following notes identify the pro forma adjustments made to the
historical amounts in the unaudited pro forma condensed consolidated financial
data:
(1) Management fees charged to Western Culinary by its parent related to non-
recurring business activities totalling approximately $1.0 million have
been eliminated.
(2) The preliminary appraised values of the acquired fixed assets of Western
Culinary, SCT, Gibbs, IAMD-U.S. and IAMD-Canada have been assigned to the
respective assets. Depreciation of fixed assets, based on appraised
values and their remaining estimated useful lives (which range from one
to 31 years) in excess of the historical amounts is recorded as an
adjustment.
(3) The historical intangible assets of Gibbs have been eliminated because
new values were assigned to intangible assets at the date of acquisition.
Intangible assets recorded in conjunction with the acquisitions of
Western Culinary, SCT, Gibbs, IAMD-U.S. and IAMD-Canada include goodwill
of approximately $18.0 million, covenants not to compete of approximately
$13.2 million and student contracts of approximately $52,000. Goodwill is
amortized on a straight-line basis over its estimated useful life of 40
years. Covenants not to compete are amortized over their estimated useful
lives, which range from three to five years, using the sum of years'
digits method. Amortization expense has been adjusted to reflect the new
values and amortization of these intangible assets for the entire periods
presented, as opposed to historical amounts, which were only recorded
from date of the acquisitions to the end of each period.
(4) The adjustment represents additional interest expense associated with
approximately $30.8 million of debt incurred to finance the acquisitions
of Western Culinary, SCT, Gibbs, IAMD-U.S., and IAMD-Canada which would
have been outstanding for the entire periods presented. Interest on bank
borrowings is imputed assuming a 9% borrowing rate for the twelve months
ended December 31, 1996 and the nine months ended September 30, 1997.
(5) Due to the historical losses experienced by the Company and the pro forma
loss derived therefrom, the historical income tax provision (benefit) has
been eliminated, and no income tax benefit has been reflected in the
unaudited pro forma consolidated condensed statements of operations for
the year ended December 31, 1996 and the nine months ended September 30,
1997.
(6) Redeemable preferred stock (including accrued paid-in-kind dividends)
will be converted into Common Stock. All warrants, except the Provident
Warrant, will be exercised prior to the consummation of the Offering.
Accrued dividends and any accretion to redemption value related to shares
of preferred stock and warrants (to be converted or exercised in
connection with the Offering) assumed to have been issued at the
beginning of each period presented to consummate the acquisitions would
be added back to income attributable to common stockholders to derive pro
forma income attributable to common stockholders. Therefore, such amounts
are eliminated.
(7) Includes the dilutive effect of (i) actual Common Stock outstanding, (ii)
options and warrants issued during the preceding twelve months, (iii)
common stock equivalents and (iv) 2,521,857 shares of Common Stock that
would be issued upon the Preferred Stock Conversion, assuming an initial
public offering price of $14.00 per share (as defined under "The
Transactions"). See "The Transactions" and "Use of Proceeds."
(8) The Company's net proceeds from the Offering, estimated to be $34.9
million net of expenses and fees, will be applied as described in "Use of
Proceeds." At September 30, 1997, the outstanding debt to be repaid in
connection with the Offering totalled $30.7 million, resulting in excess
cash from the Offering of $4.2 million. Interest expense associated with
indebtedness repaid with the proceeds from the Offering has been
eliminated.
(9) The adjustment represents the increase in the weighted average shares
outstanding related to proceeds from the issuance of shares of Common
Stock to be sold by the Company in the Offering in order to repay
indebtedness as described under "Use of Proceeds."
(10) The historical balance sheet of the Company at September 30, 1997
includes the effect of all of the acquisitions because they were all
consummated before September 30, 1997.
(11) The redemption value (including accrued paid-in-kind dividends) of the
preferred stock will be converted into Common Stock. All warrants, except
the Provident Warrant, will be exercised prior to the consummation of the
Offering.
29
<PAGE>
SELECTED HISTORICAL CONSOLIDATED FINANCIAL AND OTHER DATA
The following selected historical consolidated financial and other data are
qualified by reference to, and should be read in conjunction with, the
Company's consolidated financial statements and the related notes thereto
appearing elsewhere in this Prospectus and "Management's Discussion and
Analysis of Financial Condition and Results of Operations." The selected
statement of operations data set forth below for the Company for the years
ended December 31, 1994, 1995 and 1996 and the nine months ended September 30,
1997 and the balance sheet data as of December 31, 1995 and 1996 and September
30, 1997 are derived from the audited consolidated financial statements of the
Company included elsewhere in this Prospectus. The selected statement of
operations data for the Company set forth below for the nine months ended
September 30, 1996 are derived from the unaudited consolidated financial
statements of the Company included elsewhere in this Prospectus. The unaudited
statements of the Company include all adjustments, consisting only of normal
recurring adjustments, necessary for a fair presentation of the Company's
financial condition and results of operations for those periods and, in the
opinion of management have been prepared on the same basis as the audited
financial statements. The balance sheet data as of December 31, 1994 is
derived from audited financial statements of the Company which are not
included in this Prospectus.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER NINE MONTHS ENDED
31, SEPTEMBER 30,
-------------------------- -------------------
1994(1) 1995 1996 1996 1997
------- ------- ------- -------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue:
Tuition and registration
fees, net................... $ 5,794 $16,330 $29,269 $ 19,299 $ 45,615
Other, net................... 1,692 3,066 4,311 3,130 5,152
------- ------- ------- -------- ---------
Total net revenue.......... 7,486 19,396 33,580 22,429 50,767
Operating Expenses:
Educational services and
facilities.................. 3,074 8,565 14,404 9,579 22,269
General and administrative... 4,887 9,097 14,622 10,976 23,852
Depreciation and
amortization................ 980 1,330 2,134 1,481 5,000
------- ------- ------- -------- ---------
Total operating expenses... 8,941 18,992 31,160 22,036 51,121
------- ------- ------- -------- ---------
Income (loss) from operations. (1,455) 404 2,420 393 (354)
Interest expense.............. 134 311 717 358 2,046
------- ------- ------- -------- ---------
Income (loss) before provision
for taxes and extraordinary
item......................... (1,589) 93 1,703 35 (2,400)
Provision (benefit) for income
taxes........................ -- 24 208 14 (1,008)
------- ------- ------- -------- ---------
Income (loss) before
extraordinary item........... (1,589) 69 1,495 21 (1,392)
Extraordinary loss on early
extinguishment of debt (net
of taxes of $233)............ -- -- -- -- (418)
------- ------- ------- -------- ---------
Net income (loss)............. $(1,589) $ 69 $ 1,495 $ 21 $ (1,810)
======= ======= ======= ======== =========
Income (loss) attributable to
common stockholders:
Income (loss) before
extraordinary item, as
reported.................... $(1,589) $ 69 $ 1,495 $ 21 $ (1,392)
Accrued dividends on
preferred stock (2)......... (393) (777) (1,128) (841) (1,444)
Accretion to redemption
value of preferred stock
and warrants (3)............ -- (96) (230) (175) (727)
------- ------- ------- -------- ---------
Income (loss) before
extraordinary item,
attributable to common
stockholders................. (1,982) (804) 137 (995) (3,563)
Extraordinary loss, net...... -- -- -- -- (418)
------- ------- ------- -------- ---------
Net income (loss) attributable
to common stockholders....... $(1,982) $ (804) $ 137 $ (995) $ (3,981)
======= ======= ======= ======== =========
OTHER DATA:
EBITDA (4).................... (475) 1,734 4,554 1,874 4,646
EBITDA margin (4)............. (6.3)% 8.9% 13.6% 8.4% 9.2%
Cash flow provided by (used
in):
Operating activities......... (1,000) 235 5,275 600 (6,274)
Investing activities......... (2,372) (3,478) (9,518) (952) (39,733)
Financing activities......... 6,014 4,566 8,076 (509) 43,650
Capital expenditures, net..... 153 897 1,231 915 2,010
Student population (5)........ 1,131 3,347 4,537 3,533 10,951
Number of campuses (6)........ 2 4 5 4 18
</TABLE>
30
<PAGE>
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------- SEPTEMBER 30,
1994 1995 1996 1997
------- ------- ------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents............. $ 2,642 $ 3,965 $ 7,798 $ 5,448
Working capital....................... 578 1,314 1,379 1,402
Total assets.......................... 11,704 23,584 36,208 103,369
Long-term debt, net of current
maturities........................... 1,890 6,725 13,783 46,892
Redeemable preferred stock and
warrants............................. 8,243 13,628 14,561 34,027
Total stockholders' investment........ (1,982) (2,756) (2,589) (1,774)
</TABLE>
- --------
(1) Commencing January 5, 1994, the date of the Company's incorporation.
(2) Represents the dividends paid on, or added to the redemption value of
outstanding preferred stock. See Note 2 of the Notes to the Company's
Consolidated Financial Statements.
(3) See Note 2 of the Notes to the Company's Consolidated Financial
Statements.
(4) For any period, EBITDA equals earnings before interest expense, taxes,
depreciation and amortization (including amortization of debt discount and
deferred financing costs), and EBITDA margin equals EBITDA as a percentage
of net revenue. EBITDA and EBITDA margin are presented because the Company
believes they allow for a more complete analysis of the Company's results
of operations. EBITDA and EBITDA margin should not be considered as
alternatives to, nor is there any implication that they are more
meaningful than, any measure of performance or liquidity as promulgated
under GAAP.
(5) Represents the total student population at the Company's schools (a) in
the case of each full year, as of October 31 and (b) in the case of the
nine months ended September 30, 1996 and 1997, as of September 30.
(6) Represents the total number of campuses operated by the Company as of the
end of the period.
31
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with the
Selected Historical Consolidated Financial Data and the Company's Consolidated
Financial Statements and Notes thereto appearing elsewhere in this Prospectus.
BACKGROUND AND OVERVIEW
CEC is one of the largest providers of private, for-profit postsecondary
education in North America, with approximately 13,000 students enrolled as of
October 31, 1997. CEC operates nine schools, with 18 campuses located in 13
states and two Canadian provinces. These schools enjoy long operating
histories and offer a variety of bachelor's degree, associate degree and non-
degree programs in career-oriented disciplines within the Company's core
curricula of (i) computer technologies, (ii) visual communication and design
technologies, (iii) business studies and (iv) culinary arts.
Net revenue, EBITDA and net income have increased in each of the years the
Company has operated. Net revenue increased 349%, to $33.6 million in 1996,
from $7.5 million in 1994; EBITDA increased to $4.6 million in 1996, from a
loss of $0.5 million in 1994; and net income increased to $1.5 million in
1996, from a loss of $1.6 million in 1994. Student population at the Company's
schools increased 288%, from 3,347 students at October 31, 1995 to 12,992
students at October 31, 1997. During the period 1994 to 1996, the Company
acquired five schools (Allentown, Brooks, Brown, Collins and Western
Culinary). The Company has invested significant amounts of capital in the
hiring of additional personnel and increased marketing and capital
improvements at each of the acquired schools. The increased costs of personnel
and marketing are expensed as incurred and are reflected in general and
administrative expenses. Additional depreciation and amortization are
reflected as a result of the capital improvements.
The Company believes that EBITDA, while not a substitute for GAAP measures
of operating results, is an important measure of the financial performance of
the Company and its campuses. Management believes that EBITDA is particularly
meaningful due principally to the role acquisitions have played in the
Company's development. CEC's rapid growth through acquisitions has resulted in
significant non-cash amortization expenses, because a significant portion of
the purchase price of a school acquisition by CEC is generally allocated to
goodwill and other intangible assets. In a number of the Company's recent
acquisitions, a large portion of the purchase price has been allocated to non-
competition agreements. As a result of its ongoing acquisition strategy, non-
cash amortization expenses may continue to be substantial.
The Company's principal source of revenue is tuition collected from its
students. The academic year is at least 30 weeks in length, but varies both by
individual school and program of study. The academic year is divided by term,
which is determined by start dates which vary by school and program. Payment
of each term's tuition may be made by full cash payment, financial aid and/or
an installment payment plan. If a student withdraws from school prior to the
completion of the term, the Company refunds a portion of the tuition already
paid which is attributable to the period of the term that is not completed.
Revenue is recognized ratably over the period of the student's program.
The Company's campuses charge tuition at varying amounts, depending not only
on the particular school, but also upon the type of program (i.e., diploma,
associate or bachelor's) and the specific curriculum. Each of the Company's
campuses typically implements one or more tuition increases annually. The
sizes of these increases differ from year to year and among campuses and
programs. Tuition at the Company's campuses as of October 31, 1997 represented
an average increase of 5.2% over the same date in 1996.
Other revenue consists of bookstore sales, placement fees (Gibbs only),
dormitory and cafeteria fees (Brooks only), and restaurant revenue (Western
Culinary only). Other revenue is recognized during the period services are
rendered.
32
<PAGE>
The Company categorizes its expenses as educational services and facilities,
general and administrative and depreciation and amortization. Educational
services and facilities expense generally consists of expense directly
attributable to the educational activity of the schools, including salaries and
benefits of faculty, academic administrators and student support personnel.
Educational services and facilities expense also includes costs of educational
supplies and facilities (including rents on school leases), certain costs of
establishing and maintaining computer laboratories, costs of student housing
(Brooks and SCT only) and all other physical plant and occupancy costs, with
the exception of costs attributable to the Company's corporate offices.
General and administrative expense includes salaries and benefits of
personnel in recruitment, admissions, accounting, personnel, compliance, and
corporate and school administration. Costs of promotion and development,
advertising and production of marketing materials, and occupancy of the
corporate offices are also included in this expense category.
Depreciation and amortization includes costs associated with the depreciation
of purchased computer laboratories, equipment, furniture and fixtures,
courseware, owned facilities, capitalized equipment leases and amortization of
intangible assets, primarily goodwill and non-competition agreements with
previous owners of the schools.
1997 ACQUISITIONS
In the first nine months of 1997, the Company completed the following four
acquisitions, each of which was accounted for as a purchase:
On February 28, 1997, the Company acquired all of the outstanding capital
stock of SCT for a purchase price of approximately $5.5 million, subject to
adjustment. In addition, the Company paid $1.8 million to the former owners of
SCT pursuant to non-competition agreements.
Effective May 31, 1997, the Company acquired all of the outstanding capital
stock of Gibbs for a purchase price of approximately $20.0 million, subject to
adjustment. In addition, the Company paid $7.0 million to the former owner of
Gibbs pursuant to a non-competition agreement.
On June 30, 1997, the Company acquired all of the outstanding capital stock
of IAMD-U.S. for a purchase price of $3.0 million, which amount may be
increased by up to $5.0 million based on future revenues of IAMD-U.S.
operations and which amount is otherwise subject to adjustment. In addition,
the Company paid $2.0 million to the former owners of IAMD-U.S. pursuant to
non-competition agreements.
Also on June 30, 1997, the Company acquired all of the capital stock of IAMD-
Canada for a purchase price of $6.5 million, subject to adjustment. In
addition, the Company paid $2.0 million to the former owners of IAMD-Canada
pursuant to non-competition agreements.
COMPENSATION EXPENSE
As of October 20, 1997, certain option agreements between the Company and two
of its executive officers and directors were amended to fix, upon the
consummation of the Offering, the number of shares of Common Stock issuable
upon exercise of the stock options provided under these agreements. Under the
amended options, which will be fully vested upon the consummation of the
Offering, the holders will be entitled to purchase an aggregate of 97,734
shares of Common Stock at an exercise price of $0.01 per share. Additionally,
during 1997 the Company issued options to one of these executive officers
entitling such officer to purchase an aggregate of 6,838 shares of Common Stock
at an exercise price of $0.01 per share, under a supplemental option agreement
with such officer. As a result, assuming an initial public offering price of
$14.00 per share and the consummation of the Offering in the first quarter of
1998, the Company will record a related one-time, non-cash compensation expense
of approximately $1.4 million in the first quarter of 1998, substantially
reducing operating and net income in such period and for the year ending
December 31, 1998. See "Management--Executive Compensation," "Certain
Relationships and Related Transactions" and Note 8 to the Notes to the
Company's Consolidated Financial Statements.
33
<PAGE>
RESULTS OF OPERATIONS
The following table summarizes the Company's operating results as a
percentage of net revenue for the period indicated.
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
YEAR ENDED SEPTEMBER
DECEMBER 31, 30,
--------------------- -------------
1994 1995 1996 1996 1997
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Revenue:
Tuition and registration, net......... 77.4% 84.2% 87.2% 86.0% 89.9%
Other, net............................ 22.6 15.8 12.8 14.0 10.1
----- ----- ----- ----- -----
Net revenue......................... 100.0 100.0 100.0 100.0 100.0
Operating expenses:
Educational services and facilities... 41.1 44.2 42.9 42.7 43.9
General and administrative............ 65.2 46.8 43.5 48.9 47.0
Depreciation and amortization......... 13.1 6.9 6.4 6.6 9.8
----- ----- ----- ----- -----
Total operating expenses............ 119.4 97.9 92.8 98.2 100.7
----- ----- ----- ----- -----
Income (loss) from operations....... (19.4) 2.1 7.2 1.8 (0.7)
Interest expense........................ 1.8 1.6 2.1 1.6 4.0
----- ----- ----- ----- -----
Income (loss) before provision for
taxes and extraordinary item......... (21.2) 0.5 5.1 0.2 (4.7)
Provision (benefit) for income taxes.... -- 0.1 0.6 0.1 (1.9)
----- ----- ----- ----- -----
Income (loss) before extraordinary item. (21.2) 0.4 4.5 0.1 (2.8)
Extraordinary loss on early
extinguishment of debt (net of taxes).. -- -- -- -- (0.8)
----- ----- ----- ----- -----
Net income (loss)....................... (21.2) 0.4 4.5 0.1 (3.6)
===== ===== ===== ===== =====
Net income (loss) attributable to common
stockholders........................... (26.5)% (4.1)% 0.4% (4.4)% (7.8)%
===== ===== ===== ===== =====
</TABLE>
NINE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO NINE MONTHS ENDED SEPTEMBER
30, 1996
Revenue. Net tuition revenue increased 136% from $19.3 million in the first
nine months of 1996 to $45.6 million in the first nine months of 1997, due to
an approximately 16% increase in the average number of students attending the
schools which were owned by the Company during the 1996 period and tuition
increases effective in 1997 for these schools, as well as added net tuition
revenue of $21.5 million for schools acquired after the 1996 period. Other net
revenue increased 65%, from $3.1 million in the first nine months of 1996 to
$5.2 million in the first nine months of 1997, due to an increase in student
population for schools owned during the 1996 period and the addition of $1.5
million from schools acquired after the 1996 period.
Educational Services and Facilities Expense. Educational services and
facilities expense increased 133%, from $9.6 million in the first nine months
of 1996 to $22.3 million in the first nine months of 1997. Of this increase,
$2.4 million was attributable to the increase in student population for
schools owned during the 1996 period and $10.3 million was attributable to the
addition of educational services and facilities for schools acquired after the
1996 period.
General and Administrative. General and administrative expense increased
117%, from $11.0 million in the first nine months of 1996 to $23.9 million in
the first nine months of 1997. The increase was primarily attributable to
costs totaling $1.0 million related to increased personnel at the corporate
level to enhance the Company's infrastructure and increased advertising and
marketing of $0.1 million for schools owned during the 1996 period, as well as
the addition of $10.7 million of expenses for schools acquired after the 1996
period. The increase in advertising and marketing expenses reflected, in part,
the fact that the former owners of the acquired schools had reduced their
expenditures in these areas prior to their acquisition by the Company.
34
<PAGE>
Depreciation and Amortization. Depreciation and amortization expense
increased 238%, from $1.5 million in the first nine months of 1996 to $5.0
million in the first nine months of 1997. The increase was due to increased
capital expenditures for schools owned during the 1996 period and related
increased depreciation expense of $0.4 million in the first nine months of
1997. Additionally, depreciation expense increased $1.6 million due to the
depreciation expense for schools acquired after the 1996 period. Amortization
expense increased from an immaterial amount in the first nine months of 1996
to $1.5 million in the first nine months of 1997, primarily due to additional
amortization of non-competition agreements for the acquisition of schools
after the 1996 period.
Interest Expense. Interest expense increased 472% from $0.4 million in the
first nine months of 1996 to $2.0 million in the first nine months of 1997.
The increase was primarily due to interest expense on borrowings used to
finance the acquisition of schools after the 1996 period.
Provision (Benefit) for Income Taxes. The benefit for income taxes increased
from an immaterial provision in the first nine months of 1996 to a $1.0
million benefit in the first nine months of 1997.
Income (Loss) before Extraordinary Item. Net income (loss) before
extraordinary item decreased to a net loss of $1.4 million in the first nine
months of 1997 from net income of an immaterial amount in the first nine
months of 1996.
Extraordinary Item. During the first nine months of 1997, the Company
recorded an extraordinary expense of $0.4 million, net of tax, due to the
early retirement of debt related to a credit facility which was terminated and
replaced by the Company's current facility.
Net Income (Loss). Net income (loss) decreased to a net loss of $1.8 million
in the first nine months of 1997 from net income of an immaterial amount in
the first nine months of 1996.
Net Income (Loss) Attributable to Common Stockholders. Net loss attributable
to common stockholders decreased from a loss of $1.0 million in the first nine
months of 1996 to a loss of $4.0 million in the first nine months of 1997. The
primary reasons for this decrease were the extraordinary item referred to
above; increased dividends on preferred stock, primarily due to the issuance
of additional shares; and increased accretion in the redemption value of
preferred stock and warrants as a result of the Company's growth. All
outstanding preferred stock will convert into Common Stock and all outstanding
warrants will be exercised prior to the consummation of the Offering. See "The
Transactions."
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
Revenue. Net tuition revenue increased 79%, from $16.3 million in 1995 to
$29.3 million in 1996, due to a 28% increase in the average number of students
attending the schools which were owned by the Company during 1995 and tuition
increases effective in 1996 for these schools, as well as added net revenue of
$1.1 million for schools acquired in 1996. Other net revenue increased 41%,
from $3.1 million in 1995 to $4.3 million in 1996, due to an increase in
student population for schools owned during 1995 and the addition of $0.1
million from schools acquired after 1995.
Educational Services and Facilities Expense. Educational services and
facilities expense increased 68%, from $8.6 million in 1995 to $14.4 million
in 1996. Of this increase, $5.3 million was attributable to the increase in
student population for schools owned during 1995 and $0.5 million was
attributable to the addition of educational services and facilities for
schools acquired in 1996.
General and Administrative. General and administrative expense increased
61%, from $9.1 million in 1995 to $14.6 million in 1996. The increase was
attributable to costs totalling $0.7 million related to increased personnel at
the corporate level to enhance the infrastructure and increased advertising
and marketing of $4.3 million for schools owned during 1995, as well as the
addition of $0.5 million of expense for schools acquired in 1996. The increase
in advertising and marketing expenses reflected, in part, the fact that the
former owners of the acquired schools had reduced their expenditures in these
areas prior to their acquisition by the Company.
35
<PAGE>
Depreciation and Amortization. Depreciation and amortization expense
increased 61%, from $1.3 million in 1995 to $2.1 million in 1996. The increase
was due to increased capital expenditures for schools owned during 1995 and
related increased depreciation expense of $0.7 million in 1996. Additionally,
depreciation expense increased $0.1 million due to the depreciation expense
for schools acquired in 1996. Amortization expense increased 14%, from $0.4
million in 1995 to $0.5 million in 1996, primarily due to additional
amortization of non-competition agreements for the acquisition of schools in
1996.
Interest Expense. Interest expense increased 131%, from $0.3 million in 1995
to $0.7 million in 1996. The increase was primarily due to interest expense on
borrowings used to finance the acquisition of schools in 1996.
Provision for Income Taxes. The provision for income taxes increased to $0.2
million in 1996 from an immaterial amount in 1995.
Net Income. Net income increased from an immaterial amount in 1995 to $1.5
million in 1996, due to the factors discussed above.
Net Income (Loss) Attributable to Common Stockholders. In 1996, net income
attributable to common stockholders was $0.1 million, as compared to a net
loss attributable to common stockholders of $0.8 million in 1995. This change
was attributable to the factors discussed above, offset in part by increased
dividends on preferred stock and increased accretion in the redemption value
of preferred stock and warrants.
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994
Revenue. Net tuition revenue increased 182%, from $5.8 million in 1994 to
$16.3 million in 1995, due to a 35% increase in the average number of students
attending the schools which were owned by the Company during 1994 and tuition
increases effective in 1995 for these schools, as well as added net revenue of
$5.4 million for schools acquired in 1995. Other net revenue increased 81%,
from $1.7 million in 1994 to $3.1 million in 1995, due to an increase in
student population for schools owned during 1994 and the addition of $0.2
million from schools acquired in 1995.
Educational Services and Facilities Expense. Educational services and
facilities expense increased 179%, from $3.1 million in 1994 to $8.6 million
in 1995. Of this increase, $3.0 million was attributable to the increase in
student population for schools owned during 1994 and $2.5 million was
attributable to the addition of educational services and facilities for
schools acquired in 1995.
General and Administrative. General and administrative expense increased
86%, from $4.9 million in 1994 to $9.1 million in 1995. The increase was
attributable to costs totalling $0.7 million related to increased personnel at
the corporate level to enhance the infrastructure and increased advertising
and marketing of $1.3 million for schools owned during 1994, as well as the
addition of $2.2 million of expense for schools acquired in 1995. The increase
in advertising and marketing expenses reflected, in part, the fact that the
former owners of the acquired schools had reduced their expenditures in these
areas prior to their acquisition by the Company.
Depreciation and Amortization. Depreciation and amortization expense
increased 36%, from $1.0 million in 1994 to $1.3 million in 1995. The increase
was due to increased capital expenditures for schools owned during 1994 and
related increased depreciation expense of $0.2 million in 1995. Additionally,
the Company incurred a slight increase in depreciation and amortization
expense related to schools acquired in 1995. Amortization expense decreased
26%, from $0.6 million in 1994 to $0.4 million in 1995, primarily due to
accelerated amortization of student contract intangibles.
Interest Expense. Interest expense increased 132%, from $0.1 million in 1994
to $0.3 million in 1995. The increase was primarily due to interest expense on
borrowings used to finance the acquisition of schools in 1995.
36
<PAGE>
Provision for Income Taxes. The provision for income taxes was immaterial in
both 1994 and 1995.
Net Income (Loss). The Company generated an immaterial amount of net income
in 1995, as compared to a net loss of $1.6 million in 1994, due to the factors
discussed above.
Net Income (Loss) Attributable to Common Stockholders. Net loss attributable
to common stockholders was $0.8 million in 1995, as compared to a net loss
attributable to common stockholders of $2.0 million in 1994. This change was
attributable to the factors discussed above, as well as increased dividends on
preferred stock and increased accretion in the redemption value of preferred
stock and warrants.
SEASONALITY
The Company's results of operations fluctuate primarily as a result of
changes in the level of student enrollment at the Company's schools. The
Company's schools experience a seasonal increase in new enrollments in the
fall, traditionally when the largest numbers of new high school graduates
begin postsecondary education. Furthermore, although the Company encourages
year-round attendance at all schools, Brooks has a traditional summer break
for its fashion design and interior design students. As a result of these
factors, total student enrollment and net revenue are typically highest in the
fourth quarter (October through December) and lowest in the second quarter
(April through June) of the Company's fiscal year. The Company's costs and
expenses do not, however, fluctuate as significantly on a quarterly basis. The
Company anticipates that these seasonal trends at its schools will continue.
LIQUIDITY AND CAPITAL RESOURCES
Since its formation, the Company has financed its operating activities
through cash generated from operations. Acquisitions have been financed
through a combination of additional equity investments and credit facilities.
Net cash provided by operating activities increased to $5.3 million in 1996
from $0.2 million in 1995 and $(1.0) million in 1994, due primarily to
increases in depreciation and amortization and net income. Net cash used in
operating activities was $6.3 million in the first nine months of 1997,
compared to net cash provided by operating activities of $0.6 million in the
first nine months of 1996, due primarily to post-acquisition expenditures
relating to SCT and Gibbs, along with the suspension of Title IV Program
funding for these schools while awaiting recertification.
Capital expenditures increased to $1.2 million in 1996 from $0.9 million in
1995 and $0.2 million in 1994, and increased to $2.0 million in the first nine
months of 1997 as compared to $0.9 million in the first nine months of 1996.
These increases were primarily due to investments in capital equipment as a
result of increasing student population. Capital expenditures are expected to
continue to increase as new schools are acquired, student population
increases, and the Company continues to upgrade and expand current facilities
and equipment. The Company does not have any material commitments for capital
expenditures in 1998.
The Company's net receivables as a percentage of net revenue decreased to 9%
in 1996 from 14% in 1995 and 16% in 1994, and increased to 28% in the first
nine months of 1997 as compared to 13% in the first nine months of 1996. These
changes were primarily due to student receivables at acquired schools. Based
upon past experience and judgment, the Company establishes an allowance for
doubtful accounts with respect to tuition receivables. When a student
withdraws, the receivable balance attributable to such student is charged to
this allowance for doubtful accounts. The Company's historical bad debt
expense as a percentage of revenue for the years ended December 31, 1994, 1995
and 1996 was 5%, 3% and 2%, respectively, and for the nine months ended
September 30, 1997 was 3%.
On May 30, 1997, the Company entered into the Credit Agreement with LaSalle
National Bank and prepaid approximately $21.2 million of revolving credit
notes and term loans that were outstanding under its previous credit
agreement. The Credit Agreement was amended and syndicated on September 25,
1997. Pursuant to the Credit Agreement, the Company can borrow $65 million
under a revolving credit facility and $15 million under
37
<PAGE>
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 January 21, 1998, the Company had outstanding borrowings of $32.5
million under the revolving loan facility and $13.5 million under the term
loan. Additionally, the Company had approximately $26.9 million of outstanding
letters of credit as of such date.
The Company intends to use approximately $30.8 million of its net proceeds
from the Offering to repay outstanding revolving credit borrowings under the
Credit Agreement. The Company does not intend to use any of its net proceeds
to repay outstanding borrowings under the term loan. The Company expects that
its interest expense in the period following the Offering, assuming no
material acquisitions during this period, will be lower, and will have a
lesser proportionate impact on the Company's net income, as compared to the
period prior to the Offering. The Company also intends to use approximately
$4.1 million of its net proceeds from the Offering to repay the outstanding
indebtedness on notes payable to the former shareholders of IAMD-U.S. and
IAMD-Canada.
On January 22, 1998, The Provident Bank notified the Company that it is
exercising its right to cause the Company to repurchase the Provident Warrant.
The Company expects to pay The Provident Bank approximately $400,000 in
exchange for the Provident Warrant. The Company anticipates repurchasing the
Provident Warrant on or before April 22, 1998.
The DOE requires that Title IV Program funds collected by an institution for
unbilled tuition be kept in separate cash or cash equivalent accounts until
the students are billed for the portion of their program related to these
Title IV Program funds. In addition, all funds transferred to the Company
through electronic funds transfer programs are held in a separate cash account
until certain conditions are satisfied. As of September 30, 1997, the Company
did not hold any funds in these 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.
The Company's cash flow from operations on a long-term basis is dependent on
the receipt of funds from the Title IV Programs. For 1996, the Company's U.S.
institutions derived approximately 52% to approximately 82% of their
respective tuition and fee revenue (on a cash basis) from the Title IV
Programs. The HEA and its implementing regulations establish specific
standards of financial responsibility that must be satisfied in order to
qualify for participation in the Title IV Programs. In connection with the
Company's acquisitions of Western Culinary, SCT, Gibbs and IAMD-U.S., the DOE
has reviewed the Company's financial statements and questioned the Company's
accounting treatment for certain direct marketing costs and courseware and
other instructional materials. However, the Company has maintained the
eligibility of Western Culinary, SCT, Gibbs and IAMD-U.S. to continue
participating in the Title IV Programs by posting letters of credit in favor
of the DOE in the aggregate amount of $20.4 million
38
<PAGE>
After giving effect to the Offering and the application of the net proceeds
therefrom as described under "Use of Proceeds," the Company's remaining credit
availability under the Credit Agreement would be approximately $40.6 million.
In discussions with the Company, the DOE has agreed to consider financial
information reflecting the results of the Offering, as well as the 1997
audited financial statements in the DOE's next review of the financial
responsibility of the Company and its U.S. institutions. The Company believes
that proceeds to the Company from the Offering and the cash generated from
operations during 1997 will enable the Company and each of its institutions to
satisfy the DOE's standards of financial responsibility, based upon their 1997
audited financial statements and the Company's post-Offering financial
information. The Company intends to seek the DOE's review of the Company's and
its U.S. institutions' audited 1997 financial statements and the Company's
post-Offering financial information on an expedited basis in the spring of
1998. To the extent the letters of credit are reduced or eliminated, the
Company will have additional availability under the Credit Agreement. The
Company believes that it will have sufficient liquidity to increase the
letters of credit should the DOE so require. However, there can be no
assurance that, if required, the Company will be able to maintain or increase
its letters of credit in the future. See "Risk Factors--Potential Loss of
Student Financial Aid Due to Failure to Meet Financial Responsibility
Standards" and "Financial Aid and Regulation--Federal Oversight of the Title
IV Programs--Company Compliance with Financial Responsibility Standards."
NEW ACCOUNTING STANDARDS
Recent pronouncements of the Financial Accounting Standards Board ("FASB"),
which are not required to be adopted at this date, include Statement of
Financial Accounting Standards ("SFAS") No. 131, "Disclosure about Segments of
an Enterprise and Related Information" ("SFAS No. 131"), SFAS No. 130,
"Reporting Comprehensive Income" ("SFAS No. 130"), SFAS No. 129, "Disclosure
of Information about Capital Structure" ("SFAS No. 129") and SFAS No. 128,
"Earnings Per Share" ("SFAS No. 128"). SFAS No. 131 requires that a public
business enterprise report financial and descriptive information about its
reporting segments on the same basis that it uses internally for evaluating
segment performance and deciding how to allocate resources to segments. SFAS
No. 130 establishes standards for reporting and display of comprehensive
income and its components in a full set of general-purpose financial
statements. SFAS Nos. 129 and 128 specify guidelines as to the method of
computation of, as well as presentation and disclosure requirements for,
earnings per share. Adoption of SFAS No. 128 is required for fiscal years
ending after December 15, 1997. The other Statements discussed above are
effective for fiscal years beginning after December 15, 1997 and earlier
application is not permitted. The adoption of these Statements is not expected
to have a material effect on the Company's consolidated financial statements.
39
<PAGE>
BUSINESS
OVERVIEW
CEC is one of the largest providers of private, for-profit postsecondary
education in North America, with approximately 13,000 students enrolled as of
October 31, 1997. CEC operates nine schools, with 18 campuses located in 13
states and two Canadian provinces. These schools enjoy long operating
histories and offer a variety of bachelor's degree, associate degree and non-
degree programs in career-oriented disciplines within the Company's core
curricula of (i) computer technologies, (ii) visual communication and design
technologies, (iii) business studies and (iv) culinary arts.
CEC was founded in January 1994 by John M. Larson, the Company's President
and Chief Executive Officer, who has over 23 years of experience in the
career-oriented education industry. The Company was formed to capitalize on
opportunities in the large and highly fragmented postsecondary school
industry. Since its inception, CEC has completed nine acquisitions. The
Company has acquired schools that it believes possess strong curricula,
leading reputations and broad marketability but have been undermanaged from a
marketing and financial standpoint. The Company seeks to apply its expertise
in operations, marketing and curricula development, as well as its financial
strength, to improve the performance of these schools. The schools acquired by
the Company and their improved enrollment are summarized in the following
table:
<TABLE>
<CAPTION>
STUDENT POPULATION
AT OCTOBER 31,
------------------
YEAR DATE PRINCIPAL ASSOCIATE DEGREE %
SCHOOL FOUNDED ACQUIRED CURRICULA (1) GRANTING (2) 1996 1997 INCREASE
------ ------- -------- -------------- ---------------- ---- ---- --------
<S> <C> <C> <C> <C> <C> <C> <C>
AL COLLINS
GRAPHIC DE-
SIGN SCHOOL 1978 1/94 VC, CT Yes (3)
Tempe, AZ 891 1,008 13%
BROOKS COL-
LEGE 1970 6/94 VC Yes
Long Beach,
CA 960 1,112 16
ALLENTOWN
BUSINESS
SCHOOL 1869 7/95 B, VC, CT, S Yes
Allentown,
PA 781 927 19
BROWN INSTI-
TUTE 1946 7/95 VC, CT, RTB, E Yes
Mendota
Heights, MN 1,452 1,575 8
WESTERN CULI-
NARY INSTI-
TUTE 1983 10/96 CA No
Portland,
OR 453 467 3
SCHOOL OF
COMPUTER
TECHNOLOGY 1967 2/97 CT, CA, LS Yes
Fairmont,
WV 169 184 9
Pittsburgh,
PA 771 869 13
THE KATHARINE
GIBBS
SCHOOLS 1911 5/97 B, S, CT Yes
Boston, MA 412 412 --
Melville,
NY 354 440 24
Montclair,
NJ 482 569 18
New York,
NY 984 1,211 23
Norwalk, CT
(4) 260 345 33
Piscataway,
NJ (5) 228 307 35
Providence,
RI (5) 262 272 4
INTERNATIONAL
ACADEMY OF
MERCHANDISING
& DESIGN
(U.S.) 1977 6/97 VC Yes (3)
Chicago, IL 741 871 18
Tampa, FL 461 647 40
INTERNATIONAL
ACADEMY OF
MERCHANDISING
& DESIGN
(CANADA) 1983 6/97 VC No
Montreal,
PQ 394 619 57
Toronto, ON 834 1,157 38
--------- --------- ---
Total 10,889 12,992 19%
========= ========= ===
</TABLE>
- --------
(1) The programs offered by the Company's schools include visual communication
and design technologies ("VC"), computer technologies ("CT"), business
("B"), radio and television broadcasting ("RTB"), electronics ("E"),
culinary arts ("CA"), laser surgery technologies ("LS") and secretarial
studies ("S").
(2) All of the Company's schools, other than Brooks and IAMD-U.S., in Tampa,
also offer diploma (or certificate) programs.
(3) Also offers bachelor's degrees.
(4) The Gibbs campus in Norwalk, Connecticut, is now using the name Gibbs
College.
(5) Does not offer degree programs.
40
<PAGE>
The Company's success in completing acquisitions and improving the financial
performance of acquired schools has enabled it to achieve rapid growth. Net
revenue has increased from $7.5 million in 1994 to $33.6 million in 1996. For
the first nine months of 1997, net revenue was $50.8 million. 1996 pro forma
net revenue, reflecting the results of operations of schools the Company
acquired in 1997, would have been $87.5 million.
The Company's schools offer educational programs principally in four career-
related fields of study -- (i) computer technologies (including Internet and
intranet technologies), (ii) visual communication and design technologies,
(iii) business studies and (iv) culinary arts -- identified by the Company as
areas with highly interested and motivated students, strong entry-level
employment opportunities and ongoing career and salary advancement potential.
. Computer Technologies: These programs include PC/LAN, PC/Net, computer
applications, computer information systems and computer programming. The
Company recently extended the PC/Net program to Collins, commencing in
August 1997. Diplomas can be earned at selected schools and associate
degrees can be earned at Allentown, Brown, Collins, Gibbs-Melville and
SCT. According to the U.S. Department of Labor, approximately 755,000 new
jobs in the computer technology fields will be created by 2005. This
represents an increase of approximately 91% over the number of similar
jobs in 1994.
. Visual Communication and Design Technologies: These programs include
desktop publishing, graphic design, fashion design, interior design and
graphic imaging and are offered at Allentown, Brown, Collins, IAMD-Canada
and IAMD-U.S. In addition, Brooks added a visual communications program
in the summer of 1996, which now has the largest enrollment of any of
Brooks' programs. In addition to diplomas, which can be earned at
selected schools, students in these fields can earn associate degrees at
Allentown, Brooks, Brown, Collins and IAMD-U.S. and bachelor's degrees at
Collins and IAMD-U.S. The U.S. Bureau of Labor Statistics projects growth
of approximately 30%, a gain of over 80,000 jobs, for design-related
occupations between 1994 and 2005.
. Business Studies: These programs include business administration and
business operations. Allentown and Gibbs offer diploma and associate
degree programs in business-related areas of study. According to the U.S.
Bureau of Labor Statistics, over two million new jobs will be created
between 1994 and 2005 in the executive, administrative and managerial
fields.
. Culinary Arts: In these programs, students can earn a diploma in culinary
arts at Western Culinary and an associate degree in culinary arts at SCT.
The Company believes significant opportunities exist to offer culinary
arts programs at other schools, on a contract training basis and in a
short program format on weekends, and to offer additional related
programs. The U.S. Department of Labor projects approximately 14% growth
in the food preparation and service occupations by 2005. This represents
an increase of over one million jobs from 1994.
In addition to the core curricula, the Company's schools offer a number of
other programs. These include secretarial and allied health (medical assisting
and medical office management) programs at Allentown; broadcasting and
electronics programs at Brown; laser surgery technology programs at SCT;
secretarial and hospitality programs at Gibbs; and merchandising programs at
Brooks, IAMD-Canada and IAMD-U.S.
INDUSTRY BACKGROUND
Based on estimates for 1995 by the DOE's National Center for Education
Statistics (the "NCES"), postsecondary education is a $200 billion industry in
the United States, with over 14 million students obtaining some form of
postsecondary education. Of this total, approximately 1.5 million students are
enrolled in approximately 3,000 proprietary postsecondary schools. Federal
funds available to support postsecondary education exceed $40 billion dollars
each year and have grown steadily over the last two decades. Additionally, the
federal government guaranteed over $92 billion in student loans in 1996 and is
expected to guarantee loans at comparable levels in the future. State, local
and private funds for career-oriented training are also available.
41
<PAGE>
Several national economic, demographic and social trends are converging to
contribute to growing demand for career-oriented school education:
Changes in Workplace Demands. The workplace is becoming increasingly
knowledge-intensive. Rapid advances in technology have increased demands on
employers and their employees, requiring many new workers to have some form of
training or education beyond the high school level. The increasing
technological requirements of entry level jobs are spurring demand for
specialized training which, in many cases, is not provided by traditional two-
and four-year colleges. The U.S. Department of Labor projects that jobs
requiring some form of postsecondary training are expected to increase
approximately 11% between 1994 and 2005. Furthermore, career-oriented schools
generally have the ability to react quickly to the changing needs of the
nation's business and industrial communities. Additionally, to meet the new
workplace demands, many major companies are now using career-oriented
institutions to provide customized training for their employees on a
contractual basis. Small to medium-sized companies are also using proprietary
career-oriented schools to fill their needs for training to maintain or
increase the skill levels of their employees.
Increasing Numbers of High School Graduates. Currently, in the U.S., high
school graduates alone represent over 2.5 million new prospective
postsecondary students each year, the largest pool of potential enrollees.
Over the 18 years prior to 1993, the number of high school graduates had been
declining. However, this trend has changed favorably as children of the "baby
boom" generation are entering their high school years. These members of the
"echo boom," as it is commonly known, are expected to boost enrollment in
postsecondary educational programs to as high as 16.4 million students by
2006, an increase of 15.5% from approximately 14.2 million in the fall of
1995.
Growing Demand for Postsecondary Education. High school graduates and adults
are seeking postsecondary education in increasing numbers. According to the
U.S. Department of Commerce, approximately 63% of all 1995 high school
graduates continued their education that same year, compared with 53% a decade
earlier. The U.S. Department of Labor projects the number of jobs requiring at
least an associate degree or higher to grow by more than 20% between 1994 and
2005. In addition, enrollment in postsecondary programs is expected to
increase substantially as individuals seek to enhance their skills or re-train
for new job requirements. In part because of the recent trend toward corporate
downsizing, the NCES estimates that over the next several years initial
enrollments in postsecondary education institutions by working adults will
increase more rapidly than initial enrollments by recent high school
graduates. The number of adults enrolled in postsecondary education programs
in the United States is estimated by the NCES to reach 6.8 million by 1999, or
45% of the total number of people enrolled.
Recognition of the Value of Postsecondary Education. The Company believes
that prospective students are increasingly recognizing the income premium and
other improvements in career prospects associated with a postsecondary
education. The U.S. Census Bureau reported that, in 1995, a full-time male
worker with an associate degree earned an average of 37% more per year than a
comparable worker with only a high school diploma, while a full-time male
worker with a bachelor's degree earned an average of 72% more per year than a
comparable worker with only a high school diploma. Independent research
studies have demonstrated that prospective students consider these benefits in
making their education decisions.
Reduction in Public Education Funding. The reduction of federal, state or
provincial and local funding of public educational institutions in recent
years has forced educational institutions to cut back spending on general
operations. As a result, some schools have become underfunded and overcrowded.
This trend may provide an opportunity for proprietary institutions to serve,
at more competitive prices, the postsecondary education needs of certain
individuals who would have otherwise attended public schools.
Decreasing Size of Military Forces. Due to defense budget cuts and the
corresponding reduction in the U.S. armed forces, the U.S. military, a
traditional provider of technical and career-oriented training, is able to
provide fewer educational opportunities. According to the U.S. Department of
Defense, the aggregate number of U.S. military personnel has declined by 32%
since 1987, with the aggregate number of individuals on active duty in the
U.S. military services declining from 2.2 million in 1987 to 1.5 million in
1996. This has left an educational void to be filled by other sources,
including proprietary career-oriented schools.
The Company believes that private, for-profit, career-oriented schools are
uniquely positioned to take advantage of these national trends. The Company
also believes that similar factors are creating a favorable climate for
career-oriented postsecondary education in Canada and other international
markets.
42
<PAGE>
BUSINESS AND OPERATING STRATEGY
The Company was founded based upon a business and operating strategy which
it believes has enabled it to achieve significant improvements in the
performance of its acquired schools. The Company believes this strategy will
enable it to continue to capitalize on the favorable economic, demographic and
social trends which are driving demand for career-oriented education, thereby
strengthening its position as a premier, professionally managed system of
career-oriented postsecondary educational institutions. The key elements of
the Company's business and operating strategy are as follows:
Focusing on Core Curricula. The Company's schools offer educational programs
principally in four career-related fields of study: (i) computer technologies
(including Internet and intranet technologies) (offered at 16 campuses); (ii)
visual communication and design technologies (offered at eight campuses);
(iii) business studies (offered at eight campuses) and (iv) culinary arts
(offered at two campuses). The Company perceives a growing demand by employers
for individuals possessing skills in these particular fields. Accordingly, the
Company believes there are many entry-level positions and ongoing career and
salary advancement potential for individuals who have received advanced
training in these areas. The Company recognizes that, largely as a result of
these employment opportunities, the identified areas of study attract highly
interested and motivated students. These students include both recent high
school graduates and adults seeking formal training in these fields as well as
degrees, diplomas and certificates evidencing their attainment of the
knowledge and skills sought by employers. The Company's experience and
expertise in these attractive areas of study enable it to differentiate itself
from many of its competitors and to effectively tailor its acquisition and
marketing plans.
Adapting and Expanding Educational Programs. The Company strives to meet the
changing needs of its students and the employment market. The Company
continually refines and adapts its courses to ensure that both students and
employers are satisfied with the quality and breadth of the Company's
educational programs. Through various means, including student and employer
surveys and curriculum advisory boards comprised of business community
members, the Company's schools regularly evaluate their program offerings and
consider revisions to existing classes and programs, as well as the
introduction of new courses and programs of study within the Company's core
curricula. The Company selectively duplicates programs that have been
successful at other schools within the CEC system. For example, the Company
recently introduced a visual communications program at Allentown similar to
those already offered at Brooks, Collins, IAMD-U.S. and IAMD-Canada and
introduced a computer technologies (PC/Net) program at Collins like those
offered at Allentown, Brown and SCT.
Direct Response Marketing. The Company seeks to increase school enrollment
and profitability through intensive local, regional and national direct
response marketing programs designed to maximize each school's market
penetration. Because many of the Company's schools have been significantly
undermarketed prior to their acquisition, the Company believes that major
benefits can result from carefully crafted, targeted marketing programs that
leverage schools' curriculum strength and brand name recognition. After every
school acquisition, the Company designs a marketing program tailored to the
particular school to highlight its strengths and to improve student lead
generation and student enrollment rates. Management uses a diversified media,
direct response approach, including direct mail, Internet-based advertising,
infomercials, other television-based advertising, newspaper advertising and
other print media, to attract targeted populations. The Company places
particular emphasis on high school recruitment because this market typically
produces a steady supply of new students.
Improving Student Retention. The Company emphasizes the retention of
students, from initial enrollment to completion of their courses of study, at
each of its schools. Because, as at any postsecondary educational institution,
a substantial portion of the Company's students never finish their educational
programs for personal, financial or academic reasons, substantial increases in
revenue and profitability can be achieved through modest improvements in
student retention rates. The costs to the Company of a school's efforts to
keep current students in school are much less than the expense of the
marketing efforts associated with attracting new students; therefore, such
student retention efforts, if successful, are extremely beneficial to
operating results. The Company
43
<PAGE>
strives to improve retention by treating students as valued customers. The
Company considers student retention the responsibility of the entire staff of
each school, from admissions to faculty and administration to career
counseling services, and provides resources and support for the retention
efforts developed by its local school administrators. School personnel
typically employ an approach based upon establishing personal relationships
with students; for example, students may receive a telephone call from a
school counselor or faculty member if they miss classes. In addition, the
Company's corporate staff regularly tracks retention rates at each school and
provides feedback and support to the efforts of local school administrators.
Emphasizing Employment of Graduates. The Company believes that the high
rates of employment for graduates of its schools enhances the overall
reputation of the schools as well as their ability to attract new students.
Moreover, high placement rates lead to low student loan default rates, which
are necessary to allow for the Company's schools continued participation in
the Title IV Programs. Accordingly, the Company considers student placement to
be a high priority and allocates a significant amount of time and resources to
placement services. Due, at least in part, to this emphasis, 87% of the 1996
graduates of the Company's schools who were available for employment had found
employment relating to their fields of study within six months of graduation.
The Company is committed to maintaining or improving these graduate employment
rates and newly acquired schools will be expected to meet similar graduate
employment success standards.
Making Capital Investments. The Company makes substantial annual investments
in its facilities and equipment to attract, retain and prepare students for
the increasing technical demands of the workplace. The students at each of the
Company's campuses study in comfortable, modern facilities equipped with
current, industry-specific equipment and technology.
Emphasizing School Management Autonomy and Accountability. The Company
provides significant autonomy and appropriate performance-based incentives to
its campus-level managers, which the Company believes offers important
benefits for the organization. The Company believes these policies foster
among campus-level administrative personnel an important sense of personal
responsibility for achieving campus performance objectives. The Company also
believes its willingness to grant local autonomy provides the Company and its
schools with a significant advantage in recruiting and retaining highly-
motivated individuals with an entrepreneurial spirit. Management of each of
the Company's campuses is principally directed by a campus president and local
managers, who are accountable for the campuses' operations and profitability.
Business strategy, finance and consolidation accounting functions are,
however, centralized at the Company's executive offices in Hoffman Estates,
Illinois. When a new school is acquired, the Company evaluates the
capabilities of existing campus management personnel, and typically retains a
significant portion, which contributes to the Company's ability to rapidly
integrate acquired schools into its system. The Company also determines the
acquired school's needs for additional or stronger managers in key areas and,
where necessary, takes appropriate action by hiring new managers or assigning
experienced staff to the school's campuses.
The Company believes that its application of this comprehensive business and
operating strategy has been a major factor in improving the operations of the
four schools owned by the Company as of July 1995: Allentown, Brooks, Brown
and Collins. At these four schools, the aggregate number of students has
increased over 38% over the past two years, from 3,347 at October 31, 1995 to
4,622 at October 31, 1997.
GROWTH STRATEGY
The Company believes it can achieve superior long-term growth in revenue and
profitability by continuing to expand existing operations and acquire
additional schools in attractive North American markets. The Company believes
it can achieve additional growth in the future by establishing new campuses
and also by entering new service areas and expanding internationally.
Expanding Existing Operations. The Company believes that the Company's
existing 18 campuses can achieve significant internal growth in enrollment,
revenue and profitability. The Company is executing its business and operating
strategy, including all of the elements described above, to accomplish this
growth. The Company believes that expansion of operations at its existing
schools, along with acquisitions of new schools, will be the primary
generators of the Company's growth in the near term.
44
<PAGE>
Acquiring Additional North American Schools. To date, the Company has grown
by acquiring new schools in the U.S. and Canada and then applying its
expertise in marketing and school management to increase enrollment, revenue
and profitability at those schools. The Company expects that this process will
continue to be one of the most important elements of its growth strategy. The
Company has an active acquisition program and from time to time engages in,
and is currently engaged in, evaluations of, and discussions with, possible
acquisition candidates, including evaluations and discussions relating to
acquisitions that may be material in size and/or scope. However, the Company
currently has no agreements or commitments with respect to any acquisitions.
The Company makes selective acquisitions of for-profit, career-oriented
schools which have a capable senior faculty and operations staff, as well as
quality educational programs which stand to benefit from the Company's
educational focus, marketing and operating strengths. The Company targets
schools which it believes have the potential to generate superior financial
performance. Generally, such schools demonstrate the following
characteristics:
. Success--Demonstrating the ability to attract, retain and place students,
while meeting applicable federal and state regulatory criteria and
accreditation standards;
. ""Schools of Choice"--Possessing leading reputations in career-oriented
disciplines within local, regional and national markets;
. Marketable Curricula--Offering programs with high value-added content and
relevant training to provide students with the skills necessary to obtain
attractive jobs and advance in their selected fields;
. Broad Marketability--Attracting students from each of the high school,
adult, foreign and contract training market segments; and
. Attractive Facilities and Geographic Locations--Providing geographically
desirable locations and modern facilities to attract students and
preparing them for the demands of the increasingly competitive work
place.
The Company believes that significant opportunities exist for growth through
acquisition. Some opportunities result from institutions having limited
resources to manage increasingly complex regulations or to fund the
significant cost of developing new educational programs necessary to meet
changing demands of the employment market. The Company believes that a
substantial number of schools exhibiting the characteristics described above
exist in the U.S. market and that such schools can be successfully integrated
into the Company's marketing and administrative structure.
The Company believes that there are also a significant number of potential
acquisition candidates and opportunities for growth in Canada. The Company
believes that favorable trends, similar to those occurring in the U.S., are
positively affecting the Canadian career-oriented postsecondary education
market, but that competition in Canada is not currently as intense as in the
United States. Few of the largest U.S. operators of postsecondary career-
oriented schools presently have a significant Canadian presence. The Company
believes that, given its existing Canadian operations, it is well-positioned
to take advantage of these opportunities.
The Company analyzes potential acquisition targets for their long-term
profit potential, enrollment potential and long-term demographic trends,
concentration of likely employers within the region, level of competition,
facility costs and availability and quality of management and faculty. The
Company carefully investigates any potential acquisition target for its
history of regulatory compliance, both as an indication of future regulatory
costs and compliance issues and as an indication of the school's overall
condition. Significant regulatory compliance issues in the school's past
generally will remove a school from the Company's consideration as an
acquisition candidate.
After the Company has completed an acquisition of one or more schools, the
Company immediately begins to apply its business strategy to boost enrollment
and improve the acquired schools' profitability. The Company assists acquired
schools in achieving their potential through a highly focused and active
management role, as well as through capital contributions. The Company
selectively commits resources to improve marketing, advertising,
administration and regulatory compliance at each acquired school. Further
resources may also be committed to enhance management depth. The Company
retains acquired schools' brand names to take advantage of their established
reputation in local, regional and/or national markets as "schools of choice."
45
<PAGE>
By acquiring new schools, CEC is also able to realize economies of scale in
terms of its management information systems, accounting and audit functions,
employee benefits and insurance procurement. The Company also benefits from
the exchange of ideas among school administrators regarding teacher training,
student retention programs, recruitment, curriculum, financial aid and student
placement programs.
Establishing New Campuses. Although, to date, the Company has only added new
campuses through acquisitions, in the future the Company expects to develop,
open and operate new campuses itself. These new campuses will most likely be
established as additional locations of existing institutions, but also may be
established as entirely separate, free-standing institutions. Opening new
campuses would enable the Company to capitalize on new markets or geographic
locations that exhibit strong enrollment potential and/or the potential to
establish a successful operation in one of the Company's core curricula areas.
The Company believes that this strategy will allow it to continue to grow
rapidly even if appropriate acquisition opportunities are not readily
available. The Company has not yet developed specific plans for any new
campuses, nor made any determination as to when it will first develop, open
and operate a new campus.
Entering New Service Areas. While the Company expects that its current
career-oriented school operations will continue to provide the substantial
majority of its revenue in the near term, the Company plans to develop new
education-related services which the Company believes offer strong long-term
growth potential. Among the service areas being actively considered are
distance learning (offering educational products and services for working
adults through video, Internet and other distribution channels) and
educational publishing (producing and marketing educational publications). The
Company also plans to expand its contract training business (providing
customized training on a contract basis for business and government
organizations), currently a limited part of the operations of a few of its
schools. Though the Company has not yet actively targeted the growing market
for contract training services, the Company believes that contract training
can become a much more significant part of its business.
Expanding Internationally. Although all of the Company's current operations
are located in North America, the Company believes that trends similar to
those impacting the market for career-oriented postsecondary education in the
U.S. and Canada are occurring outside of North America. As a result, the
Company believes that there may be significant international opportunities in
private, for-profit postsecondary education. To take advantage of these
opportunities, the Company may at some time in the future elect to acquire or
establish operations outside North America.
STUDENT RECRUITMENT
The Company's schools seek to attract students with both the desire and
ability to complete their academic programs. Therefore, to produce interest
among potential students, each of the Company's schools engages in a wide
variety of marketing activities.
The Company believes that the reputation of its schools in local, regional
and national business communities and the recommendations of satisfied former
students are important factors contributing to success in recruiting new
students. CEC works to further enhance the qualities that make its schools
"schools of choice" within their geographic locations. Each school's
admissions office is charged with marketing its school's programs through a
combination of admissions representatives, direct mailings and radio,
television and print media advertising, in addition to providing the
information needed by prospective students to assist them in making their
enrollment decisions.
The Company's schools employ approximately 185 admissions representatives,
each of whom focuses his or her efforts solely on the following areas: (i)
out-of-area (correspondence) recruiting, (ii) high school recruiting or (iii)
in-house (adult) recruiting. Correspondence representatives work with students
who live outside of the immediate school area to generate interest through
correspondence with potential enrollees who have learned of the school through
regional or national advertising. The Company believes it is able to
significantly boost enrollment by targeting students outside of the local
population. High school recruiting representatives conduct informational
programs at local secondary schools and follow up with interested students
outside of school, either at their homes or on the CEC school campus. The
interpersonal relationships formed with high school counselors
46
<PAGE>
and faculty may have significant influence over a potential student's choice
of school. CEC believes that the relationships of its schools' representatives
with the counseling departments of high schools are good and that the brand
awareness and placement rates of its schools assist representatives in gaining
access to counselors. In-house representatives are also available to speak
with prospective students who visit campuses and to respond to calls generated
through the school's advertising campaigns. Representatives interview and
advise students interested in specific careers to determine the likelihood of
their success in completing their educational programs. The admissions
representatives are full-time, salaried employees of the schools. Regulations
of the DOE prevent the Company from giving its employees incentive
compensation based, directly or indirectly, upon the number of students
recruited.
The Company also engages in significant direct mail campaigns. Mailing lists
are purchased from a variety of sources, and brochures are mailed regularly
during the course of the year, with frequency determined by the number of
school starts in a given year. The Company believes direct mailings offer a
fast and cost-effective way to reach a targeted population.
In addition, each school develops advertising for a variety of media,
including radio, television and the Internet, which is run locally, regionally
and sometimes nationally. While multi-media advertising is generally more
appropriate for local markets, certain initiatives have been successfully
utilized on a national basis. CEC has found infomercials to be a particularly
effective tool nationally because their length enables schools to convey a
substantial amount of information about their students, their faculty, their
facilities and, most importantly, their course offerings. The Company also
believes that the personal flavor of the presentation typical of infomercials
is well-suited to attracting potential applicants. As an additional marketing
tool, all of the Company's schools have established web sites, which can be
easily accessed for information about these schools and their educational
programs. Although the Company retains independent advertising agencies, the
Company designs and produces a portion of its direct marketing and multi-media
advertising and communications in-house, through Market Direct, Inc., a
wholly-owned subsidiary ("Market Direct"). While a majority of Market Direct's
operations involve designing and producing advertising for the Company, Market
Direct also provides these services to other businesses outside of the
postsecondary education industry as opportunities arise.
The Company closely monitors the effectiveness of its marketing efforts. The
Company estimates that, in 1996, admissions representatives were responsible
for attracting approximately 25% of student enrollments, direct mailings were
responsible for approximately 14%, television, radio and print media
advertising were responsible for approximately 41%, and the remaining
approximately 20% was attributable to various other methods.
STUDENT ADMISSIONS AND RETENTION
The admissions and entrance standards of each school are designed to
identify those students who are best equipped to meet the requirements of
their chosen fields of study. The most important qualifications for students
include a strong desire to learn, passion for their area of interest,
initiative and a high likelihood of successfully completing their programs.
These characteristics are generally identified through personal interviews by
admissions representatives. The Company believes that a success-oriented
student body results in higher retention and placement rates, increased
satisfaction on the part of students and their employers and lower student
default rates on government loans. To be qualified for admission to one of the
Company's schools, each applicant must have a high school diploma or a General
Education Development (GED) certificate. Many of the Company's schools also
require that applicants obtain certain minimum scores on academic assessment
examinations. For 1996, approximately 28% of entering students at the
Company's campuses matriculated directly from high school.
The Company recognizes that its ability to retain students until graduation
is an important indicator of its success and that modest improvements in
retention rates can result in meaningful increases in school revenue and
profitability. As with other postsecondary educational institutions, many of
the Company's students do not
47
<PAGE>
complete their programs for a variety of personal, financial or academic
reasons. As a result, student retention is considered an entire school's
responsibility, from admissions to faculty and administration to career
counseling services. To minimize student withdrawals, faculty and staff
members at each of the Company's campuses strive to establish personal
relationships with students. Each campus devotes staff resources to advising
students regarding academic and financial matters, part-time employment and
other matters that may affect their success. However, while there may be many
contributors, each campus has one administrative employee specifically
responsible for monitoring and coordinating the student retention efforts. In
addition, the Company's senior management regularly tracks retention rates at
each campus and provides feedback and support to appropriate local campus
administrators.
CURRICULUM DEVELOPMENT AND FACULTY
The Company believes that curriculum is the single most important component
of its operations, because students choose, and employers recruit from,
career-oriented schools based on the type and quality of technical education
offered. The curriculum development efforts of the Company's schools are a
product of their operating partnership with students and the business and
industrial communities.
The relationship of each of the Company's schools with the business
community plays a significant role in the development and adaptation of school
curriculum. Each school has one or more curriculum advisory boards comprised
of members of the local and/or regional business community who are engaged in
businesses directly related to the educational programs provided by the
school. These boards provide valuable input to the school's education
department, which allows the school to keep its curriculum current and provide
graduates with the training and skills that these employers seek.
CEC also endeavors to enhance and maintain the relevancy of its curriculum
by soliciting ideas through student and employer surveys and by requiring
students in selected programs to complete an internship during their school
experience. CEC has developed a number of techniques designed both to gain
valuable industry insight for ongoing curriculum development and enhance the
overall student experience. These techniques include (i) classroom discussions
with industry executives, (ii) part-time job placement within a student's
industry of choice, and (iii) classroom case studies that are based upon
actual industry issues.
CEC's schools are in continuous contact with employers through their
faculty, who are industry professionals. The schools hire a significant number
of part-time faculty holding positions in business and industry because
specialized knowledge is required to teach many of the schools' courses and to
provide students with current, industry-specific training. The schedules of
business and industry professionals often permit them to teach the many
evening courses offered by the Company's schools. Unlike traditional four-year
colleges, instructors in the Company's schools are not awarded tenure and are
evaluated, in part, based upon student evaluations. As of October 31, 1997,
the Company's schools employed approximately 950 faculty members, of which
approximately 24% were full-time employees of the Company and approximately
76% had been hired on a part-time, adjunct basis.
SCHOOL ADMINISTRATION
CEC provides significant operational autonomy and appropriate performance-
based compensation to local school administrators who have demonstrated the
ability to undertake such responsibility, based on the Company's belief that
success is driven by performance at the local level through enrollment growth,
student retention rates and placement rates. In addition, each CEC school
requires, to a certain extent, different resources and operating tactics due
to a variety of factors, including curriculum, demographics, geographic
location and size. Management of each of the Company's schools is principally
in the hands of a school president who has accountability for the school's
operations and profitability. Each CEC school has five primary operating
departments: admissions, financial aid, education, placement and accounting.
48
<PAGE>
Business strategy, finance and consolidation accounting functions are
centralized at the Company's corporate headquarters. CEC's corporate staff
develops long-term and short-term operating strategies for the schools and
works closely with local administrators to accomplish their goals and ensure
adherence to Company strategy. CEC maintains stringent quality standards and
controls at both the corporate and individual school levels. Activities at the
corporate level include regular reporting processes which track the vital
statistics of each school's operations, including enrollments, placements,
leads, retention rates and financial data. These reports provide real-time
data which allow management to monitor the performance of each campus. Each
operating department at the campus level is also required to compile certain
quantitative reports at regular intervals, including reports on admissions,
financial aid, academic performance and placement.
CEC uses a number of quality and financial controls. Information is tracked
through an advanced, PC-based management information system, which currently
runs on a decentralized basis, but also allows centralized access to account
information.
TUITION AND FEES
Effective with the fall of 1997, total tuition for completion (on a full-
time basis) of a 12-month diploma program offered by the Company's schools
ranges from $5,700 to $14,270, for completion of an associate degree program
ranges from $12,600 to $22,770, and for completion of a bachelor's degree
program ranges from $31,800 to $37,080. In addition to these tuition amounts,
students at the Company's schools typically must purchase textbooks and
supplies as part of their educational programs.
The Company's institutions bill students for their tuition and other
institutional charges based on the specific instructional format or formats of
the school's educational programs. Each institution's refund policies must
meet the requirements of the DOE and such institution's state and accrediting
agencies. Generally, under the DOE's requirements, if a first-time student
ceases attendance before the point in time that is 60% of the period of
enrollment for which the student has been charged, the institution will refund
institutional charges based on the amount of time for which the student paid
but did not attend. After a student has attended 60% or more of the term, the
institution will retain 100% of the institutional charges for that period of
enrollment. After the student's first enrollment period, the institution
refunds institutional charges for subsequent periods of enrollment based on
the number of weeks remaining in the period of enrollment in which the student
withdrew. Certain state refund requirements, where more beneficial to the
students, are applied when determining refunds for students.
GRADUATE EMPLOYMENT
The Company believes that employment of graduates of its schools in
occupations related to their fields of studies is critical to the reputation
of the schools and their ability to continue to recruit students successfully.
The Company believes that its schools' most successful form of recruiting is
through referrals from satisfied graduates. A strong placement office is
important to maintain and elevate the school's reputation, as well as managing
the rate at which former students default on their loans.
CEC devotes a significant amount of time and resources to student placement,
which the Company believes to be the ultimate indicator of its success. The
Company believes that its average placement rate (calculated according to the
criteria discussed below), which was in excess of 87% for calendar year 1996
graduates, is attractive to prospective students and provides a competitive
advantage. Student placement is a top priority of each CEC school beginning on
the first day of student enrollment. This approach heightens the students'
awareness of the placement department and keeps students focused on their
goal--job placement within their field of choice. Moreover, each CEC school
includes in its curriculum a career development course which provides
instruction in the preparation of resumes, cover letters, networking and other
essential job-search tools. Placement office resources are regularly available
to CEC school graduates. With such assistance, the Company's graduates find
employment with a wide variety of businesses located not only in the schools'
local markets but also regionally and nationally.
49
<PAGE>
Each campus' placement department also plays a role in marketing the campus'
curriculum to the business community to produce job leads for graduates.
Approximately 50 employees work in the placement departments of the Company's
campuses. Placement counselors participate in professional organizations,
advisory boards, trade shows and community events to keep apprised of industry
trends and maintain relationships with key employers. Partnerships with local
and regional businesses are established through internships and curriculum
development programs and facilitate placement of graduates in local and
regional businesses. The placement department also assists current students in
finding part-time jobs while attending school. These part-time placements
often lead to permanent positions.
Based on information received from graduating students and employers (by
survey), the Company believes that students graduating from its schools during
the fiscal year ended December 31, 1996 obtained employment in fields related
to their program of study as of June 30 or earlier of the year following their
graduation as indicated below:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED DECEMBER 31, 1996
--------------------------------------
NUMBER OF % WHO OBTAINED
SCHOOL AVAILABLE GRADUATES (1) EMPLOYMENT (2)
------ ----------------------- --------------
<S> <C> <C>
AL COLLINS GRAPHIC DESIGN SCHOOL
Tempe, AZ...................... 261 82.4%
ALLENTOWN BUSINESS SCHOOL
Allentown, PA.................. 443 91.7
BROOKS COLLEGE
Long Beach, CA................. 150 92.0
BROWN INSTITUTE
Mendota Heights, MN............ 634 87.1
WESTERN CULINARY INSTITUTE
Portland, OR................... 363 97.0
SCHOOL OF COMPUTER TECHNOLOGY
Fairmont, WV................... 96 84.4
Pittsburgh, PA................. 314 92.0
THE KATHARINE GIBBS SCHOOLS
Boston, MA..................... 174 90.8
Melville, NY................... 361 89.8
Montclair, NJ.................. 281 84.7
New York, NY................... 467 79.2
Norwalk, CT.................... 275 86.2
Piscataway, NJ................. 263 78.3
Providence, RI................. 180 80.6
INTERNATIONAL ACADEMY OF
MERCHANDISING & DESIGN (U.S.)
Chicago, IL.................... 88 94.3
Tampa, FL...................... 90 95.6
INTERNATIONAL ACADEMY OF
MERCHANDISING & DESIGN (CANADA)
Montreal, PQ................... 110 90.7
Toronto, ON.................... 163 87.1
----- ----
TOTAL........................ 4,713 87.5%
===== ====
</TABLE>
- --------
(1) Available graduates excludes students who are continuing their education,
are in active military service or are disabled or deceased, as well as
students from foreign countries who are legally ineligible to work in the
United States.
(2) Represents the percentage of available graduates who obtained employment
related to their program of study within six months of graduation.
50
<PAGE>
The reputation of the Gibbs schools allows them to charge fees to employers
upon placement of many of their students. The Company's other schools do not
currently receive such placement fees, nor, the Company believes, do any of
the Company's principal proprietary competitors. The Company believes that, as
an additional source of revenue, it may be able to replicate the Gibbs
placement fee program at other CEC schools.
TECHNOLOGY
CEC is committed to providing its students access to the technology
necessary for developing skills required to succeed in the careers for which
they are training. Through regular consultation with business representatives,
the Company ensures that all its schools provide their students with industry-
current computer hardware, computer software and equipment meeting industry-
specific technical standards. In each program, students use the types of
equipment that they will eventually use in their careers of choice. For
example, graphic animation students use sophisticated computer multimedia
animation and digital video editing equipment and supplies, and visual
communication and design technologies students make significant use of
technologies for computer-related design and layout and digital pre-press
applications.
EMPLOYEES
As of October 31, 1997, CEC and its schools had a total of 1,113 full-time
and 569 part-time employees. Neither the Company nor any of its schools has
any collective bargaining agreements with its employees. The Company considers
its relations with its employees to be good.
COMPETITION
The postsecondary education market, consisting in the U.S. of approximately
7,000 accredited universities, colleges and schools, is highly fragmented and
competitive, with no single institution having a significant market share.
CEC's schools compete with traditional public and private two-year and four-
year colleges and universities, other proprietary schools and alternatives to
higher education such as immediate employment and military service. Certain
private and public colleges and universities may offer courses of study
similar to those of the Company's schools. Some public institutions are able
to charge lower tuition than the Company's schools due in part to government
subsidies, government and foundation grants, tax-deductible contributions and
other financial sources not available to proprietary schools. However, tuition
at private, non-profit institutions is, on average, higher than the average
tuition rates of the Company's schools. Other proprietary career-oriented
schools also offer programs that compete with those of the Company's schools.
The Company believes that its schools compete with other educational
institutions principally based upon quality of their educational programs,
reputation in the business community, costs of programs and graduates' ability
to find employment. Some of the Company's competitors in both the public and
private sectors may have substantially greater financial and other resources
than the Company.
Changes in the regulatory environment have stimulated consolidation in the
postsecondary education industry. Regulations adopted in recent years have
tightened standards for educational content, established stricter permissible
student outcomes (i.e., completion, placement and federal loan default rates)
and created more stringent standards for the evaluation of a school's
financial responsibility and administrative capability. As a result, certain
career-oriented schools have been forced to close because they lacked
sufficient quality or financial resources or could not manage the increased
regulatory burden. At the same time, despite increasing demand, potential new
entrants face significant barriers to entry due to the highly regulated nature
of the industry and the considerable expense of start-up operations.
FACILITIES
CEC's corporate headquarters are located in Hoffman Estates, Illinois, near
Chicago, and its 18 campuses are located in 13 states and two Canadian
provinces. Each campus contains teaching facilities, including modern
classrooms, laboratories and, in the case of the schools with culinary arts
programs, large, well-equipped kitchens. Admissions and administrative offices
are also located at each campus. Additionally, Brooks' campus includes a
dormitory and student cafeteria, and Western Culinary leases and operates
three restaurants in conjunction with its culinary arts program.
51
<PAGE>
The Company leases all of its facilities, except the primary Gibbs facility
in Montclair, New Jersey, which is owned by the Company, and one building in
Minneapolis, Minnesota, which is owned by the Company and which the Company
intends to sell. The leases have remaining terms ranging from less than one to
eleven years. The following table sets forth certain information as of December
31, 1997 with respect to the principal facilities of the Company:
<TABLE>
<CAPTION>
APPROXIMATE
FACILITY SQUARE FEET
-------------------------------------------------------------- -----------
<S> <C>
CEC CORPORATE HEADQUARTERS
Hoffman Estates, IL......................................... 5,000
AL COLLINS GRAPHIC DESIGN SCHOOL
Tempe, AZ................................................... 51,000
ALLENTOWN BUSINESS SCHOOL
Allentown, PA............................................... 51,000
BROOKS COLLEGE
Long Beach, CA.............................................. 34,000
BROWN INSTITUTE
Mendota Heights, MN......................................... 118,000
WESTERN CULINARY INSTITUTE
Portland, OR................................................ 26,000
SCHOOL OF COMPUTER TECHNOLOGY
Fairmont, WV................................................ 10,000
Pittsburgh, PA.............................................. 46,000
THE KATHARINE GIBBS SCHOOLS
Boston, MA.................................................. 27,000
Melville, NY................................................ 32,000
Montclair, NJ............................................... 34,000
New York, NY................................................ 52,000
Norwalk, CT................................................. 17,000
Piscataway, NJ.............................................. 17,000
Providence, RI.............................................. 15,000
INTERNATIONAL ACADEMY OF MERCHANDISING & DESIGN (U.S.)
Chicago, IL................................................. 45,000
Tampa, FL................................................... 30,000
INTERNATIONAL ACADEMY OF MERCHANDISING & DESIGN (CANADA)
Montreal, PQ................................................ 41,000
Toronto, ON................................................. 56,000
</TABLE>
The Company actively monitors facility capacity in light of current
utilization and projected enrollment growth. The Company believes that the
facilities occupied by most of its schools can accommodate expected near-term
growth, but that certain of its schools may need to acquire additional space
within the next few years. The Company believes that its schools can acquire
any necessary additional capacity on reasonably acceptable terms. The Company
devotes capital resources to facility improvements and expansions as necessary.
52
<PAGE>
LEGAL PROCEEDINGS
CEC is subject to occasional lawsuits, investigations and claims arising out
of the ordinary conduct of its business, including the following:
On February 24, 1997, 39 former and current students in Brown's PC/LAN
program brought a suit entitled Peter Alsides, et al. v. Brown Institute, Ltd.
(Fourth Judicial District, Hennepin County, Minnesota) against Brown alleging
breach of contract, fraud, and misrepresentation, violation of the Minnesota
Consumer Fraud Act, violation of the Minnesota Deceptive Trade Practices Act
and negligent misrepresentation. Plaintiffs allege that Brown failed to
provide them with the education for which they contracted and which had been
represented to them upon enrollment. Brown has answered the complaint,
asserted defenses and the parties have exchanged written discovery. Brown
believes that all of these claims are frivolous and without merit and is
vigorously contesting the allegations.
Although outcomes cannot be predicted with certainty, the Company does not
believe that the above-described matter or any other legal proceeding to which
the Company is a party will have a material adverse effect on the Company's
financial performance, results of operations or liquidity.
53
<PAGE>
FINANCIAL AID AND REGULATION
ACCREDITATION
Accreditation is a non-governmental process through which an institution
submits itself to qualitative review by an organization of peer institutions.
The three types of accrediting agencies are (i) national accrediting agencies,
which accredit institutions on the basis of the overall nature of the
institutions without regard to their locations, (ii) regional accrediting
agencies, which accredit institutions located within their geographic areas and
(iii) programmatic accrediting agencies, which accredit specific educational
programs offered by an institution. Accrediting agencies primarily examine the
academic quality of the instructional programs of an institution, and a grant
of accreditation is generally viewed as certification that an institution's
programs meet generally accepted academic standards. Accrediting agencies also
review the administrative and financial operations of the institutions they
accredit to ensure that each institution has the resources to perform its
educational mission.
Pursuant to provisions of the HEA, the DOE relies on accrediting agencies to
determine whether institutions' educational programs qualify them to
participate in the Title IV Programs. The HEA specifies certain standards that
all recognized accrediting agencies must adopt in connection with their review
of postsecondary institutions. Accrediting agencies that meet the DOE standards
are recognized as reliable arbiters of educational quality. All of the
Company's U.S. campuses are accredited by an accrediting agency recognized by
the DOE. Twelve of the Company's campuses are accredited by the Accrediting
Council for Independent Colleges and Schools ("ACICS"), three of the Company's
campuses are accredited by the Accrediting Commission of Career Schools and
Colleges of Technology ("ACCSCT") and one of the Company's campuses is
accredited by the Accrediting Commission for Community and Junior Colleges of
the Western Association of Schools and Colleges ("WASC/ACCJC"). In addition,
four of the campuses' interior design programs are accredited by the Foundation
for Interior Design Education Research ("FIDER") and two of the campuses'
culinary arts programs are accredited by the American Culinary Federation
Educational Institute Accrediting Commission ("ACFEI"); FIDER and ACFEI are not
recognized by the DOE for Title IV Program eligibility purposes.
The accrediting agencies for each of the Company's U.S. campuses are set
forth in the following table:
<TABLE>
<CAPTION>
ACCREDITING
SCHOOL AGENCIES
-------------------------------------------------------- ----------------
<S> <C>
AL COLLINS GRAPHIC DESIGN SCHOOL
Tempe, AZ............................................. ACCSCT
ALLENTOWN BUSINESS SCHOOL
Allentown, PA......................................... ACICS
BROOKS COLLEGE
Long Beach, CA........................................ WASC/ACCJC&FIDER
BROWN INSTITUTE
Mendota Heights, MN................................... ACCSCT
WESTERN CULINARY INSTITUTE
Portland, OR.......................................... ACCSCT&ACFEI
SCHOOL OF COMPUTER TECHNOLOGY
Fairmont, WV.......................................... ACICS
Pittsburgh, PA........................................ ACICS&ACFEI
THE KATHARINE GIBBS SCHOOLS
Boston, MA............................................ ACICS
Melville, NY.......................................... ACICS
Montclair, NJ......................................... ACICS
New York, NY.......................................... ACICS
Norwalk, CT........................................... ACICS
Piscataway, NJ........................................ ACICS
Providence, RI........................................ ACICS
INTERNATIONAL ACADEMY OF MERCHANDISING & DESIGN (U.S.)
Chicago, IL........................................... ACICS&FIDER
Tampa, FL............................................. ACICS&FIDER
</TABLE>
The HEA requires each recognized accrediting agency to submit to a periodic
review of its procedures and practices by the DOE as a condition of its
continued recognition.
54
<PAGE>
The HEA requires accrediting agencies recognized by the DOE to review many
aspects of an institution's operations to ensure that the education or
training offered by the institution is of sufficient quality to achieve, for
the duration of the accreditation period, the stated objective for which the
education or training is offered. Under the HEA, a recognized accrediting
agency must perform regular inspections and reviews of institutions of higher
education, including unannounced site visits to institutions that provide
career-oriented education and training. An accrediting agency may place an
institution on "reporting" status in order to monitor one or more specified
areas of the institution's performance. An institution placed on reporting
status is required to report periodically to its accrediting agency on that
institution's performance in the specified areas. Several of the Company's
institutions were on reporting status, requiring them regularly to report
their placement or retention results or both to their accrediting agency,
during 1997. However, the Company expects all but two of these institutions,
IAMD-U.S. in Chicago and Brown, to be removed from such reporting status in
1998. IAMD-U.S. in Chicago has also been and will continue to be on financial
reporting status to ACICS during 1998, based solely on the financial status of
IAMD-U.S. in Chicago under its previous ownership. While on reporting status,
an institution may be required to seek the permission of its accrediting
agency to open and commence instruction at new locations.
STUDENT FINANCIAL ASSISTANCE
Students attending the Company's schools finance their education through a
combination of family contributions, individual resources (including earnings
from full or part-time employment) and government-sponsored financial aid. The
Company estimates that over 71% of the students at its U.S. schools receive
some government-sponsored (federal or state) financial aid. For the 1996-97
award year (July 1, 1996 to June 30, 1997), approximately 81% of the Company's
U.S. tuition and fee revenue (on a cash basis) was derived from some form of
such financial aid received by the students of its schools. In addition,
students attending IAMD-Canada receive government-sponsored financial aid.
To provide students access to financial assistance available through the
Title IV Programs, an institution, including its additional locations, must be
(i) authorized to offer its programs of instruction by the relevant agencies
of the state in which it and its additional campuses, if any, are located,
(ii) accredited by an accrediting agency recognized by the DOE and (iii)
certified as eligible by the DOE. In addition, the institution must ensure
that Title IV Program funds are properly accounted for and disbursed in the
correct amounts to eligible students.
Under the HEA and its implementing regulations, each of the Company's
campuses that participates in the Title IV Programs must comply with certain
standards on an institutional basis, as more specifically identified below.
For purposes of these standards, the regulations define an institution as a
main campus and its additional locations, if any. Under this definition, each
of the Company's U.S. campuses is a separate institution, except for The
Katharine Gibbs School in Piscataway, New Jersey, which is an additional
location of The Katharine Gibbs School in Montclair, New Jersey, and the
School of Computer Technology in Fairmont, West Virginia, which is an
additional location of the School of Computer Technology in Pittsburgh,
Pennsylvania.
NATURE OF FEDERAL SUPPORT FOR POSTSECONDARY EDUCATION IN THE U.S.
While many of the states support public colleges and universities primarily
through direct state subsidies, the federal government provides a substantial
part of its support for postsecondary education in the form of grants and
loans to students who can use this support at any institution that has been
certified as eligible by the DOE. The Title IV Programs have provided aid to
students for more than 30 years and, since the mid-1960's, the scope and size
of such programs have steadily increased. Since 1972, Congress has expanded
the scope of the HEA to provide for the needs of the changing national student
population by, among other things, (i) providing that students at proprietary
institutions, such as the Company's institutions, are eligible for assistance
under the Title IV Programs, (ii) establishing a program for loans to parents
of eligible students, (iii) opening the Title IV Programs to part-time
students, and (iv) increasing maximum loan limits and in some cases
eliminating the requirement that students demonstrate financial need to obtain
federally guaranteed student loans. Most recently, the FDL program was
enacted, enabling students to obtain loans from the federal government rather
than from commercial lenders.
The process of reauthorizing the HEA by the U.S. Congress, which takes place
approximately every five years, has begun and is expected to be completed in
1998. Numerous changes to the HEA have been proposed by the DOE and other
parties. For example, the DOE has circulated proposals to amend the HEA as
follows: (i)
55
<PAGE>
to require all vocational programs of up to one year in length to establish a
70% completion and placement rate; (ii) to modify cohort default rate
threshold provisions so that they apply with respect to the Federal Perkins
Loan ("Perkins") program; and (iii) to require each institution that appeals
high cohort default rates to post surety and be liable for loans and related
costs if the institution's appeal is not successful. The DOE has also
circulated proposals that would impact guaranty agencies and lenders which
could impact the access of the Company's institutions and their students to
Federal Family Education Loan ("FFEL") program loans. Such proposals include,
among other things, (i) requiring FFEL lenders to offer extended and graduated
payment plans for borrowers and (ii) raising the level of lender risk-sharing.
Students at the Company's institutions receive grants, loans and work
opportunities to fund their education under several of the Title IV Programs,
of which the two largest are the FFEL program and the Federal Pell Grant
("Pell") program. The Company's institutions also participate in the Federal
Supplemental Educational Opportunity Grant ("FSEOG") program, and some of them
participate in the Perkins program and the Federal Work-Study ("FWS") program.
One of the Company's institutions is an active participant in the William D.
Ford Federal Direct Loan ("FDL") program.
Most aid under the Title IV Programs is awarded on the basis of financial
need, generally defined under the HEA as the difference between the cost of
attending an educational program and the amount a student can reasonably
contribute to that cost. All recipients of Title IV Program funds must
maintain a satisfactory grade point average and progress in a timely manner
toward completion of their program of study.
Pell. Pell grants are the primary component of the Title IV Programs under
which the DOE makes grants to students who demonstrate financial need. Every
eligible student is entitled to receive a Pell grant; there is no
institutional allocation or limit. For the 1997-98 award year, Pell grants
range from $400 to $2,700 per year. Amounts received by students enrolled in
the Company's U.S. institutions in the 1996-97 award year under the Pell
program equaled approximately 12% of the Company's U.S. tuition and fee
revenue.
FSEOG. FSEOG awards are designed to supplement Pell grants for the neediest
students. FSEOG grants generally range in amount from $100 to $4,000 per year;
however, the availability of FSEOG awards is limited by the amount of those
funds allocated to an institution under a formula that takes into account the
size of the institution, its costs and the income levels of its students. The
Company is required to make a 25% matching contribution for all FSEOG program
funds disbursed. Resources for this institutional contribution may include
institutional grants, scholarships and other eligible funds (i.e., funds from
foundations and other charitable organizations) and, in certain states,
portions of state scholarships and grants. During the 1996-97 award year, the
Company's required 25% institutional match was met by approximately $110,000
in funds from its institutions and approximately $177,000 in funds from state
scholarships and grants and from foundations and other charitable
organizations. Amounts received by students in the Company's institutions
under the federal share of the FSEOG programs in the 1996-97 award year
equaled approximately 1% of the Company's U.S. tuition and fee revenue.
FFEL and FDL. The FFEL program consists of two types of loans, Stafford
loans, which are made available to students, and PLUS loans, which are made
available to parents of students classified as dependents. Under the FDL
program, students may obtain loans directly from the DOE rather than
commercial lenders. The conditions on FDL loans are generally the same as on
loans made under the FFEL program. Certain of the Company's institutions have
been selected by the DOE to participate in the FDL program. Under the Stafford
loan program, a student may borrow up to $2,625 for the first academic year,
$3,500 for the second academic year and, in some educational programs, $5,500
for each of the third and fourth academic years. Students with financial need
qualify for interest subsidies while in school and during grace periods.
Students who are classified as independent can increase their borrowing limits
and receive additional unsubsidized Stafford loans. Such students can obtain
an additional $4,000 for each of the first and second academic years and,
depending upon the educational program, an additional $5,000 for each of the
third and fourth academic years. The obligation to begin repaying Stafford
loans does not commence until six months after a student ceases enrollment as
at least a half-time student. Amounts received by students in the Company's
institutions under the Stafford program in the 1996-97
56
<PAGE>
award year equaled approximately 44% of the Company's U.S. tuition and fee
revenue (on a cash basis). PLUS loans may be obtained by the parents of a
dependent student in an amount not to exceed the difference between the total
cost of that student's education (including allowable expenses) and other aid
to which that student is entitled. Amounts received by students in the
Company's institutions under the PLUS program in the 1996-97 award year
equaled approximately 11% of the Company's U.S. tuition and fee revenue (on a
cash basis).
The Company's schools and their students use a wide variety of lenders and
guaranty agencies and have not experienced difficulties in identifying lenders
and guaranty agencies willing to make federal student loans. Additionally, the
HEA requires the establishment of lenders of last resort in every state to
ensure that students at any institution that cannot identify such lenders will
have access to the FFEL program loans.
Perkins. Eligible undergraduate students may borrow up to $3,000 under the
Perkins program during each academic year, with an aggregate maximum of
$15,000, at a 5% interest rate and with repayment delayed until nine months
after the borrower ceases to be enrolled on at least a half-time basis.
Perkins loans are made available to those students who demonstrate the
greatest financial need. Perkins loans are made from a revolving account, 75%
of which was initially capitalized by the DOE. Subsequent federal capital
contributions, with an institutional match in the same proportion, may be
received if an institution meets certain requirements. Each institution
collects payments on Perkins loans from its former students and loans those
funds to currently enrolled students. Collection and disbursement of Perkins
loans is the responsibility of each participating institution. During the
1996-97 award year, the Company collected approximately $543,000 from its
former students in repayment of Perkins loans. In the 1996-97 award year, the
Company's required matching contribution was approximately $47,000. The
Perkins loans disbursed to students in the Company's institutions in the 1996-
97 award year equaled approximately 1% of the Company's U.S. tuition and fee
revenue. In 1995, the Gibbs institutions voluntarily chose to discontinue
participation in the Perkins program. IAMD-U.S., SCT and Western Culinary also
do not participate in the Perkins program.
FWS. Under the FWS program, federal funds are made available to pay up to
75% of the cost of part-time employment of eligible students, based on their
financial need, to perform work for the institution or for off-campus public
or non-profit organizations. During the 1996-97 award year, the Company's
institutions and other organizations provided matching contributions totaling
approximately $70,000. At least 5% of an institution's FWS allocation must be
used to fund student employment in community service positions. In general,
FWS earnings are not used for tuition and fees. However, in the 1996-97 award
year, the federal share of FWS earnings equalled 0.2% of the Company's U.S.
tuition and fee revenue.
FEDERAL OVERSIGHT OF THE TITLE IV PROGRAMS
The substantial amount of federal funds disbursed through the Title IV
Programs coupled with the large numbers of students and institutions
participating in those programs have led to instances of fraud, waste and
abuse. As a result, the United States Congress has required the DOE to
increase its level of regulatory oversight of institutions to ensure that
public funds are properly used. Each institution which participates in the
Title IV Programs must annually submit to the DOE an audit by an independent
accounting firm of that institution's compliance with the Title IV Program
requirements, as well as audited financial statements. The DOE also conducts
compliance reviews, which include on-site evaluations, of several hundred
institutions each year, and directs student loan guaranty agencies to conduct
additional reviews relating to the FFEL programs. In addition, the Office of
the Inspector General of the DOE conducts audits and investigations of
institutions in certain circumstances. Under the HEA, accrediting agencies and
state licensing agencies also have responsibilities for overseeing
institutions' compliance with Title IV Program requirements. As a result, each
participating institution, including each of the Company's institutions, is
subject to frequent and detailed oversight and must comply with a complex
framework of laws and regulations or risk being required to repay funds or
becoming ineligible to participate in the Title IV Programs. In addition,
because the DOE periodically revises its regulations (e.g., in November 1997,
the DOE published new regulations with respect to financial responsibility
standards to
57
<PAGE>
take effect July 1, 1998) and changes its interpretation of existing laws and
regulations, there can be no assurance that the DOE will agree with the
Company's understanding of each Title IV Program requirement. See "--Financial
Responsibility Standards."
Largely as a result of this increased oversight, the DOE has reported that
more than 800 institutions have either ceased to be eligible for or have
voluntarily relinquished their participation in some or all of the Title IV
Programs since October 1, 1992. This has reduced competition among
institutions with respect to certain markets and educational programs.
Cohort Default Rates. A significant component of the Congressional
initiative aimed at reducing fraud, waste and abuse was the imposition of
limitations on participation in the Title IV Programs by institutions whose
former students defaulted on the repayment of federally guaranteed or funded
student loans at an "excessive" rate. Since the DOE began to impose sanctions
on institutions with cohort default rates above certain levels, the DOE has
reported that more than 600 institutions have lost their eligibility to
participate in some or all of the Title IV Programs. However, many
institutions, including all of the Company's institutions, have responded by
implementing aggressive student loan default management programs aimed at
reducing the likelihood of students failing to repay their loans in a timely
manner. An institution's cohort default rates under the FFEL and FDL programs
are calculated on an annual basis as the rate at which student borrowers
scheduled to begin repayment on their loans in one federal fiscal year default
on those loans by the end of the next federal fiscal year. An institution that
participates in both the FFEL and FDL programs, including one of the Company's
institutions, receives a single "weighted average" cohort default rate in
place of an FFEL or FDL cohort default rate. Any institution whose cohort
default rate equals or exceeds 25% for any one of the three most recent
federal fiscal years may be found by the DOE to lack administrative capability
and, on that basis, placed on provisional certification status for up to four
years. Provisional certification status does not limit an institution's access
to Title IV Program funds but does subject that institution to closer review
by the DOE and possible summary adverse action if that institution commits
violations of the Title IV Program requirements. Any institution whose cohort
default rates equal or exceed 25% for three consecutive years will no longer
be eligible to participate in the FFEL or FDL programs for the remainder of
the federal fiscal year in which the DOE determines that such institution has
lost its eligibility and for the two subsequent federal fiscal years. In
addition, an institution whose cohort default rate for any federal fiscal year
exceeds 40% may have its eligibility to participate in all of the Title IV
Programs limited, suspended or terminated. Since the calculation of cohort
default rates involves the collection of data from many non-governmental
agencies (i.e., lenders, private guarantors or servicers), as well as the DOE,
the HEA provides a formal process for the review and appeal of the accuracy of
cohort default rates before the DOE takes any action against an institution
based on such rates.
None of the Company's institutions has had a published FFEL or FDL cohort
default rate of 25% or greater for three consecutive federal fiscal years. For
federal fiscal year 1995, the published cohort default rates for the Company's
institutions ranged from a low of 10.7% to a high of 27.4%. The average cohort
default rates for proprietary institutions nationally were 23.9%, 21.1% and
19.9% in federal fiscal years 1993, 1994 and 1995, respectively. Gibbs-Norwalk
is the only one of the Company's institutions that received a cohort default
rate for federal fiscal year 1995 that exceeds 25%, which rate is 27.4%. In
addition, two of the Company's institutions, including Gibbs-Norwalk, have had
an FFEL cohort default rate exceeding 25% in one of the last three federal
fiscal years for which such rates have been published. To date, neither of
these institutions has been placed on provisional certification status as a
result of FFEL cohort default rates in excess of 25%.
58
<PAGE>
The following table sets forth the cohort default rates for the Company's
institutions 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................................................ 15.7%* 13.3% 15.0%
Tampa, FL.................................................. 13.3%* 15.0% 17.3%
</TABLE>
- --------
* This is a "prepublication" cohort default rate. The Company has not yet
received the published cohort default rate for federal fiscal year 1995 for
this institution.
In addition, if an institution's cohort default rate for loans under the
Perkins program exceeds 15% for any federal award year (i.e., July 1 through
June 30), that institution may be placed on provisional certification status
for up to four years. Nine of the Company's institutions have Perkins cohort
default rates in excess of 15% for students who were scheduled to begin
repayment in the 1996-97 federal award year, the most recent year for which
such rates have been calculated. These institutions are Allentown, Brown,
Collins, Gibbs-Boston, Gibbs-Melville, Gibbs-Montclair, Gibbs-New York, Gibbs-
Norwalk and Gibbs-Providence. The Perkins program cohort default rates for
these nine institutions ranged from 20.7% to 64.3%. Thus, these institutions
could be placed on provisional certification status, which would subject them
to closer review by the DOE and possible summary adverse action if they commit
any violation of the Title IV Program requirements. However, to date, none of
these institutions has been placed on such status for this reason. In 1995,
the Gibbs institutions voluntarily chose to discontinue their participation in
the Perkins program.
Each of the Company's institutions has adopted a student loan default
management plan. Those plans emphasize the importance of meeting loan
repayment requirements and provide for extensive loan counseling, methods to
increase student persistence and completion rates and graduate employment
rates, and proactive borrower contacts after students cease enrollment. They
may also include the use of external agencies to assist the institution with
loan counseling and loan servicing if students cease attending the
institution. Those activities are in addition to the loan servicing and
collection activities of FFEL lenders and guaranty agencies and FDL servicers.
Increased Regulatory Scrutiny. The HEA provides for a three-part initiative,
referred to as the Program Integrity Triad, intended to increase regulatory
scrutiny of postsecondary education institutions. One part of the Program
Integrity Triad expands the 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
59
<PAGE>
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.
Financial Responsibility Standards. All institutions participating in the
Title IV Programs must satisfy a series of specific standards of financial
responsibility. Institutions are evaluated for compliance with those
requirements in several circumstances, including as part of the DOE's
quadrennial recertification process and also annually as each institution
submits its audited financial statements to the DOE. One standard requires
each institution to demonstrate an acid test ratio (defined as the ratio of
cash, cash equivalents and current accounts receivable to current liabilities)
of at least 1:1 at the end of each fiscal year. Another standard requires that
each institution have a positive tangible net worth at the end of each fiscal
year. A third standard prohibits any institution from having a cumulative net
operating loss during its two most recent fiscal years that results in a
decline of more than 10% of that institution's tangible net worth as measured
at the beginning of that two-year period. The DOE may measure an institution's
financial responsibility on the basis of the financial statements of the
institution itself or the financial statements of the institution's parent
company, and may also consider the financial condition of any other entity
related to the institution.
An institution that is determined by the DOE not to meet any one of the
standards of financial responsibility is nonetheless entitled to participate
in the Title IV Programs if it can demonstrate to the DOE that it is
financially responsible on an alternative basis. An institution may do so by
posting surety either in an amount equal to 50% (or greater, as the DOE may
require) of the total Title IV Program funds received by students enrolled at
such institution during the prior year or in an amount equal to 10% (or
greater, as the DOE may require) of such prior year's funds if the institution
also agrees to transfer to the reimbursement system of payment for its Title
IV Program funds. The DOE has interpreted this surety condition to require the
posting of an irrevocable letter of credit in favor of the DOE. Alternatively,
an institution may demonstrate, with the support of a statement from a
certified public accountant and other information specified in the
regulations, that it was previously in compliance with the numeric standards
and that its continued operation is not jeopardized by its financial
condition.
In November 1997, the DOE published new regulations regarding financial
responsibility to take effect on July 1, 1998. The regulations provide a
transition year alternative which will permit institutions to have their
financial responsibility for the 1998 fiscal year measured on the basis of
either the new regulations or the current
60
<PAGE>
regulations, whichever are more favorable. Under the new regulations, the DOE
will calculate three financial ratios for an institution, each of which will
be scored separately and which will then be combined to determine the
institution's financial responsibility. If an institution's composite score is
below the minimum requirement for unconditional approval but above a
designated threshold level, such institution may take advantage of an
alternative that allows it to continue to participate in the Title IV Programs
for up to three years under additional monitoring and reporting procedures. If
an institution's composite score falls below this threshold level or is
between the minimum for unconditional approval and the threshold for more than
three consecutive years, the institution will be required to post a letter of
credit in favor of the DOE. The Company does not believe that these new
regulations will have a material effect on the Company's compliance with the
DOE's financial responsibility standards.
Company Compliance with Financial Responsibility Standards. In reviewing the
Company's acquisitions in the last 14 months, it has been the DOE's practice
to measure financial responsibility on the basis of the financial statements
of both the institutions and the Company. In its review of the Company's
annual financial statements and interim balance sheets, as filed with the DOE
in connection with the Company's applications for DOE certification of
institutions acquired subsequent to September 1996 to allow such institutions
to participate in the Title IV Programs, the DOE has questioned the Company's
accounting for certain direct marketing costs and its valuation of courseware
and other instructional materials of the Company's recently acquired
institutions. The audited financial statements included in this Registration
Statement have been restated to expense as incurred, and the audited 1997
financial statements to be submitted to the DOE will expense as incurred, all
direct marketing and advertising costs which had previously been deferred.
This change in accounting method is disclosed in the audit opinion and
footnotes to the financial statements and is permitted in accordance with
Accounting Principles Board Opinion No. 20. The DOE also previously asserted
that the Company did not satisfy the 1:1 acid test ratio based on its fiscal
1996 financial statements, but, after reviewing additional materials submitted
by the Company, the DOE has recently indicated that the Company did in fact
satisfy this test.
As a result of the DOE's concerns regarding the Company's accounting for
direct marketing costs and courseware and instructional materials, the DOE has
offered the Company the alternative of posting an irrevocable letter of credit
in favor of the Secretary of Education with respect to each institution the
Company has acquired since September 1996 in a sum sufficient to secure the
DOE's interest in the Title IV Program funds administered by the applicable
institution. While the Company continues to disagree with the position taken
by the DOE, in order to obtain certification of the institutions to resume
participation in the Title IV Programs in a timely fashion, and thus to avoid
any material interruption in Title IV Program funding for the acquired
institutions, the Company has posted, and currently has outstanding, a letter
of credit in the amount of $1.9 million, which expires on September 30, 1998,
with respect to Western Culinary; 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. Beginning in October 1997, the DOE has imposed a
condition that, through September 30, 1998, SCT, Gibbs and IAMD-U.S. may not
disburse Title IV Program funds in excess of the total Title IV Program funds
that students enrolled at each institution received in the most recent award
year for which data are available to the DOE. The DOE has calculated this
amount to be $1.6 million in the case of SCT, $16.0 million in the case of
Gibbs and $7.0 million in the case of IAMD-U.S. In subsequent discussions, the
DOE has agreed to consider potential increases in the Title IV Program funding
available to students at the affected institutions, if the Company so requests
and with the understanding that the Company would secure any such increase in
Title IV Program funding by increasing the applicable letter of credit in an
amount commensurate with the additional Title IV Program funding utilized by
such students. The DOE has advised the Company that the DOE does not include
William D. Ford Federal Direct Loan ("FDL")
61
<PAGE>
funds in calculating the amount of any letter of credit and that FDL funds are
not considered in determining the total Title IV Program funding available to
an affected institution. SCT disburses significant amounts of FDL funds to
students enrolled in its educational programs. The DOE also has stated that,
prior to a determination that the Company satisfies the standards of financial
responsibility, the DOE will not consider applications to resume Title IV
Program participation on behalf of any institutions that the Company may
acquire in the future or applications that seek approval of any action that
would expand the Title IV Program participation of any of the Company's U.S.
institutions that already is certified for such participation.
The DOE limitation on the aggregate dollar value of the Title IV Program
participation of SCT, Gibbs and IAMD-U.S. could significantly reduce the
Company's ability to provide financial assistance to additional students at
those institutions, which in turn could reduce the Company's ability to enroll
such additional students. The inability of the Company to significantly
increase aggregate enrollment at SCT, Gibbs and IAMD-U.S. and to file
applications with the DOE for other newly acquired U.S. institutions to seek
Title IV Program participation could have a material adverse effect on the
Company's business, results of operations and financial condition and on its
ability to generate sufficient liquidity to continue to fund growth in its
operations and purchase other institutions. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources."
In accordance with applicable law, the DOE will be required to rescind the
letters of credit and related requirements if the Company and its U.S.
institutions demonstrate that they satisfy the standards of financial
responsibility, using accounting treatments that are acceptable to the DOE.
After discussions with the DOE, the Company changed its accounting to eliminate
deferred direct marketing costs from its financial statements. In the course of
further discussions with the DOE, the Company provided additional information
regarding the valuation of courseware and instructional materials at one of the
recently acquired institutions where such valuation was questioned by the DOE.
Based upon these discussions, the Company believes its valuation of courseware
and instructional materials as will be presented in its 1997 financial
statements will not impair a determination by the DOE that the Company is
financially responsible. Further, the DOE agreed that in the conduct of its
next review of the financial responsibility of the Company and its U.S.
institutions, the DOE will consider financial information reflecting the
results of the Offering, as well as the 1997 audited financial statements of
each entity. The Company expects to receive net proceeds from the Offering of
approximately $34.9 million. See "Use of Proceeds." The Company believes that
such proceeds and the cash generated from operations during 1997 will enable
the Company and each of its U.S. institutions to satisfy each of the DOE's
standards of financial responsibility, based on their audited financial
statements and the Company's post-Offering financial information. Accordingly,
the Company intends to seek the DOE's review of the Company's and its U.S.
institutions' audited 1997 financial statements and the Company's post-Offering
financial information on an expedited basis in the spring of 1998. However,
there can be no assurance that the DOE will expedite its review or of the
outcome of such review.
Under a separate standard of financial responsibility, if an institution has
made late Title IV Program refunds to students in its prior two years, the
institution is required to post a letter of credit in favor of the DOE in an
amount equal to 25% of the total Title IV Program refunds paid by the
institution in its prior fiscal year. As of July 1, 1997, this standard has
been modified to exempt an institution if it has not been found to make late
refunds to 5% or more of its students in either of the two most recent fiscal
years and has not been cited for a reportable condition or material weakness in
its internal controls related to late refunds in either of its two most recent
fiscal years. Based on this standard, since July 1, 1997, the Company has
posted a total of $310,000 in additional letters of credit with respect to
Brown, Collins, Gibbs-Montclair, Gibbs-New York, SCT and Western Culinary.
62
<PAGE>
Restrictions on Acquiring or Opening Additional Schools and Adding
Educational Programs. An institution which undergoes a change of ownership
resulting in a change in control, including all the institutions the Company
has acquired or will acquire, must be reviewed and recertified for
participation in the Title IV Programs under its new ownership. Pending
recertification, the DOE suspends Title IV Program funding to that
institution's students except for certain Title IV Program funds that were
committed under the prior owner. If an institution is recertified following a
change of ownership, it will be on a provisional basis. During the time an
institution is provisionally certified, it may be subject to closer review by
the DOE and to summary adverse action for violations of Title IV Program
requirements, but provisional certification does not otherwise limit an
institution's access to Title IV Program funds.
In addition, the HEA generally requires that proprietary institutions be
fully operational for two years before applying to participate in the Title IV
Programs. However, under the HEA and applicable regulations, an institution
that is certified to participate in the Title IV Programs may establish an
additional location and apply to participate in the Title IV Programs at that
location without reference to the two-year requirement, if such additional
location satisfies all other applicable eligibility requirements. The
Company's expansion plans are based, in part, on its ability to acquire
schools that can be recertified and to open additional locations as part of
its existing institutions.
Generally, if an institution eligible to participate in the Title IV
Programs adds an educational program after it has been designated as an
eligible institution, the institution must apply to the DOE to have the
additional program designated as eligible. However, an institution is not
obligated to obtain DOE approval of an additional program that leads to an
associate, baccalaureate, professional or graduate degree or which prepares
students for gainful employment in the same or related recognized occupation
as an educational program that has previously been designated as an eligible
program at that institution and meets certain minimum length requirements.
Furthermore, short-term educational programs, which generally consist of those
programs that provide at least 300 but less than 600 clock hours of
instruction, are eligible only for FFEL funding and only if they have been
offered for a year and the institution can demonstrate, based on an
attestation by its independent auditor, that 70% of all students who enroll in
such programs complete them within a prescribed time and 70% of those students
who graduate from such programs obtain employment in the recognized occupation
for which they were trained within a prescribed time. Certain of the Gibbs
institutions offer such short-term programs, but students enrolled in such
programs represent a small percentage of the total enrollment of the Company's
schools. To date, the applicable institutions have been able to establish that
their short-term educational programs meet the required completion and
placement percentages. In the event that an institution erroneously determines
that an educational program is eligible for purposes of the Title IV Programs
without the DOE's express approval, the institution would likely be liable for
repayment of Title IV Program funds provided to students in that educational
program. The Company does not believe that the DOE's regulations will create
significant obstacles to its plans to add new programs.
Certain of the state authorizing agencies and accrediting agencies with
jurisdiction over the Company's campuses also have requirements that may, in
certain instances, limit the ability of the Company to open a new campus,
acquire an existing campus or establish an additional location of an existing
institution or begin offering a new educational program. The Company does not
believe that those standards will have a material adverse effect on the
Company or its expansion plans.
The "85/15 Rule." Under a provision of the HEA commonly referred to as the
"85/15 Rule," a proprietary institution, such as each of the Company's U.S.
institutions, would cease being eligible to participate in the Title IV
Programs if, on a cash accounting basis, more than 85% of its revenue for the
prior fiscal year was derived from the Title IV Programs. Any institution that
violates the 85/15 Rule immediately becomes ineligible to participate in the
Title IV Programs and is unable to apply to regain its eligibility until the
following fiscal year. The Company has calculated that, since this requirement
took effect in 1995, none of the Company's U.S. institutions has derived more
than 83% of its revenue from the Title IV Programs for any fiscal year, and
that for 1996 the range for the Company's U.S. institutions was from
approximately 52% to approximately 82%. For 1996, the independent auditors of
the Company or prior owner, if applicable, examined management's assertion
63
<PAGE>
that each of the Company's U.S. institutions complied with these requirements
and opined that such assertion was fairly stated in all material respects. The
Company regularly monitors compliance with this requirement in order to
minimize the risk that any of its U.S. institutions would derive more than 85%
of its revenue from the Title IV Programs for any fiscal year. If an
institution appears likely to approach the 85% threshold, the Company would
evaluate the appropriateness of making changes in student funding and
financing to ensure compliance with the 85/15 Rule.
Restrictions on Payment of Bonuses, Commissions or Other Incentives. The HEA
prohibits an institution from providing any commission, bonus or other
incentive payment based directly or indirectly on success in securing
enrollments or financial aid to any person or entity engaged in any student
recruitment, admission or financial aid awarding activity for programs
eligible for Title IV Program funds. The Company believes that its current
compensation plans are in compliance with HEA standards, although the
regulations of the DOE do not establish clear criteria for compliance.
STATE AUTHORIZATION
Each of the Company's campuses is authorized to offer educational programs
and grant degrees or diplomas by the state in which such campus is located.
The level of regulatory oversight varies substantially from state to state. In
some states, the campuses are subject to licensure by the state education
agency and also by a separate higher education agency. State laws establish
standards for instruction, qualifications of faculty, location and nature of
facilities, financial policies and responsibility and other operational
matters. State laws and regulations may limit the ability of the Company to
obtain authorization to operate in certain states or to award degrees or
diplomas or offer new degree programs. Certain states prescribe standards of
financial responsibility that are different from those prescribed by the DOE.
The Company believes that each of its campuses is in substantial compliance
with state authorizing and licensure laws.
CANADIAN REGULATION
Canadian students, other than those who reside in the province of Quebec,
are eligible to receive loans under the CSL program. Students who are
residents of the province of Quebec are eligible to receive loans from the
QLBP. Students from the province of Ontario receive financial assistance under
both the CSL program and the OSLP program. CSL program loans are made by the
Canadian federal government. IAMD-Canada in Toronto has two buildings, each of
which must be registered under the PVSA but which the Company operates
together as a single campus.
With respect to students who reside in the province of Ontario, the Ontario
Ministry of Education and Training ("OMET") provides financial assistance to
eligible students through the Ontario Student Assistance Plan ("OSAP"), which
includes two main components, the CSL program and the OSLP program. To
maintain its right to administer OSAP, an institution, such as the IAMD-Canada
campus in Toronto, must, among other things, be registered and in good
standing under the PVSA and abide by the rules, regulations and administrative
manuals of the CSL, OSLP and other OSAP-related programs. In order to attain
initial eligibility, an institution must establish, among other things, that
it has been in good standing under the PVSA for at least 12 months, that it
has offered an eligible program for at least 12 months, and that it has
graduated at least one class in an eligible program that satisfies specific
requirements with respect to class size and graduation rate. During the first
two years of initial eligibility, the institution must have its administration
of OSAP independently audited, and full eligibility will not be granted unless
these audits establish that the institution has properly administered OSAP.
The institution can only administer CSL funds, and cannot administer OSLP
funds, until it has gained full eligibility. Once an institution has gained
OSAP eligibility, the institution must advise OMET before it takes any
material action that may result in its failure or inability to meet any rules,
regulations or requirements related to OSAP.
In order for an OSAP-eligible institution to establish a new branch of an
existing eligible institution, it must obtain an OSAP-designation from OMET,
either as a separate institution if the branch administers OSAP without
64
<PAGE>
the involvement of the main campus or as part of the same institution if OSAP
is administered through the main campus of the institution. The Company does
not believe that OSAP's requirements will create significant obstacles to its
plans to acquire additional institutions or open new branches in Ontario.
Institutions participating in OSAP, such as the IAMD-Canada campus in
Toronto, cannot submit applications for loans to students enrolled in
educational programs that have not been designated as OSAP-eligible by OMET.
To be eligible, among other things, a program must be registered with the
Private Vocational Schools unit, must be of a certain minimum length and must
lead to a diploma or certificate. The Company does not anticipate that these
program approval requirements will create significant problems with respect to
its plans to add new educational programs.
An institution cannot automatically acquire OSAP-designation through
acquisition of other OSAP-eligible institutions. When there is a change of
ownership, including a change in controlling interest, in a non-incorporated
OSAP-eligible institution, OMET will require evidence of the institution's
continued capacity to properly administer the program before extending OSAP
designation to the new owner. The Company does not believe that the Offering
will be considered a change of ownership for purposes of OSAP. Given that OMET
periodically revises its regulations and other requirements and changes its
interpretations of existing laws and regulations, there can be no assurance
that OMET will agree with the Company's understanding of each OMET
requirement.
IAMD-Canada, in Toronto, is required to audit its OSAP administration
annually and OMET is authorized to conduct its own audits of the
administration of the OSAP programs by any OSAP-eligible institution. The
Company has complied with these requirements on a timely basis. Based on its
most recent annual compliance audits, IAMD-Canada, in Toronto has been found
to be in substantial compliance with the requirements of OSAP and the Company
believes that they continue to be in substantial compliance with these
requirements. OMET has the authority to take any measures it deems necessary
to protect the integrity of the administration of OSAP. If OMET deems a
failure to comply to be minor, OMET will advise the institution of the
deficiency and provide the institution with the opportunity to remedy the
asserted deficiency. If OMET deems the failure to comply to be serious in
nature, OMET has the authority to: (i) condition the institution's continued
OSAP designation upon the institution's meeting specific requirements during a
specific time frame; (ii) refuse to extend the institution's OSAP eligibility
to the OSLP program; (iii) suspend the institution's OSAP designation or (iv)
revoke the institution's OSAP designation. In addition, when OMET determines
that any non-compliance in an institution's OSAP administration is serious,
OMET has the authority to contract with an independent auditor, at the expense
of the institution, to conduct a full audit in order to quantify the
deficiencies and to require repayment of all loan amounts. In addition, OMET
may impose a penalty up to the amount of the damages assessed in the
independent audit.
As noted above, IAMD-Canada, in Toronto, is subject to the PVSA. The Company
may not operate a private vocational school in the province of Ontario unless
such school is registered under the PVSA. Upon payment of the prescribed fee
and satisfaction of the conditions prescribed by the regulations under the
PVSA and by the Private Vocational Schools Unit of the OMET, an applicant or
registrant such as IAMD-Canada, in Toronto, is entitled to registration or
renewal of registration to conduct or operate a private vocational school
unless: (1) it cannot reasonably be expected to be financially responsible in
the conduct of the private vocational school; (2) the past conduct of the
officers or directors provides reasonable grounds for belief that the
operations of the campus will not be carried on in accordance with relevant
law and with integrity and honesty; (3) it can reasonably be expected that the
course or courses of study or the method of training offered by the private
vocational school will not provide the skill and knowledge requisite for
employment in the vocation or vocations for which the applicant or registrant
is offering instruction; or (4) the applicant is carrying on activities that
are, or will be, if the applicant is registered, in contravention of the PVSA
or the regulations under the PVSA. An applicant for registration to conduct or
operate a private vocational school is required to submit with the application
a bond in an amount determined in accordance with the regulations under the
PVSA. IAMD-Canada, in Toronto, is currently registered under the PVSA at both
of its buildings, and the Company does not believe that there will be any
impediment to renewal of such registrations on an annual basis.
65
<PAGE>
The PVSA provides that a "registration" is not transferable. However, the
Private Vocational Schools Unit of MET takes the position that a purchase of
shares of a private vocational school does not invalidate the school's
registration under the PVSA. The Company does not believe that the Offering
will invalidate the registrations of IAMD-Canada, in Toronto.
If a corporation is convicted of violating the PVSA or the regulations under
the PVSA, the maximum penalty that may be imposed on the corporation is
$25,000.
Students who reside in the province of Quebec are eligible to receive funds
under the QLBP subject to certain student eligibility criteria. Under this
program, student financial assistance is initially provided in the form of a
loan. IAMD-Canada, in Quebec, is subject to the ARPE. In accordance with ARPE,
the Company may not operate a private educational institution without holding
a permit issued by the Quebec Minister of Education (the "QME") for the
institution itself and for the educational services to be provided. The QME
will issue the permit after consulting with the Commission Consultative de
l'Enseignement Prive (the "Commission") concerning the particular institution
and the educational services to determine if such institution and services
meet certain conditions. Permits cannot be transferred without the written
authorization of the QME, and any entity holding a permit must advise the QME
of any amalgamation, sale or transfer affecting such entity. The QME, after
consultation with the Commission, has the authority to modify or revoke a
permit where the holder of the permit, among other things: (i) does not comply
with the conditions, restrictions or prohibitions relating to the institution
or (ii) is, or is about to become, insolvent. The QME must provide the
institution with a chance to present its views before revoking a permit.
The Company does not believe that the Offering will be considered a "sale or
transfer" affecting IAMD-Canada, in Quebec, or that it will invalidate the
permit issued to IAMD-Canada, in Quebec, for the purposes of the ARPE. Given
that the QME periodically revises its regulations and other requirements and
changes its interpretations of existing laws and regulations, there can be no
assurance that the QME will agree with the Company's understanding of each
requirement of the QME.
The Company does not believe that the QME's requirements will create
significant obstacles to its plans to acquire additional institutions, or open
new branches in Quebec or that the QME's requirements will create significant
obstacles to its plans to add new educational programs at IAMD-Canada, in
Quebec. The Company does not believe that there will be any impediment to
renewal of the permit issued to IAMD-Canada, in Quebec, under the ARPE.
The legislative, regulatory and other requirements relating to student
financial assistance programs in Ontario and Quebec are subject to change by
applicable governments due to political and budgetary pressures and any such
change may affect the eligibility for student financial assistance of the
students attending IAMD-Canada which, in turn, could materially adversely
affect the Company's business, results of operations and financial condition.
66
<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
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
Wallace O. Laub......... 72 Director
Patrick K. Pesch........ 41 Director
Todd H. Steele.......... 35 Director
Thomas B. Lally......... 53 Director
Keith K. Ogata.......... 43 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, accounting, MIS, human resources, forecasting,
treasury, legal, acquisitions and two operating subsidiaries. From 1976 to
1987, Mr. Klettke served in various positions with The Enterprise Companies (a
paint and coatings manufacturer), a subsidiary of Insilco, starting as an
accountant and progressing to Senior Vice President of Finance and
Administration. Mr. Klettke is a Certified Public Accountant and holds
Bachelor's of Arts degrees in Psychology and Sociology from Baker University,
a Bachelor's of Science in Accounting from Illinois State University, a
Masters Degree in Management from Northwestern University.
ROBERT E. DOWDELL has been a director of the Company since its inception in
January 1994. From 1989 to present, Dowdell has served as Chief Executive
Officer and director of Marshall & Swift, L.P., a publishing company. Mr.
Dowdell is also a director of ADMS and LaQuinta Spring, L.P., in which he is
the general partner.
67
<PAGE>
WALLACE O. LAUB has been a director of the Company since October 1994. Mr.
Laub was a co-founder of NEC, where he served as Executive Vice President and
director from 1955 to 1993. From 1981 to 1990, Mr. Laub served as a director
of the Distance Education Training Council, a trade association and
accrediting agency for distance education companies. Mr. Laub is now retired.
PATRICK K. PESCH has been a director of the Company since 1995. Mr. Pesch
was designated as director of the Company by HECC. Since 1992, Mr. Pesch has
served as a Senior Vice President of Heller Financial, Inc. ("HFI"), the
parent of Heller Equity Capital Corporation ("HECC"), and also as an officer
of HECC, managing a portfolio of loan and equity investments. Mr. Pesch also
serves as a director of Kimpex, Inc., a Canadian company and as an officer and
director of Amersig Graphics, Inc.
TODD H. STEELE has been a director of the Company since its inception in
January 1994. Mr. Steele was designated as a director of the Company by HECC.
Since December 1996, he has served as Vice President of Baker, Fentress & Co.,
an investment company, making equity investments in private companies. From
May 1990 to November 1996, he served as a Vice President of Heller Financial,
Inc. and HECC, also making equity investments in private companies.
THOMAS B. LALLY is becoming a director of the Company on the date of this
Prospectus. Mr. Lally has been designated to be a director of the Company by
HECC. He has been the President of HECC since 1996 and an Executive Vice
President of HFI since 1994, with direct responsibility for the asset quality
oversight of HFI's portfolio of loan and equity investments. Mr. Lally joined
HFI in 1974 and is currently a director of Kroy Holding Company.
KEITH K. OGATA is becoming a director of the Company on the date of this
Prospectus. Since 1995, Mr. Ogata has served as President of National
Education Centers, Inc., a subsidiary of National Education Corporation. From
1991 to June 1997, he served as Vice President, Chief Financial Officer and
Treasurer of National Education Corporation, with responsibility for finance,
accounting, treasury, tax, mergers and acquisitions, human resources, investor
and public relations and information systems. In June 1997, National Education
Corporation was acquired by Harcourt General Inc.
None of the executive officers and directors are related to one another.
CERTAIN OTHER SIGNIFICANT EMPLOYEES OF THE COMPANY
The following information is supplied with respect to certain other
significant employees of the Company.
J. PATRICK ANDREWS has served as Director of Advertising of the Company
since October 1995. From 1994 until he joined CEC corporate management, Mr.
Andrews was Advertising Manager for two of the Company's schools, Collins and
Brooks. For approximately 12 years prior to joining CEC, Mr. Andrews managed
the advertising and marketing functions for Spartan, a 2,800 student school in
Tulsa, Oklahoma. Mr. Andrews holds a Bachelor's of Arts in Journalism from the
University of South Carolina and a Masters in Marketing from the University of
Texas.
DR. JON R. COOVER joined CEC as National Director of Marketing in May 1997,
after serving for 14 months as Director of Education at the Company's largest
school, Brown. Dr. Coover's background in private career education includes
holding positions as Vice President of Marketing for the Rasmussen Business
Colleges, Minneapolis, Minnesota; Vice President of Operations at Virginia
College, Birmingham, Alabama; President of Dominion College, Roanoke,
Virginia; President of Nettle Junior College, Sioux Falls, South Dakota; Co-
Director of New York Restaurant School in New York City; and Regional Director
with DeVry Institute of Technology. Dr. Coover holds a Bachelor's of Science
degree in Business Administration and an M.B.A. from California Western
University and a Ph.D. in Business from California Coast University.
NICK FLUGE has served as Managing Director of Operations--Culinary Division
(Portland, Pittsburgh and Fairmont) of the Company since July 1997. Mr. Fluge
has served as Director and President of Western Culinary
68
<PAGE>
since 1989. From 1984 until 1988, Mr. Fluge was Director of Retail/Restaurants
and a member of the management team of Western Culinary. With over 20 years of
experience in the hospitality/foodservice industry and as a Certified Culinary
Educator with the American Culinary Federation, Mr. Fluge has chaired American
Culinary Federation Food Salons, judged wine competitions and written columns
for various periodicals, including The National Culinary Review. Mr. Fluge has
been a Team Leader for the Accrediting Commission of Career Schools and
Colleges of Technology (ACCSCT) since 1992. Mr. Fluge is a member of the Oregon
Department of Education--Career College Division. Mr. Fluge holds a Bachelor's
of Science degree in Political Science from Portland State University.
LAWRENCE GROSS has served as Managing Director of Operations--Canadian School
Group (Toronto and Montreal) of the Company since June 1997. Mr. Gross has been
a Director and Manager of IAMD-Canada since 1981. He previously founded
National Carpet Mills and other companies in the home furnishings industry. Mr.
Gross is a graduate of the University of Chicago and earned his M.B.A. at the
University of Toronto Graduate School of Business.
JACOB P. GRUVER has served as Managing Director of Operations--Business
School Group (Allentown, Boston, Melville, Montclair, New York, Norwalk,
Piscataway and Providence) of the Company since May 1997. From August 1994 to
May 1997, Mr. Gruver served as the Company's Director of Finance. From 1989
until joining the Company, Mr. Gruver was Vice President and Controller of
Wyoming Technical Institute in Laramie, Wyoming, a moderately sized career-
oriented school. In such positions, he managed all financial functions,
including budgeting and implementation of management information/financial
systems. From 1978 to 1989, Mr. Gruver audited career-oriented schools and
other clients at a regional public accounting firm in Laramie, Wyoming. Mr.
Gruver received a Bachelor's degree in Accounting from National College.
PATRICIA KAPPER has served as Director of Education of the Company since
August 1997. From 1990 until joining the Company, Ms. Kapper was Dean of
Academic Affairs (Chief Academic Officer) of DeVry Institute of Technology,
Addison, Illinois. From 1986 until 1990, Ms. Kapper held academic management
positions with Milwaukee Area Technical College, from 1984 to 1986 as Associate
Dean of Business and Graphic and Applied Arts and from 1986 to 1990 as Dean of
Business and Graphic Arts. Ms. Kapper holds a Bachelor's of Arts degree in
Business Education from the University of Wisconsin--Eau Claire, a Master of
Science in Teaching degree from the University of Wisconsin--Whitewater, and is
in the process of completing her dissertation for her doctorate in Adult
Education at Northern Illinois University.
JAMES R. MCELLHINEY was appointed Director of Regulatory Compliance of the
Company in August 1997. Mr. McEllhiney served as Director of Education of the
Company from August 1994 until August 1997. Prior to joining CEC corporate
management in August 1994, Mr. McEllhiney was the Vice President of Academic
Affairs for Phillips Colleges, Inc. In this position, Mr. McEllhiney managed
regulatory compliance, including processing change of ownership applications
for over 60 acquisitions, and oversaw corporate educational administration for
this group of 92 schools. From 1975 to 1988, Mr. McEllhiney managed regulatory
compliance and served as Chief Academic Officer for MetriData Computing, a 40
unit career-oriented school company. Prior to joining MetriData, Mr. McEllhiney
was an instructor and Academic Dean at Northwood Institute. Mr. McEllhiney
holds a Bachelor's of Science in Education and a Masters of Science in
Psychology from Indiana State University.
ROBERT W. NACHTSHEIM has served as Controller of the Company since December
1995. Mr. Nachtsheim joined CEC's corporate management with 19 years of
accounting and financial analysis experience in multiple industries. From 1993
until 1995, Mr. Nachtsheim served as Controller for Century 21 North Central,
Inc., overseeing the financial performance of 600 midwestern Century 21
franchises. His prior experience includes six years as the Director of
Financial Analysis and Reporting for Newark Electronics, a nationwide
electronics distributor, and 11 years with Amoco Corporation in various
accounting positions. Mr. Nachtsheim holds a Bachelor's of Science degree in
Accountancy from the University of Missouri and an M.B.A. in Finance from
DePaul University.
69
<PAGE>
JASON L. ROBERTS has served as Director of Management Information Systems of
the Company since August 1995. Mr. Roberts has several years of experience in
proprietary school management and information technology. From 1993 to 1995,
Mr. Roberts was a computer and networking consultant working primarily with
small businesses and proprietary schools. From 1991 to 1993, Mr. Roberts was
the Director of MIS for Wyoming Technical Institute, a moderately sized
automotive technology school owned by Phillips Colleges, Inc. Mr. Roberts holds
a Bachelor's of Science degree in Management Information Systems from the
University of Wyoming and has the industry recognized credential of Certified
Netware Engineer.
STEVE B. SOTRAIDIS has served as Managing Director of Operations-Visual
Communications Group (Long Beach, Tempe, Minneapolis, Chicago and Tampa) of the
Company since July 1, 1997. Mr. Sotraidis joined CEC's administrative
management team in June 1994. Mr. Sotraidis joined Brooks College in 1970 and
has managed Brooks' overall operations since 1975. Mr. Sotraidis holds a
Bachelor of Science degree in Psychology and completed two years of graduate
work in Industrial Psychology at California State University at Long Beach.
MARK J. TOBIN has served as Director of Student Finance of the Company since
March 1996. Mr. Tobin joined DeVry, Inc., in 1984 and, from 1989 until joining
CEC corporate management, Mr. Tobin was Director of Student Finance for DeVry,
Inc. In that position, Mr. Tobin was responsible for student finance policy
development, technical and operations assistance and performance monitoring for
the DeVry Institutes of Technology and the Keller Graduate School of
Management. From 1984 to 1989, Mr. Tobin held corporate financial aid
management positions at DeVry, Inc. Prior to his tenure at DeVry, Inc. (1984-
1996), Mr. Tobin was Director of Financial Aid at Carthage College (1978-1984)
and Marian College (1973-1978). Mr. Tobin holds a Bachelor of Arts degree in
Psychology from Northeastern Illinois State College and a Master of Education
degree in Student Personnel Work in Higher Education from Loyola University of
Chicago.
BOARD OF DIRECTORS
The Company's Board of Directors is divided into three classes with staggered
three-year terms. The terms of Messrs. Dowdell and Pesch expire at the annual
meeting of the Company's stockholders in 1999, the terms of Messrs. Laub and
Steele expire at the annual meeting of the Company's stockholders in 2000, and
the term of Mr. Larson expires at the annual meeting of the Company's
stockholders in 2001. Mr. Lally's term will expire at the annual meeting of
stockholders in 2001, and Mr. Ogata's term will expire at the annual meeting of
stockholders in 2000. At each annual meeting of the Company's stockholders, the
successors to the directors whose terms expire at such annual meeting will be
elected for a three-year term.
ARRANGEMENTS FOR NOMINATION AS DIRECTOR
In connection with sales of the Company's capital stock, the Company and
certain of its stockholders, including Heller and Electra, entered into the
Amended and Restated Stockholders' Agreement, dated as of July 31, 1995 and
amended as of February 28, 1997 and May 30, 1997 (the "Stockholders'
Agreement"), which provides, among other things, that the Board of Directors of
the Company shall have six members, consisting, subject to certain conditions,
of Messrs. Larson and Dowdell, two persons designated by HECC, one person
designated by Electra and one person designated by the other directors. The
Stockholders' Agreement, including the rights and obligations of the
aforementioned parties to designate directors, will terminate upon the
consummation of the Offering.
The Company and HECC intend to enter into an agreement, to be effective upon
the consummation of the Offering, pursuant to which HECC will be entitled to
designate two individuals for nomination to the Board of Directors. This
agreement will provide that the Company will, among other things, cause such
individuals to be nominated and solicit proxies from the Company's stockholders
to vote in favor of such nominees, and will appoint the HECC designees to the
Compensation and Audit Committees of the Board. The number of directors HECC
will be entitled to designate will be reduced to one if HECC no longer owns at
least 25% of the aggregate voting power of the Company, and the agreement will
terminate if HECC no longer owns at least 10% of the aggregate voting power of
the Company. Messrs. Pesch and Lally will be the initial designees of Heller.
70
<PAGE>
COMMITTEES OF THE BOARD OF DIRECTORS
The Board of Directors has established an Audit Committee and a Compensation
Committee. Both the Audit Committee and the Compensation Committee are
currently composed entirely of directors who are not officers or employees of
the Company.
The Audit Committee generally has responsibility for recommending independent
auditors to the Board of Directors for selection, reviewing the plan and scope
of the annual audit, reviewing the Company's audit and control functions and
reporting to the full Board of Directors regarding all of the foregoing. The
members of the Audit Committee are Messrs. Dowdell and Pesch, and Messrs. Lally
and Ogata are joining the Audit Committee on the date of this Prospectus.
The Compensation Committee generally has responsibility for recommending to
the Board guidelines and standards relating to the determination of executive
compensation, reviewing the Company's executive compensation policies and
reporting to the Board of Directors regarding the foregoing. The Compensation
Committee also has responsibility for administering the Company's incentive
compensation plans, determining the number of options to be granted to the
Company's executive officers pursuant to such plans and reporting to the Board
of Directors regarding the foregoing. The members of the Compensation Committee
are Messrs. Laub and Pesch, and Mr. Lally is joining the Compensation Committee
on the date of this Prospectus.
COMPENSATION OF DIRECTORS
Subsequent to the closing of the Offering, all directors who are not
employees of the Company will be paid an annual fee of $6,000 and will be paid
$1,000 for each Board meeting attended and $500 for each Board committee
meeting attended. Non-employee directors are also reimbursed for their
reasonable out-of-pocket expenses incurred in attending Board and committee
meetings. The Company has adopted the Career Education Corporation 1998 Non-
Employee Directors' Stock Option Plan, effective upon the closing of the
Offering, providing for annual option grants to each director who is not an
employee of the Company. See "--Stock Plans--Career Education Corporation 1998
Non-Employee Directors' Stock Option Plan."
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Wallace O. Laub, Patrick K. Pesch ("Pesch") and Scott D. Steele ("Scott
Steele"), who resigned as a director of the Company on January 23, 1998, served
as the members of the Compensation Committee during 1996.
The following information reflects a 100-for-one split of the Company's
common stock effected as of July 31, 1995 and a 10-for-one split of the
Company's Series C Preferred Stock effected as of July 26, 1996. It does not
reflect the Transactions to be effected immediately prior to the consummation
of the Offering, as described under "The Transactions."
As of February 28, 1997, the Company entered into a Securities Purchase
Agreement (the "February 1997 Agreement") with HECC, which as of December 31,
1997 beneficially owned 69.9% of the outstanding Common Stock of the Company;
Electra Investment Trust P.L.C. ("EIT"), which as of December 31, 1997 owned,
together with an affiliate, Electra Associates, Inc. ("EAP" and, collectively
with EIT, "Electra"), 26.0% of the Common Stock of the Company; John M. Larson,
the President and Chief Executive Officer and a director of the Company
("Larson"); William A. Klettke, the Senior Vice President, Chief Financial
Officer and Treasurer of the Company ("Klettke"); Robert E. Dowdell, a director
of the Company; and Mr. Laub and Constance L. Laub (collectively, "Laub").
Pesch is an officer of HECC and a Vice President of HFI (collectively with
HECC, "Heller"), the parent of HECC, and was designated as a director of the
Company by HECC. Todd H. Steele ("Todd Steele"), who served as a Vice President
of HFI and HECC from May 1990 to November 1996, was also designated as a
director of the Company by Heller. Scott Steele is a principal of Electra
Fleming Inc, an affiliate of EIT and EAP, and was designated as a director of
the Company by EIT.
71
<PAGE>
On February 28, 1997, pursuant to the February 1997 Agreement, the Company
issued (i) 1,391 shares of Series D Preferred Stock and Warrants to purchase
1,655 shares of Class E Common Stock to HECC in exchange for total
consideration of $1,391,000, (ii) 468 shares of Series D Preferred Stock and
Warrants to purchase 558 shares of Class E Common Stock to Electra in exchange
for total consideration of $468,000, (iii) 84 shares of Series D Preferred
Stock and Warrants to purchase 99 shares of Series E Common Stock to Dowdell
in exchange for total consideration of $84,000, (iv) 16 shares of Series D
Preferred Stock and Warrants to purchase 19 shares of Class E Common Stock to
Larson in exchange for total consideration of $16,000, (v) 15 shares of Series
D Preferred Stock and Warrants to purchase 18 shares of Class E Common Stock
to Klettke in exchange for total consideration of $15,000, (vi) 26 shares of
Series D Preferred Stock and Warrants to purchase 31 shares of Class E Common
Stock to Laub in exchange for total consideration of $26,000.
On May 30, 1997, pursuant to the February 1997 Agreement, the Company issued
(i) 3,995 shares of Series D Preferred Stock and Warrants to purchase 4,754
shares of Class E Common Stock to HECC in exchange for total consideration of
$3,995,000, (ii) 1,348 shares of Series D Preferred Stock and Warrants to
purchase 1,603 shares of Class E Common Stock to Electra in exchange for total
consideration of $1,348,000, (iii) 44 shares of Series D Preferred Stock and
Warrants to purchase 52 shares of Class E Common Stock to Larson in exchange
for total consideration of $44,000, (iv) 42 shares of Series D Preferred Stock
and Warrants to purchase 50 shares of Class E Common Stock to Klettke in
exchange for total consideration of $42,000, (v) 71 shares of Series D
Preferred Stock and Warrants to purchase 85 shares of Class E Common Stock to
Laub in exchange for total consideration of $71,000.
As of May 30, 1997, the Company entered into a Securities Purchase Agreement
with Heller, Electra and Klettke (the "May 1997 Agreement" and, together with
the February 1997 Agreement, the "1997 Agreements"). On May 30, 1997, pursuant
to the May 1997 Agreement, the Company issued (i) 11,127 shares of Series D
Preferred Stock and Warrants to purchase 26,842 shares of Class E Common Stock
to Heller in exchange for total consideration of $11,127,000, (ii) 2,376
shares of Series D Preferred Stock and Warrants to purchase 5,732 shares of
Class E Common Stock to Electra in exchange for total consideration of
$2,376,000 and (iii) 122 shares of Series D Preferred Stock and Warrants to
purchase 295 shares of Class E Common Stock to Klettke in exchange for total
consideration of $122,000.
On June 30, 1997, pursuant to the May 1997 Agreement, the Company issued
1,375 shares of Series D Preferred Stock and Warrants to purchase 3,317 shares
of Class E Common Stock to Electra in exchange for total consideration of
$1,375,000.
The number of shares covered by each of the Warrants issued pursuant to the
1997 Agreements (collectively, the "Warrants") is subject to adjustment in
certain events described therein. The Warrants have an exercise price of $.01
per share and expire on July 31, 2005. The holders of the Warrants are
required to exercise them concurrently with the consummation of the Offering.
It is expected that the exercise price of each of the Warrants will be paid by
surrender of a portion of such Warrant. The Series D Preferred Stock issued
pursuant to the 1997 Agreements (including all accrued paid-in-kind dividends
thereon) will be converted into shares of Common Stock at a rate determined by
dividing the liquidation value of such Series D Preferred Stock by the initial
public offering price of the Common Stock in the Offering. See "The
Transactions."
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.
72
<PAGE>
The Company and Heller intend to enter into a Registration Rights Agreement
(the "Heller Registration Rights Agreement") prior to the consummation of the
Offering. Under the Heller Registration Rights Agreement, Heller will be
entitled, subject to certain exceptions, to demand that the Company register
shares of Common Stock held by Electra 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 certain exceptions, to
cause the Company to register shares held by Heller on a registration
statement on Form S-3. The Company will be required to pay certain expenses
relating to any registration effected pursuant to the Heller Registration
Rights Agreement and to indemnify Heller against certain liabilities,
including liabilities under the Securities Act.
Pursuant to a Securities Purchase Agreement dated as of July 31, 1995, among
the Company and Electra, the Company is required to pay Electra an annual
portfolio administration fee in the amount of $75,000. This obligation will
terminate upon the consummation of the Transactions as described under "The
Transactions."
EXECUTIVE COMPENSATION
The following table sets forth information with respect to all compensation
paid by the Company for services rendered during the fiscal year ended
December 31, 1997, to its Chief Executive Officer and the other executive
officer of the Company (each, a "Named Executive Officer").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL LONG TERM
COMPENSATION COMPENSATION
------------------ ------------
SECURITIES
SALARY UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITIONS ($) BONUS ($) OPTIONS (#) COMPENSATION ($)
---------------------------- ------ --------- ------------ ----------------
<S> <C> <C> <C> <C>
John M. Larson,
President and Chief Executive
Officer..................... $229,167 (1) 16,823 $17,018(2)
William A. Klettke,
Senior Vice President and
Chief Financial Officer..... $152,500 (1) 7,847 $ 6,771(3)
</TABLE>
- --------
(1) Bonuses for 1997 have not yet been determined. Bonuses paid to Messrs.
Larson and Klettke for 1996 were $96,602 and $43,764, respectively.
(2) Includes $8,594 in 401(k) matching contributions by the Company and $8,424
in term life insurance premium payments by the Company.
(3) Includes $6,100 in 401(k) matching contributions by the Company and $671
in term life insurance premium payments by the Company.
73
<PAGE>
OPTION GRANTS IN 1997
The following table contains information concerning the grant of stock
options by the Company to the Named Executive Officers during 1997.
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
PERCENTAGE VALUE AT ASSUMED ANNUAL
NUMBER OF OF TOTAL FAIR RATES OF STOCK PRICE
SHARES OPTIONS MARKET VALUE APPRECIATION FOR
UNDERLYING GRANTED TO EXERCISE OR ON DATE OF OPTION TERM (1)
OPTIONS EMPLOYEES IN BASE PRICE GRANT EXPIRATION -------------------------
NAME GRANTED (#) FISCAL YEAR ($/SH) ($/SH) DATE 0%($) 5% ($) 10% ($)
---- ----------- ------------ ----------- ------------ ---------- ------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
John M. Larson.......... 6,838(2) 11.1% $ 0.01 $14.00(3) 1/31/2004 $95,664 $134,616 $186,467
1,465(4) 2.4% $17.37(5) $17.37 2/27/2007 -- $ 16,006 $ 40,562
8,520(4) 13.8% $18.46(5) $18.46 6/29/2007 -- $ 98,902 $250,637
William A. Klettke...... 1,099(4) 1.8% $17.37(5) $17.37 2/27/2007 -- $ 12,004 $ 30,421
6,748(4) 10.9% $18.46(5) $18.46 6/29/2007 -- $ 78,341 $198,531
</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 assumed initial public offering price of the Common Stock of
$14.00 per share.
(4) These options were granted under the Career Education Corporation 1995
Stock Option Plan. Each of these options is an incentive stock option and
vests in five equal annual installments on each of the first five
anniversaries of the grant date; provided, however, that these options
become exercisable in full upon stockholder approval of the Offering. See
"--Stock Plans--Career Education Corporation 1995 Stock Option Plan."
(5) The exercise price of each of these options equals the fair market value of
the option shares on the date of grant, as determined by the Company's
Board of Directors based on the most recent price prior to the grant date
at which the Company sold or agreed to sell Preferred Stock in capital
raising transactions.
FISCAL YEAR-END OPTION VALUES
The following table contains information regarding the Named Executive
Officers' unexercised options as of December 31, 1997. Neither of the Named
Executive Officers exercised any options during 1997.
<TABLE>
<CAPTION>
NUMBER OF SHARES UNDERLYING UNEXERCISED VALUE OF UNEXERCISED IN-THE-MONEY
OPTIONS AS OF DECEMBER 31, 1997 (#) OPTIONS AS OF DECEMBER 31, 1997 ($) (1)
--------------------------------------- ---------------------------------------
NAME EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
---- --------------------------------------- ---------------------------------------
<S> <C> <C>
John M. Larson.......... 24,179/26,102 $288,594/$192,373
William A. Klettke...... 262/20,365 $ 2,389/$114,315
</TABLE>
- --------
(1) The value per option is calculated by subtracting the exercise price of the
option from the assumed initial public offering price of the Common Stock
of $14.00 per share.
EMPLOYMENT AGREEMENT
The Company has entered into an Employment and Non-Competition Agreement with
Mr. Larson, dated as of October 9, 1997 (the "Larson Employment Agreement"),
which has an initial term ending July 31, 2000. The Larson Employment Agreement
is subject to successive, automatic employer extensions if the Company gives
written notice at least 90 days prior to the expiration date. The Larson
Employment Agreement provides for an initial base salary of $250,000 plus bonus
compensation established by the Company's Board of Directors. The Larson
Employment Agreement provides for continuation of salary, bonus and benefits
for one year following Mr. Larson's termination of employment with the Company,
other than termination by the Company for "Cause" (as defined in the Larson
Employment Agreement) or termination by Mr. Larson without "Good Reason" (as
defined in the Larson Employment Agreement). Good Reason includes a Change of
Control (as
74
<PAGE>
defined in the Larson Employment Agreement) of the Company. The Larson
Employment Agreement also prohibits Mr. Larson from disclosing confidential
information and prohibits him from engaging in activities competitive with the
Company for a period which includes the term of his employment with the Company
or service as a director of the Company and continues for two years thereafter.
However, if Mr. Larson's employment with the Company is terminated by the
Company without "Cause" or by Mr. Larson for "Good Reason," the non-competition
period will expire on the later of the termination of Mr. Larson's service as a
director with the Company or six months after the termination of his
employment. In such case, the Company may extend the non-competition period up
to an additional 18 months if it pays Mr. Larson's base salary, a portion of
his bonus and benefits during this additional period. If the term of the Larson
Employment Agreement expires and the Company refuses its renewal or Mr. Larson
refuses its renewal for Good Reason, the non-competition period will expire on
the later of the termination of Mr. Larson's employment or the termination of
his service as a director. In such case, the Company may extend the non-
competition period for up to an additional two years if it pays Mr. Larson's
base salary, a portion of his bonus and benefits during this additional period.
STOCK PLANS
Career Education Corporation 1995 Stock Option Plan
Effective August 1, 1995, the Company's Board of Directors adopted the Career
Education Corporation 1995 Stock Option Plan (the "1995 Plan"), pursuant to
which options to acquire shares of Common Stock may be granted to employees,
advisors, consultants and non-employee directors as may be determined by a
committee of the Board of Directors (the "Option Committee"). As of January 23,
1998, options to acquire 120,651 shares of Common Stock were outstanding under
the 1995 Plan, and an additional 7,406 shares of Common Stock were reserved for
issuance under the 1995 Plan. The Compensation Committee of the Board of
Directors serves as the Option Committee and administers the 1995 Plan and
determines with respect to each grant the number of shares subject to the
option, the exercise price, the period of the option and the time at which the
option may be exercised, as well as any terms and conditions of the option
amount. Exercise prices may not be less than the fair market value of the
Common Stock as determined by the Option Committee as of the date of issuance
of each stock option. Options may be granted as either (i) incentive stock
options (as defined in the Code), for which the option price must be at least
100% of the fair market value of the shares subject to the option on the grant
date (110% in the case of an option granted to a person holding more than 10%
of the voting power of all classes of stock of the Company (a "10% Holder") and
which are not exercisable after ten years from the grant date (five years in
the event of an option granted to a 10% Holder), or (ii) non-qualified stock
options, which are not subject to such restrictions.
Career Education Corporation 1998 Employee Incentive Compensation Plan
The Company's Board of Directors has adopted, and the Company's stockholders
have approved, the Career Education Corporation 1998 Employee Incentive
Compensation Plan (the "Employee Plan"), effective on the date of this
Prospectus. The Employee Plan is a flexible plan that provides the Compensation
Committee of the Board of Directors (the "Compensation Committee") broad
discretion to fashion the terms of the awards to provide eligible participants
with stock-based and performance-related incentives as the Committee deems
appropriate. The Employee Plan permits the issuance of awards in a variety of
forms, including: (i) nonqualified and incentive stock options for the purchase
of Common Stock, (ii) stock appreciation rights, (iii) restricted stock, (iv)
deferred stock, (v) bonus stock and awards in lieu of obligations, (vi)
dividend equivalents, (vii) other stock-based awards and (viii) performance
awards and cash incentive awards. Options granted will provide for the purchase
of Common Stock at prices determined by the Compensation Committee.
The persons eligible to participate in the Employee Plan are officers,
employees and consultants of the Company or any subsidiary of the Company who,
in the opinion of the Committee, contribute to the growth and success of the
Company or its subsidiaries. The purpose of the Employee Plan is to promote the
overall financial objectives of the Company and its stockholders by motivating
eligible participants to achieve long-term growth in stockholder equity in the
Company and to retain the association of these individuals. The Employee Plan
is administered by the Compensation Committee.
The Employee Plan provides for the award of up to 600,000 shares of Common
Stock. At the discretion of the Compensation Committee, shares of Common Stock
subject to an award under the Employee Plan that
75
<PAGE>
remain unissued upon termination of such award, are forfeited or are received
by the Company as consideration for the exercise or payment of an award may be
reissued under the Employee Plan. In the event of a stock dividend, stock
split, recapitalization, sale of substantially all of the assets of the
Company, reorganization or other similar event, the Compensation Committee
will adjust the aggregate number of shares of Common Stock subject to the
Employee Plan and the number, class and price of shares subject to outstanding
awards.
On the date of this Prospectus, under the Employee Plan, the Company is
granting options to purchase an aggregate of 209,100 shares of Common Stock to
certain officers and employees of the Company, including options to purchase
60,000 shares to Mr. Larson, the Company's President and Chief Executive
Officer, and options to purchase 15,000 shares to Mr. Klettke, the Company's
Senior Vice President and Chief Financial Officer. These options have an
exercise price equal to the initial public offering price per share of the
Common Stock and become exercisable in five equal annual installments,
commencing on the first anniversary of the date of this Prospectus.
Career Education Corporation 1998 Non-Employee Directors' Stock Option Plan
The Company's Board of Directors has adopted, and the Company's stockholders
have approved, the Career Education Corporation 1998 Non-Employee Directors'
Stock Option Plan (the "Directors' Plan"), effective on the date of this
Prospectus. The Directors' Plan grants nonqualified stock options for the
purchase of Common Stock to directors who are not employees of the Company.
Messrs. Dowdell, Laub, Pesch and Todd Steele will be the initial participants
in the Directors' Plan.
The purpose of the Directors' Plan is to promote the overall financial
objectives of the Company and its stockholders by motivating directors to
achieve long-term growth in stockholder equity in the Company, to further
align the interest of such directors with those of the Company's stockholders
and to retain the association of these directors. The Directors' Plan is
administered by the Compensation Committee.
The Directors' Plan provides for the award of up to 200,000 shares of Common
Stock. The Directors' Plan provides for (i) the grant of an option to purchase
8,000 shares of Common Stock to each participant who is a non-employee
director of the Company on the date of this Prospectus or, if after such date,
the date such individual is first elected or appointed as a non-employee
director of the Company and (ii) a grant of an option to purchase 3,000 shares
of Common Stock on the date of each regular annual stockholder meeting after
the effective date of the Directors' Plan to each participant who is a non-
employee director upon such date and either is continuing as a non-employee
director subsequent to the meeting or who is elected at such meeting to serve
as a non-employee director (other than a meeting in the year of such
participant's initial election or appointment). Options granted under the
Directors' Plan provide for the purchase of Common Stock at the fair market
value on the date of grant and become exercisable in three equal annual
installments, commencing on the date of grant. No stock option granted under
the Directors' Plan may be exercisable later than the tenth anniversary date
of its grant.
Career Education Corporation 1998 Employee Stock Purchase Plan
The Company's Board of Directors has adopted, and the Company's stockholders
have approved, the Career Education Corporation 1998 Employee Stock Purchase
Plan (the "Stock Purchase Plan"), effective as of April 1, 1998. A total of
500,000 shares of Common Stock have been reserved for issuance under the Stock
Purchase Plan. The Stock Purchase Plan, which is intended to qualify under
Section 423 of the Code, permits eligible employees of the Company to purchase
Common Stock through payroll deductions with all such deductions credited to
an account under the Stock Purchase Plan.
The Stock Purchase Plan operates on a calendar year basis. To be eligible to
participate in the Stock Purchase Plan, an employee must file all requisite
forms prior to a specified due date known as a "Grant Date." Initially, the
first day of each calendar quarter of each year (January 1, April 1, July 1
and October 1) will be a Grant Date and the last day of each calendar quarter
of each year (March 31, June 30, September 30 and December 31) will be an
Exercise Date (an "Exercise Date"). However, the determination of the Grant
Dates and the Exercise Dates are completely within the discretion of the
Compensation Committee of the Board of Directors. On each Exercise Date,
participants' payroll deductions credited to their accounts will be
automatically applied to the purchase price of Common Stock at a price per
share equal to 85% of the fair market value of the
76
<PAGE>
Common Stock on the Exercise Date. Employees may end their participation in the
Stock Purchase Plan at any time during an offering period, and their payroll
deductions to date will be refunded. Participation ends automatically upon
termination of employment with the Company. Payroll deductions may not exceed
$5,000 for any employee in any purchase period. No more than 25,000 shares in
the aggregate may be issued to all participants in any purchase period.
Employees are eligible to participate in the Stock Purchase Plan if they are
customarily employed by the Company or a designated subsidiary for at least 20
hours per week and for more than five months in any calendar year. No person
will be able to purchase Common Stock under the Stock Purchase Plan if such
person, immediately after the purchase, would own stock possessing 5% or more
of the total combined voting power or value of all outstanding shares of all
classes of stock of the Company.
LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS
Pursuant to the provisions of the Delaware General Corporation Law ("DGCL"),
the Company will adopt certain provisions in its Amended and Restated
Certificate of Incorporation which eliminate the personal liability of its
directors to the Company or its stockholders for monetary damages for breach of
their fiduciary duty as a director to the fullest extent permitted by the DGCL
except for liability (i) for any breach of their duty of loyalty to the Company
or its stockholders, (ii) for acts or omissions not in good faith or which
involve intentional misconduct or a knowing violation of law, (iii) for
unlawful payments of dividends or unlawful stock repurchases or redemptions, or
(iv) for any transaction from which the director derived an improper personal
benefit. The provisions of the Company's Amended and Restated Certificate of
Incorporation will not affect a director's responsibilities under any other
laws, such as the federal securities laws or state or federal environmental
laws.
The Company's Amended and Restated Certificate of Incorporation will also
contain provisions which require the Company to indemnify its directors, and
permit the Company to indemnify its officers and employees, to the fullest
extent permitted by Delaware law, including those circumstances in which
indemnification would otherwise be discretionary, except that the Company shall
not be obligated to indemnify any such person (i) with respect to proceedings,
claims or actions initiated or brought voluntarily by any such person and not
by way of defense, or (ii) for any amounts paid in settlement of an action
indemnified against by the Company without the prior written consent of the
Company. The Company has obtained directors' and officers' liability insurance
and, prior to consummation of the Offering, the Company intends to enter into
indemnity agreements with each of its directors providing for the
indemnification described above.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In addition to the transactions described under "Management--Compensation
Committee Interlocks and Insider Participation," the Company has entered into
the following arrangements with one of its executive officers:
In December 1996, the Company issued 824 shares of Class E Common Stock and
70 shares of Series A Preferred Stock to William A. Klettke, the Company's
Senior Vice President, Chief Financial Officer and Treasurer, in exchange for
total consideration of $99,982. At that time, the Company made an interest-free
loan in the amount of $99,982 to Mr. Klettke to be used to purchase these
shares. This loan was repaid by Mr. Klettke in full in January 1997.
As of October 20, 1997, certain option agreements between the Company and
John M. Larson, the Company's President and Chief Executive Officer, and Robert
E. Dowdell, one of the Company's directors, were amended to fix, upon the
consummation of the Offering, the number of shares issuable upon exercise of
the stock options provided under these agreements. Under these amended options,
which will be fully vested upon consummation of the Offering, Messrs. Larson
and Dowdell will be entitled to purchase 59,490 shares and 38,244 shares,
respectively, of Common Stock at an exercise price of $0.01 per share.
The Company intends that any future transactions between the Company and its
officers, directors and affiliates will be on terms no less favorable to the
Company than can be obtained on an arm's length basis from unaffiliated third
parties and that any transactions with such persons will be approved by a
majority of the Company's outside directors or will be consistent with policies
approved by such outside directors.
77
<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table (including the Notes thereto) sets forth certain
information regarding the beneficial ownership of the Common Stock as of
December 31, 1997 (after giving effect to the Transactions) and as adjusted to
reflect the sale of the shares of Common Stock being offered hereby by: (i)
each person (or group of affiliated persons) known by the Company to
beneficially own more than 5% of the outstanding shares of Common Stock, (ii)
each director of the Company, (iii) each of the Named Executive Officers and
(iv) all of the Company's directors and executive officers as a group. Unless
otherwise indicated below, the persons in the table have sole voting and
investment power with respect to all shares shown as beneficially owned by
them.
<TABLE>
<CAPTION>
SHARES OF COMMON SHARES OF COMMON
STOCK STOCK
BENEFICIALLY BENEFICIALLY
OWNED PRIOR TO OWNED AFTER THE
THE OFFERING (1) OFFERING (1)
----------------- ------------------------
NAME NUMBER PERCENT NUMBER PERCENT
---- --------- ------- --------- -------
<S> <C> <C> <C> <C>
Heller Equity Capital Corporation
(2)............................. 2,731,747 69.9% 2,606,239(3) 38.7%
Electra Investment Trust P.L.C.
and
Electra Associates, Inc. (4).... 1,016,468 26.0 1,016,468 15.1
John M. Larson (5)............... 120,321 3.0 120,321 1.8
William A. Klettke (6)........... 48,441 1.2 48,441 *
Robert E. Dowdell (7)............ 106,420 2.7 109,086(8) 1.6
Thomas B. Lally.................. -- -- 2,666(9) *
Wallace O. Laub.................. 24,616 * 27,282(8) *
Keith K. Ogata................... -- -- 2,666(9) *
Patrick K. Pesch................. -- -- 2,666(9) *
Todd H. Steele................... -- -- 21,305(8)(10) *
All directors and executive
officers
as a group (8 persons).......... 299,798 7.4 334,430 4.8
</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 December 31, 1997 (including
options that will become exercisable upon consummation of the Offering).
(2) The address of HECC is 500 West Monroe Street, Chicago, Illinois 60661.
(3) Excludes 125,508 shares of Common Stock being transferred by HECC to
certain of its former employees, including Mr. Steele, on the date of this
Prospectus.
(4) EIT and Electra Associates, Inc. ("EAI") are affiliated entities, and
their address is c/o EIT, 65 Kingsway, London, England WC2B 6QT.
(5) Includes 109,771 shares of Common Stock which may be acquired by Mr.
Larson upon the exercise of currently exercisable stock options.
(6) Includes 20,626 shares of Common Stock which may be acquired by Mr.
Klettke upon the exercise of currently exercisable stock options.
(7) Includes 2,324 shares of Common Stock held by Mr. Dowdell, as Custodian
for Brian M. Dowdell under the Uniform Transfers to Minors Act; 2,324
shares of Common Stock held by Mr. Dowdell, as Custodian for Sharon T.
Dowdell under the Uniform Transfers to Minors Act; 4,370 shares of Common
Stock held by Robert E. Dowdell Defined Benefit Plan and Trust, under
Agreement dated 12/9/96; 3,812 shares of Common Stock held by Robert E.
Dowdell and Grace C. Dowdell, as Trustees under Trust Agreement dated July
1, 1991; 14,600 shares of Common Stock held by Delaware Charter Guarantee
and Trust Co., Custodian for Robert E. Dowdell Individual Retirement
Account; and 38,243 shares of Common Stock which may be acquired by Mr.
Dowdell upon the exercise of currently exercisable stock options.
(8) Includes 2,666 shares of Common Stock which may be acquired upon the
exercise of the immediately exercisable portion of the option being
automatically granted to this non-employee director under the Directors'
Plan on the date of this Prospectus.
(9) Represents shares of Common Stock which may be acquired upon the exercise
of the immediately exercisable portion of the option being automatically
granted to this non-employee director under the Directors' Plan on the
date of this Prospectus.
(10) Includes 18,639 shares of Common Stock being transferred to Mr. Steele by
HECC on the date of this Prospectus.
78
<PAGE>
DESCRIPTION OF CAPITAL STOCK
Upon consummation of the Offering, the authorized capital stock of the
Company will consist of 50,000,000 shares of Common Stock, $.01 par value per
share ("Common Stock"), and 1,000,000 shares of Preferred Stock, $.01 par value
per share ("Preferred Stock").
The following summary of certain provisions relating to the Common Stock and
Preferred Stock does not purport to be complete and is subject to, and
qualified in its entirety by, provisions of applicable law, and by the
provisions of the Company's Amended and Restated Certificate of Incorporation
and Amended and Restated Bylaws that are included as exhibits to the
Registration Statement of which this Prospectus is a part.
COMMON STOCK
As of December 31, 1997, 612,805 shares of common stock were outstanding and
held by eight holders of record. Approximately 6,729,775 shares of Common Stock
will be outstanding upon consummation of the Offering (assuming an initial
public offering price of the Common Stock of $14.00 per share). Subject to the
rights of holders of preferred stock, the holders of outstanding shares of
Common Stock are entitled to share ratably in dividends declared out of assets
legally available therefor at such time and in such amounts as the Board of
Directors may from time to time lawfully determine. Each holder of Common Stock
is entitled to one vote for each share held. Subject to the rights of holders
of any outstanding Preferred Stock, upon liquidation, dissolution or winding up
of the Company, any assets legally available for distribution to stockholders
as such are to be distributed ratably among the holders of the Common Stock at
that time outstanding. All shares of Common Stock currently outstanding are,
and all shares of Common Stock offered by the Company hereby when duly issued
and paid for will be, fully paid and nonassessable, not subject to redemption
and assessment and without conversion, preemptive or other rights to subscribe
for or purchase any proportionate part of any new or additional issues of any
class or of securities convertible into stock of any class.
PREFERRED STOCK
Preferred stock may be issued by the Company in series from time to time with
such designations, relative rights, priorities, preferences, qualifications,
limitations and restrictions thereof, to the extent that such are not fixed in
the Company's Amended and Restated Certificate of Incorporation, as the Board
of Directors determines. The rights, preferences, limitations and restrictions
of different series of Preferred Stock may differ with respect to dividend
rates, amounts payable on liquidation, voting rights, conversion rights,
redemption provisions, sinking fund provisions and other matters. The Board of
Directors may authorize the issuance of Preferred Stock which ranks senior to
the Common Stock with respect to the payment of dividends and the distribution
of assets on liquidation. In addition, the Board of Directors is authorized to
fix the limitations and restrictions, if any, upon the payment of dividends on
Common Stock to be effective while any shares of Preferred Stock are
outstanding. The Board of Directors, without stockholder approval, may issue
Preferred Stock with voting and conversion rights which could adversely affect
the voting power of the holders of Common Stock. The issuance of Preferred
Stock may have the effect of delaying, deferring or preventing a change in
control of the Company. The Company has no present intention to issue shares of
Preferred Stock.
CERTAIN CORPORATE PROVISIONS
Upon the consummation of the Offering, the Company will be subject to the
provisions of Section 203 of the DGCL. In general, this statute prohibits a
publicly held Delaware corporation from engaging, under certain circumstances,
in a "business combination" with an "interested stockholder" for a period of
three years after the date of the transaction in which the person becomes an
interested stockholder, unless either (i) prior to the date at which the
stockholder became an interested stockholder the board of directors approved
either the business combination or the transaction in which the person becomes
an interested stockholder, (ii) the stockholder acquires more than 85% of the
outstanding voting stock of the corporation (excluding shares held by directors
who are officers or held in certain employee stock plans) upon consummation of
the transaction in which the stockholder becomes an interested stockholder or
(iii) the business combination is approved by the
79
<PAGE>
board of directors and by two-thirds of the outstanding voting stock of the
corporation (excluding shares held by the interested stockholder) at a meeting
of the stockholders (and not by written consent) held on or subsequent to the
date of the business combination. An "interested stockholder" is a person who,
together with affiliates and associates, owns (or at any time within the prior
three years did own) 15% or more of the corporation's voting stock. Section
203 defines a "business combination" to include, without limitation, mergers,
consolidations, stock sales and asset based transactions and other
transactions resulting in a financial benefit to the interested stockholder. A
business combination by the Company with Heller or Electra would not be
prohibited by Section 203.
The Company's Certificate of Incorporation and Bylaws contain a number of
provisions relating to corporate governance and to the rights of stockholders.
Certain of these provisions may be deemed to have a potential "anti-takeover"
effect in that such provisions may delay, defer or prevent a change of control
of the Company. These provisions include (i) a requirement that stockholder
action may be taken only at stockholder meetings; (ii) notice requirements in
the Bylaws relating to nominations to the Board of Directors and to the
raising of business matters at stockholders meetings; and (iii) the
classification of the Board of Directors into three classes, each serving for
staggered three year terms. See "Management--Executive Officers and
Directors."
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is Harris Trust and
Savings Bank.
80
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Prior to the Offering, there has been no public market for the Common Stock.
Sales of substantial amounts of Common Stock in the public market, or the
availability of such shares for sale, could adversely affect the market price
of the Common Stock.
Upon completion of the Offering, the Company will have an aggregate of
approximately 6,729,775 shares of Common Stock outstanding, assuming no
exercise of the Underwriters' over-allotment option and no exercise of
outstanding options. Of these shares, the 2,850,000 shares sold in the
Offering will be freely tradable without restriction or further registration
under the Securities Act, unless held by "affiliates" of the Company, as that
term is defined in Rule 144 promulgated under the Securities Act. The
remaining 3,879,775 shares of Common Stock outstanding upon completion of the
Offering will be Restricted Shares.
All directors, officers and stockholders of the Company have agreed with the
Underwriters that, for a period of 180 days from the date of this Prospectus,
they will not offer to sell or otherwise sell, dispose of or grant rights with
respect to any shares of Common Stock, now owned or hereafter acquired
directly by such holders or with respect to which they have the power of
disposition, otherwise than with the prior written consent of Credit Suisse
First Boston Corporation. As a result of these contractual restrictions,
notwithstanding possible earlier eligibility for sale under the provisions of
Rules 144, 144(k) and 701 of the Securities Act, shares subject to Lock-Up
Agreements will not be salable until the agreements expire or unless prior
written consent is received from Credit Suisse First Boston Corporation. Any
early waiver of the Lock-Up Agreements by the underwriters, which, if granted,
could permit sales of a substantial number of shares and could adversely
affect the trading price of the Company's shares, may not be accompanied by an
advance public announcement by the Company. See "Underwriting."
Taking into account the Lock-Up Agreements, (i) 3,879,035 Restricted Shares
will become eligible for public resale immediately following expiration of the
Lock-Up Agreements under the provisions of Rule 144, subject to the volume and
manner of sale limitations under such Rule, and (ii) the remaining 740
Restricted Shares will become eligible for public resale in September 1998.
In general, under Rule 144 a person (or persons whose shares are aggregated)
who has beneficially owned Restricted Shares for at least one year, including
persons who may be deemed "affiliates" of the Company, would be entitled to
sell within any three-month period a number of shares that does not exceed the
greater of one percent of the number of shares of Common Stock then
outstanding or the average weekly trading volume of the Common Stock during
the four calendar weeks preceding the filing of a Form 144 with respect to
such sale. Sales under Rule 144 are also subject to certain manner of sale
provisions and notice requirements and to the availability of current public
information about the Company. In addition, a person who is not deemed to have
been an affiliate of the Company at any time during the 90 days preceding a
sale, and who has beneficially owned for at least two years the shares
proposed to be sold, would be entitled to sell such shares under Rule 144(k)
without regard to the requirements described above. The Company is unable to
estimate accurately the number of Restricted Shares that will be sold under
Rule 144 because this will depend in part on the market price for the Common
Stock, the personal circumstances of the seller and other factors.
Upon consummation of the Offering, options to purchase 498,746 shares of
Common Stock will be issued and outstanding, of which options to purchase
257,642 shares of Common Stock will be exercisable. See "Management--Stock
Plans." Beginning 90 days after the date of this Prospectus, certain shares
issued or issuable upon exercise of options granted by the Company prior to
the effective date of the Registration Statement will also be eligible for
sale in the public market pursuant to Rule 701 under the Securities Act,
subject to the Lock-Up Agreements. In general, Rule 701 permits resales of
shares issued pursuant to certain compensatory benefit plans and contracts
commencing 90 days after the issuer becomes subject to the reporting
requirements of the Securities Exchange Act of 1934, as amended, in reliance
upon Rule 144 but without compliance with certain restrictions, including the
holding period requirements, contained in Rule 144.
81
<PAGE>
Following the Offering, the Company intends to file under the Securities Act
one or more registration statements on Form S-8 to register all of the shares
of Common Stock (i) subject to outstanding options and reserved for future
option grants under the Stock Plans and (ii) that the Company intends to offer
for sale to its employees pursuant to the Stock Purchase Plan. These
registration statements are expected to become effective upon filing and
shares covered by these registration statements will be eligible for sale,
subject, in the case of affiliates only, to the restrictions of Rule 144,
other than the holding period requirement, and subject to expiration of the
lock-up agreements with the Underwriters.
REGISTRATION RIGHTS
The Company and Electra are parties to the Electra Registration Rights
Agreement. Under the Electra Registration Rights Agreement, Electra is
entitled, subject to certain exceptions, to 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,
Electra will be entitled, subject to certain exceptions, to cause the Company
to register shares held by Electra on registration statement on Form S-3. Upon
consummation of the Offering, Electra will hold 1,016,468 shares covered by
the Electra Registration Rights Agreement.
The Company and Heller intend to enter into the Heller Registration Rights
Agreement, to be effective upon the consummation of the Offering. Under the
Heller Registration Rights Agreement, Heller will be entitled, subject to
certain exceptions, to demand that the Company register shares of Common Stock
held by Electra 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 certain exceptions, to cause the Company to
register shares held by Heller on a registration statement on Form S-3. Upon
consummation of the Offering, Heller will hold 2,606,241 shares which will be
covered by the Heller Registration Rights Agreement. See "Management--
Compensation Committee Interlocks and Insider Participation."
82
<PAGE>
UNDERWRITING
Upon the terms and subject to the conditions contained in an Underwriting
Agreement dated , 1998 (the "Underwriting Agreement"), the underwriters
named below (the "Underwriters"), for whom Credit Suisse First Boston
Corporation and Smith Barney Inc. are acting as representatives (the
"Representatives"), have severally but not jointly agreed to purchase from the
Company the following respective numbers of shares of Common Stock:
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
----------- ---------
<S> <C>
Credit Suisse First Boston Corporation..........................
Smith Barney Inc................................................
---------
Total....................................................... 2,850,000
=========
</TABLE>
The Underwriting Agreement provides that the obligations of the Underwriters
are subject to certain conditions precedent and that the Underwriters will be
obligated to purchase all the shares of Common Stock offered hereby (other
than those shares covered by the over-allotment option described below) if any
are purchased. The Underwriting Agreement provides that, in the event of a
default by an Underwriter, in certain circumstances the purchase commitments
of non-defaulting Underwriters may be increased or the Underwriting Agreement
may be terminated.
The Company has granted to the Underwriters an option, expiring at the close
of business on the 30th day after the date of this Prospectus, to purchase up
to 427,500 additional shares at the initial public offering price, less the
underwriting discount and commissions, all as set forth on the cover page of
this Prospectus. Such option may be exercised only to cover over-allotments in
the sale of the shares of Common Stock offered hereby. To the extent such
option is exercised, each Underwriter will become obligated, subject to
certain conditions, to purchase approximately the same percentage of such
additional shares of Common Stock as it was obligated to purchase pursuant to
the Underwriting Agreement.
The Company has been advised by the Representatives that the Underwriters
propose to offer shares of Common Stock to the public initially at the public
offering price set forth on the cover page of this Prospectus and, through the
Representatives, to certain dealers at such price less a concession of $
per share, and the Underwriters and such dealers may allow a discount of
$ per share on sales to certain other dealers. After the initial public
offering, the public offering price and concession and discount to dealers may
be changed by the Representatives.
At the request of the Company, the Underwriters are reserving shares of
Common Stock from the Offering for sale to certain persons identified by the
Company. Any sales to such persons will be at the public offering price. Any
shares not purchased in this reserve program will be sold to the general
public in the Offering.
The Representatives have informed the Company that they do not expect
discretionary sales by the Underwriters to exceed 5% of the shares of Common
Stock being offered hereby.
The Company, its officers, directors and all other current stockholders of
the Company (including former employees of HECC who are receiving shares of
Common Stock from HECC on the date of this Prospectus), who, immediately
following the consummation of the Offering, will own an aggregate of 3,879,775
shares of Common Stock and vested and exercisable options to purchase an
additional 188,888 shares of Common Stock in the aggregate, have agreed not to
offer, sell, contract to sell, pledge or otherwise dispose of, directly or
indirectly, any shares of Common Stock or securities or other rights
convertible into or exchangeable or exercisable for any shares of Common Stock
or publicly disclose the intention to make any such offer, sale,
83
<PAGE>
pledge, disposal or filing, without the prior written consent of Credit Suisse
First Boston Corporation, for a period of 180 days after the date of this
Prospectus except, in the case of the Company, issuance of Common Stock
pursuant to the conversion or exchange of convertible or exchangeable
securities or the exercise of warrants or options, in each case outstanding on
the date of this Prospectus, or grants of employee or director stock options
pursuant to the terms of a plan in effect on the date of the Prospectus or
issuance of common stock pursuant to the exercise of such options.
The Company has agreed to indemnify the Underwriters against certain
liabilities, including civil liabilities under the Securities Act, or to
contribute to payments that the Underwriters may be required to make in
respect thereof.
The Common Stock has been approved for listing on the Nasdaq National Market
under the symbol "CECO," subject to official notice of issuance.
Prior to the Offering, there has been no public market for the Common Stock.
Accordingly, the initial public offering price for the shares will be
determined by negotiation between the Company and the Representatives. In
determining such price, consideration will be given to various factors,
including market conditions for initial public offerings, the history of and
prospects for the Company's business, the Company's past and present
operations, its past and present earnings and current financial position, an
assessment of the Company's management, the market for securities of companies
in businesses similar to those of the Company, the general condition of the
securities markets and other relevant factors. There can be no assurance,
however, that the initial public offering price will correspond to the price
at which the Common Stock will trade in the public market subsequent to the
Offering or that an active trading market for the Common Stock will develop
and continue after the Offering.
The Representatives, on behalf of the Underwriters, may engage in over-
allotment, stabilizing transactions, syndicate covering transactions and
penalty bids in accordance with Regulation M under the Exchange Act. Over-
allotment involves syndicate sales in excess of the offering size, which
creates a syndicate short position. Stabilizing transactions permit bids for
and purchases of the Common Stock so long as the stabilizing bids do not
exceed a specified maximum. Syndicate covering transactions involve purchases
of the Common Stock in the open market after the distribution has been
completed in order to cover syndicate short positions. Penalty bids permit the
Underwriters to reclaim a selling concession from a syndicate member when the
Common Stock originally sold by such syndicate member is purchased in a
stabilizing transaction or syndicate covering transaction to cover syndicate
short positions. Such stabilizing transactions, syndicate covering
transactions and penalty bids may cause the price of the Common Stock to be
higher than it would otherwise be in the absence of such transactions. These
transactions may be effected on the Nasdaq National Market or otherwise and,
if commenced, may be discontinued at any time.
NOTICE TO CANADIAN RESIDENTS
RESALE RESTRICTIONS
The distribution of the Common Stock in Canada is being made only on a
private placement basis exempt from the requirement that the Company prepare
and file a prospectus with the securities regulatory authorities in each
province where trades of Common Stock are effected. Accordingly, any resale of
the Common Stock in Canada must be made in accordance with applicable
securities laws which will vary depending on the relevant jurisdiction, and
which may require resales to be made in accordance with available statutory
exemptions or pursuant to a discretionary exemption granted by the applicable
Canadian securities regulatory authority. Purchasers are advised to seek legal
advice prior to any resale of the Common Stock.
REPRESENTATIONS OF PURCHASERS
Each purchaser of Common Stock in Canada who receives a purchase
confirmation will be deemed to represent to the Company and the dealer from
whom such purchase confirmation is received that (i) such
84
<PAGE>
purchaser is entitled under applicable provincial securities laws to purchase
such Common Stock without the benefit of a prospectus qualified under such
securities laws, (ii) where required by law, that such purchaser is purchasing
as principal and not as agent, and (iii) such purchaser has reviewed the text
above under "Resale Restrictions."
RIGHTS OF ACTION (ONTARIO PURCHASERS)
The securities being offered are those of a foreign issuer and Ontario
purchasers will not receive the contractual right of action prescribed by
section 32 of the Regulation under the Securities Act (Ontario). As a result,
Ontario purchasers must rely on other remedies that may be available, including
common law rights of action for damages or rescission or rights of action under
the civil liability provisions of the U.S. federal securities laws.
ENFORCEMENT OF LEGAL RIGHTS
All of the issuer's directors and officers as well as the experts named
herein may be located outside of Canada and, as a result, it may not be
possible for Canadian purchasers to effect service of process within Canada
upon the issuer or such persons. All or a substantial portion of the assets of
the issuer and such persons may be located outside of Canada and as a result,
it may not be possible to satisfy a judgment against the issuer or such persons
in Canada or to enforce a judgment obtained in Canadian courts against such
issuer or persons outside of Canada.
NOTICE TO BRITISH COLUMBIA RESIDENTS
A purchaser of Common Stock to whom the Securities Act (British Columbia)
applies is advised that such purchaser is required to file with the British
Columbia Securities Commission a report within ten days of the sale of any
Common Stock acquired by such purchaser pursuant to the Offering. Such report
must be in the form attached to British Columbia Securities Commission Blanket
Order BOR #95/17, a copy of which may be obtained from the Company. Only one
such report must be filed in respect of Common Stock acquired on the same date
and under the same prospectus exemption.
TAXATION AND ELIGIBILITY FOR INVESTMENT
Canadian purchasers of Common Stock should consult their own legal and tax
advisors with respect to the tax consequences of an investment in the Common
Stock in their particular circumstances and with respect to the eligibility of
the Common Stock for investment by the purchaser under relevant Canadian
Legislation.
LEGAL MATTERS
The validity of the Common Stock offered hereby and certain other legal
matters will be passed upon for the Company by Katten Muchin & Zavis, Chicago,
Illinois, a partnership including professional corporations. Certain legal
matters in connection with the Offering will be passed upon for the
Underwriters by Sidley & Austin, Chicago, Illinois.
EXPERTS
The consolidated financial statements and schedules of the Company and its
subsidiaries as of December 31, 1995, December 31, 1996 and September 30, 1997,
and for each of the three years in the period ended December 31, 1996 and for
the nine months ended September 30, 1997, the consolidated financial statements
of IAMD, Limited and Subsidiaries as of June 30, 1997 and for the year ended
June 30, 1997, the consolidated financial statements of International Academy
of Merchandising & Design (Canada) Ltd. and Subsidiary as of June 30, 1997 and
for the ten months ended June 30, 1997, and the statements of operations and
cash flows of Western Culinary Institute (a division of Phillips Educational
Group of Portland, Inc., a wholly owned subsidiary of Phillips Colleges, Inc.)
for the nine months and twenty-one days ended October 21, 1996, included in
this
85
<PAGE>
Prospectus and elsewhere in the Registration Statement, have been audited by
Arthur Andersen LLP, independent public accountants, as indicated in their
reports with respect thereto, and are included herein in reliance upon the
authority of said firm as experts in giving said reports.
The financial statements of International Academy of Merchandising & Design
(Canada) Ltd. as of August 31, 1996 and for the year ended August 31, 1996,
included in this Prospectus and elsewhere in the Registration Statement, have
been audited by Price Waterhouse, independent accountants, whose report
thereon appears herein. Such financial statements have been so included in
reliance on their report given on the authority of said firm as experts in
auditing and accounting.
The financial statements of IAMD, Limited and Subsidiaries as of and for the
year ended June 30, 1996, included in this Prospectus and elsewhere in the
Registration Statement, have been audited by Gleeson, Sklar, Sawyers & Cumpata
LLP, independent accountants, whose report thereon appears herein. Such
financial statements have been so included in reliance on their report given
on the authority of said firm as experts in auditing and accounting.
The consolidated financial statements of The Katharine Gibbs Schools, Inc.
and subsidiaries as of December 31, 1995 and 1996 and for the period from
March 7, 1994 to December 31, 1994, and for the years ended December 31, 1995
and 1996, included in this Prospectus have been audited by Deloitte & Touche
LLP, independent auditors, as stated in their report appearing herein and
elsewhere in the Registration Statement, and are included in reliance upon the
report of such firm given upon their authority as experts in accounting and
auditing.
ADDITIONAL INFORMATION
The Company has filed with the Commission in Washington, D.C., a
Registration Statement on Form S-1 (of which this Prospectus is a part) under
the Securities Act with respect to the Common Stock offered hereby. This
Prospectus does not contain all the information set forth in the Registration
Statement and the exhibits and schedules thereto, certain portions of which
have been omitted as permitted by the rules and regulations of the Commission.
For further information with respect to the Company and the Common Stock
offered hereby, reference is made to the Registration Statement and such
exhibits and schedules. Statements contained in this Prospectus regarding the
contents of any agreement or other document referred to are not necessarily
complete, and in each instance, reference is made to a copy of such agreement
or other document filed as an exhibit to the Registration Statement. Each such
statement is qualified in all respects by such reference. The Registration
Statement and the exhibits and schedules thereto may be inspected without
charge at the public reference facilities maintained by the Commission,
including at the Commission's Public Reference Room, 450 Fifth Street, N.W.,
Judiciary Plaza, Washington, D.C. 20549 and at the Commission's Regional
Offices at 7 World Trade Center, Suite 1300, New York, New York 10048 and
Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661.
Copies may be obtained at prescribed rates from the Public Reference Section
of the Commission at its principal office in Washington, D.C. Such materials
also may be accessed electronically by means of the Commission's web site at
http://www.sec.gov.
86
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C> <C>
CONSOLIDATED FINANCIAL STATEMENTS OF CAREER EDUCATION CORPORATION AND
SUBSIDIARIES:
Report of Independent Public Accountants....................... F-3
Consolidated Balance Sheets as of December 31, 1995 and 1996
and September 30, 1997........................................ F-4
Consolidated Statements of Operations for the years ended
December 31, 1994, 1995 and 1996 and the nine months ended
September 30, 1996 (unaudited) and September 30, 1997......... F-7
Consolidated Statements of Cash Flows for the years ended
December 31, 1994, 1995 and 1996 and the nine months ended
September 30, 1996 (unaudited) and September 30, 1997......... F-8
Consolidated Statements of Stockholders' Investment for the
years ended December 31, 1994, 1995 and 1996, and the nine
months ended September 30, 1997............................... F-9
Notes to Consolidated Financial Statements..................... F-11
CONSOLIDATED FINANCIAL STATEMENTS OF THE KATHARINE GIBBS SCHOOLS, INC.
AND SUBSIDIARIES:
Report of Independent Public Accountants....................... F-36
Consolidated Balance Sheets as of December 31, 1995 and 1996... F-37
Statements of Consolidated Operations for the period from March
7, 1994 to December 31, 1994, and the years ended December 31,
1995 and 1996................................................. F-38
Statements of Shareholder's Deficiency for the period from
March 7, 1994 to December 31, 1994, and the years ended
December 31, 1995 and 1996.................................... F-39
Statements of Consolidated Cash Flows for the period from March
7, 1994 to December 31, 1994, and the years ended December 31,
1995 and 1996................................................. F-40
Notes to Consolidated Financial Statements..................... F-41
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OF THE KATHARINE
GIBBS SCHOOLS, INC. AND SUBSIDIARIES:
Unaudited Condensed Consolidated Balance Sheets as of June 30,
1996 and May 31, 1997......................................... F-46
Unaudited Condensed Consolidated Statements of Operations for
the six months ended June 30, 1996 and five months ended May
31, 1997...................................................... F-47
Unaudited Condensed Consolidated Statements of Cash Flows for
the six months ended June 30, 1996 and five months ended May
31, 1997...................................................... F-48
Notes to Unaudited Condensed Consolidated Financial Statements. F-49
CONSOLIDATED FINANCIAL STATEMENTS OF IAMD, LIMITED AND SUBSIDIARIES:
Reports of Independent Public Accountants...................... F-50
Consolidated Balance Sheets as of June 30, 1996 and 1997....... F-52
Consolidated Statements of Operations for the years ended June
30, 1996 and 1997............................................. F-53
Consolidated Statements of Cash Flows for the years ended June
30, 1996 and 1997............................................. F-54
Consolidated Statements of Stockholders' Investment for the
years ended June 30, 1996 and 1997............................ F-55
Notes to Consolidated Financial Statements..................... F-56
</TABLE>
F-1
<PAGE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
CONSOLIDATED FINANCIAL STATEMENTS OF INTERNATIONAL ACADEMY OF
MERCHANDISING & DESIGN (CANADA) LTD. AND SUBSIDIARY:
Reports of Independent Public Accountants............................... F-63
Consolidated Balance Sheets as of August 31, 1996 and June 30, 1997..... F-65
Consolidated Statements of Operations for the year ended August 31, 1996
and for the ten months ended June 30, 1997............................. F-66
Consolidated Statements of Cash Flows for the year ended August 31, 1996
and for the ten months ended June 30, 1997............................. F-67
Consolidated Statements of Stockholders' Equity for the year ended
August 31, 1996 and for the ten months ended June 30, 1997............. F-68
Notes to Consolidated Financial Statements.............................. F-69
FINANCIAL STATEMENTS OF WESTERN CULINARY INSTITUTE (A DIVISION OF PHILLIPS
EDUCATIONAL GROUP
OF PORTLAND, INC., A WHOLLY OWNED SUBSIDIARY OF PHILLIPS COLLEGES, INC.):
Report of Independent Public Accountants................................ F-74
Statement of Operations for the nine months and twenty-one days ended
October 21, 1996....................................................... F-75
Statement of Cash Flows for the nine months and twenty-one days ended
October 21, 1996....................................................... F-76
Notes to Consolidated Financial Statements.............................. F-77
</TABLE>
F-2
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders of
Career Education Corporation:
We have audited the accompanying consolidated balance sheets of CAREER
EDUCATION CORPORATION (a Delaware corporation) AND SUBSIDIARIES as of December
31, 1995, December 31, 1996 and September 30, 1997 and the related
consolidated statements of operations, stockholders' investment and cash flows
for each of the three years in the period ended December 31, 1996 and nine
months ended September 30, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Career Education
Corporation and Subsidiaries as of December 31, 1995, December 31, 1996 and
September 30, 1997 and the results of their operations and their cash flows
for each of the three years in the period ended December 31, 1996 and nine
months ended September 30, 1997 in conformity with generally accepted
accounting principles.
As explained in Note 14 to the consolidated financial statements, the
Company has given retroactive effect to the change in accounting for deferred
marketing and advertising costs.
Arthur Andersen LLP
Chicago, Illinois
November 19, 1997
F-3
<PAGE>
CAREER EDUCATION CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31 SEPTEMBER 30
--------------- -----------------------
PRO FORMA
1995 1996 1997 1997 (NOTE 15)
------- ------- -------- --------------
ASSETS (UNAUDITED)
<S> <C> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents............ $ 3,965 $ 7,798 $ 5,448 $ 5,448
Receivables--
Students, net of allowance for
doubtful accounts of $258, $455
and $1,403 at December 31, 1995
and 1996 and September 30, 1997,
respectively...................... 2,414 2,159 12,513 12,513
From former owners of acquired
businesses........................ -- 523 87 87
Stockholder........................ -- 100 -- --
Other.............................. 250 120 1,378 1,378
Inventories.......................... 167 213 412 412
Prepaid expenses and other current
assets.............................. 505 725 1,921 1,921
Deferred income tax assets........... -- 194 883 883
------- ------- -------- --------
Total current assets............. 7,301 11,832 22,642 22,642
------- ------- -------- --------
PROPERTY AND EQUIPMENT, net of
accumulated depreciation and
amortization........................ 12,841 19,560 46,944 46,944
------- ------- -------- --------
OTHER ASSETS:
Deferred income tax assets........... -- 195 -- --
Intangible assets, net............... 2,813 3,407 31,931 31,931
Deposits............................. 113 154 547 547
Perkins program fund, net............ 225 262 287 287
Deferred financing costs, net........ 151 346 634 634
Organization costs, net.............. 140 452 384 384
------- ------- -------- --------
Total other assets............... 3,442 4,816 33,783 33,783
------- ------- -------- --------
TOTAL ASSETS........................... $23,584 $36,208 $103,369 $103,369
======= ======= ======== ========
</TABLE>
F-4
<PAGE>
CAREER EDUCATION CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31 SEPTEMBER 30
------------- ---------------------
PRO FORMA
1995 1996 1997 1997 (NOTE 15)
------ ------ ------ --------------
LIABILITIES AND STOCKHOLDERS' INVESTMENT (UNAUDITED)
<S> <C> <C> <C> <C>
CURRENT LIABILITIES:
Current maturities of long-term debt.......... $1,309 $2,676 $3,993 $3,993
Book overdraft................................ -- 683 1,688 1,688
Accounts payable.............................. 640 502 2,500 2,500
Accrued expenses--
Payroll and related benefits................ 505 678 1,502 1,502
Other....................................... 747 1,658 2,950 2,950
Deferred tuition revenue...................... 2,786 4,256 8,607 8,607
------ ------ ------ ------
Total current liabilities................. 5,987 10,453 21,240 21,240
------ ------ ------ ------
LONG TERM DEBT, net of current maturities shown
above.......................................... 6,725 13,783 46,892 46,892
------ ------ ------ ------
DEFERRED INCOME TAX LIABILITIES................. -- -- 2,984 2,984
------ ------ ------ ------
COMMITMENTS AND CONTINGENCIES
REDEEMABLE PREFERRED STOCK AND WARRANTS
Redeemable Series A preferred stock, $0.01 par
value; 50,000 shares authorized; 7,782 shares
outstanding at December 31, 1995, 7,852
shares outstanding at December 31, 1996, and
September 30, 1997, respectively, at
liquidation value (stated value plus
accumulated dividends)....................... 8,729 9,432 9,937 --
Redeemable Series B preferred stock, $0.01 par
value; 1,000 shares authorized; no shares
outstanding.................................. -- -- -- --
Redeemable Series C preferred stock, $0.01 par
value; 5,000 shares authorized; 4,954 shares
outstanding at December 31, 1995 and 1996,
and September 30, 1997, at liquidation value. 4,065 4,259 4,338 --
Redeemable Series D preferred stock, $0.01 par
value; 25,000 shares authorized; no shares
outstanding at December 31, 1995 and 1996,
22,500 shares outstanding at September 30,
1997, at liquidation value (stated value plus
accumulated dividends)....................... -- -- 18,323 --
Warrants exercisable into 27,484 shares of
Class D common stock at December 31, 1995 and
1996, and 21,576 shares of Class D common
stock at September 30, 1997, at an exercise
price of $0.01 per share, at estimated
redemption value............................. 834 870 1,140 --
Warrants exercisable into 3,514 shares of
Class E common stock at September 30, 1997,
at an exercise price of $0.01 per share, at
estimated redemption value................... -- -- 289 289
------ ------ ------ ------
Total redeemable preferred stock and
warrants................................. 13,628 14,561 34,027 289
------ ------ ------ ------
</TABLE>
F-5
<PAGE>
CAREER EDUCATION CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31 SEPTEMBER 30
---------------- ------------------------
PRO FORMA
1995 1996 1997 1997 (NOTE 15)
------- ------- -------- --------------
STOCKHOLDERS' INVESTMENT: (UNAUDITED)
<S> <C> <C> <C> <C>
Class A common stock, $0.01 par
value; 600,000 shares authorized;
5,250 shares issued and
outstanding at December 31, 1995
and 1996, and September 30, 1997.. -- -- -- --
Class B common stock, $0.01 par
value; 100,000 shares authorized;
5,100 shares issued and
outstanding at December 13, 1995
and 1996, and September 30, 1997.. -- -- -- --
Class C common stock, $0.01 par
value; 100,000 shares authorized;
69,900 shares issued and
outstanding at December 31, 1995
and 1996, and September 30, 1997.. 1 1 1 --
Class D common stock, $0.01 par
value; 100,000 shares authorized;
no shares issued and outstanding
at December 31, 1995 and 1996, and
September 30, 1997................ -- -- -- --
Class E common stock, $0.01 par
value; 200,000 shares authorized;
824 issued and outstanding at
December 31, 1995, 1,648 shares
issued and outstanding at December
31, 1996, 1,747 shares issued and
outstanding at September 30, 1997. -- -- -- --
Common stock....................... -- -- -- 38
Warrants........................... -- -- 4,777 --
Additional paid-in capital......... 30 60 71 38,549
Foreign currency translation....... -- -- 7 7
Accumulated deficit................ (2,787) (2,650) (6,630) (6,630)
------- ------- -------- --------
Total stockholders' investment... (2,756) (2,589) (1,774) 31,964
------- ------- -------- --------
TOTAL LIABILITIES AND STOCKHOLDERS'
INVESTMENT.......................... $23,584 $36,208 $103,369 $103,369
======= ======= ======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
F-6
<PAGE>
CAREER EDUCATION CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED FOR THE NINE MONTHS
DECEMBER 31 ENDED SEPTEMBER 30
------------------------- -------------------
1994 1995 1996 1996 1997
------- ------- ------- ----------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUE:
Tuition and registration
fees, net.................... $ 5,794 $16,330 $29,269 $19,299 $45,615
Other, net.................... 1,692 3,066 4,311 3,130 5,152
------- ------- ------- ------- -------
Total net revenue......... 7,486 19,396 33,580 22,429 50,767
OPERATING EXPENSES:
Educational services and
facilities................... 3,074 8,565 14,404 9,579 22,269
General and administrative.... 4,887 9,097 14,622 10,976 23,852
Depreciation and
amortization................. 980 1,330 2,134 1,481 5,000
------- ------- ------- ------- -------
Total operating expenses.. 8,941 18,992 31,160 22,036 51,121
------- ------- ------- ------- -------
Income (loss) from
operations............... (1,455) 404 2,420 393 (354)
INTEREST EXPENSE............... 134 311 717 358 2,046
------- ------- ------- ------- -------
Income (loss) before
provision for income
taxes and extraordinary
item..................... (1,589) 93 1,703 35 (2,400)
PROVISION (BENEFIT) FOR INCOME
TAXES......................... -- 24 208 14 (1,008)
------- ------- ------- ------- -------
Income (loss) before
extraordinary item....... (1,589) 69 1,495 21 (1,392)
EXTRAORDINARY LOSS ON EARLY
EXTINGUISHMENT OF DEBT (net of
taxes of $233, Note 4)........ -- -- -- -- (418)
------- ------- ------- ------- -------
NET INCOME (LOSS).............. $(1,589) $ 69 $ 1,495 $ 21 $(1,810)
======= ======= ======= ======= =======
INCOME (LOSS) ATTRIBUTABLE TO
COMMON STOCKHOLDERS
Income (loss) before
extraordinary item........... $(1,589) $ 69 $ 1,495 $ 21 $(1,392)
Dividends on preferred stock.. (393) (777) (1,128) (841) (1,444)
Accretion to redemption value
of preferred stock and
warrants..................... -- (96) (230) (175) (727)
------- ------- ------- ------- -------
Income (loss) before
extraordinary item
attributable to common
stockholders............. (1,982) (804) 137 (995) (3,563)
Extraordinary loss............ -- -- -- -- (418)
------- ------- ------- ------- -------
Net income (loss)
attributable to common
stockholders............. $(1,982) $ (804) $ 137 $ (995) $(3,981)
======= ======= ======= ======= =======
PRO FORMA (UNAUDITED):
Income (loss) before
extraordinary item
attributable to common
stockholders, as reported.... $(1,982) $ (804) $ 137 $ (995) $(3,563)
Dividends on preferred
stock...................... 393 777 1,128 841 1,444
Accretion to redemption
value of preferred stock
and warrants............... -- 96 230 175 698
------- ------- ------- ------- -------
Pro forma income (loss) before
extraordinary item
attributable to common
stockholders.................. $(1,589) $ 69 $ 1,495 $ 21 $(1,421)
======= =======
Extraordinary loss............ -- -- (418)
------- ------- -------
Pro forma net income (loss)
attributable to common
stockholders.................. $ 1,495 $ 21 $(1,839)
======= ======= =======
Pro forma income (loss) before
extraordinary item per share.. $ 0.69 $ 0.01 $ (0.51)
======= ======= =======
Pro forma net income (loss) per
share attributable to common
stockholders.................. $ 0.69 $ 0.01 $ (0.67)
======= ======= =======
Pro forma weighted average
number of common and common
stock equivalent shares
outstanding................... 2,169 2,169 2,764
======= ======= =======
</TABLE>
The accompanying notes are an integral part of these statements.
F-7
<PAGE>
CAREER EDUCATION CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE NINE
FOR THE YEAR ENDED MONTHS ENDED
DECEMBER 31 SEPTEMBER 30
------------------------- --------------------
1994 1995 1996 1996 1997
------- ------- ------- ----------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net income (loss).......... $(1,589) $ 69 $ 1,495 $ 21 $ (1,810)
Adjustments to reconcile
net income (loss) to net
cash provided by
(used in) operating
activities--
Depreciation,
amortization and debt
discount................ 980 1,351 2,188 1,493 5,083
Warrants issued to a
bank.................... -- -- -- -- 180
Deferred income taxes.... -- -- (208) (1,008)
Loss on sale of assets... 2 -- -- -- --
Extraordinary loss....... -- -- -- -- 651
Changes in operating
assets and liabilities,
net of acquisitions--
Receivables, net....... (708) (869) 385 (194) (6,100)
Inventories, prepaid
expenses and other
current assets........ (101) (246) (245) (179) (1,111)
Deposits............... (116) 33 8 (12) (101)
Accounts payable....... (14) 118 (138) (52) 1,998
Accrued expenses....... (142) (233) 752 (78) (2,090)
Deferred tuition 688 12 1,038 (399) (1,966)
revenue............... ------- ------- ------- ------ --------
Net cash provided by
(used in) operating (1,000) 235 5,275 600 (6,274)
activities.......... ------- ------- ------- ------ --------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Business acquisitions, net
of cash................... (1,985) (1,622) (8,250) -- (36,250)
Acquisition and
organizational costs...... (234) (959) -- -- (1,467)
Purchase of property and
equipment, net............ (153) (897) (1,231) (915) (2,010)
Investment in Perkins -- -- (37) (37) (6)
program fund.............. ------- ------- ------- ------ --------
Net cash used in
investing (2,372) (3,478) (9,518) (952) (39,733)
activities.......... ------- ------- ------- ------ --------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Issuance of common stock... -- 30 -- -- 30
Issuance of warrants....... -- -- -- -- 4,788
Issuance of redeemable
preferred stock and
warrants.................. 7,850 5,070 -- -- 17,557
Redemption of preferred
stock..................... -- (200) -- -- --
Dividends paid on preferred
stock..................... -- (207) (495) (372) (372)
Equity and debt financing
costs..................... -- (535) (553) -- (670)
Book overdraft............. -- -- 683 -- 1,005
Payments of long-term
debt...................... (1,836) (6,363) (1,309) (3,400) (577)
Net proceeds from
(repayment of) revolving
credit facility........... -- 6,771 1,500 3,263 (8,246)
Proceeds from term loan
facility.................. -- -- 8,250 -- 3,400
Repayments of term loan
facility.................. -- -- -- -- (11,650)
Net proceeds from revolving
loans under Credit
Agreement................. -- -- -- -- 26,635
Proceeds from issuance of
term loans under Credit
Agreement................. -- -- -- -- 12,500
Payments on term loans -- -- -- -- (750)
under Credit Agreement.... ------- ------- ------- ------ --------
Net cash provided by
(used in) financing 6,014 4,566 8,076 (509) 43,650
activities.......... ------- ------- ------- ------ --------
EFFECT OF EXCHANGE RATE
CHANGES ON CASH............. -- -- -- -- 7
NET INCREASE (DECREASE) IN
CASH AND CASH EQUIVALENTS... 2,642 1,323 3,833 (861) (2,350)
CASH AND CASH EQUIVALENTS,
BEGINNING OF YEAR........... -- 2,642 3,965 3,965 7,798
------- ------- ------- ------ --------
CASH AND CASH EQUIVALENTS,
END OF YEAR................. $ 2,642 $ 3,965 $ 7,798 $3,104 $ 5,448
======= ======= ======= ====== ========
SUPPLEMENTAL DISCLOSURES OF
CASH FLOW INFORMATION:
Cash paid for--
Interest................... $ 119 $ 327 $ 407 $ 305 $ 1,944
Taxes...................... -- -- 80 -- 2,306
======= ======= ======= ====== ========
NON-CASH INVESTING AND
FINANCING ACTIVITIES:
Accretion to redemption
value of preferred stock
and warrants.............. $ -- $ 96 $ 230 $ 175 $ 727
Dividends on preferred
stock added to liquidation
value..................... 393 570 632 470 1,072
======= ======= ======= ====== ========
</TABLE>
The accompanying notes are an integral part of these statements.
F-8
<PAGE>
CAREER EDUCATION CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' INVESTMENT
<TABLE>
<CAPTION>
COMMON STOCK
-------------------------------------------------------------------------------------------
CLASS A CLASS B CLASS C CLASS D CLASS E
---------------- ---------------- ---------------- ---------------- ----------------
600,000 $0.01 100,000 $0.01 100,000 $0.01 100,000 $0.01 200,000 $0.01
SHARES PAR SHARES PAR SHARES PAR SHARES PAR SHARES PAR TOTAL
AUTHORIZED VALUE AUTHORIZED VALUE AUTHORIZED VALUE AUTHORIZED VALUE AUTHORIZED VALUE AMOUNT
---------- ----- ---------- ----- ---------- ----- ---------- ----- ---------- ----- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, January 5,
1994 -- $-- -- $-- -- $-- -- $-- -- $-- $--
Issuance of stock..... 5,250 53 5,100 51 69,900 699 -- -- -- -- 803
Dividends on preferred
stock for the year... -- -- -- -- -- -- -- -- -- -- --
Net loss.............. -- -- -- -- -- -- -- -- -- -- --
----- ---- ----- ---- ------ ---- --- ---- ----- ---- ----
BALANCE, December 31,
1994.................. 5,250 $ 53 5,100 $ 51 69,900 $699 -- $-- -- $-- $803
Issuance of stock and
warrants............. -- -- -- -- -- -- -- -- 824 8 8
Dividends paid........ -- -- -- -- -- -- -- -- -- -- --
Dividends on preferred
stock for the year... -- -- -- -- -- -- -- -- -- -- --
Preferred stock and
warrant accretion.... -- -- -- -- -- -- -- -- -- -- --
Net income............ -- -- -- -- -- -- -- -- -- -- --
----- ---- ----- ---- ------ ---- --- ---- ----- ---- ----
BALANCE, December 31,
1995.................. 5,250 53 5,100 51 69,900 699 -- -- 824 8 811
Issuance of stock..... -- -- -- -- -- -- -- -- 824 8 8
Dividends paid........ -- -- -- -- -- -- -- -- -- -- --
Dividends on preferred
stock for the year... -- -- -- -- -- -- -- -- -- -- --
Preferred stock and
warrant accretion.... -- -- -- -- -- -- -- -- -- -- --
Net income............ -- -- -- -- -- -- -- -- -- -- --
----- ---- ----- ---- ------ ---- --- ---- ----- ---- ----
BALANCE, December 31,
1996.................. 5,250 53 5,100 51 69,900 699 -- -- 1,648 16 819
Issuance of warrants.. -- -- -- -- -- -- -- -- -- -- --
Exercise of warrants.. -- -- -- -- -- -- -- -- 99 1 1
Dividends paid........ -- -- -- -- -- -- -- -- -- -- --
Dividends on preferred
stock for the period. -- -- -- -- -- -- -- -- -- -- --
Preferred stock and
warrant accretion.... -- -- -- -- -- -- -- -- -- -- --
Net loss.............. -- -- -- -- -- -- -- -- -- -- --
----- ---- ----- ---- ------ ---- --- ---- ----- ---- ----
BALANCE, September 30,
1997.................. 5,250 $ 53 5,100 $ 51 69,900 $699 -- $-- 1,747 $ 17 $820
===== ==== ===== ==== ====== ==== === ==== ===== ==== ====
</TABLE>
The accompanying notes are an integral part of these statements.
F-9
<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, January 5,
1994................... $ -- $ -- $ -- $ -- $ --
Issuance of stock..... -- -- -- (795) 8
Dividends on preferred
stock for the year... -- -- -- (392,790) (392,790)
Net loss.............. -- -- -- (1,589,171) (1,589,171)
---------- ------- ------ ----------- -----------
BALANCE, December 31,
1994................... -- -- -- (1,982,756) (1,981,953)
Issuance of stock..... -- 29,974 -- -- 29,982
Dividends paid........ -- -- -- (206,800) (206,800)
Dividends on preferred
stock for the year... -- -- -- (570,277) (570,277)
Preferred stock and
warrant accretion.... -- -- -- (95,822) (95,822)
Net income............ -- -- -- 68,543 68,543
---------- ------- ------ ----------- -----------
BALANCE, December 31,
1995................... -- 29,974 -- (2,787,112) (2,756,327)
Issuance of stock..... -- 29,974 -- -- 29,982
Dividends paid........ -- -- -- (495,400) (495,400)
Dividends on preferred
stock for the year... -- -- -- (632,417) (632,417)
Preferred stock and
warrant accretion.... -- -- -- (229,975) (229,975)
Net income............ -- -- -- 1,494,666 1,494,666
---------- ------- ------ ----------- -----------
BALANCE, December 31,
1996................... -- 59,948 -- (2,650,238) (2,589,471)
Issuance of warrants.. 4,788,563 -- -- -- 4,788,563
Exercise of warrants.. (11,136) 11,135 -- -- --
Dividends paid........ -- -- -- (371,550) (371,550)
Dividends on preferred
stock for the period. -- -- -- (1,072,352) (1,072,352)
Preferred stock and
warrant accretion.... -- -- -- (726,586) (726,586)
Net loss.............. -- -- -- (1,809,588) (1,809,588)
Foreign currency
translation.......... -- -- 7,072 -- 7,072
---------- ------- ------ ----------- -----------
BALANCE, September 30,
1997................... $4,777,427 $71,083 $7,072 $(6,630,314) $(1,773,912)
========== ======= ====== =========== ===========
</TABLE>
F-10
<PAGE>
CAREER EDUCATION CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 IS UNAUDITED)
1. DESCRIPTION OF THE BUSINESS
Career Education Corporation (the "Company") was incorporated in January
1994, for the purpose of acquiring operations of various for-profit
postsecondary schools. The Company manages and operates the educational
institutions acquired through its wholly-owned subsidiaries, Al Collins
Graphic Design School, Ltd. ("Collins"), Brooks College, Ltd. ("Brooks"),
Allentown Business School, Ltd. ("Allentown"), Brown Institute, Ltd.
("Brown"), Western Culinary Institute, Inc. ("Western Culinary"), School of
Computer Technology, Inc. ("SCT"), The Katharine Gibbs Schools, Inc.
("Gibbs"), IAMD, Limited and Subsidiaries, (The International Academy of
Merchandising and Design; "IAMD-U.S."), and The International Academy of
Merchandising & Design (Canada) Ltd. and Subsidiary ("IAMD-Canada").
The Collins campus is located in Tempe, Arizona, and offers associate and
bachelor degrees in visual communications and a certificate in desktop
publishing. The Brooks campus is located in Long Beach, California, and offers
associate degrees in fashion design, fashion merchandising, interior design
and visual communications. The Allentown campus is located in Allentown,
Pennsylvania, and offers associate degrees in business administration,
accounting, marketing, secretarial, fashion merchandising and medical-related
fields, and offers diplomas in business operations, PC/LAN, office assistant
and medical-related fields. The Brown campus is located in Minneapolis,
Minnesota, and offers certificates and/or associate degrees in allied health,
visual communications, business administration, information systems
management, computer programming, electronics technology and radio/television
broadcasting. The Western Culinary campus is located in Portland, Oregon, and
offers diplomas in culinary arts. SCT is headquartered in Pittsburgh,
Pennsylvania and has campuses in Pittsburgh, Pennsylvania and Fairmont, West
Virginia and offers associate degrees and diplomas in computer technology,
laser technology and specialized culinary arts. Gibbs is headquartered in New
York, New York and has campuses located in various cities through out New
York, New Jersey, and New England and offers associate degrees in secretarial
arts and business administration. IAMD-U.S. has campuses located in Chicago,
Illinois and Tampa, Florida. IAMD-Canada has campuses located in Toronto,
Canada and Montreal, Canada. Both IAMD-U.S. and IAMD-Canada offer associate
and bachelor degrees in various fields of merchandising management, fashion
design, interior design, and computer graphics.
2. SIGNIFICANT ACCOUNTING POLICIES
The financial statements and related notes thereto for the nine months ended
September 30, 1996 are unaudited and have been prepared on the same basis as
the audited financial statements included herein. In the opinion of
management, such unaudited financial statements include all adjustments
(consisting of normal recurring adjustments) necessary to present fairly the
information set forth herein. Operating results for the nine months ended
September 30, 1997 are not necessarily indicative of results that may be
expected for the fiscal year ended December 31, 1997. The principal accounting
policies of the Company are as follows:
a. Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries. All significant intercompany transactions
and balances have been eliminated in the consolidation. The results of
operations of all acquired businesses have been consolidated for all periods
subsequent to the date of acquisition.
b. Concentration of Credit Risk
The Company extends unsecured credit for tuition to a significant portion of
the students who are in attendance at the campuses operated by its
subsidiaries. A substantial portion of credit extended to students is repaid
through the student's participation in various federally funded financial aid
programs under Title IV of
F-11
<PAGE>
CAREER EDUCATION CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 IS UNAUDITED)
the Higher Education Act of 1965 ("Title IV Programs"), as amended.
Approximately 70%, 73%, 72%, 69% and 59% of the Company's net revenue, on a
cash basis, was collected from Title IV Program funds for the years ended
December 31, 1994, 1995 and 1996 and for the nine months ended September 30,
1996 and 1997, respectively. The Company generally completes and approves the
financial aid packet of each student who qualifies for financial aid prior to
the student beginning class in an effort to enhance the collectibility of its
unsecured credit. Transfers of funds from the financial aid programs to the
Company are made in accordance with the United States Department of Education
("DOE") requirements. Changes in DOE funding federal student financial aid
programs could impact the Company's ability to attract students.
c. Cash and Cash Equivalents
Cash and cash equivalents consists of cash in banks and certificates of
deposit with maturities of less than 30 days.
d. Restricted Cash
Cash received from the U. S. Government under various student aid grant and
loan programs is considered to be restricted. Restricted cash is held in
separate bank accounts and does not become available for general use by the
Company until the financial aid is credited to the accounts of students and
the cash is transferred to an operating account.
e. Perkins Matching Funds
The Company participates in the Perkins Loan program in order to provide
continuing long-term, low interest loans to qualifying students in need of
financial assistance. Perkins loans are available on the basis of student
financial need and are subject to the availability of Perkins loan funds at
the institution. As previous borrowers repay their Perkins loans, their
payments are used to fund new loans thus creating a permanent revolving loan
fund. There is a 25% institutional matching requirement for Perkins loans. The
Company carries its investments at cost, net of allowances for losses and
collections. At December 31, 1995, December 31, 1996 and September 30, 1997,
the Company had estimated that approximately $225,000, $262,000 and $287,000,
respectively, of contributions to the program are expected to be returned if
the program should cease.
f. Marketing and Advertising Costs
Marketing and advertising costs are expensed as incurred. Marketing and
advertising costs included in general and administrative expenses were
$971,000, $2,715,000, $3,494,000, $2,887,000 and $6,767,000 for the years
ended December 31, 1994, December 31, 1995, December 31, 1996 and the nine
months ended September 30, 1996 and 1997, respectively (Note 14).
g. Inventories
Inventories consisting principally of program materials, books and supplies
are stated at the lower of cost, determined on a first-in, first-out, basis or
market.
h. Property and Equipment
Property and equipment are stated at cost. Depreciation and amortization are
recognized utilizing the straight-line method over the related assets useful
lives. Leasehold improvements and assets recorded under
F-12
<PAGE>
CAREER EDUCATION CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 IS UNAUDITED)
capital leases are amortized on a straight-line basis over their estimated
useful lives or lease terms, whichever is shorter. Maintenance, repairs and
minor renewals and betterments are expensed; major improvements are
capitalized. The estimated useful lives and cost basis of property and
equipment at December 31, 1995, December 31, 1996 and September 30, 1997, are
as follows (dollars in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------- SEPTEMBER 30,
1995 1996 1997 LIFE
------- ------- ------------- ----------
<S> <C> <C> <C> <C>
Buildings.......................... $ 350 $ 350 $ 1,190 31 years
Classroom equipment, courseware and
other
instructional materials........... 10,237 17,905 40,313 3-15 years
Furniture, fixtures and equipment.. 2,653 2,926 6,447 3-10 years
Leasehold improvements............. 843 1,296 4,648 1-7 years
Vehicles........................... 40 40 40 5 years
------- ------- -------
14,123 22,517 52,638
Less-Accumulated depreciation and
amortization...................... 1,282 2,957 5,694
------- ------- -------
$12,841 $19,560 $46,944
======= ======= =======
</TABLE>
The gross cost of assets recorded under capital leases included above
amounted to $39,000 at December 31, 1995, and 1996 and $2,835,000 at September
30, 1997.
i. Intangible Assets
Intangible assets include the excess of cost over fair market value of
identifiable assets acquired through the business purchases described in Note
3. Goodwill and student contracts are being amortized on a straight-line basis
over their estimated useful life. Covenants not-to-compete entered into before
1997 are being amortized on a straight-line basis over their useful life.
Those entered into during 1997 and thereafter are being amortized on an
accelerated method over their estimated useful life. At December 31, 1995,
December 31, 1996 and September 30, 1997, the cost basis and useful lives of
intangible assets consist of the following (dollars in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------- SEPTEMBER 30, ESTIMATED
1995 1996 1997 LIVES
------ ------ ------------- ---------
<S> <C> <C> <C> <C>
Goodwill............................... $2,824 $3,470 $20,858 40 years
Covenants not-to-compete............... 100 500 13,250 3-5 years
Student contracts...................... 1,055 1,107 -- 1 year
------ ------ -------
3,979 5,077 34,108
Less-Accumulated amortization.......... 1,166 1,670 2,177
------ ------ -------
$2,813 $3,407 $31,931
====== ====== =======
</TABLE>
On an ongoing basis, the Company reviews intangible assets and other long-
lived assets for impairment whenever events or circumstances indicate that
carrying amounts may not be recoverable. To date, no such events or changes in
circumstances have occurred. If such events or changes in circumstances occur,
the Company will recognize an impairment loss if the undiscounted future cash
flows expected to be generated by the asset (or acquired business) are less
than the carrying value of the related asset. The impairment loss would adjust
the asset to its fair value.
F-13
<PAGE>
CAREER EDUCATION CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 IS UNAUDITED)
j. Organizational Costs
Costs incurred in conjunction with the organization of the Company and its
subsidiaries are being amortized on a straight-line basis over an estimated
useful life of five years. Accumulated amortization as of December 31, 1995,
December 31, 1996 and September 30, 1997, was $94,000, $153,000 and $247,000,
respectively.
k. Deferred Financing Costs
Costs incurred in connection with obtaining financing are capitalized and
amortized over the maturity period of the debt. Accumulated amortization as of
December 31, 1995, December 31, 1996 and September 30, 1997, was $14,000,
$59,000 and $36,000, respectively.
l. Revenue Recognition
Revenue is derived primarily from courses taught at the schools. Tuition
revenue is recognized on a straight-line basis over the length of the
applicable course. Dormitory and cafeteria revenues charged to students are
recognized on a straight-line basis over the length of the students' program.
Other dormitory and cafeteria revenues are recognized as earned. Textbook sales
and other revenues are recognized as services are performed. If a student
withdraws, future revenue is reduced by the amount of refund due to the
student. Refunds are calculated in accordance with federal, state and
accrediting agency standards. Deferred tuition revenue represents the portion
of payments received but not earned and is reflected as a current liability in
the accompanying consolidated balance sheets as such amount is expected to be
earned within the next year.
m. Management's Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make certain estimates and
assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingent liabilities at the date of the financial statements
and reported amounts of revenues and expenses during the reported period.
Actual results could differ from those estimates.
n. Income Taxes
The Company files a consolidated federal income tax return. The Company
provides for deferred income taxes under the asset and liability method of
accounting. This method requires the recognition of deferred income taxes based
upon the tax consequences of "temporary differences" by applying enacted
statutory tax rates applicable to future years to differences between the
financial statement carrying amounts and the tax basis of existing assets and
liabilities.
o. Financial Instruments
The carrying value 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.
p. Accretion to Redemption Value of Preferred Stock and Warrants
Accretion to redemption value of redeemable preferred stock and warrants
represents the change in the redemption value of outstanding preferred stock
and warrants in each period which is being accreted to its redemption value
over the earliest period redemption can occur using the effective interest
method. The redemption values are based on the estimated fair market values of
the classes of stock and consider the amounts the Company has received for the
sale of equity instruments, prices paid for acquired businesses and operations
of the Company.
F-14
<PAGE>
CAREER EDUCATION CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 IS UNAUDITED)
q. Pro Forma Income (Loss) before Extraordinary Item per Share Attributable
to Common Stockholders, Supplemental Pro Forma Income (Loss) before
Extraordinary Item per Share Attributable to Common Stockholders and
Supplemental Pro Forma Net Income (Loss) per Share Attributable to Common
Stockholders
Pro forma income (loss) before extraordinary item per share available to
common stockholders is based on the weighted average number of shares of
common stock and common stock equivalents outstanding after giving retroactive
adjustments for (i) stock splits described in Notes 5 and 15 for all periods
presented, (ii) shares of redeemable preferred stock and warrants converted
into shares of common stock and (iii) the conversion of all existing classes
of common stock into a single new class of common stock. Common stock
equivalents represent stock options and warrants using the treasury stock
method for all periods presented. All common stock options and warrants issued
within one year prior to the initial public filing with a price below the
estimated initial public offering price have been included as outstanding
shares for all periods presented, reduced by the number of shares which could
be purchased with proceeds from the exercise of the options and warrants.
Supplemental pro forma net income (loss) before extraordinary item per share
attributable to common stockholders for the year ended December 31, 1996 and
for the nine months ended September 30, 1996 and September 30, 1997 of $0.72,
$0.09 and $(0.04), respectively, is computed based upon (i) pro forma income
(loss) before extraordinary item attributable to common stockholders adjusted
for the reduction in interest expense (net of tax benefit) resulting from the
application of net proceeds of the contemplated offering to reduce
indebtedness of the Company and (ii) the pro forma weighted average number of
shares of common stock outstanding adjusted to reflect the assumed sale by the
Company of approximately 2,200,000 and 2,191,786 shares of common stock in the
offering resulting in net proceeds sufficient to pay indebtedness as described
in Note 15 in 1996 and 1997, respectively. Supplemental pro forma net income
(loss) per share attributable to common stockholders of $0.72, $0.09 and
$(0.12) for the year ended December 31, 1996 and for the nine months ended
September 30, 1996 and September 30, 1997, respectively, is based upon the pro
forma income (loss) before extraordinary item adjusted for the extraordinary
loss on the early extinguishment of debt.
r. Stock-Based Compensation
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-
Based Compensation" ("SFAS No. 123"), was issued in October, 1995 by the
Financial Accounting Standards Board. SFAS No. 123 provides an alternative
method of accounting for stock-based compensation arrangements, based on fair
value of the stock-based compensation utilizing various assumptions regarding
the underlying attributes of the options and stock, rather than the existing
method of accounting for stock-based compensation which is provided in
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" ("APB No. 25"). The Financial Accounting Standards Board encourages
entities to adopt the fair-value based method but does not require adoption of
this method. The Company will continue its current accounting policy and has
adopted the disclosure-only provisions of SFAS No. 123 for options and
warrants issued to employees and directors. Expense associated with stock
options and warrants issued to non-employees/non-directors is recorded in
accordance with SFAS No. 123.
s. New Accounting Pronouncements
Earnings Per Share
In February 1997, the Financial Accounting Standards Board issued Financial
Accounting Standard No. 128 ("SFAS No. 128"), addressing earnings per share.
SFAS No. 128 changed the methodology of calculating earnings per share and
renamed the two calculations, basic earnings per share (currently primary) and
diluted earnings per share (currently fully diluted). The calculations differ
by eliminating any common stock equivalents
F-15
<PAGE>
CAREER EDUCATION CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 IS UNAUDITED)
(such as stock options, warrants, and convertible preferred stock) from basic
earnings per share and changes certain calculations when computing diluted
earnings per share. The weighted average number of common shares for the pro
forma basic earnings per common share calculation includes (i) common stock
outstanding during each period presented, (ii) all common stock options and
warrants issued within one year prior to the initial public filing with a
price below the estimated initial public offering price, reduced by the number
of shares which could be purchased with proceeds from the exercise of the
options and warrants and (iii) the common stock that will be issued upon the
preferred stock conversion and exercise of warrants. The weighted average
number of common shares for the pro forma diluted earnings per common share
calculation is based on similar assumptions and is adjusted for all other
dilutive common stock equivalents that were outstanding during each period
presented. SFAS No. 128 is effective for reporting periods ending after
December 15, 1997. For the year ended December 31, 1996 and the nine months
ended September 30, 1996 and September 30, 1997, had the Company calculated
pro forma earnings per share before extraordinary item using SFAS No. 128, the
pro forma basic earnings per share would have been $0.70, $0.01 and $(0.48),
respectively, and the pro forma diluted earnings per share would have been
$0.69, $0.01 and $(0.48), respectively. The Company will adopt SFAS No. 128 on
December 31, 1997.
Capital Structure
In February 1997, the Financial Accounting Standards Board issued SFAS No.
129, "Disclosure of Information about Capital Structure" ("SFAS No. 129"),
which requires all companies to disclose all relevant information regarding
their capital structure. SFAS No. 129 presentation is required for reporting
periods ending after December 15, 1997. Based on the capital structure
disclosures presented in the accompanying consolidated financial statements
and notes thereto, the Company does not believe that any additional
disclosures will be required as a result of adopting this pronouncement.
Comprehensive Income
In June 1997, the Financial Accounting Standards Board issued SFAS No. 130,
"Reporting Comprehensive Income" ("SFAS No. 130"), which establishes standards
for reporting of comprehensive income. This pronouncement requires that all
items recognized under accounting standards as components of comprehensive
income, as defined in the pronouncement, be reported in a financial statement
that is displayed with the same prominence as other financial statements.
Comprehensive income includes all changes in equity during a period except
those resulting from investments by owners and distributions to owners. The
financial statement presentation required under SFAS No. 130 is effective for
all fiscal years beginning after December 15, 1997. The Company will adopt
SFAS No. 130 in 1998. As of September 30, 1997, the impact of adopting this
pronouncement has not been determined; however, the Company will be affected
by it because it maintains a subsidiary which has operations in Canada.
Segment Reporting
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
"Disclosure about Segments of an Enterprise and Related Information" ("SFAS
No. 131"), which amends the requirements for a public enterprise to report
financial and descriptive information about its reportable operating segments.
Operating segments, as defined in the pronouncement, are components of an
enterprise about which separate financial information is available that is
evaluated regularly by the Company in deciding how to allocate resources and
in assessing performance. The financial information is required to be reported
on the basis that is used internally for evaluating segment performance and
deciding how to allocate resources to segments. The disclosures required by
SFAS No. 131 are effective for all fiscal years beginning after December 15,
1997. The Company will adopt SFAS No. 131 in 1998. This pronouncement will
have an effect on the Company's reporting in the subsequent periods; however,
as of September 30, 1997, the impact of this pronouncement has not been
determined.
F-16
<PAGE>
CAREER EDUCATION CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 IS UNAUDITED)
t. Foreign Currency Translation
The Company acquired IAMD-Canada, an entity with operations in Canada, on
June 30, 1997. At September 30, 1997, revenues and expenses related to these
operations have been translated at average exchange rates in effect at the
time the underlying transactions occurred. Transaction gains or losses are
included in income. Assets and liabilities of this subsidiary have been
translated at month-end exchange rates, with gains and losses resulting from
such translation at approximately $7,000 being included in stockholders'
investment at September 30, 1997.
3. BUSINESS ACQUISITIONS
COLLINS
On January 31, 1994, Collins acquired certain assets and assumed certain
liabilities of the Al Collins Graphic Design School. This acquisition was
accounted for as a purchase and, accordingly, the purchased assets and assumed
liabilities have been recorded at their estimated fair market values at the
date of the acquisition. The purchase price of $2,260,000 exceeded the fair
market value of assets acquired and liabilities assumed, resulting in goodwill
of approximately $906,000.
BROOKS
On June 20, 1994, Brooks acquired certain assets and assumed certain
liabilities of Brooks College. This acquisition was accounted for as a
purchase and, accordingly, the purchased assets and assumed liabilities have
been recorded at their estimated fair market values at the date of the
acquisition. The purchase price of $4,100,000 exceeded the fair market value
of assets acquired and liabilities assumed resulting in goodwill of
approximately $1,075,000.
ALLENTOWN AND BROWN
On July 31, 1995, Brown acquired certain assets and assumed certain
liabilities of Brown Institute Campus of National Education Centers, Inc., and
Allentown acquired certain assets and assumed certain liabilities of Allentown
Business School Campus of National Education Centers, Inc. These acquisitions
were accounted for as purchases and, accordingly, the purchased assets and
assumed liabilities have been recorded at their estimated fair market values
at the date of the acquisition. The total purchase price of approximately
$6,993,000, exceeded the fair market value of the assets acquired, resulting
in goodwill of approximately $843,000. In connection with the purchase, the
former owner of the schools entered into a three-year covenant not-to-compete
agreement with the Company.
WESTERN CULINARY
On October 21, 1996, Western Culinary acquired certain assets and assumed
certain liabilities of Western Culinary Institute, a wholly owned subsidiary
of Phillips College, Inc. This acquisition was accounted for as a purchase
and, accordingly, the purchased assets and assumed liabilities have been
recorded at their estimated fair market values at the date of the acquisition.
The purchase price, subject to certain adjustments, of approximately
$8,000,000 exceeded the fair market value of net assets acquired, resulting in
goodwill of approximately $646,000. In connection with the purchase, the
former owner of the school entered into a four-year covenant not-to-compete
agreement with the Company for a total price of $400,000.
At closing, the Company paid $7,000,000 to the former owner, assumed a
$150,000 obligation and deposited $1,250,000 into escrow. At December 31,
1996, the Company estimated that approximately $523,000 would be returned to
the Company as a result of purchase price adjustments and has reflected such
amount as due from former owners of acquired businesses in the accompanying
December 31, 1996 consolidated balance sheet. This amount was collected in
January 1997.
F-17
<PAGE>
CAREER EDUCATION CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 IS UNAUDITED)
SCT
On February 28, 1997, the Company, through SCT Acquisition, Ltd., acquired
100% of the outstanding shares of capital stock of School of Computer
Technology, Inc. This acquisition was accounted for as a purchase and,
accordingly, the acquired assets and assumed liabilities have been recorded at
their estimated fair market values at the date of the acquisition. The
estimated fair market values of certain assets are based upon preliminary
appraisal reports. The purchase price, subject to certain modifications, of
approximately $5,450,000 exceeded the estimated fair market value of net
assets acquired, resulting in goodwill of approximately $3,032,000. In
connection with the purchase, the former owners of the school each entered
into three-year covenant not-to-compete agreements with the Company for a
total price of $1,750,000.
At closing, the Company paid $400,000 to the former owners, deposited
$5,000,000 into escrow, and assumed a $1,800,000 note payable due to the
former owners. Funds paid were raised through the issuance of $2,000,000 of
Series D preferred stock and warrants and $3,400,000 of bank borrowings. The
amount in escrow will be distributed, subject to certain adjustments for
events occurring after the closing date, in 1997. Accordingly, subsequent
adjustments to the purchase price may result in changes to the purchase price
allocation. Management does not believe that such adjustments will be
material. At September 30, 1997, the Company estimates that approximately
$506,000 will be returned to the Company as a result of such purchase price
adjustments and has reflected such amount as due from former owners of
acquired businesses in the accompanying September 30, 1997 consolidated
balance.
GIBBS
On May 31, 1997, the Company acquired 100% of the outstanding shares of
capital stock of The Katharine Gibbs Schools, Inc. The Katharine Gibbs
Schools, Inc. has seven wholly-owned subsidiaries, each of which owns and
operates separate campuses. This acquisition was accounted for as a purchase
and, accordingly, the acquired assets and assumed liabilities have been
recorded at their estimated fair market values at the date of the acquisition.
The estimated fair market values of certain assets are based upon preliminary
appraisal reports. The purchase price, subject to certain modifications, of
approximately $20,000,000 exceeded the fair market value of net assets
acquired, resulting in goodwill of approximately $7,800,000. Subsequent
adjustments to the purchase price may result in changes to the purchase price
allocation. At September 30, 1997, the Company has reduced the purchase price
by approximately $1,093,000 as a result of estimated purchase price
adjustments.
In connection with the purchase, the former owner of the schools also
entered into a covenant not-to-compete agreement with the Company in exchange
for $7,000,000. The covenant not-to-compete restricts the former owners'
ability to own or operate certain types of for-profit postsecondary schools
for five years.
At closing, the Company paid $5,400,000 to the former owner and deposited
$18,850,000 into escrow with borrowings of $12,500,000 from its new bank
financing arrangement and $15,000,000 which was raised through the issuance of
Series D preferred stock. The amount in escrow will be paid, subject to
certain adjustments for events occurring after the closing date, in 1997. At
September 30, 1997, the Company estimates that $1,657,000 is still owed to the
seller.
IAMD-U.S.
On June 30, 1997, the Company, through IAMD, Acquisition I, Ltd. acquired
100% of the outstanding shares of capital stock of IAMD, Limited for
$3,000,000. Subsequent to the purchase, IAMD Acquisition I, Ltd.
F-18
<PAGE>
CAREER EDUCATION CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 IS UNAUDITED)
merged with and into IAMD, Limited and assumed its name ("IAMD-U.S."). The
purchase price may be increased by up to $5,000,000 based upon the amount by
which revenue of the acquired operations for the 12 month period ended June
30, 1998 exceeds $8,000,000, as provided for in an earn-out provision in the
purchase agreement. IAMD-U.S. generated revenue of $7,493,000 for the year
ended June 30, 1997. The purchase price of the acquisition is subject to
certain modifications in addition to the earn-out provision. This acquisition
was accounted for as a purchase and, accordingly, the acquired assets and
assumed liabilities have been recorded at their estimated fair market values
at the date of the acquisition. The estimated fair market values of certain
assets are based upon preliminary appraisal reports. The purchase price,
subject to certain modifications, exceeded the fair market value of net assets
acquired, resulting in goodwill of approximately $1,968,000. At September 30,
1997, the Company estimates that the purchase price will be increased by
approximately $90,000 as a result of purchase price adjustments and has
reflected such amount in the accompanying September 30, 1997 consolidated
balance sheet.
In connection with the purchase, the former owners of the school also
entered into covenant not-to-compete agreements with the Company in exchange
for $2,000,000. The covenant not-to-compete restricts the former owners'
ability to own or operate certain types of for-profit postsecondary schools
for four years.
On June 30, 1997, the Company paid $100,000 to the former owners, issued
$1,500,000 in notes payable to the former owners and issued letters of credit
totaling $3,400,000 to secure amounts owed to the former owners to consummate
these transactions. The funds to consummate these transactions were obtained
through the issuance of Series D preferred stock and warrants and bank
borrowings. The notes, secured by letters of credit, bear interest, payable
quarterly, at 7% per annum, and the entire principal balance is due on June
30, 2001 or earlier in the event of an initial public offering of the Company.
IAMD-CANADA
On June 30, 1997, the Company purchased 100% of the capital stock of IAMD-
Canada for $6,500,000. This acquisition was accounted for as a purchase and,
accordingly, the acquired assets and assumed liabilities have been recorded at
their estimated fair market values at the date of the acquisition. The
estimated fair market values of certain assets are based upon preliminary
appraisal reports. The purchase price, subject to certain modifications,
exceeded the fair market value of net assets acquired, resulting in goodwill
of approximately $4,588,000. At September 30, 1997, the Company estimates that
the purchase price will be decreased by approximately $87,000 as a result of
purchase price adjustments and has reflected such amount as due from former
owners of acquired businesses in the accompanying September 30, 1997
consolidated balance sheet.
In connection with the purchase, the former owners of the school entered
into covenant not-to-compete agreements with the Company in exchange for
$2,000,000. The covenant not-to-compete restricts the former owners' ability
to own or operate certain types of postsecondary vocational schools for four
years.
On June 30, 1997, the Company paid $3,820,000 to the former owners,
deposited $2,120,000 into escrow, and issued $2,550,000 in notes payable to
the former owners to consummate these transactions. The funds to consummate
these transactions were obtained through the issuance of Series D preferred
stock and warrants and bank borrowings. The notes are secured by letters of
credit, bear interest, payable quarterly, at 7% per annum, and the entire
principal balance is due on June 30, 2001 or earlier in the event of an
initial public offering of the Company.
F-19
<PAGE>
CAREER EDUCATION CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 IS UNAUDITED)
The following unaudited pro forma results of operations data (in thousands)
for the years ended December 31, 1994, December 31, 1995 and December 31,
1996, and the nine months ended September 30, 1997, assume the business
acquisitions subsequent to January 1, 1995 described above occurred at the
beginning of the year preceding the year of the acquisition. The pro forma
results below are based on historical results of operations and do not
necessarily reflect actual results that would have occurred. The pro forma
results for the nine months ended September 30, 1997, are not necessarily
indicative of results that may be expected for the fiscal year ending December
31, 1997.
<TABLE>
<CAPTION>
FOR THE
NINE MONTHS
FOR THE YEARS ENDED ENDED
DECEMBER 31 SEPTEMBER 30
------------------------ ------------
1994 1995 1996 1997
------- ------- ------- ------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Net revenue........................ $23,243 $32,175 $87,476 $74,636
Income (loss) before extraordinary
item.............................. (902) 1,070 (5,041) (4,431)
Net income (loss).................. (902) 1,070 (5,041) (4,849)
</TABLE>
F-20
<PAGE>
CAREER EDUCATION CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 IS UNAUDITED)
4. DEBT
Debt of the Company at December 31, 1995, December 31, 1996 and September
30, 1997, consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31
-------------- SEPTEMBER 30
1995 1996 1997
------ ------- ------------
(IN THOUSANDS)
<S> <C> <C> <C>
Borrowings under Credit Agreement with a syndicate
of banks as discussed below--
Revolving loans................................. $ -- $ -- $26,635
Term loan....................................... -- -- 11,750
Revolving credit notes with a bank, as discussed
below, net of debt discount of $73,000 and
$57,000, as of December 31, 1995 and December 31,
1996, respectively............................... 6,698 8,182 --
Bank term loan, as discussed below................ -- 8,250 --
Notes payable to former owner of Allentown
Business School and Brown Institute; paid in
January, 1996.................................... 1,286 -- --
Notes payable to former owners of SCT, bearing
annual interest of 7%, interest only payable
quarterly, principal due February 28, 2001,
secured by bank letters of credit................ -- -- 1,800
Amount due to former owner of Gibbs, currently
payable, non-interest-bearing and unsecured...... -- -- 1,657
Notes payable to former owners of IAMD-U.S.,
bearing annual interest of 7%, interest only
payable quarterly, principal due June 30, 2001
(or earlier upon the occurrence of an initial
public offering), secured by bank letters of
credit........................................... -- -- 1,500
Amounts due to former owners of IAMD-U.S.,
currently payable, non-interest-bearing, secured
by bank letters of credit........................ -- -- 3,400
Notes payable to former owners of IAMD-Canada,
bearing annual interest of 7%, interest only
payable quarterly, principal due June 30, 2001
(or earlier upon the occurrence of an initial
public offering), secured by bank letters of
credit........................................... -- -- 2,550
Equipment under capital leases, discounted at a
weighted average interest rate of 21.9%.......... 50 27 1,502
Other............................................. -- -- 91
------ ------- -------
8,034 16,459 50,885
Less--Current portion............................. 1,309 2,676 3,993
------ ------- -------
$6,725 $13,783 $46,892
====== ======= =======
</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
F-21
<PAGE>
CAREER EDUCATION CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 IS UNAUDITED)
credit facility availability under the amended Credit Agreement. The amended
Credit Agreement matures on May 30, 2002; however, availability under the
revolving credit facility is reduced by $10,000,000 on May 30, 2001. The Term
Loan is payable in equal quarterly installments of $750,000. The Company's
borrowings under the amended Credit Agreement bear interest, payable
quarterly, at the amended Credit Agreement's Base Rate (defined as the greater
of the bank's prime rate plus 0.75%, 9.25% at September 30, 1997, or the
Federal Funds Rate plus 0.50%, 7.00% at September 30, 1997) or at LIBOR plus
2% (7.77% at September 30, 1997), at the Company's election. Interest rates
are subject to change based upon the Company's funded debt levels relative to
consolidated earnings before interest, taxes, depreciation and amortization on
a pro forma basis for the last four fiscal quarters. The Company is also
required to pay annual commitment fees of 0.375% on unused availability.
At September 30, 1997, the Company had outstanding, under the amended Credit
Agreement, $26,635,000 in revolving credit borrowings and a $11,750,000 term
loan and had issued various letters of credit totaling approximately
$11,805,000 (to meet certain Department of Education financial responsibility
requirements and to guarantee certain purchase price payments). At September
30, 1997, borrowings totaling $13,455,000 were at the bank's prime rate plus
0.75%, and borrowings totaling $25,000,000 were at LIBOR plus 2%.
During 1995, the Company and its subsidiaries entered into a credit
agreement (the "Agreement") with a bank. The Agreement provided for the
Company and its subsidiaries to borrow, on a consolidated basis, $8,000,000
under a revolving credit note and $12,000,000 through a term loan. In
connection with the Agreement, the Company also issued warrants to purchase
2,199 shares of Class D common stock and recorded a debt discount of $79,977
for the value of the warrants. The debt discount is amortized over the five
year maturity of the related debt. On May 30, 1997, in connection with
entering into the Credit Agreement and prepaying all amounts outstanding under
the Agreement, the Company expensed the remaining unamortized debt discount
totaling $51,000, prepayment penalty fees totaling $294,000 and the remaining
unamortized deferred financing costs totaling $306,000. The loss on the early
extinguishment of debt of $651,000, net of related tax benefit of $233,000,
has been reflected as an extraordinary item in the accompanying consolidated
statement of operations for the nine months ended September 30, 1997.
At December 31, 1996, the Company, under the Agreement, had $8,239,057
outstanding under revolving credit notes and had issued various letters of
credit totaling approximately $270,000 to meet certain Department of Education
financial responsibility requirements. The revolving credit facility
availability is reduced by these amounts. Amounts outstanding under the
revolving credit notes bear interest either at the bank's prime rate plus
1.25% (9.50% at December 31, 1996), or LIBOR plus 3.5% (8.875% at December 31,
1996), and are reduced annually over a five-year period with the balance due
in July, 2000. Interest is payable monthly. At December 31, 1996, $5,239,057
in borrowings were at the bank's prime rate plus 1.25%, and $3,000,000 in
borrowings were at LIBOR plus 3.5% rate. The term loan is payable in 35 equal
monthly installments beginning a year from the origination date of the term
loan, October 21, 1996, with any unpaid balance due in full in July, 2000.
Amounts outstanding bear monthly interest either at the bank's prime rate plus
1.25%, or LIBOR plus 3.5%. At December 31, 1996, the Company had $8,250,000
outstanding under the term loan.
The Company and its subsidiaries have collectively guaranteed repayment of
amounts outstanding under the Credit Agreement. In addition, the Company has
pledged the stock of its subsidiaries as collateral for repayment of the debt.
The Company may voluntarily make principal prepayments. Mandatory principal
prepayments are required if the Company generates excess cash flows, as
defined, sells certain assets, or upon the occurrence of certain other events.
The Company is restricted from paying dividends, as defined, selling or
disposing of certain assets or subsidiaries, making annual rental payments in
excess of $14,000,000, and issuing
F-22
<PAGE>
CAREER EDUCATION CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 IS UNAUDITED)
subordinated debt in excess of $5,000,000, among other things. The Company is
required to maintain certain financial ratios, including a quarterly fixed
coverage ratio of at least 1.25:1, a quarterly interest coverage ratio of at
least 3:1, certain levels of consolidated tangible net worth, consolidated net
worth, and funded debt to consolidated earnings before interest, taxes,
depreciation, and amortization, on a pro forma basis for the last four fiscal
quarters, of 3.75:1 through June 30, 1998, among others. At September 30,
1997, the Company was either in compliance with or had obtained a waiver for
the covenants of the Credit Agreement, as amended.
As of September 30, 1997, the Company intends to refinance amounts owed to
former owners of acquired businesses as noted above through availability under
its amended Credit Agreement and, therefore, such amounts have been classified
as long-term.
At September 30, 1997, future annual principal payments of long-term debt
mature as follows (in thousands):
<TABLE>
<S> <C>
For the 12 months ended September 30,
1999........................................... $ 3,380
2000........................................... 3,107
2001........................................... 18,620
2002........................................... 16,638
2003 and thereafter............................ 5,147
-------
$46,892
=======
</TABLE>
5. STOCKHOLDERS' INVESTMENT
COMMON STOCK
Class A and Class B common stock maintain voting rights while Class C, D and
E common stock is nonvoting. Class B common stock is convertible into shares
of Class A common stock at any time at the discretion of the holder at a ratio
of 1:1. Class C common stock is convertible into shares of either Class A
common stock or Class B common stock at any time at the discretion of the
holder at a ratio of 1:1. Class D common stock is convertible into shares of
Class A common stock, subject to certain restrictions. Class E common stock
may only be converted into shares of Class A common stock upon the occurrence
of certain events.
In July 1995, the Company increased the number of authorized shares of
common stock and completed a 100-for-1 stock split. The par value of the
additional shares arising from these splits has been reclassified from
additional paid in capital or accumulated deficit (as appropriate) to common
stock. The stock splits have been retroactively reflected in the accompanying
consolidated financial statements. All references to per share amounts in this
report have been restated to reflect the stock splits.
In 1996, the Company entered into a stock subscription agreement with an
employee, whereby the employee may purchase up to $100,000 of common and
preferred stock. A receivable and the common and preferred stock to be issued
under the agreement have been recorded at December 31, 1996. This receivable
was paid in February 1997.
F-23
<PAGE>
CAREER EDUCATION CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 IS UNAUDITED)
6. REDEEMABLE PREFERRED STOCK
SERIES A
Series A preferred stock has a stated value of $1,000 per share, and its
holders are entitled to receive dividends at an annual rate of 7% of the
liquidation value per share, as defined. Dividends are paid in equal
semiannual installments on January 31 and July 31 of each year by increasing
the liquidation value of the Series A preferred stock. The mandatory
redemption value of the Series A preferred stock has been increased to reflect
these dividends. The Company may call the Series A preferred stock at any time
and is required to redeem the stock on August 31, 2003, at its liquidation
value. The liquidation value is $1,000 per share plus dividends, as defined.
Shares of Series A preferred stock were issued at $1,000 per share during
1995 and 1994. The Company also redeemed 138 shares of Series A preferred
stock at $1,000 per share plus dividends during 1995.
SERIES B
Series B preferred stock has a stated value of $1,000 per share, and its
holders are not entitled to any dividends on any outstanding shares. Series B
preferred stock may be called at the option of the Company at any time and
must be redeemed by the Company on August 31, 2003, at its liquidation value
($1,000 per share). At September 30, 1997, there were no shares of Series B
preferred stock issued or outstanding.
SERIES C
Series C preferred stock has a stated value of $1,000 per share, and its
holders are entitled to receive cash dividends at an annual rate of 10% of the
liquidation value per share, as defined. Dividends are payable in equal
quarterly installments on each March 31, June 30, September 30 and December
31. To the extent dividends are declared and not paid, they are added to the
liquidation value. The Company has paid all dividends through June 30, 1997 on
Series C preferred stock. The Company may call Series C preferred stock at any
time and is required to redeem the stock, at its liquidation value, upon the
earlier of July 31, 2003, a sale of substantially all of the assets of the
Company or a qualified initial public offering. The liquidation value is
$1,000 per share plus undeclared dividends, as defined.
In July 1995, the Company issued shares of Series C preferred stocks and
redeemable warrants described in Note 7. The proceeds, totaling $5,000,000,
have been allocated to preferred stock and warrants based upon their relative
market values after considering issuance costs.
In July 1996, the Company increased the number of authorized shares of
Series C preferred stock and completed a 10-for-1 stock split. The stock split
has been retroactively reflected in the accompanying financial statements.
SERIES D
Series D preferred stock has a stated value of $1,000 per share, and its
holders are entitled to receive dividends at an annual rate of 7% of the
liquidation value per share, as defined. Dividends are paid in equal
semiannual installments on January 31 and July 31 of each year by increasing
the liquidation value of the Series D preferred stock. The mandatory
redemption value of the Series D preferred stock has been increased to reflect
these dividends. The Company may call the Series D preferred stock at any time
and is required to redeem the stock on September 30, 2003, at its liquidation
value. The liquidation value is $1,000 per share plus dividends, as defined.
F-24
<PAGE>
CAREER EDUCATION CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 IS UNAUDITED)
On February 28, 1997, the Company entered into a securities purchase
agreement with existing common and preferred stockholders to raise funds for
acquisitions. The securities purchase agreement gives them the right to
purchase up to 7,500 shares of Series D preferred stock for $1,000 per share
and receive warrants, currently exercisable, for the purchase of 8,924 shares
of Class E common stock at an exercise price of $.01 per share.
Under the February 28, 1997, securities purchase agreement, the Company
issued 2,000 shares of Series D preferred stock and warrants to purchase 2,380
shares of Class E common stock to existing stockholders in connection with the
acquisition of SCT. On May 30, 1997, the Company issued the remaining 5,500
shares of Series D preferred stock and warrants to purchase 6,544 shares of
Class E common stock to existing stockholders. The proceeds (totaling
$7,500,000) were used for the acquisition of SCT and Gibbs and have been
allocated to preferred stock and warrants based upon their relative market
values after considering issuance costs.
On May 30, 1997, the Company also entered into another securities purchase
agreement with existing common and preferred stockholders to raise funds for
additional acquisitions. The securities purchase agreement gives them the
right to purchase up to an additional 15,000 shares of Series D preferred
stock for $1,000 per share and receive warrants, currently exercisable, for
the purchase of 36,186 shares of Class E common stock at an exercise price of
$.01 per share.
Under the May 30, 1997, securities purchase agreement, the Company issued
15,000 shares of Series D preferred stock and warrants to purchase 36,186
shares of Class E common stock to existing stockholders in connection with the
acquisitions of Gibbs, IAMD-U.S. and IAMD-Canada. The proceeds, totaling
$15,000,000, have been allocated to preferred stock and warrants based upon
their relative market values after considering issuance costs.
7. REDEEMABLE WARRANTS
In connection with the issuance of Series C preferred stock during 1995, the
Company issued warrants exercisable into 25,285 shares of Class D common
stock. These warrants, which are exercisable at any time, have an exercise
price of $.01 per share and expire in July 2005. The number of warrants is
subject to adjustment upon the occurrence of certain events. In any event, the
total number of shares the warrant may be exercised into may not be reduced by
more than 9,894 shares. Based upon the results of operations through September
30, 1997, the total number of shares of Class D common stock into which these
warrants are exercisable was adjusted to be 21,576. The Company is required to
redeem these warrants upon the occurrence of certain events and in any event
no later than March 31, 2001, at a price based upon specified formulas and a
valuation of the Company. The holder of the warrants is required to exercise
them upon a qualified public offering, as defined. The Company is accreting
the difference between the value of the warrants at the date of issuance and
their expected redemption value over the period to the earliest date
redemption can occur using the effective interest method.
In connection with the Company's previous credit agreement entered into
during 1995 (Note 4), the Company issued warrants exercisable into 2,199
shares of Class D common stock. The warrants, which are exercisable at any
time, have an exercise price of $.01 per share and expire in July 2005. The
number of warrants is subject to adjustment under certain circumstances. The
warrants may be called by the Company at any time after one year and can be
put to the Company after July 31, 2001, or upon occurrence of certain other
events. Based upon the terms and provisions of the credit and warrant
agreements, the Company assigned a value (based upon the relative fair market
value of the debt and warrants) of $79,997 to these warrants. The fair market
value of the warrants was determined with reference to the exercise price of
the warrants, the fair market value of the Company's common stock at the date
the warrants were issued (considering its recent sale of stock to third
parties) and the period the warrants can be exercised. In connection with the
sales of Series D preferred stock through the various securities purchase
agreements, the outstanding warrants to purchase 2,199 shares of Class
F-25
<PAGE>
CAREER EDUCATION CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 IS UNAUDITED)
D common stock were exchanged for warrants (with similar put and call
features) to purchase 2,199 shares of Class E common stock and also increased
to include additional warrants to purchase 1,315 shares of Class E common
stock. The value of these additional warrants, totaling approximately $180,000
(based upon a Black-Scholes option pricing model with assumptions as described
in Note 8) was recorded as interest expense in 1997.
8. STOCK OPTIONS AND WARRANTS
STOCK OPTIONS
During 1994, certain stockholders were granted options to purchase shares of
common stock of the Company up to a total of approximately 13.5% of the
outstanding shares of common stock. These options, which have an exercise
price of $.10 per share, are earned and become exercisable based upon certain
financial returns earned and realized in a cash payment by certain
stockholders and are subject to other conditions. In July 1995, the option
agreements were amended to reduce the total number of shares of common stock
for which the options could be exercised to 11.5% of the outstanding shares,
and a supplemental option agreement was entered into entitling one of these
stockholders to purchase 2,199 shares of common stock at $0.01 per share. The
supplemental option vests over a five year period. Under the supplemental
option agreement, additional options to purchase a total of 915 shares of
common stock at an exercise price of $0.01 per share were issued in 1997.
These options vest over the same period as the initial supplemental option. At
December 31, 1995, December 31, 1996, and September 30, 1997, 440, 880, and
1,868 of the supplemental options, respectively, had vested. As of September
30, 1997, none of the options granted under the amended option agreements had
been earned.
On October 20, 1997, the original option agreements were further amended to
fix the number of shares that the stockholders may exercise only upon the
closing of an initial public offering ("IPO"). Under these amended agreements,
in addition to the options issued under the supplemental option agreement, the
stockholders may purchase an aggregate of 13,077.5 shares of common stock of
the Company at any time after the IPO closing, but prior to January 1, 2004.
The options (other than the supplemental options) will be fully vested upon
the IPO closing. Assuming that the IPO is completed and that the price per
share is $14.00 (post split), the Company will record related compensation
expense of approximately $1.4 million upon the IPO closing.
During 1995, the Company adopted the 1995 Stock Option Plan. The plan
provides for the Company to grant up to 17,135 options exercisable into shares
of Class E common stock to certain members of management. The options vest and
become exercisable in five equal annual installments commencing with the first
anniversary of the grant, and expire 10 years from the date of grant, or
earlier under certain circumstances. All granted options become fully vested
upon a qualified public offering, as defined.
Stock option activity for the Company's 1995 Stock Option Plan for the years
ended December 31, 1995 and 1996, and for the nine months ended September 30,
1997, was as follows:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
EXERCISE
SHARES PRICE RANGE PRICE
------ ------------- --------
<S> <C> <C> <C>
Outstanding as of January 1, 1995........... -- $ -- $ --
Granted................................... 6,791 36.38 36.38
Cancelled................................. (996) 36.38 36.38
------
Outstanding as of December 31, 1995......... 5,795 36.38 36.38
Granted................................... 3,298 36.38 36.38
------
Outstanding as of December 31, 1996......... 9,093 36.38 36.38
Granted................................... 7,336 129.85-137.95 136.83
Cancelled................................. (285) 36.38 36.38
------
Outstanding as of September 30, 1997........ 16,144 $36.38-137.95 $82.03
====== ============= ======
Stock options exercisable at 1,102 $36.38 $36.38
December 31, 1996.......................... ====== ====== ======
September 30, 1997......................... 1,558 $36.38 $36.38
====== ====== ======
</TABLE>
F-26
<PAGE>
CAREER EDUCATION CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 IS UNAUDITED)
The following table summarizes information about all stock options
outstanding as of September 30, 1997:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------------------------------------- ---------------------------------
NUMBER OUTSTANDING WEIGHTED WEIGHTED AVERAGE NUMBER EXERCISABLE WEIGHTED
AS OF AVERAGE REMAINING AT AVERAGE
EXERCISE PRICE RANGES SEPTEMBER 30, 1997 EXERCISE PRICE CONTRACTUAL LIFE SEPTEMBER 30, 1997 EXERCISE PRICE
- --------------------- ------------------ -------------- ---------------- ------------------ --------------
<S> <C> <C> <C> <C> <C>
$0.01-$0.10............. 3,114 $ 0.01 6.3 1,868 0.01
$36.38-$36.38........... 8,808 36.38 8.3 1,558 36.38
$129.85-$137.95......... 7,336 136.83 9.7 -- --
------ ------- --- ----- -----
$0.01-$137.95........... 19,258 68.76 8.5 3,426 16.55
====== ======= === ===== =====
</TABLE>
For purposes of determining the pro forma effect of these options, the fair
value of each option is estimated on the date of grant based on the Black-
Scholes option pricing model assuming, among other things, no dividend yield,
a range of risk-free interest rates of 5.7% to 6.8%, no volatility and an
expected life of 10 years. The weighted average fair value of the options
granted during the years ended December 31, 1995, December 31, 1996, and for
the nine months ended September 30, 1997, was approximately $16.58, $16.87 and
$24.21, respectively.
WARRANTS
During 1997, in connection with the issuance of Class D preferred stock
through the various securities purchase agreements, the Company issued
warrants exercisable into a total of 45,110 shares of Class E common stock.
These warrants, which are exercisable at any time, have an exercise price of
$.01 per share and expire in July 2005. The number of warrants is subject to
adjustment under certain circumstances. The Company may call the warrants,
which were valued at approximately $6,204,000 on the date of their issuance,
at any time after one year. The holders of these warrants are required to
exercise them upon a qualified public offering, as defined.
F-27
<PAGE>
CAREER EDUCATION CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 IS UNAUDITED)
A summary of warrant activity, including redeemable warrants, for the years
ended December 31, 1995, December 31, 1996, and for the nine months ended
September 30, 1997, is as follows:
<TABLE>
<CAPTION>
SHARES UNDER WARRANT
---------------------------
CLASS D CLASS E
COMMON STOCK COMMON STOCK
------------- -------------
SHARES PRICE SHARES PRICE
------ ----- ------ -----
<S> <C> <C> <C> <C>
Outstanding as of January 1, 1995................ -- $ -- -- $ --
Issued......................................... 27,484 0.01 -- --
------ ------
Outstanding as of December 31, 1995.............. 27,484 0.01 -- --
Issued......................................... -- -- -- --
------ ------
Outstanding as of December 31, 1996.............. 27,484 0.01 -- --
Issued......................................... -- -- 46,425 0.01
Cancelled...................................... (3,709) 0.01 -- --
Exercised...................................... -- -- (99) 0.01
Exchanged...................................... (2,199) 0.01 2,199 0.01
------ ------
Outstanding as of September 30, 1997............. 21,576 0.01 48,525 0.01
====== ===== ====== =====
Warrants exercisable at December 31, 1996........ 27,484 $0.01 -- $ --
====== ===== ====== =====
Warrants exercisable at September 30, 1997....... 21,576 $0.01 48,525 $0.01
====== ===== ====== =====
</TABLE>
The fair value of each warrant is estimated on the date of grant based on
the Black-Scholes option pricing model assuming among other things, no
dividend yield, a risk-free interest rate of 6.59%, an expected volatility of
0.70 and expected life of 8-10 years.
The weighted average fair value of warrants to purchase Class D common stock
issued during the year ended December 31, 1995, was approximately $36.38. As
of September 30, 1997, the remaining contractual life of these warrants was
approximately 7.8 years. The weighted average fair value of warrants to
purchase Class E common stock issued for the nine months ended September 30,
1997 was approximately $132.65. As of September 30, 1997, the remaining
contractual life of these warrants was approximately 7.8 years.
PRO FORMA RESULTS
Had the Company accounted for its stock options in accordance with FASB No.
123, pro forma income (loss) before extraordinary item attributable to common
stockholders and pro forma income (loss) before extraordinary item per share
attributable to common stockholders would have been as follows (in thousands,
except per share data):
<TABLE>
<CAPTION>
DECEMBER 31 SEPTEMBER 30
------------ -------------------
1995 1996 1996 1997
----- ------ ----------- -------
(UNAUDITED)
<S> <C> <C> <C> <C>
Pro forma income (loss) before
extraordinary item attributable to
common stockholders................... $ 64 $1,475 $ 6 $(1,449)
Pro forma income (loss) before
extraordinary item per share
attributable to common stockholders... $0.04 $ 0.68 $0.00 $ (0.52)
</TABLE>
F-28
<PAGE>
CAREER EDUCATION CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 IS UNAUDITED)
The pro forma disclosure is not likely to be indicative of pro forma results
which may be expected in future years because of the fact that options vest
over several years, pro forma compensation expense is recognized as the
options vest and additional awards may also be granted. At September 30, 1997,
the unamortized compensation expense under FASB No. 123 is approximately
$405,000.
OTHER
The Company has the right to purchase the shares of certain common and
preferred stock upon the termination, disability or death of certain
stockholders.
9. INCOME TAXES
The provision (benefit) for income taxes for the years ended December 31,
1994, December 31, 1995, December 31, 1996, and for the nine months ended
September 30, 1996 and 1997 consists of the following (in thousands):
<TABLE>
<CAPTION>
FOR THE YEAR FOR THE NINE
ENDED MONTHS ENDED
DECEMBER 31 SEPTEMBER 30
-------------- -------------------
1994 1995 1996 1996 1997
---- ---- ---- ----------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Current--
Federal................................. $-- $-- $150 $12 $ --
State and local......................... -- 24 260 2 --
Foreign................................. -- -- -- -- --
---- ---- ---- --- -------
Total current......................... -- 24 410 14 --
---- ---- ---- --- -------
Deferred--
Federal................................. -- -- (172) -- (639)
State and local......................... -- -- (30) -- (150)
Foreign................................. -- -- -- -- (219)
---- ---- ---- --- -------
Total deferred........................ -- -- (202) -- (1,008)
---- ---- ---- --- -------
Total provision (benefit) for income tax-
es....................................... $-- $ 24 $208 $14 $(1,008)
==== ==== ==== === =======
</TABLE>
A reconciliation of the statutory U.S. federal income tax rate to the
effective income tax rate for the years ended December 31, 1994, December 31,
1995, December 31, 1996, and for the nine months ended September 30, 1996 and
1997, is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER NINE MONTHS
31 ENDED SEPTEMBER 30
---------------------- ------------------
1994 1995 1996 1996 1997
------ ------ ------ ----------- ------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Statutory U.S. Federal income tax
rate.............................. 34.0% 34.0% 34.0% 34.0% (34.0%)
State income taxes, net of Federal
benefit........................... 4.6% 17.0% 10.0% 10.0% (5.0%)
Foreign............................ --% --% --% --% (1.6%)
Permanent differences and other.... 1.4% (11.2%) 4.8% 4.8% (1.4%)
Valuation allowance................ (40.0%) (14.0%) (36.6%) (8.8%) -- %
------ ------ ------ ----- ------
Effective income tax rate.......... -- % 25.8% 12.2% 40.0% (42.0%)
====== ====== ====== ===== ======
</TABLE>
F-29
<PAGE>
CAREER EDUCATION CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 IS UNAUDITED)
Components of deferred income tax assets and liabilities consist of the
following at December 31, 1995, December 31, 1996, and September 30, 1997 (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31 SEPTEMBER 30
------------- ------------
1995 1996 1997
------- ---- ------------
<S> <C> <C> <C>
Deferred tax assets:
Tax net operating loss carryforwards.......... $ 967 $281 $ 1,372
Allowance for doubtful accounts............... 103 182 561
Other......................................... 114 49 322
------- ---- -------
Total deferred tax assets................... 1,184 512 2,255
------- ---- -------
Deferred tax liabilities:
Depreciation and amortization................. 137 86 4,356
Other......................................... 2 37 --
------- ---- -------
Total deferred tax liabilities.............. 139 123 4,356
Valuation allowance........................... (1,045) -- --
------- ---- -------
Net deferred income tax..................... $ -- $389 $(2,101)
======= ==== =======
</TABLE>
The Company has generated a tax net operating loss carryforward and has also
purchased certain tax net operating loss carryforwards in connection with its
business acquisitions. At September 30, 1997, such tax net operating loss
carryforwards totalled $3,176,000 and begin to expire in 2010.
10. COMMITMENTS AND CONTINGENCIES
CONSULTING AGREEMENT
In conjunction with the acquisition of Collins, the Company entered into a
three-year consulting agreement with one of the former stockholders. Under the
terms of this agreement, which expired in January, 1997, the Company was
obligated to compensate the former stockholder $135,000 per annum in exchange
for consulting services. Total expenses under this agreement for the years
ended December 31, 1994, December 31, 1995, December 31, 1996, and the nine
months ended September 30, 1996 and 1997 was $124,000, $135,000, $135,000,
$101,000 and $11,000, respectively.
LITIGATION
The Company is subject to occasional lawsuits, investigations and claims
arising out of the normal conduct of its business. In certain cases, claims
against acquired businesses relating to events which occurred during the
periods the Company did not own the acquired businesses are indemnified by the
former owners. Management does not believe the outcome of any pending claims
will have a material adverse impact on the Company's financial position or
results of operations.
LEASES
The Company rents its school facilities and certain equipment under non-
cancelable operating leases expiring at various dates through July, 2006. The
facility leases require the Company to make monthly payments covering rent,
taxes, insurance and maintenance costs. Rent expense, exclusive of taxes,
insurance and maintenance of the facilities and equipment for the years ended
December 31, 1994, December 31, 1995, and December 31, 1996, and for the nine
months ended September 30, 1996 and 1997, was approximately $595,000,
$1,589,000, $2,649,000, $1,923,000 and $5,014,000, respectively.
F-30
<PAGE>
CAREER EDUCATION CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 IS UNAUDITED)
Future minimum lease payments under these leases as of September 30, 1997,
are as follows (in thousands):
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES TOTAL
------- --------- -------
<S> <C> <C> <C>
Remainder of--
1997.......................................... $ 371 $ 2,711 $ 3,082
1998.......................................... 986 10,015 11,001
1999.......................................... 307 9,117 9,424
2000.......................................... 66 7,982 8,048
2001.......................................... 12 7,092 7,104
2002 and thereafter........................... 1 13,636 13,637
------ ------- -------
1,743 $50,553 $52,296
======= =======
Less--Portion representing interest at a
weighted average rate of 21.9%............... 241
------
Principal payments............................ 1,502
Less--Current portion......................... 993
------
$ 509
======
</TABLE>
11. REGULATORY
The Company and its U.S. schools are subject to extensive regulation by
federal and state governmental agencies and accrediting bodies. In particular,
the Higher Education Act of 1965, as amended (the "HEA"), and the regulations
promulgated thereunder by the DOE subject the Company's U.S. schools to
significant regulatory scrutiny on the basis of numerous standards that
schools must satisfy in order to participate in the various federal student
financial assistance programs under Title IV of the HEA (the "Title IV
Programs"). Under the HEA and its implementing regulations, certain financial
responsibility and other regulatory standards must be complied with in order
to qualify to participate in the Title IV Programs. Under such standards, each
institution must, among other things: (i) have an acid test ratio (defined as
the ratio of cash, cash equivalents, and current accounts receivable to
current liabilities) of at least 1:1 at the end of each fiscal year, (ii) have
a positive tangible net worth at the end of each fiscal year, (iii) not have a
cumulative net operating loss during its two most recent fiscal years that
results in a decline of more than 10% of the institution's tangible net worth
at the beginning of that two-year period, (iv) collect 85% or less of its
education revenues from Title IV Program funds in any fiscal year, and (v) not
have cohort default rates on federally funded or federally guaranteed student
loans of 25% or greater for three consecutive federal fiscal years. The DOE
may measure the financial responsibility standards on a school-by-school basis
or on a corporate consolidated basis. Any regulatory violation could be the
basis for the initiation of a suspension, limitation or termination proceeding
against the Company or any of its U.S. institutions. To minimize risks
associated with noncompliance with DOE requirements, the Company conducts
periodic financial and compliance reviews of its subsidiaries.
In November 1997, the DOE published new regulations regarding financial
responsibility to take effect on July 1, 1998. The regulations provide a
transition year alternative which will permit institutions to have their
financial responsibility for the 1998 fiscal year measured on the basis of
either the new regulations or the current regulations, whichever are more
favorable. Under the new regulations, the DOE will calculate three financial
ratios for an institution, each of which will be scored separately and which
will then be combined to determine the institution's financial responsibility.
If an institution's composite score is below the minimum requirement for
unconditional approval but above a designated threshold level, such
institution may take advantage of an alternative that allows it to continue to
participate in the Title IV Programs for up to three years under additional
monitoring and reporting procedures. If an institution's composite score falls
below this threshold level or is between the minimum for unconditional
approval and the threshold for more than three consecutive years, the
institution will be required to post a letter of credit in favor of the DOE.
The Company does not believe that these new regulations will have a material
effect on the Company's compliance with the DOE's financial responsibility
standards.
F-31
<PAGE>
CAREER EDUCATION CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 IS UNAUDITED)
The process of reauthorizing the HEA by the U.S. Congress, which takes place
approximately every five years, has begun and is expected to be completed by
1998. It is not possible to predict the outcome of the reauthorization
process. Although there is no present indication that the Congress will
decline to reauthorize the Title IV Programs, there can be no assurance that
government funding for the Title IV Programs will continue to be available or
maintained at current levels, nor can there be assurance that current
requirements for student and institutional participation in the Title IV
Programs will be unchanged. Thus, the reauthorization process could result in
revisions to the HEA that increase the compliance burden on the Company's
institutions. A reduction in funding levels for federal student financial
assistance programs could impact the Company's ability to attract students.
In order to operate and award degrees, diplomas and certificates and to
participate in the Title IV Programs, a campus must be licensed or authorized
to offer its programs of instruction by the relevant agencies of the state in
which such campus is located. Each of the Company's U.S. campuses is licensed
or authorized by the relevant agencies of the state in which such campus is
located. In addition, in order to participate in the Title IV Programs, an
institution must be accredited by an accrediting agency recognized by the DOE.
Each of the Company's campuses is accredited by an accrediting agency
recognized by the DOE.
With each acquisition of an institution that is eligible to participate in
the Title IV Programs, that institution undergoes a change of ownership that
results in a change of control, as defined in the HEA and applicable
regulations. In such event, that institution becomes ineligible to participate
in the Title IV Programs and may receive and disburse only previously
committed Title IV Program funds to its students until it has applied for and
received from the DOE recertification under the Company's ownership.
In reviewing the Company's acquisitions in the last 14 months, it has been
the DOE's practice to measure financial responsibility on the basis of the
financial statements of both the institutions and the Company. In its review
of the Company's annual financial statements and interim balance sheets, as
filed with the DOE in connection with the Company's applications for DOE
certification of institutions acquired subsequent to September 1996 to allow
such institutions to participate in the Title IV Programs, the DOE has
questioned the Company's accounting for certain direct marketing costs and its
valuation of courseware and other instructional materials of the Company's
recently acquired institutions. The audited financial statements included
herein have been restated to expense as incurred all direct marketing and
advertising costs which had previously been deferred. (Note 14)
As a result of the DOE's concerns regarding the Company's accounting for
direct marketing costs and courseware and instructional materials, the DOE has
offered the Company the alternative of posting an irrevocable letter of credit
in favor of the Secretary of Education with respect to each institution the
Company has acquired since September 1996 in a sum sufficient to secure the
DOE's interest in the Title IV Program funds administered by the applicable
institution. While the Company continues to disagree with the position taken
by the DOE, in order to obtain certification of the institutions to resume
participation in the Title IV Programs in a timely fashion, and thus to avoid
any material interruption in Title IV Program funding for the acquired
institutions, the Company has posted, and currently has outstanding, a letter
of credit in the amount of $1.9 million, which expires on September 30, 1998,
with respect to Western Culinary and a letter of credit in the amount of $12.0
million, which expires on October 31, 1998, with respect to Gibbs. In
addition, in response to the DOE's directive, the Company expanded an existing
letter of credit with respect to SCT from the prior amount of $800,000 to the
revised amount of $1.2 million, with an expiration date of October 31, 1998.
Further, the Company agreed to post an additional letter of credit in the
amount of $5.2 million, to expire on October 31, 1998, with respect to IAMD-
U.S.
F-32
<PAGE>
CAREER EDUCATION CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 IS UNAUDITED)
The original letters of credit for Western Culinary and SCT represented 50%
of each institution's Title IV Program funding in the prior award year.
Subsequently, the DOE increased the level of surety for SCT to, and
established the level of surety of Gibbs and IAMD-U.S. at, 75% of the Title IV
Program funds that students enrolled at each such institution received in the
previous award year. Beginning in October 1997, the DOE has imposed a
condition that, through September 30, 1998, SCT, Gibbs and IAMD-U.S. may not
disburse Title IV Program funds in excess of the total Title IV Program funds
that students enrolled at each institution received in the most recent award
year for which data are available to the DOE. The DOE has calculated this
amount to be $1.6 million in the case of SCT, $16.0 million in the case of
Gibbs and $7.0 million in the case of IAMD-U.S. In subsequent discussions, the
DOE has agreed to consider potential increases in the Title IV Program funding
available to students at the affected institutions, if the Company so requests
and with the understanding that the Company would secure any such increase in
Title IV Program funding by increasing the applicable letter of credit in an
amount commensurate with the additional Title IV Program funding utilized by
such students. The DOE has advised the Company that the DOE does not include
William D. Ford Federal Direct Loan ("FDL") funds in calculating the amount of
any letter of credit and that FDL funds are not considered in determining the
total Title IV Program funding available to an affected institution. SCT
disburses significant amounts of FDL funds to students enrolled in its
educational programs. The DOE also has stated that, prior to a determination
that the Company satisfies the standards of financial responsibility, the DOE
will not consider applications to resume Title IV Program participation on
behalf of any institutions that the Company may acquire in the future or
applications that seek approval of any action that would expand the Title IV
Program participation of any of the Company's U.S. institutions that already
is certified for such participation.
In accordance with applicable law, the DOE will be required to rescind the
letters of credit and related requirements if the Company and its U.S.
institutions demonstrate that they satisfy the standards of financial
responsibility, using accounting treatments that are acceptable to the DOE.
The Company changed its accounting to eliminate deferred direct marketing
costs from its financial statements and during discussions with the DOE,
provided additional information regarding the valuation of courseware and
instructional materials at one of the recently acquired institutions where
such valuation was questioned by the DOE. The DOE agreed that in the conduct
of its next review of the financial responsibility of the Company and its U.S.
institutions, the DOE will consider financial information reflecting the
results of the Offering, as well as the 1997 audited financial statements of
each entity. The Company intends to seek the DOE's review of the Company's and
its U.S. institutions' audited 1997 financial statements and the Company's
post-Offering financial information on an expedited basis in the spring of
1998.
12. RELATED-PARTY TRANSACTIONS
The Company maintains short-term employment and consulting agreements with
certain stockholders. Total expenses under these agreements were approximately
$200,000, $292,000, $298,000, $225,000, and $237,000 for the years ended
December 31, 1994, 1995, 1996 and the nine months ended September 30, 1996 and
1997, respectively.
In July 1995, the Company entered into an agreement with a stockholder
whereby the stockholder provides certain consulting services to the Company.
Total expenses under this agreement were $31,000, $75,000, $56,000 and $57,000
for the years ended December 31, 1995, 1996 and the nine months ended
September 30, 1996 and 1997, respectively.
The Company has also entered into a stock subscription agreement with an
employee, as discussed in Note 5.
F-33
<PAGE>
CAREER EDUCATION CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 IS UNAUDITED)
13. EMPLOYEE BENEFIT PLAN
The Company maintains a contributory profit sharing plan established
pursuant to the provisions of Section 401(k) of the Internal Revenue Code
which provides retirement benefits for eligible employees of the Company. This
plan requires matching contributions to eligible employees. The Company's
matching contributions were $6,000, $89,000, $279,000, $191,000 and $288,000,
for the years ended December 31, 1994, 1995, 1996 and the nine months ended
September 30, 1996 and 1997, respectively.
14. CHANGE IN ACCOUNTING METHODS
Deferred Advertising Costs
In December, 1993, the Accounting Standards Executive Committee of the
American Institute of Certified Public Accountants ("AICPA") issued Statement
of Position No. 93-7 ("SOP"), "Reporting on Advertising Costs." The SOP
generally requires advertising costs to be expensed as incurred. The SOP was
effective for financial statements for fiscal years beginning after December
15, 1994. The Company adopted the SOP effective January 1, 1995.
In adopting the SOP in 1995, the Company's total advertising costs were
expensed as incurred in 1995, rather than deferred and amortized as in prior
periods. In connection with adopting the SOP, the Company amortized
approximately $951,000 of the deferred advertising cost balance as of December
31, 1994, in 1995 and also expensed advertising costs incurred in 1995
totaling $1,262,985. The SOP did not permit restatement of periods prior to
January 1, 1995. In connection with the IPO (Note 15), the Company has
restated its 1994 financial statement to expense all advertising costs as
incurred.
Deferred Direct Marketing Costs
Direct marketing costs incurred related to the enrollment of new students
were capitalized using the successful efforts method. Direct marketing costs
include recruiting representatives' salaries, employee benefits and other
direct costs. Direct marketing costs were amortized on a straight-line basis
over a twelve month period beginning on the first day of the quarter following
the expenditure. The Company adopted this method of accounting for deferred
direct marketing costs effective January 1, 1995.
In connection with the IPO (Note 15), the Company changed its accounting for
deferred direct marketing costs to a more preferable method of expensing such
marketing and advertising costs as incurred. The Company has restated the
accompanying financial statements for all periods presented for such deferred
direct marketing costs.
15. SUBSEQUENT EVENTS AND PRO FORMA DATA (UNAUDITED)
On October 10, 1997, the Company filed a registration statement on Form S-1
under the Securities Act of 1933 to sell shares of its common stock in an
initial public stock offering. The Company intends to repay outstanding
revolving credit loans under its amended Credit Agreement (which totalled
$26.6 million at September 30, 1997) and repay amounts owed to former owners
of acquired businesses (which totalled $4.1 million at September 30, 1997).
The unaudited pro forma balance sheet information gives effect to (i) the
conversion of all outstanding shares of all series of preferred stock and
accumulated dividends into common stock, (ii) the conversion of all classes of
common stock into a new class of common stock and (iii) the exercise of all
warrants except for redeemable warrants exercisable into 3,514 shares of Class
E common stock. The holder of these warrants has exercised its right to put
such warrants to the Company. The Company expects to pay the holder of these
warrants approximately $400,000 to repurchase such warrants. No other
contemplated transactions in connection with the proposed offering are
included in the unaudited pro forma balance sheet.
F-34
<PAGE>
CAREER EDUCATION CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 IS UNAUDITED)
In November 1997, the Company adopted, subject to stockholder approval, the
1998 Non-Employee Directors' Stock Option Plan, effective on the date the
registration statement is declared effective by the Securities and Exchange
Commission. 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 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 the effective date.
In November 1997, the Company adopted, subject to stockholder approval, the
1998 Employee Incentive Compensation Plan, effective on the date the
registration statement is declared effective by the Securities and Exchange
Commission. The plan provides for the Company to grant stock options, stock
appreciation rights, restricted stock, deferred stock and other awards
(including stock bonus and performance awards) which are exercisable into
shares of common stock to directors, officers, employees and consultants of
the Company. The plan shall be administered by a committee of the board of
directors which shall have the authority to determine the persons to receive
awards, the type of awards to be issued, the number of shares of common stock
to be covered by each award, and the terms and conditions. The option period
of each stock option and the term of the stock appreciation right shall be
fixed by the Company; provided that no stock option or appreciation right
shall be exercisable more than ten years after the date of grant. Stock
options may be either incentive stock options or nonqualified stock options.
The Company has reserved 600,000 shares of common stock for distribution
pursuant to awards issued under the plan on the effective date.
In November 1997, the Company adopted, subject to stockholder approval, the
1998 Employee Stock Purchase Plan effective April 1, 1998. The Plan provides
for the issuance of up to 500,000 shares of common stock to be purchased by
eligible employees of the Company through periodic offerings. Employees of the
Company may purchase common stock through payroll deductions (not to exceed
$20,000 per person within any calendar year) at 85% of the fair market value.
Prior to consummation of the IPO, the Company will increase the number of
authorized shares of common stock and complete a 7.473-for-1 stock split.
F-35
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of
Career Education Corporation
Hoffman Estates, Illinois
We have audited the accompanying consolidated balance sheets of The
Katharine Gibbs Schools, Inc. and subsidiaries (a wholly-owned subsidiary of
K-III Communications Corporation) (the "Company") as of December 31, 1995 and
1996, and the related statements of consolidated operations, shareholder's
deficiency, and consolidated cash flows for the period from March 7, 1994 to
December 31, 1994, and for the years ended December 31, 1995 and 1996. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of the Company at December 31,
1995 and 1996, and the results of their operations and their cash flows for
the period from March 7, 1994 to December 31, 1994, and for the years ended
December 31, 1995 and 1996 in conformity with generally accepted accounting
principles.
DELOITTE & TOUCHE LLP
New York, New York
October 27, 1997
F-36
<PAGE>
THE KATHARINE GIBBS SCHOOLS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1995 AND 1996
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
1995 1996
------- --------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash...................................................... $ 5,507 $ 6,296
Receivables:
Students, net of allowance for doubtful accounts of
approximately $520 and $433 at December 31, 1995 and
1996, respectively..................................... 1,464 1,067
Other................................................... 456 630
Prepaid expenses and other current assets................. 599 103
------- --------
Total current assets.................................. 8,026 8,096
------- --------
PROPERTY AND EQUIPMENT, Net................................. 3,995 4,082
------- --------
OTHER ASSETS:
Intangible assets, net.................................... 21,364 20,285
Investment in Perkins loan program, net................... 50 29
Other non-current assets.................................. 217 292
------- --------
Total other assets.................................... 21,631 20,606
------- --------
TOTAL ASSETS................................................ $33,652 $ 32,784
======= ========
LIABILITIES AND SHAREHOLDER'S DEFICIENCY
CURRENT LIABILITIES:
Accounts payable.......................................... $ 1,605 $ 1,201
Accrued expenses.......................................... 2,117 2,312
Advance student payments.................................. 1,999 2,395
Deferred tuition revenue.................................. 1,727 1,072
Other current liabilities................................. 1,173 791
Current maturities of capital lease obligations........... 96 29
------- --------
Total current liabilities............................. 8,717 7,800
------- --------
NON-CURRENT LIABILITIES:
Capital lease obligations, less current maturities........ 39 89
Payable to K-III Communications Corporation............... 26,679 26,851
Other non-current liabilities............................. 653 805
------- --------
Total non-current liabilities......................... 27,371 27,745
------- --------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDER'S DEFICIENCY:
Common stock, $.01 par value; 1,000 shares authorized,
1,000 shares issued and outstanding...................... -- --
Accumulated deficit....................................... (2,436) (2,761)
------- --------
Total shareholder's deficiency........................ (2,436) (2,761)
------- --------
TOTAL LIABILITIES AND SHAREHOLDER'S DEFICIENCY.............. $33,652 $ 32,784
======= ========
</TABLE>
See notes to consolidated financial statements.
F-37
<PAGE>
THE KATHARINE GIBBS SCHOOLS, INC. AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED OPERATIONS
FOR THE PERIOD FROM MARCH 7, 1994 TO DECEMBER 31, 1994, AND FOR THE YEARS ENDED
DECEMBER 31, 1995 AND 1996
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1994 1995 1996
------- ------- -------
<S> <C> <C> <C>
REVENUES:
Tuition and registration fees, net................. $18,142 $22,343 $25,831
Other, net......................................... 1,507 2,507 2,932
------- ------- -------
Total revenues................................... 19,649 24,850 28,763
------- ------- -------
OPERATING COSTS AND EXPENSES:
Instruction........................................ 4,719 5,945 6,427
Selling, general and administrative................ 11,959 16,937 18,991
Depreciation and amortization...................... 1,804 2,400 2,235
Management fees charged by K-III Communications
Corporation....................................... 159 354 397
------- ------- -------
Total operating costs and expenses............... 18,641 25,636 28,050
------- ------- -------
INCOME (LOSS) FROM OPERATIONS........................ 1,008 (786) 713
INTEREST EXPENSE..................................... 1,264 1,394 1,038
------- ------- -------
NET LOSS............................................. $ (256) $(2,180) $ (325)
======= ======= =======
</TABLE>
See notes to consolidated financial statements.
F-38
<PAGE>
THE KATHARINE GIBBS SCHOOLS, INC. AND SUBSIDIARIES
STATEMENTS OF SHAREHOLDER'S DEFICIENCY
FOR THE PERIOD FROM MARCH 7, 1994 TO DECEMBER 31, 1994, AND FOR THE YEARS ENDED
DECEMBER 31, 1995 AND 1996
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK
------------- ACCUMULATED
SHARES AMOUNT DEFICIT
------ ------ -----------
<S> <C> <C> <C>
Balance at March 7, 1994.............................. 1,000 $ -- $ --
Net loss............................................ -- -- (256)
----- ----- -------
Balance at December 31, 1994.......................... 1,000 -- (256)
Net loss............................................ -- -- (2,180)
----- ----- -------
Balance at December 31, 1995.......................... 1,000 -- (2,436)
Net loss............................................ -- -- (325)
----- ----- -------
Balance at December 31, 1996.......................... 1,000 $ -- $(2,761)
===== ===== =======
</TABLE>
See notes to consolidated financial statements.
F-39
<PAGE>
THE KATHARINE GIBBS SCHOOLS, INC. AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED CASH FLOWS
FOR THE PERIOD FROM MARCH 7, 1994 TO DECEMBER 31, 1994, AND
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1996
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1994 1995 1996
-------- ------- -------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net loss.......................................... $ (256) $(2,180) $ (325)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization.................... 1,804 2,400 2,235
Changes in operating assets and liabilities:
(Increase) decrease in:
Accounts receivable--students.................. 5,986 463 397
Accounts receivable--other..................... (32) (195) (174)
Prepaid expenses and other current assets...... (460) (121) 496
Other non-current assets....................... (134) (29) (75)
Increase (decrease) in:
Accounts payable and accrued expenses.......... 1,654 1,087 (209)
Advance student payments and other current
liabilities................................... (521) (1,158) 14
Deferred tuition revenue....................... (7,465) 639 (655)
Other non-current liabilities.................. 454 199 152
-------- ------- -------
Net cash provided by operating activities... 1,030 1,105 1,856
-------- ------- -------
INVESTING ACTIVITIES:
Purchases of property and equipment............... (2,151) (1,025) (1,157)
Investment in Perkins loan program, net........... (4) 9 21
Payment for business acquired..................... (20,000) -- --
-------- ------- -------
Net cash used in investing activities....... (22,155) (1,016) (1,136)
-------- ------- -------
FINANCING ACTIVITIES:
Principal payments under capital lease
obligations...................................... (51) (85) (103)
Increase in payable to K-III Communications
Corporation...................................... 25,013 1,666 172
-------- ------- -------
Net cash provided by financing activities... 24,962 1,581 69
-------- ------- -------
NET INCREASE IN CASH............................... 3,837 1,670 789
CASH, BEGINNING OF PERIOD.......................... -- 3,837 5,507
-------- ------- -------
CASH, END OF PERIOD................................ $ 3,837 $ 5,507 $ 6,296
======== ======= =======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Business acquired:
Fair value of assets acquired.................... $ 34,599 $ -- $ --
Liabilities assumed.............................. (14,599) -- --
-------- ------- -------
Cash paid for business acquired................... $ 20,000 $ -- $ --
======== ======= =======
Interest paid..................................... $ 31 $ 26 $ 16
======== ======= =======
NON-CASH INVESTING AND FINANCING ACTIVITIES--
Equipment acquired under capital lease
obligations...................................... $ -- $ 57 $ 86
======== ======= =======
</TABLE>
See notes to consolidated financial statements.
F-40
<PAGE>
THE KATHARINE GIBBS SCHOOLS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE PERIOD FROM MARCH 7, 1994 TO DECEMBER 31, 1994, AND
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1996
(DOLLARS IN THOUSANDS)
1. DESCRIPTION OF THE BUSINESS AND GENERAL
The Katharine Gibbs Schools, Inc. (which together with its subsidiaries is
herein referred to as the "Company") is headquartered in New York, New York,
and has wholly-owned subsidiary campuses in New York, New York; Melville, New
York; Boston, Massachusetts; Montclair, New Jersey; Piscataway, New Jersey;
Norwalk, Connecticut; and Providence, Rhode Island. The schools are private
post-secondary vocational schools which are engaged in the instruction of
business career education programs leading towards degrees or certificates of
completion in secretarial arts, business administration, hospitality
management, and hotel and restaurant management.
On March 7, 1994, the operating assets and liabilities of the Company were
acquired from Phillips Colleges, Inc. by The Katharine Gibbs Schools, Inc.
(formerly K-III KG Holdings Corporation), a wholly-owned subsidiary of K-III
Communications Corporation (the ultimate parent company, "K-III").
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation--The consolidated financial statements include
the accounts of The Katharine Gibbs Schools, Inc. and its subsidiaries. All
significant intercompany transactions and balances have been eliminated in
consolidation.
Concentration of Credit Risk--The Company extends unsecured credit for
tuition to a significant portion of the students who are in attendance at the
schools. A substantial portion of credit extended to students is repaid
through the student's participation in Federally funded financial aid
programs. The Company generally completes and approves the financial aid
packet of each student who qualifies for financial aid prior to the student's
beginning of class in an effort to enhance the collectibility of its unsecured
credit. Transfers of funds from the financial aid programs to the Company are
made in accordance with the United States Department of Education (the "DOE")
requirements.
The Company participates in various Federal student financial aid programs
under Title IV of the Higher Education Act of 1965, as amended ("Title IV
Programs"). Approximately 46%, 62% and 63% of the Company's net revenue was
collected from funds distributed under these programs during the period from
March 7, 1994 to December 31, 1994, and for the years ended December 31, 1995
and 1996, respectively.
Investment in Perkins Loan Program, Net--The Company participates in the
Perkins Loan program in order to provide continuing long-term, low interest
loans to qualifying students in need of financial assistance. Perkins loans
are available on the basis of student financial need and are subject to the
availability of Perkins loan funds at the institution. There is a 25%
institutional matching requirement for Perkins loans. The Company carries its
investment at cost, net of an allowance of $19 at December 31, 1995 and 1996.
Marketing and Advertising Costs--Marketing and advertising costs are
expensed as incurred. Marketing and advertising costs included in selling,
general and administrative expenses were $2,849, $4,282 and $5,687 for the
period from March 7, 1994 to December 31, 1994, and for the years ended
December 31, 1995 and 1996, respectively.
Property and Equipment, Net--Property and equipment are stated at cost less
accumulated depreciation and amortization. Depreciation and amortization are
recognized utilizing the straight-line method over their useful
F-41
<PAGE>
THE KATHARINE GIBBS SCHOOLS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE PERIOD FROM MARCH 7, 1994 TO DECEMBER 31, 1994, AND
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1996
(DOLLARS IN THOUSANDS)
lives. Leasehold improvements are amortized over their useful lives or lease
term, whichever is shorter. Improvements are capitalized while maintenance and
repairs are expensed as incurred. The estimated useful lives and cost basis of
property and equipment at December 31, 1995 and 1996, are as follows:
<TABLE>
<CAPTION>
1995 1996 LIFE
------ ------ ---------------
<S> <C> <C> <C>
Building................................... $ 608 $ 633 31.5 years
Furniture, fixtures and equipment.......... 4,040 5,194 5 to 7 years
Leasehold improvements..................... 844 908 1.5 to 11 years
------ ------
Total at cost.............................. 5,492 6,735
Less accumulated depreciation and
amortization.............................. 1,497 2,653
------ ------
$3,995 $4,082
====== ======
</TABLE>
The cost of equipment acquired under capital leases was $256 and $143 at
December 31, 1995 and 1996, respectively. Accumulated amortization of
equipment acquired under capital leases was $138 and $18 at December 31, 1995
and 1996, respectively.
Intangible Assets--Intangible assets include the excess of purchase price
over net assets acquired resulting from the business acquisition described in
Note 1. Intangible assets are being amortized on a straight-line basis over
their estimated useful life. At December 31, 1995 and 1996, the cost basis and
useful lives of intangible assets consist of the following:
<TABLE>
<CAPTION>
1995 1996 LIFE
------- ------- --------
<S> <C> <C> <C>
Excess of purchase price over net assets
acquired...................................... $ 9,464 $ 9,464 40 years
Trademarks..................................... 6,569 6,569 40 years
Non-compete agreement.......................... 1,000 1,000 2 years
Curriculum..................................... 7,038 7,038 12 years
------- -------
24,071 24,071
Less accumulated amortization.................. 2,707 3,786
------- -------
$21,364 $20,285
======= =======
</TABLE>
The recoverability of the carrying values of the excess of the purchase
price over the net assets acquired and other intangible assets is evaluated
quarterly to determine if an impairment in value has occurred. An impairment
in value will be considered to have occurred when it is determined that the
undiscounted future operating cash flows generated by the acquired business is
not sufficient to recover the carrying values of such intangible assets. If it
has been determined that an impairment in value has occurred, the excess of
the purchase price over the net assets acquired and other intangible assets
would be written down to an amount which will be equivalent to the present
value of the future operating cash flows to be generated by the acquired
business.
Revenue Recognition--Revenue is derived primarily from courses taught at the
schools. Tuition revenue is recognized ratably over the length of the
applicable course. Textbook sales and other revenues are recognized as
services are performed. If a student withdraws, future revenue would be
reduced by the amount of refund due to the student. Refunds are calculated in
accordance with Federal, state and accrediting agency standards.
F-42
<PAGE>
THE KATHARINE GIBBS SCHOOLS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE PERIOD FROM MARCH 7, 1994 TO DECEMBER 31, 1994, AND
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1996
(DOLLARS IN THOUSANDS)
Deferred Rent Obligations--Certain of the schools' facility leases include
rental concessions, as defined in the various lease agreements. The Company
recognizes rent expense on a straight-line basis over the terms of the various
leases, ranging from 7 to 11 years. Rent expense recognized differs from the
actual cash payments required to be made under these lease agreements.
Use of Estimates--The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make certain
estimates and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reported periods. Actual results may differ from these
estimates. In 1996, the Company recorded an adjustment to reduce certain
liabilities established in prior periods, which decreased net loss by
approximately $341.
Fair Value of Financial Instruments--The fair value of financial instruments
approximates carrying value.
3. INCOME TAXES
The results of operations of the Company are included in the consolidated
Federal income tax return of K-III. The income tax provision has been computed
as if the Company filed a separate return. At December 31, 1996, the Company,
on a stand-alone basis, had aggregate net operating loss carryforwards of
approximately $4,200 for Federal and state income taxes. As a result of the
disposition of the Company on May 31, 1997, as discussed in Note 8, K-III will
retain all net operating losses up to the date of disposition. Deferred income
taxes reflect the net tax effects of temporary differences between the
carrying amounts of assets and liabilities for financial reporting purposes
and the amounts for income tax purposes.
The components of the deferred income tax assets consist of the following at
December 31, 1995 and 1996:
<TABLE>
<CAPTION>
1995 1996
----- ------
<S> <C> <C>
Allowance for doubtful accounts receivable........................ $ 212 $ 195
Book depreciation over tax depreciation........................... 6 136
Deferred rent obligations......................................... 292 352
Intangible assets................................................. 190 99
Operating loss carryforwards...................................... 1,200 1,675
Other............................................................. 493 250
----- ------
Total deferred tax assets....................................... 2,393 2,707
Less valuation allowance.......................................... 2,393 2,707
----- ------
Total............................................................. $ -- $ --
===== ======
</TABLE>
4. CAPITAL LEASE OBLIGATIONS
The Company leases certain equipment under capital leases. The Company
incurred interest expense related to these capital leases of $31, $26 and $16
for the period from March 7, 1994 to December 31, 1994, and for the years
ended December 31, 1995 and 1996, respectively.
F-43
<PAGE>
THE KATHARINE GIBBS SCHOOLS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE PERIOD FROM MARCH 7, 1994 TO DECEMBER 31, 1994, AND
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1996
(DOLLARS IN THOUSANDS)
The future minimum payments on the obligations under capital leases as of
December 31, 1996, are as follows:
<TABLE>
<S> <C>
1997................................................................ $ 37
1998................................................................ 37
1999................................................................ 37
2000................................................................ 31
2001................................................................ 5
----
147
Less portion applicable to interest at rates ranging from 5.18
percent to 10.38 percent........................................... 29
----
Principal obligations under capital leases.......................... 118
Less current portion................................................ 29
----
$ 89
====
</TABLE>
5. COMMITMENTS AND CONTINGENCIES
Operating Leases--The Company rents seven of its eight administrative and
classroom facilities and certain equipment under noncancellable operating
leases. The facility leases require the Company to make monthly payments
covering rent, taxes, insurance and maintenance costs and expire at various
times through 2007. Rent expense under operating leases exclusive of taxes,
insurance and maintenance of the facilities and equipment for the period from
March 7, 1994 to December 31, 1994, and for the years ended December 31, 1995
and 1996, was approximately $2,804, $3,418 and $4,098, respectively.
Future minimum lease payments under these noncancellable operating leases as
of December 31, 1996, are approximately as follows:
<TABLE>
<S> <C>
1997............................. $ 3,646
1998............................. 3,590
1999............................. 3,611
2000............................. 3,690
2001............................. 3,295
2002 and thereafter.............. 7,441
-------
$25,273
=======
</TABLE>
Litigation--The Company is subject to occasional lawsuits, investigations
and claims arising out of the normal conduct of its business. Management does
not believe the outcome of any of these legal actions and claims will have a
material adverse impact on the Company's consolidated financial statements.
Regulatory--Each of the Company's schools has Federal financial assistance
programs which are subject to ongoing program reviews by the DOE, Title IV
program audits by external auditors and state program audits by state
agencies. Any regulatory violation could be the basis for the initiation of a
suspension, limitation or termination proceeding against the Company. To
minimize risks associated with noncompliance, the Company conducts periodic
reviews of its schools' financial conditions. Changes in DOE funding of
Federal student financial aid programs could impact the Company's ability to
attract students.
F-44
<PAGE>
THE KATHARINE GIBBS SCHOOLS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONCLUDED)
FOR THE PERIOD FROM MARCH 7, 1994 TO DECEMBER 31, 1994, AND
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1996
(DOLLARS IN THOUSANDS)
Each of the Company's schools is also required to meet certain financial and
other standards in order to qualify to participate in Title IV programs. These
include maintaining an acid test ratio (defined as cash, cash equivalents and
current accounts receivable to current liabilities) of at least 1:1, having a
positive tangible net worth at the end of each fiscal year, collecting less
than 85% of its education revenues from Title IV funds on an annual basis, not
having cumulative net operating losses during its two most recent fiscal years
that result in a decline of more than 10% of the individual school's tangible
net worth at the beginning of that two-year period, and not having cohort
default rates on Federal student loans that equal or exceed 25% for three
consecutive federal fiscal years, amongst others. At December 31, 1996, each
of the Company's schools was in compliance with such requirements.
6. TRANSACTIONS WITH PARENT COMPANY
The payable to K-III Communications Corporation includes a note payable to
K-III of $13,865 and $11,413 as of December 31, 1995 and 1996, respectively.
Interest accrues on the note payable at K-III's weighted average borrowing
rate. Interest expense of $1,233, $1,368 and $1,022 on the note payable to K-
III has been recorded for the period from March 7, 1994 to December 31, 1994,
and for the years ended December 31, 1995 and 1996, respectively. The note
payable to K-III is payable on demand, however, K-III has no intention of
demanding payment in the next twelve months. The Company pays K-III management
fees for costs and expenses incurred by K-III on behalf of the Company for
certain services, including treasury, consulting, insurance, tax, financing
and other services.
7. EMPLOYEE BENEFIT PLANS
The Company participates in a K-III contributory profit sharing plan,
established pursuant to the provisions of Section 401(k) of the Internal
Revenue Code, that provides retirement benefits for eligible employees of the
Company. This plan requires matching contributions to eligible employees. The
Company's matching contributions were $0, $12, and $23 for the period from
March 7, 1994 to December 31, 1994, and for the years ended December 31, 1995
and 1996, respectively.
8. SUBSEQUENT EVENTS
On May 31, 1997, K-III sold 100% of the outstanding shares of capital stock
of the Company to Career Education Corporation ("CEC") for approximately
$20,000. The sales price is subject to certain adjustments. In connection with
the sale, K-III also entered into a covenant not-to-compete agreement with CEC
for proceeds totaling $7,000. The covenant not-to-compete restricts K-III's
ability to own or operate certain types of post-secondary vocational schools
for a period of five years.
* * * * * *
F-45
<PAGE>
THE KATHARINE GIBBS SCHOOLS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
JUNE 30, 1996, AND MAY 31, 1997
(UNAUDITED, DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
JUNE
30, MAY 31,
1996 1997
------- -------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash....................................................... $ 5,992 $ 1,157
Accounts receivable, net of allowance for doubtful accounts
of approximately $668 and $607 at June 30, 1996, and May
31, 1997, respectively.................................... 1,495 2,987
Prepaid expenses and other current assets.................. 617 75
------- -------
Total current assets..................................... 8,104 4,219
------- -------
PROPERTY AND EQUIPMENT, net.................................. 4,082 3,901
------- -------
OTHER ASSETS:
Intangibles, net........................................... 20,751 19,830
Other noncurrent assets.................................... 259 60
------- -------
Total other assets....................................... 21,010 19,890
------- -------
TOTAL ASSETS................................................. $33,196 $28,010
======= =======
LIABILITIES AND SHAREHOLDER'S DEFICIENCY
CURRENT LIABILITIES:
Current maturities of capital lease obligations............ $ 68 $ 83
Accounts payable........................................... 934 282
Accrued expenses........................................... 2,354 1,782
Deferred tuition revenue................................... 2,558 3,772
------- -------
Total current liabilities................................ 5,914 5,919
------- -------
NON-CURRENT LIABILITIES, net of current portion.............. 767 1,069
------- -------
PAYABLE TO K-III COMMUNICATIONS CORPORATION.................. 29,754 23,170
------- -------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDER'S DEFICIENCY:
Common stock, $0.01 par value; 1,000 shares authorized,
issued and outstanding at June 30, 1996, and May 31, 1997. -- --
Accumulated deficit........................................ (3,239) (2,148)
------- -------
Total shareholder's deficiency........................... (3,239) (2,148)
------- -------
TOTAL LIABILITIES AND SHAREHOLDER'S DEFICIENCY............... $33,196 $28,010
======= =======
</TABLE>
The accompanying notes are an integral part of these statements.
F-46
<PAGE>
THE KATHARINE GIBBS SCHOOLS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1996, AND
FOR THE FIVE MONTHS ENDED MAY 31, 1997
(UNAUDITED, DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
JUNE 30, 1996 MAY 31, 1997
------------- ------------
<S> <C> <C>
REVENUE:
Tuition and registration fees, net................ $12,179 $11,606
Other, net........................................ 1,316 1,222
------- -------
Total net revenue............................... 13,495 12,828
------- -------
OPERATING COSTS AND EXPENSES:
Instruction....................................... 3,247 3,029
Selling, general and administrative............... 9,261 8,028
Depreciation and amortization..................... 1,199 901
Management fees charged by K-III Communications
Corporation...................................... 82 15
------- -------
Total operating expenses........................ 13,789 11,973
------- -------
Income (loss) from operations................... (294) 855
------- -------
INTEREST EXPENSE.................................... 509 242
------- -------
Income (loss) before provision for income taxes. (803) 613
PROVISION FOR INCOME TAXES.......................... -- --
------- -------
NET INCOME (LOSS)................................... $ (803) $ 613
======= =======
</TABLE>
The accompanying notes are an integral part of these statements.
F-47
<PAGE>
THE KATHARINE GIBBS SCHOOLS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1996, AND
FOR THE FIVE MONTHS ENDED MAY 31, 1997
(UNAUDITED, DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
JUNE 30, MAY 31,
1996 1997
-------- -------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES........................ $(1,436) $(1,057)
-------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment, net.................. (542) (134)
-------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase (decrease) in Payable to K-III Communications
Corporation.............................................. 2,464 (3,948)
-------- -------
NET INCREASE (DECREASE) IN CASH............................. 486 (5,139)
CASH, beginning of period................................... 5,506 6,296
-------- -------
CASH, end of period......................................... $ 5,992 $ 1,157
======== =======
NONCASH INVESTING AND FINANCING ACTIVITIES:
Capital leases entered into for the purchase of equipment. $ 34 $ 158
======== =======
</TABLE>
The accompanying notes are an integral part of these statements.
F-48
<PAGE>
THE KATHARINE GIBBS SCHOOLS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1996, AND MAY 31, 1997
1. BASIS OF PRESENTATION
The accompanying unaudited condensed financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and Article 10 of Regulation S-X. Accordingly, they do
not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. In the
opinion of management, all adjustments (consisting only of normal recurring
adjustments) considered necessary for a fair presentation of financial
position and the results of operations and cash flows have been included, and
the disclosures made are adequate to prevent the information presented from
being misleading. Operating results for the six months ended June 30, 1996,
and the five months ended May 31, 1997, are not necessarily indicative of the
results that may be expected for the fiscal years ended December 31, 1996 and
1997. These financial statements should be read in conjunction with, and have
been prepared in conformity with the accounting principles reflected in the
financial statements and related notes of The Katharine Gibbs Schools, Inc.
and Subsidiaries (the "Company") as of and for the year ended December 31,
1996.
2. SUBSEQUENT EVENTS
On May 31, 1997, K-III Communications Corporation ("K-III"), the sole
shareholder of the Company, sold 100% of the outstanding shares of capital
stock of the Company to Career Education Corporation ("CEC") for approximately
$20,000,000. The sales price is subject to certain adjustments. In connection
with the sale, K-III also entered into a covenant not-to-compete agreement
with CEC for proceeds totaling $7,000,000. The covenant not-to-compete
restricts K-III's ability to own or operate certain types of postsecondary
vocational schools for five years.
3. USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make certain estimates
and assumptions that affect the reported amounts of assets and liabilities and
the disclosure of contingent liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reported period. Actual results could differ from these estimates.
F-49
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
The Board of Directors and Stockholders
IAMD, Limited and Subsidiaries
Chicago, Illinois
We have audited the accompanying consolidated balance sheet of IAMD, LIMITED
AND SUBSIDIARIES as of June 30, 1996, and the related consolidated statements
of operations, stockholders' investment and cash flows for the year then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of IAMD, Limited and Subsidiaries as of June 30, 1996, and the consolidated
results of its operations and cash flows for the year then ended, in
conformity with generally accepted accounting principles.
As explained in Note 9 to the consolidated financial statements, the Company
has given retroactive effect to the change in accounting for deferred
marketing costs.
Gleeson, Sklar, Sawyers & Cumpata LLP
Skokie, Illinois
August 16, 1996
(except for Notes 4, 8 and 9, as to which the date is October 23, 1997)
F-50
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders of
IAMD, Limited and Subsidiaries:
We have audited the accompanying consolidated balance sheet of IAMD, LIMITED
(an Illinois Corporation) AND SUBSIDIARIES as of June 30, 1997, and the
related consolidated statements of operations, stockholders' investment and
cash flows for the year then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all materials respects, the financial position of IAMD, Limited and
Subsidiaries as of June 30, 1997, and the results of their operations and
their cash flows for the year ended, in conformity with generally accepted
accounting principles.
Arthur Andersen LLP
Chicago, Illinois
September 16, 1997
F-51
<PAGE>
IAMD, LIMITED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 30, 1996 AND 1997
<TABLE>
<CAPTION>
1996 1997
----------- -----------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash............................................... $ 407,432 $ 25,869
Receivables--
Students, less allowance for doubtful accounts of
approximately $83,500 and $56,000 in 1996 and
1997, respectively.............................. 203,274 195,384
Other............................................ 61,136 4,625
Refundable income taxes............................ -- 180,749
Inventories........................................ 43,751 59,765
Prepaid expenses and other current assets.......... 69,277 30,445
Deferred income taxes.............................. 183,800 215,927
----------- -----------
Total current assets........................... 968,670 712,764
----------- -----------
PROPERTY AND EQUIPMENT, net.......................... 658,389 1,407,511
----------- -----------
OTHER ASSETS:
Deposits and other assets.......................... 45,889 28,450
Cash surrender value of life insurance policy...... -- 35,869
Deferred income tax assets......................... 48,600 297,549
----------- -----------
Total other assets............................. 94,489 361,868
----------- -----------
TOTAL ASSETS......................................... $ 1,721,548 $ 2,482,143
=========== ===========
LIABILITIES AND STOCKHOLDERS' INVESTMENT
CURRENT LIABILITIES:
Current maturities of long-term debt............... $ 227,811 $ 1,091,086
Accounts payable................................... 145,549 125,439
Accrued expenses................................... 120,692 181,712
Student deposits................................... 592,252 934,135
----------- -----------
Total current liabilities...................... 1,086,304 2,332,372
----------- -----------
LONG-TERM LIABILITIES:
Long-term debt, net of current maturities shown
above............................................. 718,360 769,367
Deferred rent...................................... 174,980 258,331
----------- -----------
Total long-term liabilities.................... 893,340 1,027,698
----------- -----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' INVESTMENT:
Preferred stock, $100 par value; 1,450 shares
authorized; 1,268 shares issued and outstanding... 126,885 126,885
Common stock, no par value; 27,300 shares
authorized; 20,360 shares issued and outstanding.. 848,220 848,220
Stockholders' notes receivable..................... (143,850) --
Accumulated deficit................................ (1,089,351) (1,853,032)
----------- -----------
Total stockholders' investment................. (258,096) (877,927)
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' INVESTMENT....... $ 1,721,548 $ 2,482,143
=========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-52
<PAGE>
IAMD, LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED JUNE 30, 1996 AND 1997
<TABLE>
<CAPTION>
1996 1997
---------- -----------
<S> <C> <C>
REVENUE:
Tuition and registration fees, net.................. $6,192,335 $ 6,849,785
Other, net.......................................... 152,891 642,900
---------- -----------
Total net revenue................................. 6,345,226 7,492,685
---------- -----------
OPERATING EXPENSES:
Educational services and facilities................. 4,137,733 4,523,813
General and administrative.......................... 1,954,283 2,994,915
Depreciation and amortization....................... 304,339 679,318
---------- -----------
Total operating expenses.......................... 6,396,355 8,198,046
---------- -----------
Loss from operations.............................. (51,129) (705,361)
OTHER EXPENSES:
Interest expense.................................... 95,072 288,301
Loss on sale of property............................ -- 15,769
---------- -----------
Total other expenses.............................. 95,072 304,070
---------- -----------
Loss before benefit for income taxes.............. (146,201) (1,009,431)
BENEFIT FOR INCOME TAXES.............................. (53,735) (389,600)
---------- -----------
NET LOSS.............................................. $ (92,466) $ (619,831)
========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-53
<PAGE>
IAMD, LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JUNE 30, 1996 AND 1997
<TABLE>
<CAPTION>
1996 1997
--------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss............................................. $ (92,466) $ (619,831)
Adjustments to reconcile net loss to net cash
provided by operating activities--
Depreciation and amortization...................... 312,545 679,318
Deferred income taxes.............................. (78,797) (281,076)
Loss on sale of property........................... -- 15,769
Changes in operating assets and liabilities--
Receivables, net................................. (16,966) 64,401
Refundable income taxes.......................... -- (180,749)
Inventories...................................... 12,840 (16,014)
Prepaid expenses and other current assets........ (22,734) 38,832
Deposits and other assets........................ (17,439) 17,439
Cash surrender value of life insurance policy.... -- (35,869)
Accounts payable................................. 46,030 (20,110)
Income taxes payable............................. (19,730) --
Accrued expenses................................. 54,272 61,020
Student deposits................................. 177,840 341,883
Deferred rent.................................... -- 83,351
--------- -----------
Net cash provided by operating activities...... 355,395 148,364
--------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment, net............. (103,629) (1,418,111)
--------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under long-term debt...................... 30,000 1,417,904
Payments on long-term debt........................... (251,028) (529,720)
--------- -----------
Net cash (used in) provided by financing
activities.................................... (221,028) 888,184
--------- -----------
NET INCREASE (DECREASE) IN CASH........................ 30,738 (381,563)
CASH, BEGINNING OF YEAR................................ 376,694 407,432
--------- -----------
CASH, END OF YEAR...................................... $ 407,432 $ 25,869
========= ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for--
Interest........................................... $ 85,428 $ 261,143
Taxes.............................................. 85,218 7,669
========= ===========
Noncash financing activities--
Acquisition of property and equipment in exchange
for issuance of long term debt.................... $ 101,164 $ --
Acquisition of machinery and equipment under
capital leases.................................... -- 26,098
Distribution of stockholders' notes receivable..... -- 143,850
========= ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-54
<PAGE>
IAMD, LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' INVESTMENT
FOR THE YEARS ENDED JUNE 30, 1996 AND 1997
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK
---------------------- ----------------------- STOCKHOLDERS'
1,450 SHARES $100 27,300 SHARES NO NOTES ACCUMULATED
AUTHORIZED PAR VALUE AUTHORIZED PAR VALUE RECEIVABLE DEFICIT TOTAL
------------ --------- ------------- --------- ------------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, June 30, 1995.. 1,268 $126,885 20,360 $848,220 $(143,850) $ (996,885) $(165,630)
Net loss............... -- -- -- -- -- (92,466) (92,466)
----- -------- ------ -------- --------- ----------- ---------
BALANCE, June 30, 1996.. 1,268 126,885 20,360 848,220 (143,850) (1,089,351) (258,096)
Stockholders'
distribution.......... -- -- -- -- 143,850 (143,850) --
Net loss............... -- -- -- -- -- (619,831) (619,831)
----- -------- ------ -------- --------- ----------- ---------
BALANCE, June 30, 1997.. 1,268 $126,885 20,360 $848,220 $ -- $(1,853,032) $(877,927)
===== ======== ====== ======== ========= =========== =========
</TABLE>
The accompanying notes are an integral part of these statements.
F-55
<PAGE>
IAMD, LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1996 AND 1997
1. DESCRIPTION OF THE BUSINESS
IAMD, Limited and Subsidiaries ("International Academy of Merchandising and
Design" or the "Company") is headquartered in Chicago, Illinois, and has
wholly owned subsidiaries which own and operate campuses in Chicago, Illinois,
and Tampa, Florida, and bookstores at each campus. These private,
postsecondary vocational schools are engaged in the instruction of
merchandising and design programs leading toward associate and baccalaureate
degrees in the fields of merchandising management, fashion design, interior
design, advertising design, interactive media and computer graphics.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries. All significant intercompany transactions
and balances have been eliminated.
CONCENTRATION OF CREDIT RISK
The Company extends unsecured credit for tuition to a significant number of
students who are in attendance at the schools. A substantial portion of credit
extended to students is repaid through the students' participation in
federally funded financial aid programs. The Company generally completes and
has approved the financial aid packet of each student who qualifies for
financial aid prior to the student beginning class in an effort to enhance the
collectibility of its unsecured credit. Transfers of funds from the financial
aid programs to the Company are made in accordance with the United States
Department of Education (the "DOE") requirements.
The Company participates in various federal student financial aid programs
under Title IV of the Higher Education Act of 1965 ("Title IV Programs"), as
amended. Approximately 68% and 75% of the Company's net revenue for the years
ended June 30, 1996 and 1997 was collected from funds distributed under these
programs.
RESTRICTED CASH
Cash received from the U.S. Government under various student aid grant and
loan programs is considered to be restricted. Restricted cash is held in
separate bank accounts and does not become available for general use by the
Company until the financial aid is credited to the accounts of students and
the cash is transferred to an operating account. As of June 30, 1997, there
was no restricted cash.
INVENTORIES
Inventories consisting principally of program materials, books and supplies
are stated at the lower of cost, determined on a first-in, first-out basis, or
market.
F-56
<PAGE>
IAMD, LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JUNE 30, 1996 AND 1997
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation and amortization are
recognized by utilizing the straight-line method over their useful lives.
Leasehold improvements and assets recorded under capital leases are amortized
on a straight-line basis over their estimated useful lives or lease term,
whichever is shorter. Maintenance, repairs, minor renewals, and betterments
are expensed as incurred; major improvements are capitalized. The estimated
useful lives and cost basis of property and equipment at June 30, 1996 and
1997, are as follows:
<TABLE>
<CAPTION>
ASSET DESCRIPTION 1996 1997 LIFE
----------------- ---------- ---------- ----------
<S> <C> <C> <C>
Classroom equipment, courseware and other
instructional materials................. $2,037,766 $3,132,730 3-13 years
Equipment and leasehold improvements..... 83,492 436,313 5 years
---------- ----------
2,121,258 3,569,043
Less--accumulated depreciation and
amortization............................ 1,462,869 2,161,532
---------- ----------
Property and equipment, net.............. $ 658,389 $1,407,511
========== ==========
</TABLE>
The gross cost of assets recorded under capital leases included above
amounted to approximately $81,000 at June 30, 1997.
DEFERRED RENT OBLIGATIONS
Certain of the Company's schools' facility leases included rental
concessions, as defined in the various lease agreements. The Company
recognizes rent expense on a straight-line basis over the terms of the various
leases, ranging from 7 to 10 years. Rent expense recognized differs from the
actual cash payments required to be made under these lease agreements.
REVENUE RECOGNITION
Revenue is derived primarily from courses taught at the schools. Tuition
revenue is recognized on a straight-line basis over the length of the
applicable course. Textbook sales and other revenues are recognized as
services are performed. If a student withdraws, future revenue is reduced by
the amount of the refund due to the student. Refunds are calculated in
accordance with federal, state and accrediting agency standards. Student
deposits represent payments received in excess of amounts billed and is
reflected as a current liability on the balance sheet.
USE OF ESTIMATES
The preparation of financial statements, in conformity with Generally
Accepted Accounting Principles, requires management to make certain estimates
and assumptions that affect the reported amounts of assets and liabilities and
the disclosure of contingent liabilities at the date of the financial
statements and reported amounts of revenues and expenses during the reported
period. Actual results could differ from those estimates.
FINANCIAL INSTRUMENTS
The carrying value for current assets and liabilities reasonably
approximates their fair value due to their short maturity periods. Cash
deposits at individual banks are insured by the Federal Deposit Insurance
Corporation up to $100,000. The carrying value of the Company's debt
obligations reasonably approximates fair value as the stated interest rate
approximates current market interest rates of debt with similar terms.
F-57
<PAGE>
IAMD, LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JUNE 30, 1996 AND 1997
3. LONG-TERM DEBT
As of June 30, 1996 and 1997, debt of the Company is secured by inventory,
chattel paper, accounts receivable, equipment and fixtures and is also
guaranteed by the owners of IAMD, Limited and Subsidiaries and consists of the
following:
<TABLE>
<CAPTION>
1996 1997
-------- ----------
<S> <C> <C>
Notes payable to a bank, interest at 1% above the prime
rate due August, 1997
(8.25% and 8.5% at June 30, 1996 and 1997, respectively).. $400,000 $ 700,000
Bank note payable in monthly principal and interest in-
stallments of $2,104,
through December 1998, bearing interest at 9.25%.......... 55,973 36,919
Bank note payable in monthly principal and interest in-
stallments of $12,213,
through April 1998, bearing interest at 9.25%............. 256,128 137,890
Bank note payable in monthly principal and interest in-
stallments of $32,984,
through September 1999, bearing interest at 9.25%......... -- 823,638
Bank note payable in monthly principal and interest in-
stallments of $4,873,
through March 1999, bearing interest at 16.21%............ 129,080 95,807
Bank note payable in monthly principal and interest in-
stallments of $805,
through March 1999, bearing interest at 16.21%............ 21,338 15,838
Bank note payable in monthly principal and interest in-
stallments of $1,004
through June 2000, bearing interest at 18.87%............. 33,661 --
Bank note payable in monthly principal and interest in-
stallments of $1,356
through March 1997, bearing interest at 13.85%............ 10,647 --
Capital lease obligations-interest ranging from 10.6% to
15.9%, expiring
through 1999.............................................. 39,344 50,361
-------- ----------
946,171 1,860,453
Less-Current portion....................................... 227,811 1,091,086
-------- ----------
$718,360 $ 769,367
======== ==========
</TABLE>
At June 30, 1997, future principal payments of long-term debt mature as
follows:
<TABLE>
<S> <C>
1998.............................. $1,091,086
1999.............................. 769,367
----------
$1,860,453
==========
</TABLE>
LINE OF CREDIT
The line of credit consists of a note payable to a bank collateralized by
substantially all the Company's assets, bearing interest at 1% above prime
rate (8.25% and 8.5% at June 30, 1996 and 1997, respectively). The maximum
permitted borrowings under the line of credit at June 30, 1996 and 1997 were
$400,000 and $700,000, respectively. Repayment of $400,000 of the line is due
in August 1997, and in the event of a sale the Company, $300,000 is payable
immediately upon the sale. All outstanding debt of the Company was repaid in
connection with the sale of the Company (Note 8).
F-58
<PAGE>
IAMD, LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JUNE 30, 1996 AND 1997
4. STOCKHOLDERS' INVESTMENT
PREFERRED STOCK
Holders of preferred stock are entitled to cumulative dividends at a rate of
18% but do not retain any voting rights. The Company may call preferred stock
at any time after October 1992, at par plus accumulated dividends in arrears.
As of June 30, 1996 and 1997, the accumulated dividends in arrears totaled
approximately $114,000 and $137,000, respectively.
STOCKHOLDERS' NOTES RECEIVABLE
In 1991, the Company issued notes receivable totaling $143,850 to certain
stockholders. The notes bear interest at 8.5% and were to be repaid upon
demand. These notes receivable were transferred into escrow during 1997 in
connection with the sale of the Company. This transaction was treated as a
dividend to the stockholders of the Company. The amount is reflected as an
increase in accumulated deficit during 1997.
5. COMMITMENTS AND CONTINGENCIES
REGULATORY
The Company has federal financial assistance programs which are subject to
ongoing program reviews by the Department of Education (the "DOE") and Title
IV program audits by external auditors. Based upon the results of such audits
and reviews, the Company may have to repay funds previously granted to its
students through loans and grants, and pay interest, fines and/or penalties.
Management believes such amounts would be minimal and does not expect them to
have a material effect on the results of operations of the Company.
The Company's institutions are required to meet certain financial and other
standards in order to qualify to participate in Title IV programs. These
include maintaining an acid test ratio (defined as cash, cash equivalents, and
current accounts receivable to current liabilities) of at least 1:1, having a
positive tangible net worth at the end of each fiscal year, not having
cumulative net operating losses during the two most recent fiscal years that
result in a decline of more than 10% of the Company's tangible net worth at
the beginning of that two-year period, collecting less than 85% of its
revenues from Title IV funds on an annual basis, and not having cohort default
rates on federal student loans that equal or exceed 25% for three consecutive
federal fiscal years, among others. At June 30, 1997, the Company's
institutions were not in compliance with some of the regulatory requirements.
OPERATING LEASE COMMITMENTS
The Company leases its administrative and classroom facilities and certain
equipment under noncancellable operating leases which expire at various times
through 2006. The facility leases require the Company to make monthly payments
covering rent, taxes, insurance and maintenance costs. Rent expense, exclusive
of taxes, insurance, and maintenance of the facilities and equipment for the
years ended June 30, 1996 and 1997, was $738,773 and $1,136,889, respectively.
Future minimum lease payments under these operating leases as of June 30,
1997, are as follows:
<TABLE>
<S> <C>
Remainder of 1997........................... $ 639,598
1998........................................ 1,158,031
1999........................................ 1,186,389
2000........................................ 1,219,145
2001........................................ 1,254,001
Thereafter.................................. 2,937,869
----------
Total..................................... $8,395,033
==========
</TABLE>
F-59
<PAGE>
IAMD, LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JUNE 30, 1996 AND 1997
LITIGATION
The Company is subject to occasional lawsuits, investigations and claims
arising out of the normal conduct of its business. At June 30, 1997, the
Company is not a party to any material legal action.
6. INCOME TAXES
The Company files a consolidated tax return. The Company provides for
deferred taxes under the asset and liability method for income taxes. Under
this method, deferred income taxes are recognized for the tax consequences of
"temporary differences" by applying enacted statutory tax rates applicable to
future years to differences between the financial statement carrying amounts
and the tax basis of existing assets and liabilities.
The benefit for income taxes for the years ended June 30, 1996 and 1997,
included in the accompanying statements of income consists of the following:
<TABLE>
<CAPTION>
1996 1997
-------- ---------
<S> <C> <C>
Current--
Federal........................................... $ 10,255 $ (68,898)
State and local................................... 14,807 (39,626)
-------- ---------
Total current................................... 25,062 (108,524)
-------- ---------
Deferred--
Federal........................................... (66,977) (238,914)
State and local................................... (11,820) (42,162)
-------- ---------
Total deferred.................................. (78,797) (281,076)
-------- ---------
Total provision (benefit) for income taxes...... $(53,735) $(389,600)
======== =========
</TABLE>
A reconciliation of the statutory U.S. federal income tax rate to the
effective income tax rate for the years ended June 30, 1996 and 1997, is as
follows:
<TABLE>
<CAPTION>
1996 1997
---- ----
<S> <C> <C>
Statutory U.S. federal income tax rate....................... 34.0% 34.0%
State income taxes, net of federal benefit................... 4.6 4.6
Permanent difference and other............................... (1.9) --
---- ----
Effective income tax rate.................................... 36.7% 38.6%
==== ====
</TABLE>
F-60
<PAGE>
IAMD, LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JUNE 30, 1996 AND 1997
At June 30, 1996 and 1997, deferred income taxes of the Company consist of
the following:
<TABLE>
<CAPTION>
1996 1997
-------- --------
<S> <C> <C>
Deferred tax assets--
Net operating loss carryforward..................... $ -- $204,000
Recruiting and marketing costs...................... 154,000 225,000
Deferred rent....................................... 59,400 103,000
Bad debt allowance.................................. 33,400 23,000
Other............................................... 200 7,976
-------- --------
Total deferred tax assets......................... 247,000 562,976
Deferred tax liabilities--
Depreciation........................................ (10,800) (10,800)
Other............................................... (3,800) (38,700)
-------- --------
Total deferred tax liabilities.................... (14,600) (49,500)
-------- --------
Net deferred tax assets........................... $232,400 $513,476
======== ========
</TABLE>
Realization of deferred tax assets associated with the Company's future
deductible temporary differences and net operating loss carryforwards is
dependent upon generating sufficient taxable income prior to their expiration.
Although realization of the deferred tax assets is not assured, management
believes it is more likely than not that the deferred tax assets will be
realized through future taxable income. Management will assess whether it
remains more likely than not that the deferred tax assets will be realized. If
management determines that is no longer more likely than not that the deferred
tax assets will be realized, a valuation allowance will be required against
some or all of the deferred tax assets.
7. RELATED-PARTY TRANSACTIONS
A shareholder of the Company provides legal services for the Company. Total
expenses billed to the Company for such services were $0 and $35,000 in 1996
and 1997, respectively.
8. SUBSEQUENT EVENTS
On June 30, 1997, the shareholders of IAMD, Limited sold 100% of the
outstanding shares of capital stock of the Company to Career Education
Corporation ("CEC") for $3,000,000. The purchase price may be increased by up
to $5,000,000 based upon the amount by which revenue of the Company for the
twelve-month period ended June 30, 1998, exceeds $8,000,000, as provided for
in an earn-out provision in the purchase agreement. The purchase price of the
acquisition is subject to certain modifications in addition to the earn-out
provision. Also, in connection with the purchase, the former owners of the
schools also entered into covenant not-to-compete agreements with CEC for
total proceeds of $2,000,000. The covenants not-to-compete restrict the former
owners' ability to own or operate certain types of postsecondary vocational
schools for four years. In connection with the sale, CEC repaid all
outstanding long-term debt of the Company.
9. RESTATEMENT
The Company had historically deferred certain marketing costs. During 1997,
the Company changed its method of accounting for deferred marketing costs to
the preferred method of expensing marketing costs as incurred. The Company has
retroactively restated its statements of operations for the year ended June
30, 1996
F-61
<PAGE>
IAMD, LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JUNE 30, 1996 AND 1997
and stockholders' investment as of June 30, 1996 to reflect the change in this
method. The effect of this change was to increase the accumulated deficit by
approximately $136,000, net of a deferred tax benefit of $91,000 as of June
30, 1995.
10. RECLASSIFICATIONS
Certain reclassifications have been made to the June 30, 1996 financial
statements in order for them to be in conformity with the June 30, 1997
presentation.
F-62
<PAGE>
AUDITORS' REPORT
To the Stockholders of
International Academy of Merchandising &
Design (Canada) Ltd.:
We have audited the balance sheet of International Academy of Merchandising
& Design (Canada) Ltd. as at August 31, 1996, and the statements of
operations, stockholders' equity and cash flows for the year then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of International Academy of
Merchandising & Design (Canada) Ltd. as of August 31, 1996, and the results of
its operations and its cash flows for the year then ended in conformity with
generally accepted accounting principles in the United States.
Price Waterhouse
Chartered Accountants
Toronto, Canada
October 11, 1996
F-63
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders of
International Academy of Merchandising &
Design (Canada) Ltd.:
We have audited the accompanying consolidated balance sheet of INTERNATIONAL
ACADEMY OF MERCHANDISING & DESIGN (CANADA) LTD. (an Ontario corporation) AND
SUBSIDIARY as of June 30, 1997, and the related consolidated statements of
operations, stockholders' equity and cash flows for the ten months ended June
30, 1997. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of International Academy of
Merchandising & Design (Canada) Ltd. and Subsidiary as of June 30, 1997, and
the results of their operations and their cash flows for the ten months ended
June 30, 1997, in conformity with generally accepted accounting principles in
the United States.
Arthur Andersen LLP
Chicago, Illinois
September 17, 1997
F-64
<PAGE>
INTERNATIONAL ACADEMY OF MERCHANDISING &
DESIGN (CANADA) LTD. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
AS OF AUGUST 31, 1996, AND JUNE 30, 1997
<TABLE>
<CAPTION>
AUGUST 31, JUNE 30,
1996 1997
---------- ----------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash................................................. $ -- $ 15,546
Receivables--
Student, less allowance for doubtful accounts of
$35,000 and $56,000 at August 31, 1996, and
June 30, 1997, respectively....................... 408,681 955,705
Other.............................................. 103,392 74,868
Stockholders' advances............................. 93,807 --
Deferred income tax assets........................... 34,279 51,002
Prepaid expenses and other current assets............ 173,808 54,667
---------- ----------
Total current assets............................. 813,967 1,151,788
---------- ----------
PROPERTY AND EQUIPMENT, NET............................ 1,559,588 2,498,768
---------- ----------
OTHER ASSETS:
Deposits............................................. 95,511 219,232
Deferred income tax assets........................... -- 300,276
---------- ----------
Total other assets............................... 95,511 519,508
---------- ----------
TOTAL ASSETS........................................... $2,469,066 $4,170,064
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Bank overdraft....................................... $ 70,571 $ 281,270
Current maturities of long-term debt................. 446,652 1,037,216
Accounts payable..................................... 630,698 545,853
Accrued expenses..................................... 136,915 533,431
Students deposits.................................... 499,680 957,326
---------- ----------
Total current liabilities........................ 1,784,516 3,355,096
---------- ----------
LONG-TERM LIABILITIES:
Long-term debt, net of current maturities shown
above............................................... 219,231 587,851
Deferred income tax liabilities...................... 9,078 --
Deferred rent........................................ 45,215 39,461
---------- ----------
Total long-term debt............................. 273,524 627,312
---------- ----------
STOCKHOLDERS' EQUITY:
Common stock, no par value, unlimited shares
authorized; 45,347 shares and 43,667 shares issued
and outstanding at August 31, 1996, and June 30,
1997, respectively.................................. 298,547 206,743
Cumulative translation adjustment.................... (5,241) (7,946)
Retained earning (deficit)........................... 117,720 (11,141)
---------- ----------
Total stockholders' equity....................... 411,026 187,656
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY............. $2,469,066 $4,170,064
========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
F-65
<PAGE>
INTERNATIONAL ACADEMY OF MERCHANDISING &
DESIGN (CANADA) LTD. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED AUGUST 31, 1996, AND
THE TEN MONTHS ENDED JUNE 30, 1997
<TABLE>
<CAPTION>
AUGUST 31, JUNE 30,
1996 1997
---------- ----------
<S> <C> <C>
REVENUE:
Tuition and registration, net.......................... $7,279,325 $8,407,718
Other, net............................................. 30,658 9,234
---------- ----------
Total net revenue.................................... 7,309,983 8,416,952
---------- ----------
OPERATING EXPENSES:
Educational services and facilities.................... 3,028,745 3,252,155
General and administrative............................. 3,355,940 4,119,594
Related party rent expense............................. 197,320 159,440
Depreciation and amortization.......................... 375,677 813,094
---------- ----------
Total operating expenses............................. 6,957,682 8,344,283
---------- ----------
Income from operations............................... 352,301 72,669
INTEREST EXPENSE......................................... 134,315 271,349
---------- ----------
Income (loss) before provision (benefit) for taxes... 217,986 (198,680)
PROVISION (BENEFIT) FOR INCOME TAXES..................... 92,349 (69,819)
---------- ----------
NET INCOME (LOSS)........................................ $ 125,637 $ (128,861)
========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
F-66
<PAGE>
INTERNATIONAL ACADEMY OF MERCHANDISING & DESIGN (CANADA) LTD. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEAR ENDED AUGUST 31, 1996, AND THE TEN MONTHS ENDED JUNE 30, 1997
<TABLE>
<CAPTION>
AUGUST JUNE 30,
31, 1996 1997
--------- ----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)..................................... $ 125,637 $ (128,861)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities--
Deferred income taxes............................... (17,759) (326,077)
Depreciation and amortization....................... 375,677 813,094
Changes in operating assets and liabilities--
Increase in receivables........................... (30,818) (518,500)
(Increase) decrease in prepaid expenses and other
current assets................................... (80,400) 119,141
Increase in deposits.............................. (18,844) (123,721)
Increase in accounts payable and accrued expenses. 135,960 311,671
Increase in students' deposits.................... 329,218 457,646
Decrease in deferred rent......................... -- (5,754)
--------- ----------
Net cash provided by operating activities....... 818,671 598,639
--------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment, net.............. (556,660) (272,959)
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of capital lease obligations............... (271,929) (597,002)
Bank overdraft........................................ 70,571 210,699
Repayment of bank loans............................... (38,682) (31,744)
Deposits returned from Ministry of Education.......... 74,450 --
Stockholders' loans................................... -- 108,615
Stockholders' advances................................ (93,807) --
--------- ----------
Net cash used in financing activities........... (259,397) (309,432)
--------- ----------
EFFECT OF EXCHANGE RATE CHANGES ON CASH................. (4,384) (702)
NET (DECREASE) INCREASE IN CASH......................... (1,770) 15,546
CASH, BEGINNING OF YEAR................................. 1,770 --
--------- ----------
CASH, END OF YEAR....................................... $ -- $ 15,546
========= ==========
NONCASH INVESTING AND FINANCING ACTIVITIES:
Equipment purchased through capital leases............ $ 422,683 $1,479,315
Share redemption and retirement....................... -- 91,804
========= ==========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for--
Interest............................................ $ 134,315 $ 271,349
Taxes paid.......................................... 97,819 80,729
========= ==========
</TABLE>
The accompanying notes are an integral part of these statements.
F-67
<PAGE>
INTERNATIONAL ACADEMY OF MERCHANDISING & DESIGN (CANADA) LTD. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEAR ENDED AUGUST 31, 1996, AND THE TEN MONTHS ENDED JUNE 30, 1997
<TABLE>
<CAPTION>
UNLIMITED ADDITIONAL CUMULATIVE
SHARES PAID-IN TRANSLATION RETAINED TOTAL
AUTHORIZED CAPITAL ADJUSTMENT EARNINGS AMOUNT
---------- ---------- ----------- --------- ---------
<S> <C> <C> <C> <C> <C>
BALANCE, AUGUST 31,
1995................... 45,347 $298,547 $ 1,852 $ (7,917) $ 292,482
Net income............ -- -- -- 125,637 125,637
Cumulative translation
adjustment........... -- -- (7,093) -- (7,093)
------ -------- ------- --------- ---------
BALANCE, AUGUST 31,
1996................... 45,347 298,547 (5,241) 117,720 411,026
Share redemption and
retirement........... (1,680) (91,804) -- -- (91,804)
Cumulative translation
adjustment........... -- -- (2,705) -- (2,705)
Net income............ -- -- -- (128,861) (128,861)
------ -------- ------- --------- ---------
BALANCE, JUNE 30, 1997.. 43,667 $206,743 $(7,946) $ (11,141) $ 187,656
====== ======== ======= ========= =========
</TABLE>
The accompanying notes are an integral part of these statements.
F-68
<PAGE>
INTERNATIONAL ACADEMY OF MERCHANDISING & DESIGN (CANADA) LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AUGUST 31, 1996, AND JUNE 30, 1997
1. DESCRIPTION OF THE BUSINESS
International Academy of Merchandising & Design (Canada) Ltd. ("the Company"
or "IAMD-Canada") is located and operates a campus in Toronto, Ontario and has
a wholly owned subsidiary (International Academy of Design Inc.), which
operates a campus in Montreal, Quebec. These private, postsecondary vocational
schools are engaged in the instruction of merchandising and design programs in
the fields of merchandising management, fashion design, interior design,
advertising design, interactive media and computer graphics. The assets and
liabilities relating to the Montreal campus were transferred to International
Academy of Design Inc. on September 1, 1996. Prior to that date, the
operations of the Montreal campus were included as a division of the Company.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the consolidated accounts of
the Company and its wholly owned subsidiary. All significant intercompany
transactions and accounts have been eliminated. For presentation purposes,
both periods reflect the Montreal accounts as being consolidated since they
are included in the total in both periods.
The Company's accounts are recorded in Canadian dollars ("$CD") and the
balance sheets at August 31, 1996 and June 30, 1997 have been translated to
U.S. dollars at the exchange rate of 0.73 and 0.72. The income statements for
the year ended August 31, 1996, and the ten months ended June 30, 1997, have
been translated at an average annual exchange rate of 0.74 and 0.73,
respectively.
FINANCIAL AID
The Company extends credit for tuition to a significant number of students
who are in attendance at the schools. A significant portion of the Company's
students receive financial assistance from both federal and provincial
financial aid programs which is used to repay the credit granted to the
students. Student financial assistance is received by the students in the form
of either loans or bursaries administered by the ministries of education of
the provinces. The total financial assistance received from all Canadian
sources amounted to 75% and 79% of the Company's net revenue for the year
ended August 31, 1996 and ten months ended June 30, 1997, respectively.
The Company pays an annual premium to an insurance company which provides an
insurance policy to secure the governmental funding. The insurance policy
insures liability amounts of $152,061 ($CD 210,000) for Toronto and $72,410
($CD 100,000) for the Montreal campus. Shareholders have also issued personal
guarantees related to such policies at August 31, 1996 and June 30, 1997.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is recognized
utilizing an accelerated method. Leasehold improvements and assets recorded
under capital leases are amortized on a straight-line basis over their
estimated useful lives or lease term, whichever is shorter. Maintenance,
repairs and minor renewals and
F-69
<PAGE>
INTERNATIONAL ACADEMY OF MERCHANDISING &
DESIGN (CANADA) LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
betterments are expensed as incurred; major improvements are capitalized. The
estimated useful lives and cost basis of property and equipment at August 31,
1996, and June 30, 1997, are as follows:
<TABLE>
<CAPTION>
AUGUST 31, JUNE 30,
ASSET DESCRIPTION 1996 1997 LIFE
----------------- ---------- ---------- ---------
<S> <C> <C> <C>
Furniture and fixtures.................... $ 337,233 $ 363,123 5-8 years
Machinery and equipment................... 1,105,535 1,100,636 4-6 years
Leasehold improvements.................... 599,503 787,958 5 years
Computer software......................... -- 22,631 1 year
Capital lease equipment................... 958,085 2,460,635 4-6 years
---------- ----------
3,000,356 4,734,983
Less--Accumulated depreciation and
amortization............................. 1,440,768 2,236,215
---------- ----------
Property and equipment, net............... $1,559,588 $2,498,768
========== ==========
</TABLE>
DEFERRED RENT
Certain of the Company's leases include rental concessions, as defined in
the various lease agreements. The Company recognizes rent expense on a
straight-line basis over the terms of the various leases, ranging from 2 to 7
years. Rent expense recognized differs from the actual cash payments required
to be made under these lease agreements.
REVENUE RECOGNITION
Revenue is derived primarily from courses taught at the schools. Tuition
revenue is recognized on a straight-line basis over the length of the
applicable course. If a student withdraws, future revenue is reduced by the
amount of the refund due to the student. Student deposits represent payments
received in excess of amounts billed and are reflected as a current liability
in the accompanying consolidated balance sheet.
USE OF ESTIMATES
The preparation of financial statements, in conformity with generally
accepted accounting principles, requires management to make certain estimates
and assumptions that affect the reported amounts of assets and liabilities and
the disclosure of contingent liabilities at the date of the financial
statements and reported amounts of revenues and expenses during the reported
period. Actual results could differ from those estimates.
FINANCIAL INSTRUMENTS
The carrying value for current assets and liabilities reasonably
approximates their fair value due to their short maturity periods. The
carrying value of the Company's debt obligations reasonably approximates fair
value as the stated interest rate approximates current market interest rates
of debt with similar terms.
3. LONG-TERM DEBT
At August 31, 1996, and June 30, 1997, long-term debt of the Company
consists of the following:
<TABLE>
<CAPTION>
AUGUST JUNE 30,
31, 1996 1997
-------- ---------
<S> <C> <C>
Business improvement loan, bearing interest at Canadian
prime plus 1.5% (6.25% at June 30, 1997), requiring quar-
terly principal payments of $1,267, secured by related as-
sets, repaid in connection with the sale of the Company
(Note 10)................................................. $ 10,233 $ 7,603
Business improvement loan, bearing interest at Canadian
prime plus 1.5% (6.25% at June 30, 1997), requiring quar-
terly principal payments of $2,595, secured by related as-
sets, repaid in connection with the sale of the Company
(Note 10)................................................. 68,095 38,981
Stockholder loans, bearing interest at 6.75%; repaid in
connection with the sale of the Company (Note 10)......... -- 108,615
Capital lease obligation discounted at a weighted average
interest rate of 16.0% and 24.5% at August 31, 1996 and
June 30, 1997, respectively, secured by related equipment
(Note 6).................................................. 587,555 1,469,868
-------- ---------
665,883 1,625,067
Less--Current portion...................................... 446,652 1,037,216
-------- ---------
$219,231 $ 587,851
======== =========
</TABLE>
F-70
<PAGE>
INTERNATIONAL ACADEMY OF MERCHANDISING &
DESIGN (CANADA) LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
In February 1997, the Company amended its credit agreement with a Canadian
chartered bank. Under the amended agreement, the total amount the Company may
borrow through operating lines of credit and business improvement loans
cannot, at any time, exceed $243,117 ($CD 335,750). Amounts outstanding under
lines of credit are limited to the lesser of $181,025 ($CD 250,000) or 75% of
the receivables, as defined, less priority claims and receivables over 90
days. Outstanding borrowings under the line of credit and business improvement
loans bear interest at the Canadian prime rate (4.75% at June 30, 1997) plus
1% and the Canadian prime rate (6.25% at June 30, 1997) plus 1.5%,
respectively. Accounts receivable, inventory, equipment and all other assets
serve as collateral for amounts outstanding under the agreement.
Under the amended agreement, the Company must maintain certain covenants
under the credit agreement including debt to effective equity ratio, as
defined, of not more than 3:1, capital expenditures for the current fiscal
year not to exceed $1,013,740 ($CD 1,400,000) and that no lien on present or
future company assets can be obtained without the Bank's consent.
4. STOCKHOLDERS' EQUITY
In fiscal 1996, the Company advanced $93,807 ($CD 126,000) to its
stockholders. In 1997, the Company redeemed and retired 1,680 shares of common
stock from these stockholders. The advances to stockholders were collected in
exchange for these shares.
5. RELATED-PARTY TRANSACTIONS
The Company leases one of its campus facilities from an entity with common
ownership. Rent expense under this lease amounted to approximately $197,000
and $159,000 for the year ended August 31, 1996, and the ten months ended June
30, 1997, respectively.
See stockholder loans as described in Note 3 and stockholder advances as
discussed in Note 4.
6. COMMITMENTS AND CONTINGENCIES
LEASES
The Company leases equipment under capital leases expiring in various years
through 2002. Also, the Company leases its facilities and certain equipment
under operating leases through 2002. Rent expense, exclusive of taxes,
insurance, and maintenance of the facilities and equipment for the year ended
August 31, 1996, and the ten months ended June 30, 1997, was approximately
$553,275 and $600,759, respectively. The following is a schedule by year of
future minimum payments under these capital and operating leases:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES TOTAL
---------- ---------- ----------
<S> <C> <C> <C>
Remainder of 1997........................ $ 613,911 $1,180,026 $1,793,937
1998..................................... 846,359 1,884,954 2,731,313
1999..................................... 199,862 1,375,332 1,575,194
2000..................................... 20,647 880,817 901,464
2001..................................... 5,634 868,599 874,233
Thereafter............................... 1,303 1,033,483 1,034,786
---------- ---------- ----------
1,687,716 $7,223,211 $8,910,927
========== ==========
Less--Portion representing interest at a
weighted
average interest rate of 24.53%......... 217,848
----------
Equipment under capital leases........... 1,469,868
Less--Current portion.................... 882,017
----------
$ 587,851
==========
</TABLE>
F-71
<PAGE>
INTERNATIONAL ACADEMY OF MERCHANDISING &
DESIGN (CANADA) LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
AUGUST 31, 1996 AND JUNE 30, 1997
LITIGATION
The Company is subject to occasional lawsuits, investigations and claims
arising out of the normal conduct of its business. At June 30, 1997, the
Company is not a party to any material legal action.
7. INCOME TAXES
The Company provides for deferred taxes under the asset and liability method
of accounting. This method requires the recognition of deferred income taxes
based upon the tax consequences of "temporary differences" by applying enacted
statutory tax rates applicable to future years to differences between the
financial statement carrying amounts and the tax basis of existing assets and
liabilities.
The income tax provision (benefit) for the year ended August 31, 1996, and
the ten months ended June 30, 1997, consists of the following:
<TABLE>
<CAPTION>
AUGUST JUNE 30,
31, 1996 1997
-------- --------
<S> <C> <C>
Current income taxes.................................. $110,108 $256,258
Deferred income taxes (benefit)....................... (17,759) (326,077)
-------- --------
Net income tax provision (benefit).................... $ 92,349 $(69,819)
======== ========
</TABLE>
A reconciliation of the statutory tax rate computed as weighted average of
federal and provincial tax rates to the effective income tax rate for the year
ended August 31, 1996, and the ten months ended June 30, 1997, consists of the
following:
<TABLE>
<CAPTION>
AUGUST 31, JUNE 30,
1996 1997
---------- --------
<S> <C> <C>
Tax provision (benefit) for income taxes based on
federal statutory tax rates......................... 29.1% (29.1)%
Provincial income taxes, net of federal benefit...... 15.2 (13.2)
Permanent difference and other....................... (1.9) 7.2
---- -----
Effective income tax rate............................ 42.4% (35.1)%
==== =====
</TABLE>
At August 31, 1996, and June 30, 1997, deferred income taxes consist of the
following:
<TABLE>
<CAPTION>
AUGUST 31, JUNE 30,
1996 1997
---------- --------
<S> <C> <C>
Recruiting and marketing costs........................ $43,593 $ 51,002
Net operating loss carryforward....................... -- 311,390
Lease inducements..................................... 18,870 16,574
------- --------
Total deferred tax assets........................... 62,463 378,966
------- --------
Depreciation.......................................... 27,948 27,688
Other................................................. 9,314 --
------- --------
Total deferred tax liabilities...................... 37,262 27,688
------- --------
Total net deferred tax assets....................... $25,201 $351,278
======= ========
</TABLE>
F-72
<PAGE>
INTERNATIONAL ACADEMY OF MERCHANDISING &
DESIGN (CANADA) LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
AUGUST 31, 1996 AND JUNE 30, 1997
Realization of deferred tax assets associated with the Company's future
deductible temporary differences and net operating loss carryforwards is
dependent upon generating sufficient taxable income prior to their expiration.
Although realization of the deferred tax assets is not assured, management
believes it is more likely than not that the deferred tax assets will be
realized through future taxable income. Management will assess whether it
remains more likely than not that the deferred tax assets will be realized. If
management determines that is no longer more likely than not that the deferred
tax assets will be realized, a valuation allowance will be required against
some or all of the deferred tax assets.
8. BENEFIT PLAN
The Company maintains a benefit plan for eligible employees. The plan
requires matching contributions (58% of the costs) for eligible employees. The
Company's matching contributions were $38,613 and $44,354 for the year and
period ended August 31, 1996, and June 30, 1997, respectively.
9. NONRECURRING CHARGES
In fiscal 1997, the Company identified an employee who misappropriated
corporate funds totalling approximately $87,000. The individual resigned from
the Company. The loss associated with this activity resulted in a reduction of
operating income in fiscal 1997.
10. SUBSEQUENT EVENTS
On June 30, 1997, the shareholders of IAMD-Canada sold 100% of the
outstanding shares of capital stock of the Company to Career Education
Corporation ("CEC") for $6,500,000. In connection with the purchase, the
former owners of the school also entered into covenant not-to-compete
agreements with CEC for at total price of $2,000,000. The covenant not-to-
compete agreements restrict the former owners' ability to own or operate
certain types of postsecondary vocational schools for four years. The note
payable to a former stockholder and all bank loans were repaid in connection
with the sale.
F-73
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
Phillips Educational Group of Portland, Inc.:
We have audited the accompanying statements of operations and cash flows for
the nine months and twenty-one days ended October 21, 1996 of WESTERN CULINARY
INSTITUTE (a division of Phillips Educational Group of Portland, Inc., a
wholly owned subsidiary of Phillips Colleges, Inc.). These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the Western Culinary Institute results of operations
and cash flows for the nine months and twenty-one days ended October 21, 1996
in conformity with generally accepted accounting principles.
As discussed in Notes 8 and 9, on October 21, 1996, the assets and certain
liabilities of the Western Culinary Institute were sold in accordance with
provisions of the agreements with Phillips Colleges, Inc., the U.S. Department
of Education, U.S. Department of Justice and various banks.
ARTHUR ANDERSEN LLP
Chicago, Illinois
October 24, 1997
F-74
<PAGE>
WESTERN CULINARY INSTITUTE
STATEMENT OF OPERATIONS
FOR THE NINE MONTHS AND TWENTY-ONE DAYS ENDED OCTOBER 21, 1996
<TABLE>
<S> <C>
REVENUE:
Tuition and registration fees, net................................ $4,296,565
Other revenue, net................................................ 304,350
----------
Total net revenue............................................... 4,600,915
----------
OPERATING EXPENSES:
Educational services and facilities............................... 697,345
General and administrative........................................ 2,032,711
Depreciation and amortization..................................... 17,736
Management fees to parent......................................... 1,443,970
----------
Total operating expenses........................................ 4,191,762
----------
Income from operations, before provision for income taxes....... 409,153
PROVISION FOR INCOME TAXES.......................................... 163,661
----------
NET INCOME.......................................................... $ 245,492
==========
</TABLE>
The accompanying notes are an integral part of this statement.
F-75
<PAGE>
WESTERN CULINARY INSTITUTE
STATEMENT OF CASH FLOWS
FOR THE NINE MONTHS AND TWENTY-ONE DAYS ENDED OCTOBER 21, 1996
<TABLE>
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income........................................................ $ 245,492
Adjustments to reconcile net income to net cash provided by
operating activities--
Depreciation and amortization................................... 17,736
Changes in operating assets and liabilities resulting in an
increase (decrease) in cash--
Student receivables........................................... (344,355)
Inventories................................................... 18,652
Prepaid expenses and other current assets..................... (11,251)
Accounts payable.............................................. (414,549)
Accrued expenses.............................................. 35,709
Deferred tuition revenue and advance student payments......... 532,801
---------
Net cash provided by operating activities................... 80,235
---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Capital contribution from parent.................................. 76,999
---------
NET INCREASE IN CASH................................................ 157,234
CASH, beginning of period........................................... 77,217
---------
CASH, end of period................................................. $ 234,451
=========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Approximate cash paid during the period for--
Interest........................................................ $ 1,000
Income taxes.................................................... $ --
=========
</TABLE>
The accompanying notes are an integral part of this statement.
F-76
<PAGE>
WESTERN CULINARY INSTITUTE
NOTES TO FINANCIAL STATEMENTS
FOR THE NINE MONTHS AND TWENTY-ONE DAYS ENDED OCTOBER 21, 1996
1. DESCRIPTION OF THE BUSINESS
Western Culinary Institute (the "Company" or the "School"), located in
Portland, Oregon, is a private post-secondary vocational school that offers a
degree in culinary arts. The Company is a division of Phillips Educational
Group of Portland, Inc., a wholly owned subsidiary of Phillips Colleges, Inc.
("Phillips"). Phillips manages and operates educational institutions through
its wholly owned subsidiaries.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CONCENTRATION OF CREDIT RISK
The Company extends unsecured credit for tuition to a significant portion of
the students who are in attendance at the school. A substantial portion of
credit extended to students is repaid through the student's participation in
various federally funded financial aid programs under Title IV of the Higher
Education Act of 1965 ("Title IV Programs"), as amended. Approximately 52% of
the Company's net revenue was collected from Title IV Program funds during the
nine months and twenty-one days ended October 21, 1996. The Company generally
reviews and approves the financial aid packet of each student who qualifies
for financial aid prior to the student beginning class in an effort to enhance
the collectibility of its unsecured credit. Transfers of funds from the
financial aid programs to the Company are made in accordance with the United
States Department of Education ("DOE") requirements. Changes in DOE funding
for federal student financial aid programs could impact the Company's ability
to attract students.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is recognized
utilizing the straight-line method over the estimated useful lives of the
assets which range from three to eighteen years for financial reporting
purposes and accelerated methods for income tax purposes. Leasehold
improvements are amortized over the shorter of the estimated useful life of
the asset or the lease term. Maintenance, repairs and minor renewals and
betterments are expensed; major improvements are capitalized.
MARKETING AND ADVERTISING COSTS
Marketing and advertising costs are expensed as incurred. Marketing and
advertising costs included in general and administrative expenses were
$109,000 during the nine months and twenty-one days ended October 21, 1996.
INCOME TAXES
The Company files a consolidated federal income tax return with Phillips and
state income tax returns with its Oregon affiliates. Liabilities related to
the Company's current year taxable income are included in the capital
contribution from Phillips during 1997 (Note 4). Current and deferred income
taxes are allocated to the Company as if it were a separate taxpayer. There
are no significant temporary differences and the Company's effective tax rate
on a stand-alone basis is equal to its statutory rate of approximately 40%.
REVENUE RECOGNITION
Revenue is derived primarily from courses taught at the schools. Tuition
revenue is recognized on a straight-line basis over the length of the
applicable course. Textbook sales and other revenues are recognized as
services are performed. If a student withdraws, future revenue would be
reduced by the amount of refund due to the student. Refunds are calculated in
accordance with federal, state and accrediting agency standards.
F-77
<PAGE>
WESTERN CULINARY INSTITUTE
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
MANAGEMENT'S USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make certain estimates
and assumptions that affect the reported amounts of assets and liabilities and
the disclosure of contingent liabilities at the date of the financial
statements and reported amounts of revenues and expenses during the reported
period. Actual results could differ from these estimates.
3. EMPLOYEE BENEFIT PLANS
Prior to January 31, 1996, eligible employees of the Company participated in
the Phillips Colleges, Inc. Employee Retirement Savings Plan (the "Plan"), a
defined contribution plan. Effective January 31, 1996, the Plan was terminated
by Phillips. The Plan was fully funded after termination and Plan assets were
subsequently paid out to Plan participants. The Company made no contributions
to the Plan during the nine months and twenty-one days ended October 21, 1996.
4. PHILLIPS' INVESTMENT
The change in Phillips' investment in the Company for the nine months and
twenty-one days ended October 21, 1996 consists of the following:
<TABLE>
<S> <C>
Balance, January 1, 1996...................................... $(374,606)
Net income for the period..................................... 245,492
Capital contribution from parent.............................. 76,999
---------
Balance, October 21, 1996..................................... $ (52,115)
=========
</TABLE>
The Company had a net receivable due from Phillips of $648,089 at December
31, 1995, for which no formal note agreement exists. The realizability of this
amount is uncertain given the insolvency of Phillips (Note 8) and, therefore,
its amount has been recorded as a reduction in Phillips' investment in the
Company at January 1, 1996. Phillips' investment in the Company has not been
reduced for any contingent liabilities described in Note 7 or 8.
5. RELATED-PARTY TRANSACTIONS
The Company pays management fees to Phillips for certain administrative
services provided. Management fees charged to the Company by Phillips during
the nine months and twenty-one days ended October 21, 1996 were $1,443,970.
6. OPERATING LEASES
The Company leases its administrative and classroom facilities under two
operating leases which expire July 31, 1997 and October 31, 1998. Rent expense
under these agreements for the nine months and twenty-one days ended October
21, 1996, was approximately $256,000.
Future minimum lease payments under these leases as of October 21, 1996, are
approximately as follows:
<TABLE>
<S> <C>
Remainder of 1996............... $ 58,000
1997............................ 199,000
1998............................ 56,000
--------
$313,000
========
</TABLE>
F-78
<PAGE>
WESTERN CULINARY INSTITUTE
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
7. COMMITMENTS AND CONTINGENCIES
REGULATORY
The Company is subject to extensive regulation by federal and state
governmental agencies and accrediting bodies. In particular, the Higher
Education Act of 1965, as amended (the "HEA"), and the regulations promulgated
thereunder by the DOE subject the Company to significant regulatory scrutiny
on the basis of numerous standards that schools must satisfy in order to
participate in the various federal student financial assistance programs under
Title IV of the HEA (the "Title IV Programs"). Under the HEA and its
implementing regulations, certain financial and other regulatory standards
must be complied with in order to qualify to participate in Title IV programs.
Under such standards, the school must: (i) have an acid test ratio (defined as
the ratio of cash, cash equivalents, and current accounts receivable to
current liabilities) of at least 1:1 at the end of each fiscal year, (ii) have
a positive tangible net worth at the end of each fiscal year, (iii) not have a
cumulative net operating loss during its two most recent fiscal years that
results in a decline of more than 10% of the Company's tangible net worth at
the beginning of that two-year period, (iv) collect less than 85% of its
education revenues from Title IV funds on an annul basis, and (v) not have
cohort default rates on federal student loans that equal or exceed 25% for
three consecutive federal fiscal years, among others. The DOE may measure the
above financial standards on a school-by-school basis or on a corporate
consolidated basis. Any regulatory violation could be the basis for the
initiation of a suspension, limitation or termination proceeding against the
Company.
In order to operate and award degrees, diplomas and certificates and to
participate in the Title IV Programs in the U.S., a school must be licensed or
authorized to offer its programs of instruction by the relevant agency of the
state in which such school is located. The Company is licensed or authorized
by the relevant agency of the state in which such campus is located. In
addition, in order to participate in the Title IV Programs, an institution
must be accredited by an accrediting agency recognized by the DOE. The Company
is accredited by at least one accrediting agency recognized by the DOE.
TERMINATION OF TITLE IV FUNDING
A notice of intent to terminate the availability of Title IV funding to
Phillips was issued by the DOE on August 18, 1995. This notice resulted from
the expiration of the Financial Responsibility Agreement between Phillips and
the DOE and the subsequent claim by the DOE that Phillips failed to meet the
acid test ratio required by the current financial responsibility regulations.
Additionally, Phillips received a decision on an administrative appeal made to
the Secretary of Education which resulted in an assessment of liability
related to commissioned sales practices by Phillips' colleges during the
period from 1987 to 1991 in the amount of approximately $114 million. The
total assessed liability of approximately $114 million related to the
commissioned sales issue has been recorded as a corporate liability in
Phillips' financial statements as of December 31, 1995.
8. ORDERLY SALE OF ASSETS
On October 11, 1996, Phillips reached agreements with the DOE, U.S.
Department of Justice and various banks which called for the orderly sale or
closure of all schools owned by Phillips by December 31, 1996. The agreements
require that upon sale of a school, one-third of the net proceeds from the
sale of the assets of the school, as defined, be distributed to the DOE and
two-thirds distributed to banks which had outstanding obligations to Phillips
totaling $8.2 million at October 11, 1996. In addition, Phillips had letters
of credit totaling approximately $1.7 million at October 11, 1996. The
proceeds distributed to the DOE are to be applied to the commissioned sales
liability. The terms of the agreement provide that prospective buyers of
Phillips colleges would not be required to assume any portion of the
commissioned sales liability as a trailing liability.
F-79
<PAGE>
WESTERN CULINARY INSTITUTE
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
At October 21, 1996, all assets of the Company and Phillips other schools
are pledged as collateral under the debt agreement entered into by Phillips.
In addition, each of Phillips' subsidiaries have guaranteed, jointly and
severally, the payment of amounts outstanding under the bank agreement.
9. SUBSEQUENT EVENTS
On October 21, 1996, Phillips sold certain assets and liabilities of the
Company to WCI Acquisition, Ltd., a wholly owned subsidiary of Career
Education Corporation ("CEC"), for a sales price, subject to certain
adjustments, of approximately $8,000,000. Simultaneously with the purchase,
WCI Acquisition, Ltd. changed its name to Western Culinary Institute, Inc. In
connection with the sale, Phillips also entered into a covenant not-to-compete
agreement with CEC for proceeds totaling $400,000. The covenant not-to-compete
restricts Phillips from owning or operating certain types of post-secondary
vocational schools for four years. In connection with the sale, the net
proceeds were distributed in accordance with the agreements disclosed in Note
8.
F-80
<PAGE>
CAREER EDUCATION CORPORATION AND SUBSIDIARIES
FINANCIAL STATEMENT SCHEDULE
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
Our audit was made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The Valuation and Qualifying Account
Schedule is presented for purposes of additional analysis and is not a
required part of the basic financial statements. This information has been
subjected to the auditing procedures applied in our audit of the basic
financial statements and, in our opinion, is fairly stated in all material
respects in relation to the basic financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Chicago, Illinois
November 19, 1997
S-1
<PAGE>
CAREER EDUCATION CORPORATION AND SUBSIDIARIES
FINANCIAL STATEMENT SCHEDULE
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
BALANCE NET CHARGES
AT TO INCREASE DUE BALANCE AT
BEGINNING OPERATING TO END OF
OF PERIOD EXPENSES ACQUISITIONS PERIOD
--------- ----------- ------------ ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Student receivable allowance
activity for the year ended
December 31, 1994............. $624 $ (91) $-- $ 533
Student receivable allowance
activity for the year ended
December 31, 1995............. 533 (433) 158 258
Student receivable allowance
activity for the year ended
December 31, 1996............. 258 167 30 455
Student receivable allowance
activity for the nine months
ended September 30, 1997...... 455 517 431 1,403
</TABLE>
S-2
<PAGE>
[INSIDE BACK COVER]
MAP OF NORTH AMERICA WITH LOGOS OF THE COMPANY AND ITS SCHOOLS SUPERIMPOSED
ON THE MAP, INDICATING THE LOCATION OF EACH CAMPUS.
BELOW THE MAP ARE THE LOGOS, FULL NAMES AND ADDRESSES OF EACH OF THE SCHOOLS
AND THEIR CAMPUSES.
<PAGE>
- --------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFOR-
MATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS, AND, IF
GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED BY THE COMPANY, THE SELLING STOCKHOLDER OR ANY UNDER-
WRITER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION
OF AN OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY IN ANY JURISDICTION TO
ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER IN SUCH JURISDICTION. NEI-
THER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER
ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMATION HEREIN IS COR-
RECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF OR THAT THERE HAS BEEN NO
CHANGE IN THE AFFAIRS OF THE COMPANY SINCE SUCH DATE.
-----------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary........................................................ 3
Risk Factors.............................................................. 8
The Transactions.......................................................... 21
Use of Proceeds........................................................... 22
Dividend Policy........................................................... 22
Capitalization............................................................ 23
Dilution.................................................................. 24
Unaudited Pro Forma Condensed Consolidated Financial Data................. 25
Selected Historical Consolidated Financial and Other Data................. 30
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 32
Business.................................................................. 40
Financial Aid and Regulation.............................................. 54
Management................................................................ 67
Certain Relationships and Related Transactions............................ 77
Security Ownership of Certain Beneficial Owners and Management............ 78
Description of Capital Stock.............................................. 79
Shares Eligible for Future Sale........................................... 81
Underwriting.............................................................. 83
Notice to Canadian Residents.............................................. 84
Legal Matters............................................................. 85
Experts................................................................... 85
Additional Information.................................................... 86
Index to Financial Statements............................................. F-1
Financial Statement Schedule.............................................. S-1
</TABLE>
-----------
UNTIL , 1998 (25 DAYS AFTER THE DATE OF THE OFFERING), ALL DEALERS EF-
FECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT PARTICIPATING
IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN
ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS
UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
LOGO
2,850,000 Shares
Common Stock
PROSPECTUS
CREDIT SUISSE FIRST BOSTON
SALOMON SMITH BARNEY
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
Set forth below is an estimate of the approximate amount of fees and
expenses (other than underwriting commissions and discounts) payable by the
Registrant in connection with the issuance and distribution of the Common
Stock pursuant to the Prospectus contained in this Registration Statement. The
Registrant will pay all of these expenses.
<TABLE>
<CAPTION>
AMOUNT*
----------
<S> <C>
Securities and Exchange Commission registration fee........... $ 16,989
NASD filing fee............................................... 6,107
Nasdaq National Market listing fee............................ 37,122
Accountants' fees and expenses................................ 1,000,000
Blue Sky fees and expenses.................................... 5,000
Legal fees and expenses....................................... 700,000
Transfer Agent and Registrar fees and expenses................ 15,000
Printing and engraving........................................ 300,000
Miscellaneous expenses........................................ 119,782
----------
Total..................................................... $2,200,000
==========
</TABLE>
- --------
*All expenses other than the Securities and Exchange Commission registration
fee, NASD filing fee and Nasdaq National Market listing fee are estimated.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Article XII of the Registrant's Amended and Restated Certificate of
Incorporation will provide that the Registrant shall indemnify its directors
to the full extent permitted by the General Corporation Law of the State of
Delaware and may indemnify its officers and employees to such extent, except
that the Registrant shall not be obligated to indemnify any such person (i)
with respect to proceedings, claims or actions initiated or brought
voluntarily by any such person and not by way of defense, or (ii) for any
amounts paid in settlement of an action indemnified against by the Registrant
without the prior written consent of the Registrant. Prior to consummation of
the Offering, the Registrant will enter into indemnity agreements with each of
its directors. These agreements may require the Registrant, among other
things, to indemnify such directors against certain liabilities that may arise
by reason of their status or service as directors, to advance expenses to them
as they are incurred, provided that they undertake to repay the amount
advanced if it is ultimately determined by a court that they are not entitled
to indemnification, and to obtain directors' liability insurance if available
on reasonable terms.
In addition, Article XII of the Registrant's Amended and Restated
Certificate of Incorporation will also provide that a director of the
Registrant shall not be personally liable to the Registrant or its
stockholders for monetary damages for breach of his or her fiduciary duty as a
director, except for liability (i) for any breach of the director's duty of
loyalty to the Registrant or its stockholders, (ii) for acts or omissions not
in good faith or which involve intentional misconduct or a knowing violation
of law, (iii) for willful or negligent conduct in paying dividends or
repurchasing stock out of other than lawfully available funds or (iv) for any
transaction from which the director derives an improper personal benefit.
Reference is made to Section 145 of the General Corporation Law of the State
of Delaware which provides for indemnification of directors and officers in
certain circumstances.
II-1
<PAGE>
The Registrant has purchased a directors' and officers' liability insurance
policy.
Under the terms of the Underwriting Agreement, the Underwriters have agreed
to indemnify, under certain conditions, the Registrant, its directors, certain
of its officers and persons who control the Company within the meaning of the
Securities Act of 1933, as amended (the "Securities Act"), against certain
liabilities.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
The following information reflects a 100-for-one split of the Registrant's
common stock effected as of July 31, 1995 and a 10-for-one split of the
Registrant's Series C Preferred Stock effected as of July 26, 1996. It does
not reflect the Transactions to be effected immediately prior to the
consummation of the Offering, as described in the Prospectus under the heading
"The Transactions."
On January 31, 1994, the Registrant issued (i) 500 shares of Class A Common
Stock and 50 shares of Series A Preferred Stock to John M. Larson ("Larson")
in exchange for total consideration of $50,000.50, (ii) 3,000 shares of Class
A Common Stock and 300 shares of Series A Preferred Stock to Robert E. Dowdell
("Dowdell") in exchange for total consideration of $300,003, and (iii) an
aggregate of 2,700 shares of Class B Common Stock, 27,300 shares of Class C
Common Stock and 3,000 shares of Series A Preferred Stock to Heller Equity
Capital Corporation and Heller Financial, Inc. (collectively, "Heller") in
exchange for total consideration of $3,000,030.
On June 20, 1994, the Registrant issued 45,000 shares of Class C Common
Stock (2,400 shares of which converted into Class B Common Stock of the
Registrant on June 27, 1994) and 4,500 shares of Series A Preferred Stock to
Heller in exchange for total consideration of $4,500,045.
On June 27, 1994, the Registrant issued (i) 250 shares of Class A Common
Stock to Larson in exchange for consideration of $0.25, (ii) 1,500 shares of
Class A Common Stock to Dowdell in exchange for consideration of $1.50, and
(iii) 2,400 shares of Class B Common Stock to Heller as a result of a
conversion of Heller's Class C Common Stock.
On July 31, 1995, (i) pursuant to a Securities Purchase Agreement dated as
of July 31, 1995, the Registrant issued 5,000 shares of Series C Redeemable
Preferred Stock and Warrants to purchase 25,285 shares of Class D Common Stock
to Electra Investment Trust P.L.C. and Electra Associates, Inc. (collectively,
"Electra") in exchange for total consideration of $5,000,000.00, and (ii) as a
condition to the obligations of The Provident Bank ("Provident") under a
credit agreement with the Registrant, the Registrant issued Warrants to
purchase 2,199 shares of Class D Common Stock to Provident.
On September 1, 1995, the Registrant issued 824 shares of Class E Common
Stock and 70 shares of Series A Preferred Stock to Wallace O. Laub and
Constance L. Laub, as joint tenants (collectively, "Laub"), in exchange for
total consideration of $99,982.06.
In December 1996, the Registrant issued 824 shares of Class E Common Stock
and 70 shares of Series A Preferred Stock to William A. Klettke ("Klettke") in
exchange for total consideration of $99,982.06.
On February 28, 1997, pursuant to a Securities Purchase Agreement dated as
of February 28, 1997 (the "February 1997 Agreement"), the Registrant issued
(i) 1,391 shares of Series D Preferred Stock and Warrants to purchase 1,655
shares of Class E Common Stock to Heller in exchange for total consideration
of $1,391,000, (ii) 468 shares of Series D Preferred Stock and Warrants to
purchase 558 shares of Class E Common Stock to Electra in exchange for total
consideration of $468,000, (iii) 84 shares of Series D Preferred Stock and
Warrants to purchase 99 shares of Series E Common Stock to Dowdell in exchange
for total consideration of $84,000, (iv) 16 shares of Series D Preferred Stock
and Warrants to purchase 19 shares of Class E Common Stock to Larson in
exchange for total consideration of $16,000, (v) 15 shares of Series D
Preferred Stock and Warrants to purchase 18 shares of Class E Common Stock to
Klettke in exchange for total consideration of $15,000, (vi) 26 shares of
Series D Preferred Stock and Warrants to purchase 31 shares of Class E Common
Stock to Laub in exchange for total consideration of $26,000.
II-2
<PAGE>
On May 30, 1997, pursuant to the February 1997 Agreement, the Registrant
issued (i) 3,995 shares of Series D Preferred Stock and Warrants to purchase
4,754 shares of Class E Common Stock to Heller in exchange for total
consideration of $3,995,000, (ii) 1,348 shares of Series D Preferred Stock and
Warrants to purchase 1,603 shares of Class E Common Stock to Electra in
exchange for total consideration of $1,348,000, (iii) 44 shares of Series D
Preferred Stock and Warrants to purchase 52 shares of Class E Common Stock to
Larson in exchange for total consideration of $44,000, (iv) 42 shares of
Series D Preferred Stock and Warrants to purchase 50 shares of Class E Common
Stock to Klettke in exchange for total consideration of $42,000, (v) 71 shares
of Series D Preferred Stock and Warrants to purchase 85 shares of Class E
Common Stock to Laub in exchange for total consideration of $71,000.
On May 30, 1997, pursuant to a Securities Purchase Agreement dated as of May
30, 1997 (the "May 1997 Agreement"), the Registrant issued (i) 11,127 shares
of Series D Preferred Stock and Warrants to purchase 26,842 shares of Class E
Common Stock to HECC in exchange for total consideration of $11,127,000, (ii)
2,376 shares of Series D Preferred Stock and Warrants to purchase 5,732 shares
of Class E Common Stock to Electra in exchange for total consideration of
$2,376,000 and (iii) 122 shares of Series D Preferred Stock and Warrants to
purchase 295 shares of Class E Common Stock to Klettke in exchange for total
consideration of $122,000.
On June 30, 1997, pursuant to the May 1997 Agreement, the Registrant issued
1,375 shares of Series D Preferred Stock and Warrants to purchase 3,317 shares
of Class E Common Stock to Electra in exchange for total consideration of
$1,375,000.
No underwriters were involved in any of the transactions described above.
Each of the sales of securities described above is claimed to be exempt from
registration with the Securities and Exchange Commission pursuant to Section
4(2) of the Securities Act as transactions by an issuer not involving any
public offering, in that the transactions involved the issuance and sale by
the Company of its securities to financially sophisticated institutions or
individuals who represented that they took such securities for investment for
their own account and not for distribution and understood the ramifications of
the same. All certificates representing the securities issued in each of the
sales of unregistered securities have been legended.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) EXHIBITS.
<TABLE>
<C> <S>
1+ Form of Underwriting Agreement.
2.1+ Asset Purchase Agreement dated as of September 30, 1996, among
the Registrant, WCI Acquisition, Ltd., Phillips Educational
Group of Portland, Inc., and Phillips Colleges, Inc. Schedules
and exhibits to this Asset Purchase Agreement have not been
included herewith, but will be furnished supplementally to the
Commission upon request.
2.2+ Stock Sale Agreement dated as of April 7, 1997, between K-III
Prime Corporation, Inc. and the Registrant. Schedules and
exhibits to this Stock Sale Agreement have not been included
herewith, but will be furnished supplementally to the Commission
upon request.
2.3+ Stock Purchase Agreement dated as of June 30, 1997, among IAMD
Acquisition I, Ltd. and Clem Stein, Jr., Marion Stein, Leonard
Rutstein, Barbara Ann Scott King, Thomas V. King, William W.
Wirtz and David Powell. Schedules and exhibits to this Stock
Purchase Agreement have not been included herewith, but will be
furnished supplementally to the Commission upon request.
2.4+ Share Purchase Agreement dated as of June 30, 1997, among the
Registrant and Clem Stein, Jr., Leonard Rutstein, Barbara Ann
Scott King and Lawrence N. Gross. Schedules and exhibits to this
Share Purchase Agreement have not been included herewith, but
will be furnished supplementally to the Commission upon request.
3.1+ Form of Amended and Restated Certificate of Incorporation of the
Registrant.
3.2+ Form of Amended and Restated By-laws of the Registrant.
4.1+ Form of specimen stock certificate representing Common Stock.
4.2+ Credit Agreement dated as of May 30, 1997 among the Registrant,
as borrower, the lenders named therein and LaSalle National
Bank, as agent, as amended.
</TABLE>
II-3
<PAGE>
<TABLE>
<C> <S>
5 Opinion of Katten Muchin & Zavis as to the legality of the
securities being registered (including consent).
10.1+ Career Education Corporation 1995 Stock Option Plan, as amended.
10.2+ Form of Option Agreement under the Registrant's 1995 Stock
Option Plan.
10.3 Career Education Corporation 1998 Employee Incentive
Compensation Plan.
10.4+ Forms of Option Agreements under the Registrant's 1998 Employee
Incentive Compensation Plan.
10.5 Career Education Corporation 1998 Non-Employee Directors' Stock
Option Plan.
10.6+ Form of Option Agreement under the Registrant's 1998 Non-
Employee Directors' Stock Option Plan.
10.7+ Career Education Corporation 1998 Employee Stock Purchase Plan.
10.8+ Amended and Restated Option Agreement dated as of July 31, 1995,
between the Registrant and John M. Larson, and Amendment thereto
dated as of October 20, 1997.
10.9+ Supplemental Option Agreement dated July 31, 1995, between the
Registrant and John M. Larson.
10.10+ Amended and Restated Option Agreement dated as of July 31, 1995,
between the Registrant and Robert E. Dowdell, and Amendment
thereto dated as of October 20, 1997.
10.11+ Employment and Non-Competition Agreement dated as of October 9,
1997, between the Registrant and John M. Larson.
10.12+ Form of Indemnification Agreement for Directors and Executive
Officers.
10.13+ Career Education Corporation Amended and Restated Stockholders'
Agreement dated as of July 31, 1995, as amended on February 28,
1997 and May 30, 1997.
10.14 Registration Rights Agreement dated as of July 31, 1995, between
the Registrant, Electra Investment Trust P.L.C. and Electra
Associates, Inc., and form of Amendment Agreement 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 Corporation, Electra
Investment Trust P.L.C., Robert E. Dowdell, John M. Larson,
Wallace O. Laub and Constance L. Laub and William A. Klettke
(the "February 1997 Agreement").
10.19+ Securities Purchase Agreement dated as of May 30, 1997 among the
Registrant, Heller Equity Capital Corporation, Electra
Investment Trust P.L.C. and William A. Klettke (the "May 1997
Agreement").
10.20+ Form of Warrant Certificate issued pursuant to the February 1997
Agreement and the May 1997 Agreement.
10.21+ Form of Management Fee Agreement between the Registrant and each
of its subsidiaries.
10.22+ Form of Tax Sharing Agreement between the Registrant and each of
its subsidiaries.
10.23 Form of Registration Rights Agreement between the Registrant and
Heller Equity Capital Corporation.
10.24+ Form of Agreement between the Registrant and Heller Equity
Capital Corporation, regarding designation of directors of the
Registrant.
11 Statement regarding computation of per share earnings.
</TABLE>
II-4
<PAGE>
<TABLE>
<C> <S>
21+ Subsidiaries of the Registrant.
23.1 Consent of Arthur Andersen LLP with respect to financial
statements of Career Education Corporation and Subsidiaries.
23.2 Consent of Katten Muchin & Zavis (contained in its opinion filed
as Exhibit 5 hereto).
23.3+ Consent of Thomas B. Lally
23.4+ Consent of Arthur Andersen LLP with respect to the financial
statements of Western Culinary Institute (a division of Phillips
Educational Group of Portland, Inc., a wholly owned subsidiary
of Phillips Colleges, Inc.).
23.5+ Consent of Arthur Andersen LLP with respect to the financial
statements of IAMD, Limited and Subsidiaries.
23.6+ Consent of Arthur Andersen LLP with respect to the financial
statements of International Academy of Merchandising and Design
(Canada), Ltd. and Subsidiary.
23.7 Consent of Gleeson, Sklar, Sawyers and Cumpata LLP with respect
to the financial statements of IAMD, Limited and Subsidiaries.
23.8 Consent of Price Waterhouse with respect to the financial
statements of International Academy of Merchandising and Design
(Canada), Ltd. and Subsidiary.
23.9 Consent of Deloitte & Touche LLP with respect to the financial
statements of The Katharine Gibbs Schools, Inc. and
subsidiaries.
23.10+ Consent of Keith K. Ogata.
24+ Power of Attorney.
27+ Financial Data Schedule.
</TABLE>
- --------
+Previously filed as part of this Registration Statement.
<TABLE>
<CAPTION>
PAGE
(b) FINANCIAL STATEMENT SCHEDULES. ----
<S> <C>
Report of Independent Public Accountants S-1
Schedule II--Valuation and Qualifying Accounts S-2
</TABLE>
ITEM 17. UNDERTAKINGS
The Registrant hereby undertakes:
(1) To provide to the Underwriters at the closing specified in the
underwriting agreement, certificates in such denominations and registered in
such names as required by the Underwriters to permit prompt delivery to each
purchaser.
(2) Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that, in the opinion of the Securities and Exchange
Commission, such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
(3) For purposes of determining any liability under the Securities Act, (i)
the information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act shall be deemed to be part of this Registration
Statement as of the time it was declared effective and (ii) each post-
effective amendment that contains a form of prospectus shall be deemed to be a
new registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof.
II-5
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
HAS DULY CAUSED THIS AMENDMENT NO. 3 TO THE REGISTRATION STATEMENT TO BE
SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE
CITY OF CHICAGO, AND STATE OF ILLINOIS ON THE 22ND DAY OF JANUARY, 1998.
Career Education Corporation
/s/ William A. Klettke
By: _________________________________
William A. Klettke
Senior Vice President
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS AMENDMENT
NO. 3 TO THE REGISTRATION STATEMENT HAS BEEN SIGNED BELOW BY THE FOLLOWING
PERSONS IN THE CAPACITIES INDICATED ON JANUARY 22, 1998.
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<S> <C>
* President, Chief Executive Officer
___________________________________________ (Principal Executive Officer) and a
John M. Larson Director
/s/ William A. Klettke Senior Vice President and Chief Financial
___________________________________________ Officer (Principal Financial and
William A. Klettke Accounting Officer)
* Director
___________________________________________
Robert E. Dowdell
* Director
___________________________________________
Wallace O. Laub
* Director
___________________________________________
Patrick K. Pesch
* Director
___________________________________________
Scott D. Steele
* Director
___________________________________________
Todd Steele
</TABLE>
/s/ William A. Klettke
*By: ________________________________
William A. Klettke
Attorney-in-fact
II-6
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DOCUMENT DESCRIPTION
------- --------------------
<C> <S> <C>
5 Opinion of Katten Muchin & Zavis as to the legality of the
securities being registered (including consent).
10.3 Career Education Corporation 1998 Employee Incentive
Compensation Plan.
10.5 Career Education Corporation 1998 Non-Employee Directors'
Stock Option Plan.
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 Agreement
relating thereto.
10.23 Form of Registration Rights Agreement between the Registrant
and Heller Equity Capital Corporation.
11 Statement regarding computation of per share earnings.
23.1 Consent of Arthur Andersen LLP with respect to financial
statements of Career Education Corporation and Subsidiaries.
23.2 Consent of Katten Muchin & Zavis (contained in its opinion
filed as Exhibit 5 hereto).
23.7 Consent of Gleeson, Sklar, Sawyers and Cumpata LLP with
respect to the financial statements of IAMD, Limited and
Subsidiaries.
23.8 Consent of Price Waterhouse with respect to the financial
statements of International Academy of Merchandising and
Design (Canada), Ltd. and Subsidiary.
23.9 Consent of Deloitte & Touche LLP with respect to the financial
statements of The Katharine Gibbs Schools, Inc. and
subsidiaries.
</TABLE>
<PAGE>
Exhibit 5
January 22, 1998
Career Education Corporation
2800 W. Higgins Road
Suite 790
Hoffman Estates, Illinois 60195
Re: Registration Statement on Form S-1
----------------------------------
Ladies and Gentlemen:
We have acted as counsel for Career Education, a Delaware corporation (the
"Company") in connection with the preparation and filing of a Registration
Statement on Form S-1, File No. 333-37601 (the "Registration Statement"), with
the Securities and Exchange Commission under the Securities Act of 1933, as
amended. The Registration Statement relates to the sale by the Company of up to
an aggregate of 3,277,500 shares of the Company's Common Stock, $.01 par value
per share (the "Common Stock").
In connection with this opinion, we have relied as to matters of fact,
without investigation, upon certificates of public officials and others and upon
affidavits, certificates and written statements of directors, officers and
employees of, and the accountants for, the Company. We have also examined
originals or copies, certified or otherwise identified to our satisfaction, of
such instruments, documents and records as we have deemed relevant and necessary
to examine for the purpose of this opinion, including (a) the Registration
Statement, (b) the proposed form of Underwriting Agreement between the Company
and Credit Suisse First Boston Corporation and Credit Suisse First Boston
Corporation, as representatives of the several underwriters to be named therein
(the "Underwriting Agreement"), (c) the form of Amended and Restated Certificate
of Incorporation of the Company, (d) the form of Amended and Restated By-laws of
the Company, and (e) resolutions adopted by the Board of Directors and
stockholders of the Company.
In connection with this opinion, we have assumed the accuracy and
completeness of all documents and records that we have reviewed, the genuineness
of all signatures, the authenticity of the documents submitted to us as
originals and conformity to authentic original documents of all documents
submitted to us as certified, conformed or reproduced copies.
Based upon and subject to the foregoing, it is our opinion that up to the
3,277,500 shares of Common Stock covered by the Registration Statement
(including up to the 427,500 shares issuable upon exercise of the Underwriter's
over-allotment option), when sold by the Company and paid for in accordance with
the provisions of the Underwriting Agreement, will be legally issued, fully paid
and non-assessable shares of Common Stock.
Our opinion expressed above is limited to the General Corporation Law of
the State of Delaware, and we do not express any opinion concerning any other
laws. This opinion is given as of the date hereof, and we assume no obligation
to advise you of changes that may hereafter be brought to our attention.
We hereby consent to the reference to our name in the Registration
Statement under the caption "Legal Matters" and further consent to the filing of
this opinion as Exhibit 5 to the Registration Statement.
Very truly yours,
KATTEN MUCHIN & ZAVIS
<PAGE>
EXHIBIT 10.3
CAREER EDUCATION CORPORATION
1998 EMPLOYEE INCENTIVE COMPENSATION PLAN
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<C> <S> <C>
ARTICLE I ESTABLISHMENT........................................... 1
1.1 Purpose................................................. 1
ARTICLE II DEFINITIONS............................................. 1
2.1 "Affiliate"............................................. 1
2.2 "Agreement"............................................. 1
2.3 "Award"................................................. 1
2.4 "Beneficiary"........................................... 1
2.5 "Board of Directors" or "Board"......................... 2
2.6 "Cash Incentive Award".................................. 2
2.7 "Cause"................................................. 2
2.8 "Change in Control" and "Change in Control Price"....... 2
2.9 "Code" or "Internal Revenue Code"....................... 2
2.10 "Commission"............................................ 2
2.11 "Committee"............................................. 2
2.12 "Common Stock".......................................... 2
2.13 "Company"............................................... 2
2.14 "Covered Employee"...................................... 3
2.15 "Deferred Stock"........................................ 3
2.16 "Disability"............................................ 3
2.17 "Dividend Equivalent"................................... 3
2.18 "Effective Date"........................................ 3
2.19 "Exchange Act".......................................... 3
2.20 "Fair Market Value"..................................... 3
2.21 "Grant Date"............................................ 4
2.22 "Incentive Stock Option"................................ 4
2.23 "Initial Public Offering"............................... 4
2.24 "Nasdaq"................................................ 4
2.25 "Non-Qualified Stock Option"............................ 4
2.26 "Option Period"......................................... 4
2.27 "Option Price".......................................... 4
2.28 "Other Stock-Based Awards".............................. 4
2.29 "Participant"........................................... 4
2.30 "Performance Award"..................................... 4
2.31 "Plan".................................................. 4
2.32 "Representative"........................................ 4
2.33 "Restricted Stock"...................................... 5
2.34 "Retirement"............................................ 5
2.35 "Rule 16b-3"............................................ 5
2.36 "Securities Act"........................................ 5
2.37 "Stock Appreciation Right".............................. 5
2.38 "Stock Option" or "Option".............................. 5
2.39 "Termination of Employment"............................. 5
</TABLE>
i
<PAGE>
<TABLE>
<CAPTION>
<C> <S> <C>
2.40 "Transfer".............................................. 5
ARTICLE III ADMINISTRATION.......................................... 6
3.1 Committee Structure and Authority....................... 6
ARTICLE IV STOCK SUBJECT TO PLAN................................... 8
4.1 Number of Shares........................................ 8
4.2 Release of Shares....................................... 8
4.3 Restrictions on Shares.................................. 8
4.4 Stockholder Rights...................................... 8
4.5 Reasonable Efforts To Register.......................... 9
4.6 Anti-Dilution........................................... 9
ARTICLE V ELIGIBILITY............................................. 9
5.1 Eligibility............................................. 9
5.2 Per Person Award Limitations............................ 10
ARTICLE VI STOCK OPTIONS........................................... 10
6.1 General................................................. 10
6.2 Grant and Exercise...................................... 10
6.3 Terms and Conditions.................................... 10
6.4 Termination by Reason of Death.......................... 12
6.5 Termination by Reason of Disability..................... 12
6.6 Other Termination....................................... 12
6.7 Cashing Out of Option................................... 13
ARTICLE VII STOCK APPRECIATION RIGHTS............................... 13
7.1 General................................................. 13
7.2 Grant................................................... 13
7.3 Terms and Conditions.................................... 13
ARTICLE VIII RESTRICTED STOCK........................................ 15
8.1 General................................................. 15
8.2 Awards and Certificates................................. 15
8.3 Terms and Conditions.................................... 15
ARTICLE IX DEFERRED STOCK.......................................... 16
9.1 General................................................. 16
9.2 Terms and Conditions.................................... 17
ARTICLE X OTHER AWARDS............................................ 18
10.1 Bonus Stock and Awards In Lieu of Obligations........... 18
10.2 Dividend Equivalents.................................... 18
10.3 Other Stock-Based Awards................................ 18
10.4 Performance Awards...................................... 18
</TABLE>
ii
<PAGE>
<TABLE>
<CAPTION>
<C> <S> <C>
ARTICLE XI PROVISIONS APPLICABLE TO STOCK ACQUIRED UNDER
THE PLAN............................................................. 21
11.1 Limited Transfer During Offering..................................... 21
11.2 Committee Discretion................................................. 21
11.3 No Company Obligation................................................ 21
ARTICLE XII CHANGE IN CONTROL PROVISIONS......................................... 22
12.1 Impact of Event...................................................... 22
12.2 Definition of Change in Control...................................... 22
12.3 Change in Control Price.............................................. 23
ARTICLE XIII MISCELLANEOUS........................................................ 23
13.1 Amendments and Termination........................................... 23
13.2 Stand-Alone, Additional, Tandem, and Substitute Awards............... 24
13.3 Form and Timing of Payment Under Awards; Deferrals................... 24
13.4 Status of Awards Under Code Section 162(m)........................... 24
13.5 Unfunded Status of Plan; Limits on Transferability................... 25
13.6 General Provisions................................................... 25
13.7 Mitigation of Excise Tax............................................. 26
13.8 Rights with Respect to Continuance of Employment..................... 27
13.9 Awards in Substitution for Awards Granted by Other Corporations...... 27
13.10 Procedure for Adoption............................................... 27
13.11 Procedure for Withdrawal............................................. 27
13.12 Delay................................................................ 27
13.13 Headings............................................................. 27
13.14 Severability......................................................... 27
13.15 Successors and Assigns............................................... 28
13.16 Entire Agreement..................................................... 28
</TABLE>
iii
<PAGE>
CAREER EDUCATION CORPORATION
1998 EMPLOYEE INCENTIVE COMPENSATION PLAN
ARTICLE I
---------
ESTABLISHMENT
-------------
1.1 Purpose.
The Career Education Corporation 1998 Employee Incentive Compensation Plan
is hereby established by Career Education Corporation. The purpose of the Plan
is to promote the overall financial objectives of the Company and its
stockholders by motivating those persons selected to participate in the Plan to
achieve long-term growth in stockholder equity in the Company and by retaining
the association of those individuals who are instrumental in achieving this
growth. At the time the Company is a publicly held corporation, if any, it is
intended that compensation awarded under the Plan qualifies for tax
deductibility under Section 162(m) of the Code to the extent deemed appropriate
by the Committee (as defined herein). The Plan and the grant of awards hereunder
are expressly conditioned upon the Plan's approval by the stockholders of the
Company. If such approval is not obtained, then this Plan and all Awards (as
defined herein) hereunder shall be null and void ab initio. The Plan is adopted,
subject to stockholder approval, effective as of the date the Commission (as
defined herein) declares effective the registration statement on Form S-1
relating to the Initial Public Offering (as defined herein).
ARTICLE II
----------
DEFINITIONS
-----------
For purposes of the Plan, the following terms are defined as set forth
below:
2.1 "Affiliate" means any individual, corporation, partnership,
association, joint-stock company, trust, unincorporated association or other
entity (other than the Company) that directly, or indirectly through one or more
intermediaries, controls, is controlled by, or is under common control with, the
Company including, without limitation, any member of an affiliated group of
which the Company is a common parent corporation as provided in Section 1504 of
the Code.
2.2 "Agreement" or "Award Agreement" means, individually or collectively,
any agreement entered into pursuant to the Plan pursuant to which an Award is
granted to a Participant.
2.3 "Award" means any Option, Stock Appreciation Right, Restricted Stock,
Deferred Stock, Stock, Dividend Equivalent, Other Stock-Based Award, Performance
Award or Cash Incentive Award, together with any other right or interest granted
to a Participant under the Plan.
2.4 "Beneficiary" means the person, persons, trust or trusts which have
been designated by a Participant in such Participant's most recent written
beneficiary designation filed with the Committee to receive the benefits
specified under the Plan upon such Participant's death
<PAGE>
or to which Awards or other rights are transferred if and to the extent
permitted hereunder. If, upon a Participant's death, there is no designated
Beneficiary or surviving designated Beneficiary, then the term Beneficiary means
the person, persons, trust or trusts entitled by will or the laws of descent and
distribution to receive such benefits.
2.5 "Board of Directors" or "Board" means the Board of Directors of the
Company.
2.6 "Cash Incentive Award" means a conditional right granted to a
Participant under Section 10.4(c) hereof to receive a cash payment, unless
otherwise determined by the Committee, after the end of a specified period.
2.7 "Cause" shall mean, for purposes of whether and when a Participant has
incurred a Termination of Employment for Cause, any act or omission which
permits the Company to terminate the written agreement or arrangement between
the Participant and the Company or an Affiliate for "cause" as defined in such
agreement or arrangement, or in the event there is no such agreement or
arrangement or the agreement or arrangement does not define the term "cause" or
a substantially equivalent term, then Cause shall mean (a) any act or omission
which the Company believes is of a criminal nature and the result of which the
Company believes is detrimental to the interests of the Company or an Affiliate,
(b) the material breach of a fiduciary duty owing to the Company, including,
without limitation, fraud or embezzlement or (c) conduct, or the omission of
conduct, on the part of the Participant which constitutes a material breach of
any statutory or common-law duty of loyalty to the Company or an Affiliate.
2.8 "Change in Control" and "Change in Control Price" have the meanings
set forth in Sections 12.2 and 12.3, respectively.
2.9 "Code" or "Internal Revenue Code" means the Internal Revenue Code of
1986, as amended, Treasury Regulations (including proposed regulations)
thereunder and any subsequent Internal Revenue Code.
2.10 "Commission" means the Securities and Exchange Commission or any
successor agency.
2.11 "Committee" means the Compensation Committee of the Board and/or such
other individuals designated by the Board to administer the Plan.
2.12 "Common Stock" means the shares of the Company's Common Stock, $.01
par value, whether presently or hereafter issued, and any other stock or
security resulting from adjustment thereof as described hereinafter or the
common stock of any successor to the Company which is designated for the purpose
of the Plan.
2.13 "Company" means Career Education Corporation, a Delaware corporation,
and includes any successor or assignee corporation or corporations into which
the Company may be merged, changed or consolidated; any corporation for whose
securities the securities of the Company shall be exchanged; and any assignee of
or successor to substantially all of the assets of the Company.
2
<PAGE>
2.14 "Covered Employee" means a Participant who is a "covered employee"
within the meaning of Section 162(m) of the Code.
2.15 "Deferred Stock" means a right, granted to a Participant under
Section 9.1 hereof, to receive Common Stock, cash or a combination thereof at
the end of a specified deferral period.
2.16 "Disability" means a mental or physical illness that entitles the
Participant to receive benefits under the long-term disability plan of the
Company or an Affiliate, or if the Participant is not covered by such a plan or
the Participant is not an employee of the Company or an Affiliate, a mental or
physical illness that renders a Participant totally and permanently incapable of
performing the Participant's duties for the Company or an Affiliate.
Notwithstanding the foregoing, a Disability shall not qualify under this Plan if
it is the result of (i) a willfully self-inflicted injury or willfully self-
induced sickness; or (ii) an injury or disease contracted, suffered, or incurred
while participating in a felony criminal offense. Determination of Disability
shall be made by the Committee. Determination of Disability for purposes of
this Plan shall not be construed to be an admission of disability for any other
purpose.
2.17 "Dividend Equivalent" means a right, granted to a Participant under
Section 10.2, to receive cash, Common Stock, other Awards or other property
equal in value to dividends paid with respect to a specified number of shares of
Common Stock.
2.18 "Effective Date" means the date the Commission declares effective the
registration statement on Form S-1 relating to the Initial Public Offering.
2.19 "Exchange Act" means the Securities Exchange Act of 1934, as amended,
and the rules and regulations promulgated thereunder.
2.20 "Fair Market Value" means the value determined on the basis of the
good faith determination of the Committee, without regard to whether the Common
Stock is restricted or represents a minority interest, pursuant to the
applicable method described below:
(a) if the Common Stock is listed on a national securities exchange
or quoted on Nasdaq, the closing price of the Common Stock on the relevant
date (or, if such date is not a business day or a day on which quotations
are reported, then on the immediately preceding date on which quotations
were reported), as reported by the principal national exchange on which
such shares are traded (in the case of an exchange) or by Nasdaq, as the
case may be;
(b) if the Common Stock is not listed on a national securities
exchange or quoted on Nasdaq, but is actively traded in the over-the-
counter market, the average of the closing bid and asked prices for the
Common Stock on the relevant date (or, if such date is not a business day
or a day on which quotations are reported, then on the immediately
preceding date on which quotations were reported), or the most recent
preceding date for which such quotations are reported; and
(c) if, on the relevant date, the Common Stock is not publicly traded
or reported as described in (a) or (b), the fair market value determined in
good faith by the Committee.
3
<PAGE>
2.21 "Grant Date" means the date as of which an Agreement is entered into
pursuant to the Plan.
2.22 "Incentive Stock Option" means any Stock Option intended to be and
designated as an "incentive stock option" which satisfies the requirements of
Section 422 of the Code.
2.23 "Initial Public Offering" means the Company's initial public offering
of Common Stock under the Securities Act.
2.24 "Nasdaq" means The Nasdaq Stock Market, including the Nasdaq National
Market.
2.25 "Non-Qualified Stock Option" means an Option which is not an
Incentive Stock Option.
2.26 "Option Period" means the period during which an Option shall be
exercisable in accordance with the related Agreement and Article VI.
2.27 "Option Price" means the price at which the Common Stock may be
purchased under an Option as provided in Section 6.3(b).
2.28 "Other Stock-Based Awards" means Awards granted to a Participant
under Section 10.3 hereof.
2.29 "Participant" means a person who satisfies the eligibility conditions
of Article V and with whom an Agreement has been entered into under the Plan,
and in the event a Representative is appointed for a Participant or another
person becomes a Representative, then the term "Participant" shall mean such
Representative. The term shall also include a trust for the benefit of the
Participant, the Participant's parents, spouse or descendants, or a custodian
under a uniform gifts to minors act or similar statute for the benefit of the
Participant's descendants, to the extent permitted by the Committee.
Notwithstanding the foregoing, the term "Termination of Employment" shall mean
the Termination of Employment of the person to whom the Award was originally
granted.
2.30 "Performance Award" means a right, granted to a Participant under
Section 10.4 hereof, to receive Awards based upon performance criteria specified
by the Committee.
2.31 "Plan" means the Career Education Corporation 1998 Stock Incentive
Compensation Plan, as herein set forth and as may be amended from time to time.
2.32 "Representative" means (a) the person or entity acting as the
executor or administrator of a Participant's estate pursuant to the last will
and testament of a Participant or pursuant to the laws of the jurisdiction in
which the Participant had the Participant's primary residence at the date of the
Participant's death; (b) the person or entity acting as the guardian or
temporary guardian of a Participant; (c) the person or entity which is the
Beneficiary of the Participant upon or following the Participant's death; or (d)
any person to whom an Option has been permissibly transferred; provided that
only one of the foregoing shall be the Representative at any point in time as
determined under applicable law and recognized by the Committee.
4
<PAGE>
2.33 "Restricted Stock" means Common Stock granted to a Participant under
Section 8.1 hereof, that is subject to certain restrictions and to a risk of
forfeiture.
2.34 "Retirement" means the Participant's Termination of Employment after
attaining either the normal retirement age or the early retirement age as
defined in the principal (as determined by the Committee) tax-qualified plan of
the Company or an Affiliate, if the Participant is covered by such a plan, or if
the Participant is not covered by such a plan, then age 65.
2.35 "Rule 16b-3" means Rule 16b-3, as from time to time in effect and
applicable to the Plan and Participants, promulgated by the Commission under
Section 16 of the Exchange Act.
2.36 "Securities Act" means the Securities Act of 1933, as amended, and
the rules and regulations promulgated thereunder.
2.37 "Stock Appreciation Right" means a right granted under Article VII.
2.38 "Stock Option" or "Option" means a right, granted to a Participant
under Section 6.1 hereof, to purchase Common Stock at a specified price during
specified time periods.
2.39 "Termination of Employment" means the occurrence of any act or event
that actually or effectively causes or results in the person's ceasing, for
whatever reason, to be an officer, director or employee of, or consultant to,
the Company or of any subsidiary of the Company, or to be an officer, director
or employee of, or consultant to, any entity that provides services to the
Company or a subsidiary of the Company, including, without limitation, death,
Disability, dismissal, severance at the election of the Participant, Retirement,
or severance as a result of the discontinuance, liquidation, sale or transfer by
the Company or its subsidiaries of all businesses owned or operated by the
Company or its subsidiaries. With respect to any person who is not an employee
with respect to the Company, an Agreement shall establish what act or event
shall constitute a Termination of Employment for purposes of the Plan. A
transfer of employment from the Company to a subsidiary, or from a subsidiary to
the Company, will not be a Termination of Employment, unless expressly
determined by the Committee. A Termination of Employment shall occur for an
employee who is employed by a subsidiary of the company if the subsidiary shall
cease to be a subsidiary and the Participant shall not immediately thereafter
become an employee of the Company or a subsidiary of the Company.
2.40 "Transfer" means any sale, gift, assignment, distribution,
conveyance, pledge, hypothecation, encumbrance or other transfer of title,
whether by operation of law or otherwise.
In addition, certain other terms used herein have definitions given to them
in the first place in which they are used.
5
<PAGE>
ARTICLE III
-----------
ADMINISTRATION
--------------
3.1 Committee Structure and Authority. The Plan shall be administered by a
committee (the "Committee") of the Board of Directors composed of no fewer than
two directors designated by the Board of Directors. A majority of the Committee
shall constitute a quorum, and the acts of a majority of the members present at
any meeting at which a quorum is present, or acts approved in writing by all of
the members, shall be the acts of the Committee. A member of the Committee shall
not exercise any discretion respecting himself or herself under the Plan. The
Board shall have the authority to remove, replace or fill any vacancy of any
member of the Committee upon notice to the Committee and the affected member.
Any member of the Committee may resign upon notice to the Board. The Board may
select different Committees to administer Awards for different classes of
Participants. The Committee may allocate among one or more of its members, or
may delegate to one or more of its agents, such duties and responsibilities as
it determines.
Among other things, the Committee shall have the authority, subject to the
terms of the Plan:
(a) to select those persons to whom Awards may be granted from time
to time;
(b) to determine whether and to what extent Awards are to be granted
hereunder;
(c) to determine the number of shares of Common Stock to be covered
by each Award granted hereunder;
(d) to determine the terms and conditions of any Award granted
hereunder (including, but not limited to, any Option Price or Option
Period, any exercise restriction or limitation or exercise acceleration,
forfeiture or waiver, and any performance criteria);
(e) to adjust the terms and conditions, at any time or from time to
time, of any Award, subject to the limitations of Section 13.1;
(f) to determine to what extent and under what circumstances Common
Stock and other amounts payable with respect to an Award shall be deferred;
(g) to determine under what circumstances an Award may be settled in
cash or Common Stock;
(h) to provide for the forms of Agreements to be utilized in
connection with the Plan;
(i) to determine whether a Participant has a Disability or a
Retirement;
6
<PAGE>
(j) to determine what securities law requirements are applicable to
the Plan, Awards and the issuance of shares of Common Stock under the Plan
and to require of a Participant that appropriate action be taken with
respect to such requirements;
(k) to cancel, with the consent of Participants or as otherwise
provided in the Plan or an Agreement, outstanding Awards;
(l) to interpret and make final determinations with respect to the
remaining number of shares of Common Stock available under this Plan;
(m) to require, as a condition of the exercise of an Award or the
issuance or transfer of a certificate of Common Stock, the withholding from
a Participant of such amount of any Federal, state or local taxes as may be
necessary in order for the Company or any other employer to obtain a
deduction or as may be otherwise required by law;
(n) to determine whether and under what circumstances a Participant
has incurred a Termination of Employment;
(o) to determine whether the Company or any other person has a right
or obligation to purchase Common Stock from a Participant and, if so, the
terms and conditions on which such Common Stock is to be purchased;
(p) to determine the restrictions or limitations on the transfer of
Common Stock;
(q) to determine whether an Award is to be adjusted, modified or
purchased, or is to become fully exercisable, under the Plan or the terms
of an Agreement;
(r) to determine the permissible methods of Award exercise and
payment, including cashless exercise arrangements;
(s) to adopt, amend and rescind such rules and regulations as, in its
opinion, may be advisable in the administration of the Plan; and
(t) to appoint and compensate agents, counsel, auditors or other
specialists to aid it in the discharge of its duties.
The Committee shall have the authority to adopt, alter and repeal such
administrative rules, guidelines and practices governing the Plan as it shall,
from time to time, deem advisable, to interpret the terms and provisions of the
Plan and any Award issued under the Plan (and any Agreement) and to otherwise
supervise the administration of the Plan. The Committee's policies and
procedures may differ with respect to Awards granted at different times or to
different Participants.
Any determination made by the Committee pursuant to the provisions of the
Plan shall be made in its sole discretion and, in the case of any determination
relating to an Award, may be made at the time of the grant of the Award or,
unless in contravention of any express term
7
<PAGE>
of the Plan or an Agreement, at any time thereafter. All decisions made by the
Committee pursuant to the provisions of the Plan shall be final and binding on
all persons, including the Company and Participants. No determination shall be
subject to de novo review if challenged in court.
ARTICLE IV
----------
STOCK SUBJECT TO PLAN
---------------------
4.1 Number of Shares. Subject to the adjustment under Section 4.6, the
total number of shares of Common Stock reserved and available for distribution
pursuant to Awards under the Plan shall be 600,000 shares of Common Stock
authorized for issuance on the Effective Date. Such shares may consist, in whole
or in part, of authorized and unissued shares or treasury shares.
4.2 Release of Shares. Subject to Section 6.3(f), if any shares of Common
Stock that are subject to any Award cease to be subject to an Award or are
forfeited, if any Award otherwise terminates without issuance of shares of
Common Stock being made to the Participant, or if any shares (whether or not
restricted) of Common Stock are received by the Company in connection with the
exercise of an Award, including the satisfaction of tax withholding, such
shares, in the discretion of the Committee, may again be available for
distribution in connection with Awards under the Plan.
4.3 Restrictions on Shares. Shares of Common Stock issued as or in
conjunction with an Award shall be subject to the terms and conditions specified
herein and to such other terms, conditions and restrictions as the Committee in
its discretion may determine or provide in an Agreement. The Company shall not
be required to issue or deliver any certificates for shares of Common Stock,
cash or other property prior to (i) the listing of such shares on any stock
exchange or Nasdaq (or other public market) on which the Common Stock may then
be listed (or regularly traded), (ii) the completion of any registration or
qualification of such shares under Federal or state law, or any ruling or
regulation of any government body which the Committee determines to be necessary
or advisable, and (iii) the satisfaction of any applicable withholding
obligation in order for the Company or an Affiliate to obtain a deduction with
respect to the exercise of an Award. The Company may cause any certificate for
any share of Common Stock to be delivered to be properly marked with a legend or
other notation reflecting the limitations on transfer of such Common Stock as
provided in this Plan or as the Committee may otherwise require. The Committee
may require any person exercising an Award to make such representations and
furnish such information as it may consider appropriate in connection with the
issuance or delivery of the shares of Common Stock in compliance with applicable
law or otherwise. Fractional shares shall not be delivered, but shall be rounded
to the next lower whole number of shares.
4.4 Stockholder Rights. No person shall have any rights of a stockholder
as to shares of Common Stock subject to an Award until, after proper exercise of
the Award or other action required, such shares shall have been recorded on the
Company's official stockholder records as having been issued or transferred.
Upon exercise of an Award or any portion thereof, the Company will have thirty
(30) days in which to issue the shares, and the Participant will not be
8
<PAGE>
treated as a stockholder for any purpose whatsoever prior to such issuance. No
adjustment shall be made for cash dividends or other rights for which the record
date is prior to the date such shares are recorded as issued or transferred in
the Company's official stockholder records, except as provided herein or in an
Agreement.
4.5 Reasonable Efforts To Register. The Company will use its reasonable
efforts to register under the Securities Act the Common Stock delivered or
deliverable pursuant to Awards on Commission Form S-8 if available to the
Company for this purpose (or any successor or alternate form that is
substantially similar to that form to the extent available to effect such
registration), in accordance with the rules and regulations governing such
forms, when the Committee, in its sole discretion, shall deem such registration
appropriate. The Company will use its reasonable efforts to cause the
registration statement to become effective and to file such supplements and
amendments to the registration statement as may be necessary to keep the
registration statement in effect until the earliest of (a) one year following
the expiration of the Award Period of the last Award outstanding, (b) the date
the Company is no longer a reporting company under the Exchange Act and (c) the
date all Participants have disposed of all shares delivered pursuant to any
Award.
4.6 Anti-Dilution. In the event, after the Effective Date, of any Company
stock dividend, stock split, combination or exchange of shares, recapitalization
or other change in the capital structure of the Company, corporate separation or
division of the Company (including, but not limited to, a split-up, spin-off,
split-off or distribution to Company stockholders other than a normal cash
dividend), sale by the Company of all or a substantial portion of its assets
(measured on either a stand-alone or consolidated basis), reorganization, rights
offering, partial or complete liquidation, or any other corporate transaction,
Company stock offering or event involving the Company and having an effect
similar to any of the foregoing, then the Committee shall adjust or substitute,
as the case may be, the number of shares of Common Stock available for Awards
under the Plan, the number of shares of Common Stock covered by outstanding
Awards, the exercise price per share of outstanding Awards, and performance
conditions and any other characteristics or terms of the Awards as the Committee
shall deem necessary or appropriate to reflect equitably the effects of such
changes to the Participants; provided, however, that the Committee may limit any
such adjustment so as to maintain the deductibility of the Awards under Section
162(m) and that any fractional shares resulting from such adjustment shall be
eliminated by rounding to the next lower whole number of shares with appropriate
payment for such fractional shares as shall reasonably be determined by the
Committee.
ARTICLE V
---------
ELIGIBILITY
-----------
5.1 Eligibility. Except as herein provided, the persons who shall be
eligible to participate in the Plan and be granted Awards shall be those persons
who are directors, officers, and employees of, and consultants to, the Company
or any subsidiary of the Company, who shall be in a position, in the opinion of
the Committee, to make contributions to the growth, management, protection and
success of the Company and its subsidiaries. Of those persons described in the
preceding sentence, the Committee may, from time to time, select persons to be
9
<PAGE>
granted Awards and shall determine the terms and conditions with respect
thereto. In making any such selection and in determining the form of the Award,
the Committee may give consideration to the person's functions and
responsibilities, the person's contributions to the Company and its
subsidiaries, the value of the individual's service to the Company and its
subsidiaries and such other factors deemed relevant by the Committee.
5.2 Per Person Award Limitations. In each fiscal year during any part of
which this Plan is in effect, a Participant may not be granted Awards relating
to more than 100,000 shares of Common Stock, subject to adjustment as provided
in Section 4.6, under each of Articles VI, VII, VIII and IX and Sections 10.1,
10.2, 10.3 and 10.4(b). In addition, the maximum aggregate amount that may be
paid out as final Cash Incentive Awards or other cash Awards in any fiscal year
to any Participant shall be $1,000,000.
ARTICLE VI
----------
STOCK OPTIONS
-------------
6.1 General. The Committee shall have authority to grant Stock Options
under the Plan at any time or from time to time. Stock Options may be either
Incentive Stock Options or Non-Qualified Stock Options. An Option shall entitle
the Participant to receive shares of Common Stock upon exercise of such Option,
subject to the Participant's satisfaction in full of any conditions,
restrictions or limitations imposed in accordance with the Plan or an Option
Agreement (the terms and provisions of which may differ from other Agreements),
including, without limitation, payment of the Option Price.
6.2 Grant and Exercise. The grant of a Stock Option shall occur as of the
date the Committee determines. Each Option granted under this Plan shall be
evidenced by an Agreement, in a form approved by the Committee, which shall
embody the terms and conditions of such Option and which shall be subject to the
express terms and conditions set forth in the Plan. Such Agreement shall become
effective upon execution by the Participant. To the extent that any Stock Option
is not designated as an Incentive Stock Option or, even if so designated, does
not qualify as an Incentive Stock Option, it shall constitute a Non-Qualified
Stock Option. Anything in the Plan to the contrary notwithstanding, no term of
the Plan relating to Incentive Stock Options shall be interpreted, amended or
altered, nor shall any discretion or authority granted under the Plan be
exercised, so as to disqualify the Plan under Section 422 of the Code or,
without the consent of the Participant affected, to disqualify any Incentive
Stock Option under such Section 422.
6.3 Terms and Conditions. Stock Options shall be subject to such terms and
conditions as shall be determined by the Committee, including the following:
(a) Option Period. The Option Period of each Stock Option shall be
fixed by the Committee; provided that no Stock Option shall be exercisable
more than ten (10) years after the date the Stock Option is granted. In the
case of an Incentive Stock Option granted to an individual who owns more
than ten percent (10%) of the combined voting power of all classes of stock
of the Company, a corporation which is a parent corporation
10
<PAGE>
of the Company or any subsidiary of the Company (each as defined in Section
424 of the Code), the Option Period shall not exceed five (5) years from
the date of grant. No Option which is intended to be an Incentive Stock
Option shall be granted more than ten (10) years from the date the Plan is
adopted by the Company or the date the Plan is approved by the stockholders
of the Company, whichever is earlier.
(b) Option Price. The Option Price per share of the Common Stock
purchasable under an Option shall be determined by the Committee in its
sole and absolute discretion; provided, however, that in the case of an
Incentive Stock Option granted to an individual who owns more than ten
percent (10%) of the combined voting power of all classes of stock of the
Company, a corporation which is a parent corporation of the Company or any
subsidiary of the Company (each as defined in Section 424 of the Code), the
Option Price per share shall not be less than one hundred ten percent
(110%) of the Fair Market Value per share on the date the Option is
granted.
(c) Exercisability. Subject to Section 12.1, Stock Options shall be
exercisable at such time or times and subject to such terms and conditions
as shall be determined by the Committee. If the Committee provides that
any Stock Option is exercisable only in installments, the Committee may at
any time waive such installment exercise provisions, in whole or in part,
and, subject to the foregoing, may at any time accelerate the
exercisability of any Stock Option. If the Committee intends that an
Option be an Incentive Stock Option, the Committee may, in its discretion,
provide that the aggregate Fair Market Value (determined at the date the
Option is granted) of the Common Stock as to which such Incentive Stock
Option which is exercisable for the first time during any calendar year
shall not exceed $100,000.
(d) Method of Exercise. Subject to the provisions of this Article VI,
a Participant may exercise Stock Options, in whole or in part, at any time
during the Option Period by the Participant's giving to the Company written
notice of exercise on a form provided by the Committee (if available)
specifying the number of shares of Common Stock subject to the Stock Option
to be purchased. Such notice shall be accompanied by payment in full of
the purchase price by cash or check or such other form of payment as the
Company may accept. If set forth in an Agreement or otherwise approved by
the Committee, payment in full or in part may also be made (i) by
delivering Common Stock already owned by the Participant having a total
Fair Market Value on the date of such delivery equal to the Option Price;
(ii) by the execution and delivery of a note or other evidence of
indebtedness (and any security agreement thereunder) satisfactory to the
Committee and permitted in accordance with Section 6.3(e); (iii) by the
delivery of cash or the extension of credit by a broker-dealer to whom the
Participant has submitted a notice of exercise or otherwise indicated an
intent to exercise the Option (in accordance with Part 220, Chapter II,
Title 12 of the Code of Federal Regulations, so-called "cashless"
exercise); or (iv) by any combination of the foregoing. In the case of an
Incentive Stock Option, the right to make a payment in the form of already
owned shares of Common Stock of the same class as the Common Stock subject
to the Stock Option may be authorized only at the time the Stock Option is
granted. No shares of Common Stock shall be issued until full payment
therefor, as determined by the Committee, has been made.
11
<PAGE>
(e) Company Loan or Guarantee. Upon the exercise of any Option and
subject to the pertinent Agreement and the discretion of the Committee, the
Company may at the request of the Participant:
(i) lend to the Participant an amount equal to such portion of
the Option Price as the Committee may determine; or
(ii) guarantee a loan obtained by the Participant from a third-
party for the purpose of tendering the Option Price.
The terms and conditions of any loan or guarantee, including the term,
interest rate and any security interest thereunder and whether the loan
shall be with recourse, shall be determined by the Committee, except that
no extension of credit or guarantee shall obligate the Company for an
amount to exceed the lesser of the aggregate Fair Market Value per share of
the Common Stock on the date of exercise, less the par value of the shares
of Common Stock to be purchased upon the exercise of the Award, or the
amount permitted under applicable laws or the regulations and rules of the
Federal Reserve Board and any other governmental agency having
jurisdiction.
(f) Non-transferability of Options. Except as provided herein or in
an Agreement, no Stock Option or interest therein shall be transferable by
the Participant other than by will or by the laws of descent and
distribution, and all Stock Options shall be exercisable during the
Participant's lifetime only by the Participant.
6.4 Termination by Reason of Death. Unless otherwise provided in an
Agreement or determined by the Committee, if a Participant incurs a Termination
of Employment due to death, any unexpired and unexercised Stock Option held by
such Participant shall thereafter be fully exercisable for a period of ninety
(90) days following the date of the appointment of a Representative (or such
other period or no period as the Committee may specify) or until the expiration
of the Option Period, whichever period is the shorter.
6.5 Termination by Reason of Disability. Unless otherwise provided in an
Agreement or determined by the Committee, if a Participant incurs a Termination
of Employment due to a Disability, any unexpired and unexercised Stock Option
held by such Participant shall thereafter be fully exercisable by the
Participant for the period of ninety (90) days (or such other period or no
period as the Committee may specify) immediately following the date of such
Termination of Employment or until the expiration of the Option Period,
whichever period is shorter, and the Participant's death at any time following
such Termination of Employment due to Disability shall not affect the foregoing.
In the event of the Participant's Termination of Employment by reason of
Disability, if an Incentive Stock Option is exercised after the expiration of
the exercise periods that apply for purposes of Section 422 of the Code, such
Stock Option will thereafter be treated as a Non-Qualified Stock Option.
6.6 Other Termination. Unless otherwise provided in an Agreement or
determined by the Committee, if a Participant incurs a Termination of Employment
due to Retirement or if the Termination of Employment is involuntary on the part
of the Participant (but is not due to death or Disability or with Cause), any
Stock Option held by such Participant shall immediately
12
<PAGE>
terminate, except that such Stock Option, to the extent then exercisable, may be
exercised for the a period of the ninety (90) days immediately following the
date of such Termination of Employment or until the expiration of the Option
Period, whichever is shorter. Unless otherwise provided in an Agreement or
determined by the Committee, if a Participant incurs a Termination of Employment
which is voluntary on the part of the Participant (and is not due to Retirement)
or if the Participant's Termination of Employment is for Cause, any Stock Option
held by such Participant shall terminate immediately, without any exercise
thereof. The death or Disability of a Participant after a Termination of
Employment otherwise provided herein shall not extend the time permitted to
exercise an Option.
6.7 Cashing Out of Option. On receipt of written notice of exercise, the
Committee may elect to cash out all or part of the portion of any Stock Option
to be exercised by paying the Participant an amount, in cash or Common Stock,
equal to the excess of the Fair Market Value of the Common Stock that is subject
to the Option over the Option Price times the number of shares of Common Stock
subject to the Option on the effective date of such cash-out.
ARTICLE VII
-----------
STOCK APPRECIATION RIGHTS
-------------------------
7.1 General. The Committee shall have authority to grant Stock
Appreciation Rights under the Plan at any time or from time to time. Subject to
the Participant's satisfaction in full of any conditions, restrictions or
limitations imposed in accordance with the Plan or an Agreement, a Stock
Appreciation Right shall entitle the Participant to surrender to the Company the
Stock Appreciation Right and to be paid therefor in shares of the Common Stock,
cash or a combination thereof as herein provided, the amount described in
Section 7.3(b).
7.2 Grant. Stock Appreciation Rights may be granted in conjunction with
all or part of any Stock Option granted under the Plan, in which case the
exercise of the Stock Appreciation Right shall require the cancellation of a
corresponding portion of the Stock Option, and the exercise of a Stock Option
shall result in the cancellation of a corresponding portion of the Stock
Appreciation Right. In the case of a Non-Qualified Stock Option, such rights
may be granted either at or after the time of grant of such Stock Option. In
the case of an Incentive Stock Option, such rights may be granted only at the
time of grant of such Stock Option. A Stock Appreciation Right may also be
granted on a stand-alone basis. Each Stock Appreciation Right granted under
this Plan shall be evidenced by an Agreement, which shall embody the terms and
conditions of such Stock Appreciation Right and which shall be subject to the
terms and conditions set forth in this Plan.
7.3 Terms and Conditions. Stock Appreciation Rights shall be subject to
such terms and conditions as shall be determined by the Committee, including the
following:
(a) Period and Exercise. The term of a Stock Appreciation Right shall
be established by the Committee. If granted in conjunction with a Stock
Option, the Stock Appreciation Right shall have a term which is the same as
the Option Period and shall be exercisable only at such time or times and
to the extent the related Stock Options
13
<PAGE>
would be exercisable in accordance with the provisions of Article VI. A
Stock Appreciation Right which is granted on a stand-alone basis shall be
for such period and shall be exercisable at such times and to the extent
provided in an Agreement. Stock Appreciation Rights shall be exercised by
the Participant's giving written notice of exercise on a form provided by
the Committee (if available) to the Company specifying the portion of the
Stock Appreciation Right to be exercised.
(b) Amount. Upon the exercise of a Stock Appreciation Right granted
in conjunction with a Stock Option, a Participant shall be entitled to
receive an amount in cash, shares of Common Stock or both as determined by
the Committee or as otherwise permitted in an Agreement equal in value to
the excess of the Fair Market Value per share of Common Stock over the
Option Price per share of Common Stock specified in the related Agreement
multiplied by the number of shares in respect of which the Stock
Appreciation Right is exercised. In the case of a Stock Appreciation Right
granted on a stand-alone basis, the Agreement shall specify the value to be
used in lieu of the Option Price per share of Common Stock. The aggregate
Fair Market Value per share of the Common Stock shall be determined as of
the date of exercise of such Stock Appreciation Right.
(c) Non-transferability of Stock Appreciation Rights. Stock
Appreciation Rights shall be transferable only when and to the extent that
a Stock Option would be transferable under the Plan, unless otherwise
provided in an Agreement.
(d) Termination. A Stock Appreciation Right shall terminate at such
time as a Stock Option would terminate under the Plan, unless otherwise
provided in an Agreement.
(e) Effect on Shares Under the Plan. Upon the exercise of a Stock
Appreciation Right, the Stock Option or part thereof to which such Stock
Appreciation Right is related shall be deemed to have been exercised for
the purpose of the limitation set forth in Section 4.1 on the number of
shares of Common Stock to be issued under the Plan, but only to the extent
of the number of shares of Common Stock covered by the Stock Appreciation
Right at the time of exercise based on the value of the Stock Appreciation
Right at such time.
(f) Incentive Stock Option. A Stock Appreciation Right granted in
tandem with an Incentive Stock Option shall not be exercisable unless the
Fair Market Value of the Common Stock on the date of exercise exceeds the
Option Price. In no event shall any amount paid pursuant to the Stock
Appreciation Right exceed the difference between the Fair Market Value on
the date of exercise and the Option Price.
14
<PAGE>
ARTICLE VIII
------------
RESTRICTED STOCK
----------------
8.1 General. The Committee shall have authority to grant Restricted Stock
under the Plan at any time or from time to time, either alone or in addition to
other Awards granted under the Plan. The Committee shall determine the persons
to whom and the time or times at which grants of Restricted Stock will be
awarded, the number of shares of Restricted Stock to be awarded to any
Participant, the time or times within which such Awards may be subject to
forfeiture and any other terms and conditions of the Awards. Each Award shall
be confirmed by, and be subject to the terms of, an Agreement. The Committee
may condition the grant of Restricted Stock upon the attainment of specified
performance goals by the Participant or by the Company or an Affiliate
(including a division or department of the Company or an Affiliate) for or
within which the Participant is primarily employed or upon such other factors or
criteria as the Committee shall determine. The provisions of Restricted Stock
Awards need not be the same with respect to any Participant.
8.2 Awards and Certificates. Notwithstanding the limitations on issuance
of shares of Common Stock otherwise provided in the Plan, each Participant
receiving an Award of Restricted Stock shall be issued a certificate in respect
of such shares of Restricted Stock. Such certificate shall be registered in the
name of such Participant and shall bear an appropriate legend referring to the
terms, conditions, and restrictions applicable to such Award as determined by
the Committee. The Committee may require that the certificates evidencing such
shares be held in custody by the Company until the restrictions thereon shall
have lapsed and that, as a condition of any Award of Restricted Stock, the
Participant shall have delivered a stock power, endorsed in blank, relating to
the Common Stock covered by such Award.
8.3 Terms and Conditions. Shares of Restricted Stock shall be subject to
the following terms and conditions:
(a) Limitations on Transferability. Subject to the provisions of the
Plan and the Agreement, during a period set by the Committee commencing
with the date of such Award (the "Restriction Period"), the Participant
shall not be permitted to sell, assign, transfer, pledge or otherwise
encumber any interest in shares of Restricted Stock.
(b) Rights. Except as provided in Section 8.3(a), the Participant
shall have, with respect to shares of Restricted Stock, all of the rights
of a stockholder of the Company holding the class of Common Stock that is
the subject of the Restricted Stock, including, if applicable, the right to
vote the shares and the right to receive any cash dividends. Unless
otherwise determined by the Committee and subject to the Plan, cash
dividends on the class of Common Stock that is the subject of the
Restricted Stock shall be automatically deferred and reinvested in
additional Restricted Stock, and dividends on the class of Common Stock
that is the subject of the Restricted Stock payable in Common Stock shall
be paid in the form of Restricted Stock of the same class as the Common
Stock on which such dividends were paid.
15
<PAGE>
(c) Acceleration. Based on service, performance by the Participant or
by the Company or an Affiliate, including any division or department for
which the Participant is employed, or such other factors or criteria as the
Committee may determine, the Committee may provide for the lapse of
restrictions in installments and may accelerate the vesting of all or any
part of any Award and waive the restrictions for all or any part of such
Award.
(d) Forfeiture. Unless otherwise provided in an Agreement or
determined by the Committee, if the Participant incurs a Termination of
Employment during the Restriction Period due to death or Disability, the
restrictions shall lapse and the Participant shall be fully vested in the
Restricted Stock. Unless otherwise provided in an Agreement or determined
by the Committee, upon a Participant's Termination of Employment for any
reason during the Restriction Period other than death or Disability, all
shares of Restricted Stock still subject to restriction shall be forfeited
by the Participant, except the Committee shall have the discretion to waive
in whole or in part any or all remaining restrictions with respect to any
or all of such Participant's Restricted Stock.
(e) Delivery. If and when the Restriction Period expires without a
prior forfeiture of the Restricted Stock subject to such Restriction
Period, certificates for such shares shall be delivered to the Participant.
(f) Election. A Participant may elect to further defer receipt of the
Restricted Stock for a specified period or until a specified event, subject
in each case to the Committee's approval and to such terms as are
determined by the Committee. Subject to any exceptions adopted by the
Committee, such election must be made one (1) year prior to completion of
the Restriction Period.
ARTICLE IX
----------
DEFERRED STOCK
--------------
9.1 General. The Committee shall have authority to grant Deferred Stock
under the Plan at any time or from time to time, either alone or in addition to
other Awards granted under the Plan. The Committee shall determine the persons
to whom and the time or times at which Deferred Stock will be awarded, the
number of shares of Deferred Stock to be awarded to any Participant, the
duration of the period (the "Deferral Period") prior to which the Common Stock
will be delivered, and the conditions under which receipt of the Common Stock
will be deferred and any other terms and conditions of the Awards. Each Award
shall be confirmed by, and be subject to the terms of, an Agreement. The
Committee may condition the grant of Deferred Stock upon the attainment of
specified performance goals by the Participant or by the Company or an
Affiliate, including a division or department of the Company or an Affiliate for
or within which the Participant is primarily employed, or upon such other
factors or criteria as the Committee shall determine. The provisions of
Deferred Stock Awards need not be the same with respect to any Participant.
16
<PAGE>
9.2 Terms and Conditions. Deferred Stock Awards shall be subject to the
following terms and conditions:
(a) Limitations on Transferability. Subject to the provisions of the
Plan and the Agreement, Deferred Stock Awards, or any interest therein, may
not be sold, assigned, transferred, pledged or otherwise encumbered during
the Deferral Period. At the expiration of the Deferral Period (or Elective
Deferral Period as defined in Section 9.2(e), where applicable), the
Committee may elect to deliver Common Stock, cash equal to the Fair Market
Value of such Common Stock or a combination of cash and Common Stock to the
Participant for the shares covered by the Deferred Stock Award.
(b) Rights. Unless otherwise determined by the Committee and subject
to the Plan, cash dividends on the Common Stock that is the subject of the
Deferred Stock Award shall be automatically deferred and reinvested in
additional Deferred Stock, and dividends on the Common Stock that is the
subject of the Deferred Stock Award payable in Common Stock shall be paid
in the form of Deferred Stock of the same class as the Common Stock on
which such dividends were paid.
(c) Acceleration. Based on service, performance by the Participant or
by the Company or the Affiliate, including any division or department for
which the Participant is employed, or such other factors or criteria as the
Committee may determine, the Committee may provide for the lapse of
deferral limitations in installments and may accelerate the vesting of all
or any part of any Award and waive the deferral limitations for all or any
part of such Award.
(d) Forfeiture. Unless otherwise provided in an Agreement or
determined by the Committee, if the Participant incurs a Termination of
Employment during the Deferral Period due to death or Disability, the
restrictions shall lapse and the Participant shall be fully vested in the
Deferred Stock. Unless otherwise provided in an Agreement or determined by
the Committee, upon a Participant's Termination of Employment for any
reason during the Deferral Period other than death or Disability, the
rights to the shares still covered by the Award shall be forfeited by the
Participant, except the Committee shall have the discretion to waive in
whole or in part any or all remaining deferral limitations with respect to
any or all of such Participant's Deferred Stock.
(e) Election. A Participant may elect further to defer receipt of the
Deferred Stock payable under an Award (or an installment of an Award) for a
specified period or until a specified event (an "Elective Deferral
Period"), subject in each case to the Committee's approval and to such
terms as are determined by the Committee. Subject to any exceptions
adopted by the Committee, such election must be made at least one (1) year
prior to completion of the Deferral Period for the Award (or of the
applicable installment thereof).
17
<PAGE>
ARTICLE X
---------
OTHER AWARDS
------------
10.1 Bonus Stock and Awards In Lieu of Obligations. The Committee is
authorized to grant Common Stock as a bonus, or to grant Common Stock or other
Awards in lieu of Company obligations to pay cash or deliver other property
under other plans or compensatory arrangements. Common Stock or Awards granted
hereunder shall be subject to such other terms as shall be determined by the
Committee.
10.2 Dividend Equivalents. The Committee is authorized to grant Dividend
Equivalents to a Participant, entitling the Participant to receive cash, Common
Stock, other Awards, or other property equal in value to dividends paid with
respect to a specified number of shares of Common Stock. Dividend Equivalents
may be awarded on a free-standing basis or in connection with another Award.
The Committee may provide that Dividend Equivalents will be paid or distributed
when accrued or will be deemed to have been reinvested in additional Common
Stock, Awards or other investment vehicles, and subject to such restrictions on
transferability and risks of forfeiture, as the Committee may specify.
10.3 Other Stock-Based Awards. The Committee is authorized, subject to
limitations under applicable law, to grant to Participants such other Awards
that may be denominated or payable in, valued in whole or in part by reference
to, or otherwise based on, or related to, Common Stock, as deemed by the
Committee to be consistent with the purposes of the Plan, including, without
limitation, convertible or exchangeable debt securities, other rights
convertible or exchangeable into Common Stock, purchase rights for Common Stock,
Awards with value and payment contingent upon performance of the Company or any
other factors designated by the Committee, and Awards valued by reference to the
book value of Common Stock or the value of securities of or the performance of
specified subsidiaries. The Committee shall determine the terms and conditions
of such Awards. Common Stock delivered pursuant to an Award in the nature of a
purchase right granted under this Section 10.3 shall be purchased for such
consideration and paid for at such times, by such methods, and in such forms,
including, without limitation, cash, Common Stock, other Awards, or other
property, as the Committee shall determine. Cash awards, as an element of or
supplement to any other Award under the Plan, may also be granted pursuant to
this Section 10.3.
10.4 Performance Awards.
(a) Performance Conditions. The right of a Participant to exercise or
receive a grant or settlement of any Award, and its timing, may be subject
to performance conditions specified by the Committee. The Committee may
use business criteria and other measures of performance it deems
appropriate in establishing any performance conditions, and may exercise
its discretion to reduce or increase the amounts payable under any Award
subject to performance conditions, except as limited under Sections 10.4(b)
and 10.4(c) hereof in the case of a Performance Award intended to qualify
under Code Section 162(m).
18
<PAGE>
(b) Performance Awards Granted to Designated Covered Employees. If the
Committee determines that a Performance Award to be granted to a person the
Committee regards as likely to be a Covered Employee should qualify as
"performance-based compensation" for purposes of Code Section 162(m), the grant
and/or settlement of such Performance Award shall be contingent upon achievement
of preestablished performance goals and other terms set forth in this Section
10.4(b).
(i) Performance Goals Generally. The performance goals for any such
Performance Awards shall consist of one or more business criteria and a
targeted level or levels of performance with respect to such criteria, as
specified by the Committee consistent with this Section 10.4(b).
Performance goals shall be objective and shall otherwise meet the
requirements of Code Section 162(m), including the requirement that the
level or levels of performance targeted by the Committee result in the
performance goals being "substantially uncertain."
(ii) Business Criteria. One or more of the following business criteria
for the Company, on a consolidated basis, and/or for specified subsidiaries
or business units of the Company (except with respect to the total
stockholder return and earnings per share criteria), shall be used
exclusively by the Committee in establishing performance goals for such
Performance Awards: (1) total stockholder return; (2) such total
stockholder return as compared to total return (on a comparable basis) of a
publicly available index, such as, but not limited to, the Standard &
Poor's 500 or the Nasdaq-U.S. Index; (3) net revenue; (4) net income; (5)
pre-tax income; (6) EBITDA (earnings before interest, taxes, depreciation
and amortization); (7) EBITDA margin (EBITDA as a percentage of net
revenue); (8) operating income; (9) operating margin (operating income as a
percentage of net revenue); (10) earnings per share; (11) return on equity;
(12) return on capital; and (13) return on investment. The foregoing
business criteria shall also be exclusively used in establishing
performance goals for Cash Incentive Awards granted under Section 10.4(c)
hereof.
(iii) Performance Period: Timing For Establishing Performance Goals.
Achievement of performance goals in respect of such Performance Awards
shall be measured over such periods as may be specified by the Committee.
Performance goals shall be established on or before the dates that are
required or permitted for "performance-based compensation" under Code
Section 162(m).
(iv) Settlement of Performance Awards; Other Terms. Settlement of such
Performance Awards may be in cash or Common Stock, or other Awards, or
other property, in the discretion of the Committee. The Committee may, in
its discretion, reduce the amount of a settlement otherwise to be made in
connection with such Performance Awards, but may not exercise discretion to
increase any such amount payable in respect of a Performance Award subject
to this Section 10.4(b). The Committee shall specify the circumstances in
which such Performance Awards shall be forfeited or paid in the event of a
Termination of Employment or a Change in Control prior to the end of a
performance period or
19
<PAGE>
settlement of Performance Awards, and other terms relating to such
Performance Awards.
(c) Cash Incentive Awards Granted to Designated Covered Employees. The
Committee may grant Cash Incentive Awards to Participants including those
designated by the Committee as likely to be Covered Employees, which Awards
shall represent a conditional right to receive a payment in cash, unless
otherwise determined by the Committee, after the end of a specified fiscal year
or fiscal quarter or other period specified by the Committee, in accordance with
this Section 10.4(c).
(i) Cash Incentive Award. The Cash Incentive Award for Participants
the Committee regards as likely to be regarded as Covered Employees shall
be based on achievement of a performance goal or goals based on one or more
of the business criteria set forth in Section 10.4(b), and may be based on
such criteria for any other Participant. The Committee may specify the
amount of the individual Cash Incentive Award as a percentage of any such
business criteria, a percentage thereof in excess of a threshold amount or
another amount which need not bear a strictly mathematical relationship to
such business criteria. The Committee may establish a Cash Incentive Award
pool that includes Participants the Committee regards likely to be Covered
Employees, which shall be an unfunded pool, for purposes of measuring
Company performance in connection with Cash Incentive Awards. The amount of
the Cash Incentive Award pool shall be based upon the achievement of a
performance goal or goals based on one or more of the business criteria set
forth in Section 10.4(b) hereof in the given performance period, as granted
by the Committee. The Committee may specify the amount of the Cash
Incentive Award pool as a percentage of any of such business criteria, a
percentage thereof in excess of a threshold amount or another amount which
need not bear a strictly mathematical relationship to such business
criteria.
(ii) Potential Cash Incentive Awards. Not later than the date required
or permitted for "qualified performance-based compensation" under Code
Section 162(m), the Committee shall determine the Participants who will
potentially receive Cash Incentive Awards for the specified fiscal year,
quarter or other period, either as individual Cash Incentive Awards or out
of an Cash Incentive Award pool established by such date and the amount or
method for determining the amount of the individual Cash Incentive Award or
the amount of such Participant's portion of the Cash Incentive Award pool.
(iii) Payout of Cash Incentive Awards. After the end of the specified
fiscal year, quarter or other period, as the case may be, the Committee
shall determine the amount, if any, of potential individual Cash Incentive
Award payable to a Participant or of any Cash Incentive Award pool and the
maximum amount of potential Cash Incentive Award payable to each
Participant in any Cash Incentive Award pool. The Committee may, in its
discretion, determine that the amount payable to any Participant as a final
Cash Incentive Award shall be increased or reduced from the amount of his
or her potential Cash Incentive Award, including a determination to make no
final Award whatsoever, but may
20
<PAGE>
not exercise discretion to increase any such amount in the case of a Cash
Incentive Award intended to qualify under Code Section 162(m). The
Committee shall specify the circumstances in which a Cash Incentive Award
shall be paid or forfeited in the event of Termination of Employment by the
Participant or a Change in Control prior to the end of the period for
measuring performance or the payout of such Cash Incentive Award, and other
terms relating to such Cash Incentive Award in accordance with the Plan.
Upon the completion of the measuring period and the determination of the
right to payment and the amount, the Committee shall direct the Company to
make payment.
(d) Written Determinations. All determinations by the Committee as to
the establishment of performance goals and the potential Performance Awards
or Cash Incentive Awards related to such performance goals and as to the
achievement of performance goals relating to such Awards, the amount of any
Cash Incentive Award pool and the amount of final Cash Incentive Awards,
shall be made in writing in the case of any Award intended to qualify under
Code Section 162(m). The Committee may not delegate any responsibility
relating to such Performance Awards or Cash Incentive Awards.
ARTICLE XI
----------
PROVISIONS APPLICABLE TO STOCK ACQUIRED UNDER THE PLAN
------------------------------------------------------
11.1 Limited Transfer During Offering. In the event there is an effective
registration statement under the Securities Act pursuant to which shares of
Common Stock shall be offered for sale in an underwritten offering, a
Participant shall not, during the period requested by the underwriters managing
the registered public offering, effect any public sale or distribution of shares
received directly or indirectly as, or pursuant to an exercise of, any Award.
11.2 Committee Discretion. The Committee may in its sole discretion include
in any Agreement an obligation that the Company purchase a Participant's shares
of Common Stock received upon the exercise of an Award (including the purchase
of any unexercised Awards which have not expired), or may obligate a Participant
to sell shares of Common Stock to the Company, upon such terms and conditions as
the Committee may determine and set forth in an Agreement. The provisions of
this Article XI shall be construed by the Committee in its sole discretion and
shall be subject to such other terms and conditions as the Committee may from
time to time determine. Notwithstanding any provision herein to the contrary,
the Company may upon determination by the Committee assign its right to purchase
shares of Common Stock under this Article XI, whereupon the assignee of such
right shall have all the rights, duties and obligations of the Company with
respect to purchase of the shares of Common Stock.
11.3 No Company Obligation. None of the Company, an Affiliate or the
Committee shall have any duty or obligation to disclose affirmatively to a
record or beneficial holder of Common Stock or an Award, and such holder shall
have no right to be advised of, any material information regarding the Company
or any Affiliate at any time prior to, upon or in connection
21
<PAGE>
with receipt or the exercise of an Award or the Company's purchase of Common
Stock or an Award from such holder in accordance with the terms hereof.
ARTICLE XII
-----------
CHANGE IN CONTROL PROVISIONS
----------------------------
12.1 Impact of Event. Notwithstanding any other provision of the Plan to
the contrary, unless otherwise provided in an Agreement, in the event of a
Change in Control (as defined in Section 12.2):
(a) Any Stock Appreciation Rights and Stock Options outstanding as of
the date such Change in Control and not then exercisable shall become fully
exercisable to the full extent of the original grant;
(b) The restrictions and deferral limitations applicable to any
Restricted Stock, Deferred Stock or other Award shall lapse, and such
Restricted Stock, Deferred Stock or other Award shall become free of all
restrictions and become fully vested and transferable to the full extent of
the original grant.
(c) The performance goals and other conditions with respect to any
outstanding Performance Award or Cash Incentive Award shall be deemed to
have been satisfied in full, and such Award shall be fully distributable,
if and to the extent provided by the Committee in the Agreement relating to
such Award or otherwise, notwithstanding that the Award may not be fully
deductible to the Company under Section 162(m) of the Code.
(d) Notwithstanding any other provision of the Plan, unless the
Committee shall provide otherwise in an Agreement, a Participant shall have
the right, whether or not the Award is fully exercisable or may be
otherwise realized by the Participant, by giving notice during the sixty
(60) day period from and after a Change in Control to the Company, to elect
to surrender all or part of a stock-based Award to the Company and to
receive cash, within thirty (30) days of such notice, in an amount equal to
the amount by which the "Change in Control Price" (as defined in Section
12.3) per share of Common Stock on the date of such election shall exceed
the amount which the Participant must pay to exercise the Award per share
of Common Stock under the Award (the "Spread"), multiplied by the number of
shares of Common Stock granted under the Award as to which the right
granted under this Section 12.1 shall have been exercised.
12.2 Definition of Change in Control. For purposes of this Plan, a "Change
in Control" shall be deemed to have occurred if (a) any corporation, person or
other entity (other than the Company, a majority-owned subsidiary of the Company
or any of its subsidiaries, or an employee benefit plan (or related trust)
sponsored or maintained by the Company), including a "group" as defined in
Section 13(d)(3) of the Exchange Act, becomes the beneficial owner of stock
representing more than twenty percent (20%) of the combined voting power of the
Company's
22
<PAGE>
then outstanding securities; (b)(i) the stockholders of the Company approve a
definitive agreement to merge or consolidate the Company with or into another
corporation other than a majority-owned subsidiary of the Company, or to sell or
otherwise dispose of all or substantially all of the Company's assets, and (ii)
the persons who were the members of the Board of Directors of the Company prior
to such approval do not represent a majority of the directors of the surviving,
resulting or acquiring entity or the parent thereof; (c) the stockholders of the
Company approve a plan of liquidation of the Company; or (d) within any period
of 24 consecutive months, persons who were members of the Board of Directors of
the Company immediately prior to such 24-month period, together with any persons
who were first elected as directors (other than as a result of any settlement of
a proxy or consent solicitation contest or any action taken to avoid such a
contest) during such 24-month period by or upon the recommendation of persons
who were members of the Board of Directors of the Company immediately prior to
such 24-month period and who constituted a majority of the Board of Directors of
the Company at the time of such election, cease to constitute a majority of the
Board.
12.3 Change in Control Price. For purposes of the Plan, "Change in Control
Price" means the higher of (a) the highest reported sales price of a share of
Common Stock in any transaction reported on the principal exchange on which such
shares are listed or on Nasdaq during the sixty (60) day period prior to and
including the date of a Change in Control or (b) if the Change in Control is the
result of a tender or exchange offer, merger, consolidation, liquidation or sale
of all or substantially all of the assets of the Company (in each case a
"Corporate Transaction"), the highest price per share of Common Stock paid in
such Corporate Transaction, except that, in the case of Incentive Stock Options
and Stock Appreciation Rights relating to Incentive Stock Options, such price
shall be based only on the Fair Market Value of the Common Stock on the date any
such Incentive Stock Option or Stock Appreciation Right is exercised. To the
extent that the consideration paid in any such Corporate Transaction consists
all or in part of securities or other non-cash consideration, the value of such
securities or other non-cash consideration shall be determined in the sole
discretion of the Committee.
ARTICLE XIII
------------
MISCELLANEOUS
-------------
13.1 Amendments and Termination. The Board may amend, alter or discontinue
the Plan at any time, but no amendment, alteration or discontinuation shall be
made which would impair the rights of a Participant under a Stock Option, Stock
Appreciation Right, Restricted Stock Award or Deferred Stock Award theretofore
granted without the Participant's consent. In addition, no such amendment shall
be made without the approval of the Company's stockholders to the extent such
approval is required by law or agreement.
The Committee may amend the Plan at any time provided that (a) no amendment
shall impair the rights of any Participant under any Award theretofore granted
without the Participant's consent, and (b) any amendment shall be subject to the
approval or rejection of the Board.
23
<PAGE>
The Committee may amend the terms of any Award or other Award theretofore
granted, prospectively or retroactively, but no such amendment shall impair the
rights of any Participant without the Participant's consent or reduce an Option
Price.
Subject to the above provisions, the Board shall have authority to amend
the Plan to take into account changes in law and tax and accounting rules, as
well as other developments, and to grant Awards which qualify for beneficial
treatment under such rules without stockholder approval. Notwithstanding
anything in the Plan to the contrary, if any right under this Plan would cause a
transaction to be ineligible for pooling of interests accounting that would, but
for the right hereunder, be eligible for such accounting treatment, the
Committee may modify or adjust the right so that pooling of interests accounting
shall be available, including the substitution of Common Stock having a Fair
Market Value equal to the cash otherwise payable hereunder for the right which
caused the transaction to be ineligible for pooling of interests accounting.
13.2 Stand-Alone, Additional, Tandem, and Substitute Awards. Awards
granted under the Plan may, in the discretion of the Committee, be granted
either alone or in addition to, in tandem with, or in substitution or exchange
for, any other Award or any award granted under another plan of the Company, any
subsidiary, or any business entity to be acquired by the Company or a
subsidiary, or any other right of a Participant to receive payment from the
Company or any subsidiary. Such additional, tandem, and substitute or exchange
Awards may be granted at any time. If an Award is granted in substitution or
exchange for another Award or award, the Committee shall require the surrender
of such other Award or award in consideration for the grant of the new Award.
In addition, Awards may be granted in lieu of cash compensation, including in
lieu of cash amounts payable under other plans of the Company or any subsidiary.
13.3 Form and Timing of Payment Under Awards; Deferrals. Subject to the
terms of the Plan and any applicable Agreement, payments to be made by the
Company or an Affiliate upon the exercise of an Award or settlement of an Award
may be made in such forms as the Committee shall determine, including, without
limitation, cash, Common Stock, other Awards or other property, and may be made
in a single payment or transfer, in installments, or on a deferred basis. The
settlement of any Award may be accelerated, and cash may be paid in lieu of
Common Stock in connection with such settlement, in the discretion of the
Committee or upon occurrence of one or more specified events (in addition to a
Change in Control). Installment or deferred payments may be required by the
Committee (subject to Section 13.1 of the Plan) or permitted at the election of
the Participant. Payments may include, without limitation, provisions for the
payment or crediting of reasonable interest on installment or deferred payments
or the granting or crediting of Dividend Equivalents in respect of installment
or deferred payments denominated in Common Stock.
13.4 Status of Awards Under Code Section 162(m). It is the intent of the
Company that Awards granted to persons who are Covered Employees within the
meaning of Code Section 162(m) shall constitute "qualified performance-based
compensation" satisfying the requirements of Code Section 162(m). Accordingly,
the provisions of the Plan shall be interpreted in a manner consistent with Code
Section 162(m). If any provision of the Plan or any agreement relating to such
an Award does not comply or is inconsistent with the requirements
24
<PAGE>
of Code Section 162(m), such provision shall be construed or deemed amended to
the extent necessary to conform to such requirements.
13.5 Unfunded Status of Plan; Limits on Transferability. It is intended
that the Plan be an "unfunded" plan for incentive and deferred compensation.
The Committee may authorize the creation of trusts or other arrangements to meet
the obligations created under the Plan to deliver Common Stock or make payments;
provided, however, that, unless the Committee otherwise determines, the
existence of such trusts or other arrangements is consistent with the "unfunded"
status of the Plan. Unless otherwise provided in this Plan or in an Agreement,
no Award shall be subject to the claims of Participant's creditors, and no Award
may be transferred, assigned, alienated or encumbered in any way other than by
will or the laws of descent and distribution or to a Representative upon the
death of the Participant.
13.6 General Provisions.
(a) Representation. The Committee may require each person purchasing
or receiving shares pursuant to an Award to represent to and agree with the
Company in writing that such person is acquiring the shares without a view
to the distribution thereof. The certificates for such shares may include
any legend which the Committee deems appropriate to reflect any
restrictions on transfer.
(b) No Additional Obligation. Nothing contained in the Plan shall
prevent the Company or an Affiliate from adopting other or additional
compensation arrangements for its employees.
(c) Withholding. No later than the date as of which an amount first
becomes includible in the gross income of the Participant for Federal
income tax purposes with respect to any Award, the Participant shall pay to
the Company (or other entity identified by the Committee), or make
arrangements satisfactory to the Company or other entity identified by the
Committee regarding the payment of, any Federal, state, local or foreign
taxes of any kind required by law to be withheld with respect to such
amount required in order for the Company or an Affiliate to obtain a
current deduction. If the Participant disposes of shares of Common Stock
acquired pursuant to an Incentive Stock Option in any transaction
considered to be a disqualifying transaction under the Code, the
Participant must give written notice of such transfer and the Company shall
have the right to deduct any taxes required by law to be withheld from any
amounts otherwise payable to the Participant. Unless otherwise determined
by the Committee, withholding obligations may be settled with Common Stock,
including Common Stock that is part of the Award that gives rise to the
withholding requirement. The obligations of the Company under the Plan
shall be conditional on such payment or arrangements, and the Company and
its Affiliates shall, to the extent permitted by law, have the right to
deduct any such taxes from any payment otherwise due to the Participant.
(d) Reinvestment. The reinvestment of dividends in additional
Deferred or Restricted Stock at the time of any dividend payment shall be
permissible only if sufficient shares of Common Stock are available under
the Plan for such reinvestment (taking into account then outstanding
Options and other Awards).
25
<PAGE>
(e) Representation. The Committee shall establish such procedures as
it deems appropriate for a Participant to designate a Representative to
whom any amounts payable in the event of the Participant's death are to be
paid.
(f) Controlling Law. The Plan and all Awards made and actions taken
thereunder shall be governed by and construed in accordance with the laws
of the State of Illinois (other than its law respecting choice of law).
The Plan shall be construed to comply with all applicable law and to avoid
liability to the Company, an Affiliate or a Participant, including, without
limitation, liability under Section 16(b) of the Exchange Act.
(g) Offset. Any amounts owed to the Company or an Affiliate by the
Participant of whatever nature may be offset by the Company from the value
of any shares of Common Stock, cash or other thing of value under this Plan
or an Agreement to be transferred to the Participant, and no shares of
Common Stock, cash or other thing of value under this Plan or an Agreement
shall be transferred unless and until all disputes between the Company and
the Participant have been fully and finally resolved and the Participant
has waived all claims to such against the Company or an Affiliate.
(h) Fail Safe. With respect to persons subject to Section 16 of the
Exchange Act, transactions under this Plan are intended to comply with all
applicable conditions of Rule 16b-3, as applicable. To the extent any
action by the Committee fails to so comply, it shall be deemed null and
void, to the extent permitted by law and deemed advisable by the Committee.
13.7 Mitigation of Excise Tax. If any payment or right accruing to a
Participant under this Plan (without the application of this Section 13.7),
either alone or together with other payments or rights accruing to the
Participant from the Company or an Affiliate ("Total Payments"), would
constitute a "parachute payment" (as defined in Section 280G of the Code and
regulations thereunder), such payment or right shall be reduced to the largest
amount or greatest right that will result in no portion of the amount payable or
right accruing under the Plan being subject to an excise tax under Section 4999
of the Code or being disallowed as a deduction under Section 280G of the Code.
The determination of whether any reduction in the rights or payments under this
Plan is to apply shall be made by the Committee in good faith after consultation
with the Participant, and such determination shall be conclusive and binding on
the Participant. The Participant shall cooperate in good faith with the
Committee in making such determination and providing the necessary information
for this purpose. The foregoing provisions of this Section 13.7 shall apply with
respect to any person only if, after reduction for any applicable Federal excise
tax imposed by Section 4999 of the Code and Federal income tax imposed by the
Code, the Total Payments accruing to such person would be less than the amount
of the Total Payments as reduced, if applicable, under the foregoing provisions
of the Plan and after reduction for only Federal income taxes. In addition, the
foregoing provisions of this Section 13.7 are not meant to be exclusive with
regard to any Participant, and the Company or an Affiliate may, pursuant to
employment, severance or other agreements, provide for additional payments to a
Participant due to a Participant's rights under an award constituting a
"parachute payment."
26
<PAGE>
13.8 Rights with Respect to Continuance of Employment. Nothing contained
herein shall be deemed to alter the relationship between the Company or an
Affiliate and a Participant, or the contractual relationship between a
Participant and the Company or an Affiliate if there is a written contract
regarding such relationship. Nothing contained herein shall be construed to
constitute a contract of employment between the Company or an Affiliate and a
Participant. The Company or an Affiliate and each of the Participants continue
to have the right to terminate the employment or service relationship at any
time for any reason, except as provided in a written contract.
13.9 Awards in Substitution for Awards Granted by Other Corporations.
Awards (including cash in respect of fractional shares) may be granted under the
Plan from time to time in substitution for awards held by employees, directors
or service providers of other corporations who are about to become officers,
directors or employees of the Company or an Affiliate as the result of a merger
or consolidation of the employing corporation with the Company or an Affiliate,
or the acquisition by the Company or an Affiliate of the assets of the employing
corporation, or the acquisition by the Company or Affiliate of the stock of the
employing corporation, as the result of which it becomes a designated employer
under the Plan. The terms and conditions of the Awards so granted may vary from
the terms and conditions set forth in this Plan at the time of such grant as the
Committee may deem appropriate to conform, in whole or in part, to the
provisions of the awards in substitution for which they are granted.
13.10 Procedure for Adoption. Any Affiliate of the Company may by
resolution of such Affiliate's board of directors, with the consent of the Board
of Directors and subject to such conditions as may be imposed by the Board of
Directors, adopt the Plan for the benefit of its employees as of the date
specified in the board resolution.
13.11 Procedure for Withdrawal. Any Affiliate which has adopted the Plan
may, by resolution of the board of directors of such Affiliate, with the consent
of the Board of Directors and subject to such conditions as may be imposed by
the Board of Directors, terminate its adoption of the Plan.
13.12 Delay. The Company shall have the right to suspend or delay any time
period described in the Plan or an Agreement if the Committee shall determine
that the action may constitute a violation of any law or result in liability
under any law to the Company, an Affiliate or a stockholder of the Company until
such time as the action required or permitted shall not constitute a violation
of law or result in liability to the Company, an Affiliate or a stockholder of
the Company.
13.13 Headings. The headings contained in this Plan are for reference
purposes only and shall not affect the meaning or interpretation of this Plan.
13.14 Severability. If any provision of this Plan shall for any reason be
held to be invalid or unenforceable, such invalidity or unenforceability shall
not effect any other provision hereby, and this Plan shall be construed as if
such invalid or unenforceable provision were omitted.
27
<PAGE>
13.15 Successors and Assigns. This Plan shall inure to the benefit of and
be binding upon each successor and assign of the Company. All obligations
imposed upon a Participant, and all rights granted to the Company hereunder,
shall be binding upon the Participant's heirs, legal representatives and
successors.
13.16 Entire Agreement. This Plan and the Agreements constitute the
entire agreement with respect to the subject matter hereof and thereof, provided
that in the event of any inconsistency between the Plan and any Agreement, the
terms and conditions of the Plan shall control.
28
<PAGE>
EXHIBIT 10.5
CAREER EDUCATION CORPORATION
1998 NON-EMPLOYEE DIRECTORS' STOCK OPTION PLAN
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
ARTICLE I ESTABLISHMENT...................................... 1
1.1 Purpose............................................ 1
ARTICLE II DEFINITIONS........................................ 1
2.1 "Affiliate"........................................ 1
2.2 "Agreement" or "Option Agreement".................. 1
2.3 "Board of Directors" or "Board".................... 1
2.4 A "Change in Control".............................. 1
2.5 "Code" or "Internal Revenue Code".................. 2
2.6 "Commission"....................................... 2
2.7 "Committee"........................................ 2
2.8 "Common Stock"..................................... 2
2.9 "Company".......................................... 2
2.10 "Director"......................................... 2
2.11 "Disability"....................................... 2
2.12 "Effective Date"................................... 2
2.13 "Exchange Act"..................................... 3
2.14 "Fair Market Value"................................ 3
2.15 "Grant Date"....................................... 3
2.16 "Initial Public Offering".......................... 3
2.17 "Nasdaq"........................................... 3
2.18 "Option"........................................... 3
2.19 "Option Period".................................... 3
2.20 "Option Price"..................................... 3
2.21 "Participant"...................................... 3
2.22 "Plan"............................................. 4
2.23 "Representative"................................... 4
2.24 "Rule 16b-3"....................................... 4
2.25 "Securities Act"................................... 4
ARTICLE III ADMINISTRATION..................................... 4
3.1 Committee Structure and Authority.................. 4
ARTICLE IV STOCK SUBJECT TO PLAN.............................. 5
4.1 Number of Shares................................... 5
4.2 Release of Shares.................................. 5
4.3 Restrictions on Shares............................. 5
4.4 Reasonable Efforts To Register..................... 6
4.5 Adjustments........................................ 6
4.6 Limited Transfer During Offering................... 6
</TABLE>
i
<PAGE>
<TABLE>
<CAPTION>
Page
----
<C> <S> <C>
ARTICLE V OPTIONS........................................... 7
5.1 Eligibility....................................... 7
5.2 Grant and Exercise................................ 7
5.3 Terms and Conditions.............................. 7
5.4 Termination....................................... 8
ARTICLE VI MISCELLANEOUS..................................... 8
6.1 Amendments and Termination........................ 8
6.2 General Provisions................................ 9
6.3 Special Provisions Regarding a Change in Control.. 10
6.4 Headings.......................................... 11
6.5 Severability...................................... 11
6.6 Successors and Assigns............................ 11
6.7 Entire Agreement.................................. 11
</TABLE>
ii
<PAGE>
CAREER EDUCATION CORPORATION
NON-EMPLOYEE DIRECTORS' STOCK OPTION PLAN
ARTICLE I
---------
ESTABLISHMENT
-------------
1.1 Purpose. The Career Education Corporation 1998 Non-employee Directors'
Stock Option Plan is hereby established by Career Education Corporation,
effective as of the date the Commission (as defined herein) declares effective
the registration statement on Form S-1 relating to the Initial Public Offering
(as defined herein). The purpose of the Plan is to promote the overall financial
objectives of the Company and its stockholders by motivating directors of the
Company who are not employees, to further align the interests of such directors
with those of the stockholders of the Company and to achieve long-term growth
and performance of the Company. The Plan and the grant of Options hereunder are
expressly conditioned upon the Plan's approval by the stockholders of the
Company.
ARTICLE II
----------
DEFINITIONS
-----------
For purposes of the Plan, the following terms are defined as set forth
below:
2.1 "Affiliate" means any individual, corporation, partnership, limited
liability company, association, joint-stock company, trust, unincorporated
association or other entity (other than the Company) that directly, or
indirectly through one or more intermediaries, controls, is controlled by, or is
under common control with, the Company, including, without limitation, any
member of an affiliated group of which the Company is a common parent
corporation as provided in Section 1504 of the Code.
2.2 "Agreement" or "Option Agreement" means, individually or collectively,
any agreement entered into pursuant to this Plan pursuant to which an Option is
granted to a Participant.
2.3 "Board of Directors" or "Board" means the Board of Directors of the
Company.
2.4 A "Change in Control" shall be deemed to have occurred if (a) any
corporation, person or other entity (other than the Company, a majority-owned
subsidiary of the Company or any of its subsidiaries, or an employee benefit
plan (or related trust) sponsored or maintained by the Company), including a
"group" as defined in Section 13(d)(3) of the Securities Exchange Act of 1934,
as amended, becomes the beneficial owner of stock representing more than twenty
percent (20%) of the combined voting power of the Company's then outstanding
securities; (b)(i) the stockholders of the Company approve a definitive
agreement to merge or consolidate the Company with or into another corporation
other than a majority-owned subsidiary of the
<PAGE>
Company, or to sell or otherwise dispose of all or substantially all of the
Company's assets, and (ii) the persons who were the members of the Board of
Directors of the Company prior to such approval do not represent a majority of
the directors of the surviving, resulting or acquiring entity or the parent
thereof; (c) the stockholders of the Company approve a plan of liquidation of
the Company; or (d) within any period of 24 consecutive months, persons who were
members of the Board of Directors of the Company immediately prior to such 24-
month period, together with any persons who were first elected as directors
(other than as a result of any settlement of a proxy or consent solicitation
contest or any action taken to avoid such a contest) during such 24-month period
by or upon the recommendation of persons who were members of the Board of
Directors of the Company immediately prior to such 24-month period and who
constituted a majority of the Board of Directors of the Company at the time of
such election, cease to constitute a majority of the Board.
2.5 "Code" or "Internal Revenue Code" means the Internal Revenue Code of
1986, as amended, Treasury Regulations (including proposed regulations)
thereunder and any subsequent Internal Revenue Code.
2.6 "Commission" means the Securities and Exchange Commission or any
successor agency.
2.7 "Committee" means the person or persons appointed by the Board of
Directors to administer the Plan.
2.8 "Common Stock" means the shares of the Common Stock, par value $.__
per share, of the Company, whether presently or hereafter issued, and any other
stock or security resulting from adjustment thereof as described hereinafter or
the common stock of any successor to the Company which is designated for the
purpose of the Plan.
2.9 "Company" means Career Education Corporation and includes any
successor or assignee corporation or corporations into which the Company may be
merged, changed or consolidated; any corporation for whose securities the
securities of the Company shall be exchanged; and any assignee of or successor
to substantially all of the assets of the Company.
2.10 "Director" means each and any director who serves on the Board and who
is not an officer or employee of the Company or any of its Affiliates.
2.11 "Disability" means a mental or physical illness that renders a
Participant totally and permanently incapable of performing the Participant's
duties for the Company or an Affiliate. Notwithstanding the foregoing, a
Disability shall not qualify under the Plan if it is the result of (i) a
willfully self-inflicted injury or willfully self-induced sickness; or (ii) an
injury or disease contracted, suffered, or incurred, while participating in a
criminal offense. The determination of Disability shall be made by the
Committee. The determination of Disability for purposes of the Plan shall not be
construed to be an admission of disability for any other purpose.
2.12 "Effective Date" means the date the Commission declares effective
the registration statement on Form S-1 relating to the Initial Public Offering.
2
<PAGE>
2.13 "Exchange Act" means the Securities Exchange Act of 1934, as amended,
and the rules and regulations promulgated thereunder.
2.14 "Fair Market Value" means the value determined on the basis of the
good faith determination of the Committee, pursuant to the applicable method
described below:
(a) if the Common Stock is listed on a national securities exchange
or quoted on Nasdaq, the closing price of the Common Stock on the relevant
date (or, if such date is not a business day or a day on which quotations
are reported, then on the immediately preceding date on which quotations
were reported), as reported by the principal national exchange on which
such shares are traded (in the case of an exchange) or by Nasdaq, as the
case may be;
(b) if the Common Stock is not listed on a national securities
exchange or quoted on Nasdaq, but is actively traded in the over-the-
counter market, the average of the closing bid and asked prices for the
Common Stock on the relevant date (or, if such date is not a business day
or a day on which quotations are reported, then on the immediately
preceding date on which quotations were reported), or the most recent
preceding date for which such quotations were reported; and
(c) if, on the relevant date, the Common Stock is not publicly traded
or reported as described in (a) or (b), the fair market value determined in
good faith by the Committee.
2.15 "Grant Date" means the date as of which an Option is granted pursuant
to the Plan.
2.16 "Initial Public Offering" means the Company's initial public offering
of Common Stock under the Securities Act.
2.17 "Nasdaq" means The Nasdaq Stock Market, including the Nasdaq National
Market.
2.18 "Option" means the right to purchase the number of shares of Common
Stock specified by the Plan at a price and for a term fixed by the Plan, and
subject to such other limitations and restrictions as the Plan and the Committee
impose.
2.19 "Option Period" means the period during which the Option shall be
exercisable in accordance with the Agreement and Article V.
2.20 "Option Price" means the price at which the Common Stock may be
purchased under an Option as provided in Section 5.3.
2.21 "Participant" means a Director to whom an Option has been granted
under the Plan, and in the event a Representative is appointed for a Participant
or another person becomes a Representative, then the term "Participant" shall
mean such appointed Representative. The term shall also include a trust for the
benefit of the Participant, the Participant's parents, spouse or descendants; a
partnership the interests in which are for the benefit of the Participant, the
Participant's parents, spouse or descendants; or a custodian under a uniform
gifts to minors act
3
<PAGE>
or similar statute for the benefit of the Participant's descendants, to the
extent permitted by the Committee. Notwithstanding the foregoing, the term
"Termination of Directorship" shall mean the Termination of Directorship of the
Director.
2.22 "Plan" means the Career Education Corporation Non-employee Directors'
Stock Option Plan, as herein set forth and as may be amended from time to time.
2.23 "Representative" means (a) the person or entity acting as the executor
or administrator of a Participant's estate pursuant to the last will and
testament of a Participant or pursuant to the laws of the jurisdiction in which
the Participant had the Participant's primary residence at the date of the
Participant's death; (b) the person or entity acting as the guardian or
temporary guardian of a Participant; (c) the person or entity which is the
beneficiary of the Participant upon or following the Participant's death; or (d)
any person to whom an Option has been permissibly transferred by the Committee;
provided that only one of the foregoing shall be the Representative at any point
in time as determined under applicable law and recognized by the Committee.
2.24 "Rule 16b-3" means Rule 16b-3, as promulgated under the Exchange Act,
as amended from time to time, or any successor thereto, in effect and applicable
to the Plan and Participants.
2.25 "Securities Act" means the Securities Act of 1933, as amended, and the
rules and regulations promulgated thereunder.
In addition, certain other terms used herein have definitions given to them
in the first place in which they are used.
ARTICLE III
-----------
ADMINISTRATION
--------------
3.1 Committee Structure and Authority. The Plan shall be administered by
the Committee which, except as provided herein, shall be comprised of one or
more persons appointed by the Board. In the absence of an appointment, the Board
shall be the Committee; provided that only those members of the Board who
participate in the decision relative to Options under the Plan shall be deemed
to be part of the "Committee" for purposes of the Plan. A majority of the
Committee shall constitute a quorum at any meeting thereof (including telephone
conference), and the acts of a majority of the members present, or acts approved
in writing by a majority of the entire Committee without a meeting, shall be the
acts of the Committee for purposes of the Plan. The Committee may authorize any
one or more of its members or an officer of the Company to execute and deliver
documents on behalf of the Committee. A member of the Committee shall not
exercise any discretion respecting himself or herself under the Plan. The Board
shall have the authority to remove, replace or fill any vacancy of any member of
the Committee upon notice to the Committee and the affected member. Any member
of the Committee may resign upon notice to the Board. The Committee may allocate
among one
4
<PAGE>
or more of its members, or may delegate to one or more of its agents, such
duties and responsibilities as it determines.
The Committee shall have the authority, subject to the terms of the Plan,
to adopt, alter and repeal such administrative rules, guidelines and practices
governing the Plan as it shall, from time to time, deem advisable, to interpret
the terms and provisions of the Plan and any Option issued under the Plan and to
otherwise supervise the administration of the Plan. The Committee's policies
and procedures may differ with respect to Options granted at different times or
to different Participants.
Any determination made by the Committee pursuant to the provisions of the
Plan shall be made in its sole discretion. All decisions made by the Committee
pursuant to the provisions of the Plan shall be final and binding on all
persons, including the Company and Participants. Any determination shall not be
subject to de novo review if challenged in court.
ARTICLE IV
----------
STOCK SUBJECT TO PLAN
---------------------
4.1 Number of Shares. Subject to the adjustment under Section 4.5, the
total number of shares of Common Stock reserved and available for issuance
pursuant to Options under the Plan shall be Two Hundred Thousand (200,000)
shares of Common Stock authorized for issuance on the Effective Date. Such
shares may consist, in whole or in part, of authorized and unissued shares or
treasury shares.
4.2 Release of Shares. The Committee shall have full authority to
determine the number of shares of Common Stock available for Stock Options, and
in its discretion may include (without limitation) as available for distribution
any shares of Common Stock that have ceased to be subject to Stock Options, any
shares of Common Stock subject to any Stock Options that are forfeited, any
Stock Options that otherwise terminate without issuance of shares of Common
Stock being made to the Participant, or any shares (whether or not restricted)
of Common Stock that are received by the Company in connection with the exercise
of a Stock Option, including the satisfaction of any tax liability or the
satisfaction of a tax withholding obligation. If any shares could not again be
available for Options to a particular Participant under applicable law, such
shares shall be available exclusively for Options to Participants who are not
subject to such limitations.
4.3 Restrictions on Shares. Shares of Common Stock issued upon exercise of
an Option shall be subject to the terms and conditions specified herein and to
such other terms, conditions and restrictions as the Committee in its discretion
may determine or provide in the Option Agreement. The Company shall not be
required to issue or deliver any certificates for shares of Common Stock, cash
or other property prior to (i) the listing of such shares on any stock exchange,
Nasdaq or other public market on which the Common Stock may then be listed (or
regularly traded), (ii) the completion of any registration or qualification of
such shares under federal or state law, or any ruling or regulation of any
government body which the Committee determines to be necessary or advisable, and
(iii) the satisfaction of any applicable withholding
5
<PAGE>
obligation in order for the Company or an Affiliate to obtain a deduction with
respect to the exercise of the Option. The Company may cause any certificate for
any share of Common Stock to be delivered to be properly marked with a legend or
other notation reflecting the limitations on transfer of such Common Stock as
provided in the Plan or as the Committee may otherwise require. The Committee
may require any person exercising an Option to make such representations and
furnish such information as it may consider appropriate in connection with the
issuance or delivery of the shares of Common Stock in compliance with applicable
law or otherwise. Fractional shares shall not be delivered, but shall be rounded
to the next lower whole number of shares.
4.4 Reasonable Efforts To Register. The Company will use its reasonable
efforts to register under the Securities Act the Common Stock delivered or
deliverable pursuant to Options on Commission Form S-8 if available to the
Company for this purpose (or any successor or alternate form that is
substantially similar to that form to the extent available to effect such
registration), in accordance with the rules and regulations governing such
forms, when the Committee, in its sole discretion, shall deem such registration
appropriate. The Company will use its reasonable efforts to cause the
registration statement to become effective and to file such supplements and
amendments to the registration statement as may be necessary to keep the
registration statement in effect until the earliest of (a) one year following
the expiration of the Option Period of the last Option outstanding, (b) the date
the Company is no longer a reporting company under the Exchange Act and (c) the
date all Participants have disposed of all shares delivered pursuant to any
Option. The Company may delay the foregoing obligation if the Committee
reasonably determines that any such registration would materially and adversely
affect the Company's interests or if there is no material benefit to
Participants.
4.5 Adjustments. In the event, after the Effective Date, of a stock
dividend, stock split, combination or exchange of shares, recapitalization or
other change in the capital structure of the Company, corporate separation or
division of the Company (including, but not limited to, a split-up, spin-off,
split-off or distribution to Company stockholders other than a normal cash
dividend), sale by the Company of all or a substantial portion of its assets
(measured on either a stand-alone or consolidated basis), reorganization, rights
offering, partial or complete liquidation, or any other corporate transaction,
Company stock offering or event involving the Company and having an effect
similar to any of the foregoing, then the Committee shall adjust or substitute,
as the case may be, the number of shares of Common Stock available for Options
under the Plan, the number of shares of Common Stock covered by outstanding
Options, the exercise price per share of outstanding Options, and any other
characteristics or terms of the Options as the Committee shall deem necessary or
appropriate to reflect equitably the effects of such changes to the
Participants; provided, however, that any fractional shares resulting from such
adjustment shall be eliminated by rounding to the next lower whole number of
shares with appropriate payment for such fractional shares as shall reasonably
be determined by the Committee.
4.6 Limited Transfer During Offering. In the event there is an effective
registration statement under the Securities Act pursuant to which shares of
Common Stock shall be offered for sale in an underwritten offering, a
Participant shall not, during the period requested by the underwriters managing
the registered public offering, effect any public sale or distribution of shares
received directly or indirectly pursuant to an exercise of an Option.
6
<PAGE>
ARTICLE V
---------
OPTIONS
-------
5.1 Eligibility. Each Director shall be granted Options to purchase
shares of Common Stock as provided herein.
5.2 Grant and Exercise. Each person who is a Director on the Effective
Date shall become a Participant and shall be granted an Option to purchase Eight
Thousand (8,000) shares of Common Stock without further action by the Board or
the Committee. Each person who is subsequently elected or appointed as a
Director shall become a Participant and shall, on his date of election or
appointment, without further action by the Board or the Committee, be granted an
Option to purchase Eight Thousand (8,000) shares of Common Stock. Thereafter, on
the date each annual meeting of stockholders of the Company after which a
Participant continues as a Director, in any year following the year of the
initial grant of an Option to such Participant, such Participant shall be
granted an Option to purchase Three Thousand (3,000) shares of Common Stock. If
the number of shares of Common Stock available to grant under the Plan on a
scheduled date of grant is insufficient to make all automatic grants required to
be made pursuant to the Plan on such date, then each eligible Director shall
receive an Option to purchase a pro rata number of the remaining shares of
Common Stock available under the Plan; provided further, however, that if such
proration results in fractional shares of Common Stock, then such Option shall
be rounded down to the nearest number of whole shares of Common Stock. If there
is no whole number of shares remaining to be granted, then no grants shall be
made under the Plan. Each Option granted under the Plan shall be evidenced by an
Agreement, in a form approved by the Committee, which shall embody the terms and
conditions of such Option and which shall be subject to the express terms and
conditions set forth in the Plan. Such Agreement shall become effective upon
execution by the Participant.
5.3 Terms and Conditions. Options shall be subject to such terms and
conditions as shall be determined by the Committee, including in each case the
following:
(a) Option Period. The Option Period of each Option shall be ten (10)
years.
(b) Option Price. The Option Price per share of the Common Stock
purchasable under an Option shall be the Fair Market Value as of the Grant Date.
(c) Exercisability. Unless an alternative time is specified in an
Agreement, and subject to the provisions of Section 6.3, Options shall become
exercisable in three equal annual installments on the Grant Date and each of the
first two anniversaries thereof. An Option only shall be exercisable during the
Option Period.
(d) Method of Exercise. Subject to the provisions of this Article V, a
Participant may exercise Stock Options, in whole or in part, at any time during
the Option Period by the Participant's giving to the Company written notice of
exercise on a form provided by the Committee (if available) specifying the
number of shares of Common Stock subject to the Stock Option to be purchased.
Except when waived by the Committee, such notice shall be accompanied by payment
in full of the purchase price by cash or check or such other form of
7
<PAGE>
payment as the Company may accept. If approved by the Committee (including
approval at the time of exercise), payment in full or in part may also be made
(i) by delivering Common Stock already owned by the Participant having a total
Fair Market Value on the date of such delivery equal to the Option Price; (ii)
by the execution and delivery of a note or other evidence of indebtedness (and
any security agreement thereunder) satisfactory to the Committee and permitted
in accordance with Section 5.3(e); (iii) by the delivery of cash or the
extension of credit by a broker-dealer to whom the Participant has submitted a
notice of exercise or otherwise indicated an intent to exercise an Option (in
accordance with Part 220, Chapter II, Title 12 of the Code of Federal
Regulations, so-called "cashless" exercise); or (iv) by any combination of the
foregoing or by any other method permitted by the Committee.
(e) Nontransferability of Options. Except as provided in an Agreement as
determined by the Committee, no Option or interest therein shall be transferable
by a Participant other than by will or by the laws of descent and distribution,
and all Options shall be exercisable during the Participant's lifetime only by
the Participant.
5.4 Termination. Unless otherwise provided in an Agreement or determined
by the Committee, if a Participant ceases to be a Director due to death, any
unexpired and unexercised Stock Option held by such Participant shall thereafter
be fully exercisable for a period of ninety (90) days following the date of the
appointment of a Representative (or such other period or no period as the
Committee may specify) or until the expiration of the Option Period, whichever
period is the shorter. Unless otherwise provided in an Agreement or determined
by the Committee, if a Participant ceases to be a Director due to a Disability,
any unexpired and unexercised Stock Option held by such Participant shall
thereafter be fully exercisable by the Participant for the period of ninety (90)
days (or such other period or no period as the Committee may specify)
immediately following the date the Participant ceases to be a Director or until
the expiration of the Option Period, whichever period is shorter, and the
Participant's death at any time following the date the Participant ceases to be
a Director due to Disability shall not affect the foregoing.
Unless otherwise provided in an Agreement or determined by the Committee,
if a Participant's directorship is terminated for any reason other than due to
Participant's death or Disability, any Option held by such Participant shall
terminate upon the second anniversary of the date the Participant first ceased
to hold the position of Director. Unless otherwise provided in an Agreement, the
death or Disability of a Participant after a termination of Directorship
otherwise provided herein shall not extend the exercisability of the time
permitted to exercise an Option.
ARTICLE VI
----------
MISCELLANEOUS
-------------
6.1 Amendments and Termination. The Board may amend, alter or discontinue
the Plan at any time, but no amendment, alteration or discontinuation shall be
made which would impair the rights of a Participant under a Stock Option
previously granted, without the Participant's consent, except such an amendment
(a) made to avoid an expense charge to the
8
<PAGE>
Company or an Affiliate, or (b) made to permit the Company or an Affiliate a
deduction under the Code. In addition, no such amendment shall be made without
the approval of the Company's stockholders to the extent such approval is
required by law or agreement.
The Committee may amend the Plan at any time subject to the same
limitations (and exceptions to limitations) as applied to the Board and further
subject to any approval or limitations the Board may impose.
The Committee may amend the terms of any Stock Option theretofore granted,
prospectively or retroactively, but no such amendment shall impair the rights of
any Participant without the Participant's consent or reduce an Option Price,
except such an amendment made to avoid an expense charge to the Company or an
Affiliate or qualify for a deduction.
Subject to the above provisions, the Board shall have authority to amend
the Plan to take into account changes in law and tax and accounting rules, as
well as other developments, and to grant Awards which qualify for beneficial
treatment under such rules without stockholder approval. Notwithstanding
anything in the Plan to the contrary, if any right under this Plan would cause a
transaction to be ineligible for pooling of interests accounting that would, but
for the right hereunder, be eligible for such accounting treatment, the
Committee may modify or adjust the right so that pooling of interests accounting
is available.
6.2 General Provisions.
(a) Representation. The Committee may require each person purchasing or
receiving shares pursuant to an Option to represent to and agree with the
Company in writing that such person is acquiring the shares without a view to
the distribution thereof in violation of the Securities Act. The certificates
for such shares may include any legend which the Committee deems appropriate to
reflect any restrictions on transfer.
(b) Withholding. If determined to be required to protect the Company, no
later than the date as of which an amount first becomes includible in the gross
income of the Participant for Federal income tax purposes with respect to any
Option, the Participant shall pay to the Company (or other entity identified by
the Committee), or make arrangements satisfactory to the Company or other entity
identified by the Committee regarding the payment of, any Federal, state, local
or foreign taxes of any kind required by law to be withheld with respect to such
amount. Unless otherwise determined by the Committee, withholding obligations
may be settled with Common Stock. The obligations of the Company under the Plan
shall be conditional on such payment or arrangements, and the Company and its
Affiliates shall, to the extent permitted by law, have the right to deduct any
such taxes from any payment otherwise due to the Participant.
(c) Controlling Law. The Plan and all Options made and actions taken
thereunder shall be governed by and construed in accordance with the laws of the
State of Illinois (other than its law respecting choice of law). The Plan shall
be construed to comply with all applicable law, and to avoid liability to the
Company, an Affiliate or a Participant, including, without limitation, liability
under Section 16(b) of the Exchange Act.
9
<PAGE>
(d) Offset. Any amounts owed to the Company or an Affiliate by the
Participant of whatever nature may be offset by the Company from the value of
any shares of Common Stock, cash or other thing of value under the Plan or an
Agreement to be transferred to the Participant, and no shares of Common Stock,
cash or other thing of value under the Plan or an Agreement shall be transferred
unless and until all disputes between the Company and the Participant have been
fully and finally resolved and the Participant has waived all claims to such
against the Company or an Affiliate.
(e) Fail-Safe. With respect to persons subject to Section 16 of the
Exchange Act, transactions under this Plan are intended to comply with all
applicable conditions of Rule 16b-3. To the extent any action by the Committee
fails to so comply, it shall be deemed null and void, to the extent permitted by
law and deemed advisable by the Committee.
6.3 Special Provisions Regarding a Change in Control. Notwithstanding any
other provision of the Plan to the contrary, unless otherwise provided in an
Agreement, in the event of a Change in Control:
(a) Any Stock Options outstanding as of the date of such Change in Control
and not then exercisable shall become fully exercisable to the full extent of
the original grant;
(b) The Committee shall have full discretion, notwithstanding anything
herein or in an Option Agreement to the contrary, to do any or all of the
following with respect to an outstanding Stock Option:
(1) To cause any Stock Option to be cancelled, provided notice
of at least fifteen (15) days thereof is provided before the
date of cancellation;
(2) To provide that the securities of another entity be substituted
hereunder for the Common Stock and to make equitable adjustment
with respect thereto;
(3) To grant the Participant, by giving notice during a pre-set
period, the right to surrender all or part of a Stock Option to
the Company and to receive cash in an amount equal to the amount
by which the "Change in Control Price" (as defined in Section
6.3(c)) per share of Common Stock on the date of such election
shall exceed the amount which the Participant must pay to
exercise the Option per share of Common Stock under the Option
(the "Spread"), multiplied by the number of shares of Common
Stock granted under the Option;
(4) To require the assumption of the obligation of the Company under
the Plan subject to appropriate adjustment; and
(5) To take any other action the Committee determines to take.
10
<PAGE>
(c) For purposes of this Section, "Change in Control Price" means the
higher of (i) the highest reported sales price of a share of Common Stock in any
transaction reported on the principal exchange on which such shares are listed
or on Nasdaq during the sixty (60)-day period prior to and including the date of
a Change in Control, or (ii) if the Change in Control is the result of a
corporate transaction, the highest price per share of Common Stock paid in such
tender or exchange offer or a corporate transaction. To the extent that the
consideration paid in any such transaction described above consists all or in
part of securities or other non-cash consideration, the value of such securities
or other non-cash consideration shall be determined in the sole discretion of
the Committee.
6.4 Headings. The headings contained in the Plan are for reference
purposes only and shall not affect the meaning or interpretation of the Plan.
6.5 Severability. If any provision of the Plan shall for any reason be
held to be invalid or unenforceable, such invalidity or unenforceability shall
not effect any other provision hereby, and the Plan shall be construed as if
such invalid or unenforceable provision were omitted.
6.6 Successors and Assigns. The Plan shall inure to the benefit of and be
binding upon each successor and assign of the Company. All obligations imposed
upon a Participant, and all rights granted to the Company hereunder, shall be
binding upon the Participant's heirs, legal representatives and successors.
6.7 Entire Agreement. The Plan and the Agreement constitutes the entire
agreement with respect to the subject matter hereof and thereof, provided that
in the event of any inconsistency between the Plan and any Agreement, the terms
and conditions of the Plan shall control.
11
<PAGE>
<PAGE>
EXHIBIT 10.14
REGISTRATION RIGHTS AGREEMENT
-----------------------------
REGISTRATION RIGHTS AGREEMENT, dated as of July 31, 1995, between Career
Education corporation, a corporation organized under the laws of Delaware (the
"Company"), Electra Investment Trust P.L.C., a corporation organized under the
laws of England and Wales, and Electra Associates, Inc., a corporation organized
under the laws of Delaware (individually, a "Stockholder" and collectively, the
"Stockholders").
W I T N E S S E T H:
WHEREAS, on the date hereof, each of the Stockholders has agreed to
purchase (i) shares (collectively, the "Preferred Shares") of Series C
Redeemable Preferred Stock, par value $.0l per share, of the Company (the
"Series C Preferred Stock") and (ii) warrants (collectively, the "Warrants" and
together with the Preferred Shares, the "Securities") to purchase shares of
Class D Common Stock, par value $.0l per share, of the Company (the "Common
Stock"), each as set forth opposite its name on Schedule I hereto; and
WHEREAS, as a condition to the consummation of the purchase by the
Stockholders of the Securities, the Company has agreed to provide certain
registration rights pursuant to the terms of this 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 "Commission" shall mean the Securities and Exchange Commission or
any other federal agency at the time administering the Securities Act.
1.2 "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.
1.3 "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.
1.4 "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.
<PAGE>
1.5 "Initiating Holders" shall mean the Holders of Registrable
Securities representing (i) at least fifty-one percent (51%) of the Registrable
Securities then outstanding and (ii) such number of Registrable Securities equal
to at least five percent (St) of the number of Registrable Securities issuable
upon exercise of the Warrants as of the date of this Agreement.
1.6 "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.
1.7 "Penalty Warrants" shall have the meaning ascribed to such term
in Section 7.1 of the Securities Purchase Agreement.
1.8 "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.
1.9 "Provident Warrant" shall mean the warrant to purchase shares of
Common Stock issued on the date hereof to The Provident Bank in accordance with
the Senior Loan Agreement as defined in the Securities Purchase Agreement.
1.10 "Provident Warrant Shares" shall mean the shares of Common Stock
issuable upon exercise of the Provident Warrant.
1.11 "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.
1.12 "Registrable Securities" shall mean the (i) the Warrant Shares
and (ii) any other shares of Common Stock acquired after the date of this
Agreement and held by the Stockholders and their Permitted Transferees (as
defined in the Stockholders' Agreement) 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
Securities Act and such securities shall have been disposed of in accordance
with such registration statement, (b) they
2
<PAGE>
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.
1.13 "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 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.
1.14 "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.
1.15 "Securities Purchase Agreement" shall mean that certain
Securities Purchase Agreement, dated as of the date hereof, among the Company
and the parties thereto, as amended from time to time.
1.16 "Selling Expenses" shall mean all underwriting discounts and
commissions applicable to the sale of Registrable Securities.
1.17 "Stockholders' Agreement" shall mean that certain Amended and
Restated Stockholders' Agreement, dated as of the date hereof, among the
Company, the Stockholders, Heller Equity Capital Corporation, Heller Financial,
Inc., John M. Larson and Robert E. Dowdell.
1.18 "Warrant Shares" shall mean the shares of Common Stock issued or
issuable upon exercise of the Warrants and the Penalty Warrants.
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 (i) upon or concurrently with an IPO, or any
time thereafter, or (ii) if earlier than an IPO, from and after the fourth
anniversary of the date hereof. If the Initiating Holders elect to exercise
their rights as permitted by clause (ii) above prior to an IPO, any such
underwriting in connection therewith shall be required to meet the requirements
of a NASDAQ Small Cap Company; provided, that, in connection therewith the
Company shall take (or prior thereto the Company shall have taken) all such
actions as shall be necessary to effect a stock-split with respect to its shares
of Common Stock such that, after giving effect to such stock-split and after
3
<PAGE>
giving effect to the distribution of the Registrable Securities contemplated by
the IPO, the public float criteria with respect to a NASDAQ Small Cap Company or
NASDAQ-NMS listed company, as specified by the Initiating Holders, shall be
satisfied. 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 (ninety
(90) days in the case of an IPO) 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 portion
of 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 effect, or to
take any action to 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 second
such registration pursuant to this Section 2 has been declared or ordered
effective.
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.
4
<PAGE>
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 underwriter or underwriters selected for
such underwriting by a majority in interest of the Initiating Holders.
2.5 Limitations on Shares to be 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 among all Holders in proportion, as nearly
practicable, to the respective amounts of Registrable Securities which they have
requested to be included in such registration statement. 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, 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
5
<PAGE>
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
(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,
notwithstanding 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, among all such
Holders requesting registration and the holders of the Provident Warrant Shares
requesting registration, and third, among all officers, directors or Other
Shareholders (including those Shareholders 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, Provident Warrant Shares or Additional Shares which they
had requested to be included in such registration at the time of filing the
registration statement. If any Holder of Registrable Securities, Provident
Warrant Shares or any officer, director or other Shareholder disapproves
6
<PAGE>
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,
Provident Warrant Shares 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, Provident Warrant Shares or
Additional Shares, then, to the extent practicable and without delaying the
underwriting, the Company shall offer first to the Holders and the holders of
the Provident Warrant Shares and second to the other Shareholders an opportunity
to include additional shares of Registrable Securities, Provident Warrant Shares
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.
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
7
<PAGE>
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 reports 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 provisos 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 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
8
<PAGE>
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, (y) subject itself to taxation in any such
jurisdiction or (z) consent to general service of process 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;
(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;
9
<PAGE>
(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;
(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
10
<PAGE>
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 and 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 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 statement (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 such 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.
11
<PAGE>
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 (or alleged 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, 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
12
<PAGE>
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 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.
13
<PAGE>
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 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 their 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,
14
<PAGE>
encumbrances, equities, claims and options of whatever nature other than those
imposed hereunder. If such liquidated damages are to be paid with respect to
less than all of the Warrant Shares issuable upon exercise of the Warrants held
by any Holder, the Company shall cancel the Warrants and shall issue in the name
of, and deliver to, the Holder, a new certificate or certificates for the
Warrants not required to be assigned to the Company pursuant to the provisions
of the preceding sentence. 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 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 it 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 exchanger 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 thirty (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
15
<PAGE>
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, Series C Preferred
Stock holder or warrant holder of the Company to sell its shares of Common
Stock, Series C Preferred Stock or warrants to the Company. In addition, in
making such determination, the investment banking firm shall take into account
the valuations associated with recent public offerings of common stock by
companies engaged in businesses and with capital structures similar to the
Company and such other matters as are relevant to the valuation of the Company.
Notwithstanding anything herein to the contrary, in determining
Current Market Price under this Section 11, (i) any adverse changes in GAAP from
the date of original issuance of the Warrants shall be disregarded such that any
computations shall be made as if the GAAP change had not been implemented, and
(ii) any dividends paid or redemptions or repurchases of any of the securities
of the Company (other than the Series C Preferred Stock) by the Company within
one year of the demand for payment hereunder shall be disregarded and any
amounts distributed shall be treated as if such amounts had been retained by the
Company. All costs of such determinations shall be borne by the Company.
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 (other than with respect to the Provident Warrant Shares to the
extent permitted herein) or higher priority to the rights granted to the Holders
under Sections 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
16
<PAGE>
upon and inure to the benefit of the parties and their respective successors and
permitted assigns, legal representatives and heirs. This Agreement does not
create, and shall not be construed as creating any rights enforceable by any
other Person.
14. 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 hand, by a majority
of the Registrable Securities then outstanding and, on the other, by the
Company.
15. Section Headings. The section headings contained in this Agreement
are for reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement.
16. 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 2300 N. Barrington, Suite 400, 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 party may change the address to
which each such notice or communication shall be sent by giving written notice
to tie other parties of such new address in the manner provided herein for
giving notice.
17. Governing Law. This Agreement shall be governed by, and construed and
enforced in accordance with, the laws of the State of New York without giving
effect to the provisions, policies or principles thereof respecting conflict or
choice of laws.
18. 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.
19. 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.
17
<PAGE>
IN WITNESS WHEREOF, the parties have signed this Agreement as of the date
first set forth above.
CAREER EDUCATION CORPORATION
/s/ JOHN M. LARSON
By: ________________________________
Name: John M. Larson
Title: President
ELECTRA INVESTMENT TRUST P.L.C.
/s/ H.A.L.H. MUMFORD
By: ________________________________
Name: H.A.L.H. Mumford
Title: Director
ELECTRA ASSOCIATES, INC.
/s/ R.J. LEWIS
By: ________________________________
Name: R.J. Lewis
Title: Director
18
<PAGE>
AMENDMENT AGREEMENT
THIS AMENDMENT AGREEMENT dated as of ______________, 1998 (this
"Agreement") to the Registration Rights Agreement dated as of July 31, 1995
among Career Education Corporation, a Delaware corporation (the "Company"),
Electra Investment Trust P.L.C., a corporation organized under the laws of
England and Wales, and Electra Associates, Inc., a Delaware corporation
(collectively, "Electra").
W I T N E S S E T H:
WHEREAS, the Company and Electra are parties to the Registration Rights
Agreement referred to above (the "Securities Purchase Agreement"), under
which the Company has granted to Electra certain registration rights as
provided therein; and
WHEREAS, the Company desires, and Electra is willing on the terms and
conditions set forth below, to modify certain terms of the Registration
Rights Agreement as provided herein;
NOW, THEREFORE, in consideration of the premises and the mutual covenants
and conditions contained herein, and other good and valuable consideration,
the receipt and sufficiency of which is hereby acknowledged, the parties
hereto, intending to be legally bound hereby, agree as follows:
SECTION 1. Defined Terms. Capitalized terms used herein and not defined
herein shall have the meanings specified in the Registration Rights
Agreement.
SECTION 2. Amendment to the Registration Rights Agreement. Effective
immediately upon consummation of an IPO, the following provisions to the
Registration Rights Agreement shall be modified as provided herein:
(a) The Preambles to the Registration Rights Agreement are amended by
adding the following:
"WHEREAS, Heller Equity Capital Corporation, a Delaware corporation,
is a party to that certain Registration Rights Agreement with the
Company dated as of _________________, 1998 (the 'Heller Registration
Rights Agreement');"
(b) Section 1 of the Registration Rights Agreement is hereby amended
by adding thereto the following defined term:
"'Heller' shall mean Heller Equity Capital Corporation, a Delaware
corporation, together with its successors and permitted assigns under
the Heller Registration Rights Agreement."
<PAGE>
(c) Section 2.1 of the Registration Rights Agreement is hereby amended
by deleting the phrase "or to take any action to effect" from the proviso
thereof.
(d) Section 2.1 of the Registration Rights Agreement is hereby further
amended by adding to the end thereof the following:
"; 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 right
exercisable in accordance with this Section 2."
(e) Section 2.5 of the Registration Rights Agreement is hereby amended
and restated in its entirety as follows:
"2.5 Limitations on Shares to be 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-five percent
(75%) of the shares requested for inclusion in such registration, and
(ii) the remaining shares, if any, to the Holders and Heller, 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 Heller, 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."
<PAGE>
(f) Section 3.3 of the Registration Rights Agreement is hereby amended
and restated in its entirety as follows:
"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, notwithstanding 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 Heller and the Holders in the ratio of two-
thirds (2/3) to the Holders and one-third (1/3) to Heller, until such
time as the Holders hold less than thirty-five percent (35%) of the
shares of Registrable Securities held by Electra as of
_______________, 1998 (as such number may be adjusted for stock
splits, dividends, recapitalizations, reorganizations or similar
events), third, if any, among the Holders and Heller 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, if any, among all
officers, directors or Other Shareholders (including those
Shareholders 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 Heller exercising
any demand registration rights pursuant to the Heller Registration
Rights Agreement, the number of shares that are entitled to be
included in the registration and underwriting shall be allocated
first, to Heller such that the Heller shall be entitled to include a
number of shares equal to seventy percent (70%) of the shares
requested for inclusion in such registration, second, if any, among
the Holders and Heller, pro rata based on the number of Registrable
Securities or Additional Shares requested to be included in such
registration after excluding any 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, if
any, among all officers, directors or Other Shareholders (including
those shareholders (other than Heller) 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
<PAGE>
of the terms of any such underwriting, he may elect to withdraw
therefrom any written notice to the Company and the underwriter."
(g) Section 3.4 of the Registration Rights Agreement is hereby amended
by deleting the last sentence thereof and substituting in lieu thereof the
following:
"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 Heller 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."
SECTION 3. Representations and Warranties. In order to induce Electra to
enter into this Agreement, the Company hereby represents and warrants to
Electra that the Company has full power, right and legal authority to
execute, deliver and perform its obligations under this Agreement. The
Company has taken all corporate action necessary to authorize the execution
and delivery of, and the performance of its obligations under, this
Agreement. This Agreement constitutes a legal, valid and binding obligation
of the Company enforceable against it in accordance with its terms, subject
to the effect of any applicable bankruptcy, insolvency, reorganization or
moratorium or similar laws affecting the rights of creditors generally. The
Company hereby ratifies and reaffirms the Registration Rights Agreement as
amended hereby.
SECTION 4. Reference to and Effect on the Documents. (a) Each reference
in the Registration Rights Agreement to "this Agreement", "hereunder",
"hereof", "herein" or words of like import, and each reference to the
Registration Rights Agreement in any Related Documents shall mean and be a
reference to the Registration Rights Agreement as amended hereby.
(b) Except as specifically amended hereby, the Registration Rights
Agreement shall remain in full force and effect and is hereby ratified,
confirmed and acknowledged by the Company. The amendments set forth above
are limited precisely as written and shall not be deemed to (i) be a
consent to any waiver or modification of any term or condition of the
Registration Rights Agreement, except in each case as expressly provided
herein, or (ii) prejudice any right or rights which Electra or the Company
may now or in the future have in connection with the Registration Rights
Agreement.
SECTION 5. Fees and Expenses. The Company agrees to pay Electra all costs
and expenses, including, without limitation, all reasonable fees and
disbursements of counsel, incurred by Electra in connection with the
preparation, reproduction, execution and delivery of this Agreement and any
other instruments and documents to be delivered hereunder or in connection
herewith.
<PAGE>
SECTION 6. Governing Law. This Agreement and the rights and obligations
of the parties hereunder shall be governed by and construed and interpreted
in accordance with the substantive laws of the State of New York, without
regard for its conflict of laws principles.
SECTION 7. Headings. Section headings in this Agreement are included
herein for convenience of reference only and shall not constitute a part of
this Agreement for any other purpose.
SECTION 8. Successors. This Agreement shall be binding upon the heirs,
successors and assigns of the parties hereto.
SECTION 9. Counterparts. This Agreement may be executed in any number of
counterparts, all of which taken together shall constitute one and the same
instrument, and any party hereto may execute this Agreement by signing any
such counterpart.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed as of the day and year first above written.
CAREER EDUCATION CORPORATION
By:__________________________________
Name:
Title:
ELECTRA INVESTMENT TRUST P.L.C.
By:__________________________________
Name:
Title:
ELECTRA ASSOCIATES, INC.
By:__________________________________
Name:
Title:
<PAGE>
EXHIBIT 10.23
REGISTRATION RIGHTS AGREEMENT
-----------------------------
REGISTRATION RIGHTS AGREEMENT, dated as of ____________ 199_, 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 ___ 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 be 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 Registratable
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,
notwithstanding 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 Registratable 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 provisos 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 and 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
-11-
<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 statement (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 such
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 (or alleged 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 he 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 thirty (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
Sections 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 representatives 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 not 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 party may change the address to
which each such notice or communication shall be sent by giving written notice
to tie 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:_______________________________
Name:
Title:
HELLER EQUITY CAPITAL CORPORATION
By:_______________________________
Name:
Title:
-20-
<PAGE>
EXHIBIT 11
Career Education Corporation and Subsidiaries
EXHIBIT 11
Statement Regarding Computation of Earnings Per Share
(amounts in thousands, except per share data)
<TABLE>
<CAPTION>
For The
Nine Months Ended
For The Year ------------------------------
Ended December 31, September 30, September 30,
1996 1996 1997
------------------ ------------- -------------
<S> <C> <C> <C>
Income Attributable to common
stockholders, as reported $ 137 $(995) $(1,392)
Dividends on preferred stock 1,128 841 1,444
Accretion to redemption
value of preferred
stocks and warrants 230 175 698
------ ----- -------
Pro forma income (loss) before extraordinary item
attributable to common stockholders 1,495 21 (1,421)
Extraordinary item -- -- (418)
------ ----- -------
Pro forma net income (loss) attributable
to common stockholders $1,495 $ 21 $(1,839)
====== ===== =======
Primary Earnings Per Share:
Common stock outstanding 612 612 612
Preferred stock conversion 1,027 1,027 1,837
Common stock equivalents 530 530 315
------ ----- -------
Total weighted average
shares outstanding 2,169 2,169 2,764
====== ===== =======
Pro forma income (loss) before extraordinary item
attributable to common stockholders $ 0.69 $0.01 $ (0.51)
====== ===== =======
Pro forma net income (loss) attributable to
common stockholders $ 0.69 $0.01 $ (0.67)
====== ===== =======
Fully Diluted Earnings Per Share:
Common stock outstanding 612 612 612
Preferred stock conversion 1,027 1,027 1,837
Common stock equivalents 530 530 315
------ ----- -------
Total weighted average
shares outstanding 2,169 2,169 2,764
====== ===== =======
Pro forma income (loss) before extraordinary item
attributable to common stockholders $ 0.69 $0.01 $ (0.51)
====== ===== =======
Pro forma net income (loss) attributable to
common stockholders $ 0.69 $0.01 $ (0.67)
====== ===== =======
</TABLE>
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use in this
registration statement of our report dated November 19, 1997, on the financial
statements of CAREER EDUCATION CORPORATION and SUBSIDIARIES included herein and
to all references to our Firm included in this registration statement.
Arthur Andersen LLP
Chicago, Illinois
January 23, 1998
<PAGE>
EXHIBIT 23.7
INDEPENDENT AUDITORS' CONSENT
We consent to the use in the Registration Statement of Career Education
Corporation on Form S-1 of our report dated August 16, 1996, except for notes 8
and 9 as to which the date is October 23, 1997 (relating to the financial
statements of IAMD, Ltd. and Subsidiaries presented separately herein) appearing
in the Prospectus, which is part of this Registration Statement.
We also consent to the reference to us under the heading "Experts" in such
Prospectus.
Gleeson, Sklar, Sawyers & Cumpata LLP, Independent Auditors
Skokie, Illinois
December 29, 1997
<PAGE>
EXHIBIT 23.8
[LETTERHEAD PRICE WATERHOUSE] [LOGO]
December 29, 1997
Consent of Independent Accountants
We hereby consent to the use in the Prospectus constituting part of this
Registration Statement on Form S-1 of our report dated October 11, 1996 relating
to the financial statements of International Academy of Design and Merchandising
(Canada) Ltd. which appears in such Prospectus. We also consent to the
references to us under the headings "Experts" in such Prospectus.
/s/ Price Waterhouse
Chartered Accountants
<PAGE>
EXHIBIT 23.9
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Amendment No. 2 to the Registration Statement No.
333-37601 of Career Education Corporation on Form S-1 of our report dated
October 27, 1997, relating to the consolidated financial statements of The
Katharine Gibbs Schools, Inc. and subsidiaries as of December 31, 1995 and 1996
and for the period from March 7, 1994 to December 31, 1994, and for the years
ended December 31, 1995 and 1996, appearing in the Prospectus, which is part of
this Registration Statement.
We also consent to the reference to us under the heading "Experts" in such
Prospectus.
DELOITTE & TOUCHE LLP
New York, New York
December 29, 1997
