<PAGE>
As filed with the Securities and Exchange Commission on January 19, 1999
Registration No. 333-
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------
FORM S-1
REGISTRATION STATEMENT
Under
The Securities Act of 1933
--------------
CAREER EDUCATION CORPORATION
(Exact name of registrant as specified in its charter)
--------------
Delaware 8200 39-3932190
(Primary Standard (I.R.S. Employer
(State or other Industrial Classification Identification No.)
jurisdiction of Code No.)
incorporation or
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.
Katten Muchin & Zavis Sidley & Austin
525 West Monroe Street, Suite 1600 One First National Plaza
Chicago, Illinois 60661 Chicago, Illinois 60603
(312) 902-5200 (312) 853-7000
--------------
Approximate date of commencement of proposed sale to the public: As soon as
practicable after the effective date of this Registration Statement.
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box: [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering: [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering: [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box: [_]
CALCULATION OF REGISTRATION FEE
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- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Proposed
Amount Proposed maximum Amount of
Title of each class of to be maximum aggregate registration
securities to be registered registered offering price offering price fee
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
2,127,500 shares $29.375 per share
Common Stock, $.01 par value..... (1) (2) $62,495,313 (2) $17,374
</TABLE>
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- -------------------------------------------------------------------------------
(1) Includes 277,500 shares to be offered upon exercise of the Underwriters'
over-allotment option.
(2) Estimated solely for purposes of calculating the registration fee pursuant
to Rule 457 of Regulation C under the Securities Act of 1933, as amended.
--------------
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this
Registration Statement shall thereafter become effective in accordance with
Section 8(a) of the Securities Act of 1933 or until the Registration Statement
shall become effective on such date as the Securities and Exchange Commission,
acting pursuant to Section 8(a), may determine.
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- -------------------------------------------------------------------------------
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this prospectus is not complete and may be changed. We and +
+the Selling Stockholders may not sell these securities until the registration +
+statement filed with the Securities and Exchange Commission is effective. +
+This prospectus is not an offer to sell these securities, and it is not +
+soliciting an offer to buy these securities in any state where the offer or +
+sale is not permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED JANUARY 19, 1999
1,850,000 Shares
[LOGO OF CAREER EDUCATION]
Common Stock
--------
The shares of common stock in this offering are being sold by the Selling
Stockholders named under "Principal and Selling Stockholders." We will not
receive any of the proceeds from the shares of common stock sold by the
Selling Stockholders. The Underwriters have an option to purchase a
maximum of 277,500 additional shares to cover over-allotments of
shares.
Our common stock is traded on The Nasdaq National Market under the symbol
"CECO." On January 15, 1999, the last reported sales price of our common
stock on The Nasdaq National Market was $30.50.
Investing in the common stock involves certain risks. See "Risk Factors" on
page 7.
<TABLE>
<CAPTION>
Price Underwriting Proceeds to
to Discounts and Selling
Public Commissions Stockholders
------ ------------- ------------
<S> <C> <C> <C>
Per Share.................................. $ $ $
Total...................................... $ $ $
</TABLE>
Delivery of the shares of common stock will be made on or about
, 1999, against payment in immediately available funds.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if
this prospectus is truthful or complete. Any representation to the contrary is
a criminal offense.
Credit Suisse First Boston
Salomon Smith Barney
NationsBanc Montgomery Securities LLC
Prospectus dated , 1999
<PAGE>
[INSIDE FRONT COVER]
CAREER
EDUCATION
CORPORATION
LOGO
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
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary.................. 1
Risk Factors........................ 7
Use of Proceeds..................... 14
Dividend Policy..................... 14
Price Range of Common Stock......... 14
Capitalization...................... 15
Unaudited Pro Forma Condensed
Consolidated Financial Data........ 16
Selected Historical Consolidated
Financial and Other Data........... 20
Management's Discussion and Analysis
of Financial Condition and Results
of Operations...................... 22
</TABLE>
<TABLE>
<CAPTION>
Page
----
<S> <C>
Business............................ 30
Financial Aid and Regulation........ 42
Management.......................... 53
Principal and Selling Stockholders.. 62
Description of Capital Stock........ 64
Shares Eligible for Future Sale..... 65
Underwriting........................ 67
Notice to Canadian Residents........ 69
Legal Matters....................... 70
Experts............................. 70
Where You Can Find More Information. 70
Index to Financial Statements....... F-1
</TABLE>
----------------
Notes to Readers of this Prospectus
You should keep in mind the following points as you read this prospectus:
. References in this document to "we," "us," "our," "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 the 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 U.S. Department of Education.
. This offering is for 1,850,000 shares; however, the underwriters have a
30-day option to purchase up to 277,500 additional shares to cover over-
allotments. Some of the disclosures in this prospectus would be different
if the underwriters exercise the option. Unless we tell you otherwise,
the information in this prospectus assumes that the underwriters will not
exercise the option.
----------------
Special Note Regarding Forward-Looking Statements
This prospectus contains certain "forward-looking" statements that have been
made pursuant to the Private Securities Litigation Reform Act of 1995 which
reflect our expectations regarding our future growth, results of operations,
performance and business prospects and opportunities. Wherever possible, words
such as "anticipate," "believe," "plan," "expect" and similar expressions have
been used to identify these forward-looking statements. These statements
reflect our current beliefs and are based on information currently available to
us. Accordingly, these statements are subject to risks and uncertainties,
including those listed under "Risk Factors," which could cause our actual
growth, results, performance and business prospects and opportunities to differ
from those expressed in, or implied by, these statements. We are not obligated
to update or revise these forward-looking statements to reflect new events or
circumstances.
----------------
You should rely only on the information contained in this document or to
which we have referred you. We have not authorized anyone to provide you with
information that is different. This document may only be used where it is legal
to sell these securities. The information in this document may only be accurate
on the date of this document.
(i)
<PAGE>
PROSPECTUS SUMMARY
This summary highlights some of the information in this prospectus. It may
not contain all of the information that is important to you. To understand this
offering fully, you should read the entire prospectus carefully, including the
risk factors and the financial statements.
The Company
Career Education Corporation is one of the largest providers of private,
for-profit postsecondary education in North America, with approximately 15,900
students enrolled as of October 31, 1998. We operate 12 schools, with 21
campuses located in 13 states and two Canadian provinces. Our schools enjoy
long operating histories and offer a variety of bachelor's degree, associate
degree and non-degree programs in career-oriented disciplines within our core
curricula of:
. computer technologies
. visual communication and design technologies
. business studies
. culinary arts
We have experienced significant growth both internally and through
acquisitions with our net revenue increasing from $7.5 million in 1994 to $82.6
million in 1997. For the first nine months of 1998, our net revenue was $99.9
million.
CEC was founded in January 1994 by John M. Larson, our President and Chief
Executive Officer, who has over 24 years of experience in the career-oriented
education industry. We were formed to capitalize on opportunities in the large
and highly fragmented postsecondary school industry. Since our inception, we
have completed 12 acquisitions. We have acquired schools that we believe
possess strong curricula, leading reputations and broad marketability but that
have been undermanaged from a marketing and financial standpoint. We seek to
apply our expertise in operations, marketing and curricula development, as well
as our financial strength, to improve the performance of these schools.
Our Acquisition History
<TABLE>
<CAPTION>
Number of Year Month Degree
School Campuses Founded Acquired Granting
------ --------- ------- -------- --------
<S> <C> <C> <C> <C>
Al Collins Graphic Design School
("Collins")............................... 1 1978 1/94 Yes
Brooks College ("Brooks").................. 1 1970 6/94 Yes
Allentown Business School ("Allentown").... 1 1869 7/95 Yes
Brown Institute ("Brown").................. 1 1946 7/95 Yes
Western Culinary Institute ("Western")..... 1 1983 10/96 No
School of Computer Technology ("SCT")...... 2 1967 2/97 Yes
The Katharine Gibbs Schools ("Gibbs")...... 7 1911 5/97 Yes(1)
International Academy of Merchandising &
Design ("IAMD")........................... 2 1977 6/97 Yes
International Academy of Design ("IAD").... 2 1983 6/97 No
Southern California School of Culinary Arts
("SCSCA")................................. 1 1994 3/98 No
Scottsdale Culinary Institute
("Scottsdale")............................ 1 1986 7/98 Yes
Harrington Institute of Interior Design
("Harrington")............................ 1 1931 1/99 Yes
</TABLE>
- --------
(1) Two Gibbs campuses do not offer degree programs.
1
<PAGE>
Our Business and Operating Strategy
Our company was founded based on a business and operating strategy which we
believe has enabled us to achieve significant improvements in the performance
of our schools. We believe this strategy will enable us to continue to
capitalize on the favorable economic, demographic and social trends which are
driving demand for career-oriented education. These trends include greater
technological skills required for entry-level jobs, increasing numbers of high
school graduates and a greater recognition of the value of higher education.
The key elements of our strategy are:
. Focusing on Core Curricula. Our schools offer educational programs
principally in four career-related fields of study identified by us 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 our 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 offered elsewhere in our
school system and introducing entirely new programs of study.
. Investing for Future Growth. We make substantial investments in our
infrastructure to prepare us for continued growth. We devote particular
attention to attracting and retaining both corporate and campus-level
management, and we focus on employee development to facilitate internal
promotions. Our investments in facilities and classroom technologies help
us attract and retain students and prepare them for the increasing
technical demands of the workplace.
. Emphasizing School Management Autonomy and Accountability. We provide
significant operating autonomy and appropriate performance-based
incentives to our campus-level managers. We believe these policies create
an important sense of personal responsibility for achieving campus
performance objectives and provide us with a significant advantage in
recruiting and retaining highly-motivated, entrepreneurial individuals.
. Direct Response Marketing. We seek to increase school enrollment and
profitability through intensive local, regional and national direct
response marketing programs specifically crafted for each school to
maximize its market penetration. We also use the Internet to attract
potential students and believe this medium will be an increasingly
important marketing tool.
. Improving Student Retention. We focus substantial attention on student
retention, as modest improvements in student retention can result in
meaningful increases in school revenue and profitability. We strive to
improve retention by treating students as valued customers.
. Emphasizing Employment of Graduates. We devote significant resources to
graduate placement efforts because we believe that maintaining high
employment rates for graduates of our schools enhances the overall
reputation of the schools and their ability to attract new students.
Approximately 92.5% of our students graduating during the 1998 academic
year (July 1, 1997 to June 30, 1998) obtained employment related to their
program of study within six months of graduation.
2
<PAGE>
Our Growth Strategy
We believe we can continue to achieve superior long-term growth in revenue
and profitability through:
. Expanding Existing Operations. We intend to achieve continued growth
at our existing campuses by executing our business and operating
strategy.
. Acquiring Additional North American Schools. We continually evaluate
opportunities to acquire schools in the U.S. and Canada that have
leading reputations, broad marketability and demonstrated compliance
with regulatory requirements and accreditation standards. In March
1998, we hired a Director of Strategic Planning and Development to
proactively identify and evaluate these opportunities. We seek to
acquire schools which we believe will benefit from the implementation
of our business and operating strategy.
. Establishing New Campuses. We expect 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
or the opportunity to establish a successful school operation in one
of our core curricula areas.
. Entering New Service Areas. We plan to develop new services, such as
distance learning (offering educational products and services through
video, Internet and other distribution channels), which we believe
offer strong long-term growth potential. We also plan to expand our
contract training operations (providing customized training on a
contract basis for business and government organizations).
. Expanding Internationally. We may also acquire or establish operations
outside North America where we believe significant opportunities
exist.
Our Address
CEC was incorporated in Delaware on January 5, 1994. Our principal executive
offices are located at 2800 West Higgins Road, Suite 790, Hoffman Estates,
Illinois 60195 and our telephone number is (847) 781-3600. Our web site is
located at http://www.careered.com. Web sites for our schools can be accessed
through hyperlinks at our web site. Information contained in our web site is
not a part of this prospectus.
The Offering
<TABLE>
<S> <C>
Common Stock offered by the
Selling Stockholders........ 1,850,000 shares
Common Stock outstanding..... 7,152,896 shares (1)
Use of proceeds.............. We will not receive any proceeds from the sale of
shares by the Selling Stockholders. See "Use of
Proceeds."
Nasdaq National Market
symbol...................... CECO
</TABLE>
- --------
(1) This information is as of December 31, 1998. It excludes 902,384 shares of
common stock issuable upon the exercise of stock options outstanding at
December 31, 1998 at a weighted average exercise price of $16.30 per share
and 194,774 shares reserved for issuance under our stock plans. See
"Management--Stock Plans" and "Description of Capital Stock."
3
<PAGE>
Recent Developments
Acquisitions
On January 4, 1999, we acquired Harrington for $2.9 million, subject to
adjustment. Harrington was founded in 1931 and provides degree and diploma
programs in interior design and related fields at its campus in Chicago,
Illinois. Harrington had a student population of approximately 425 as of
September 30, 1998 and is accredited by the National Association of Schools of
Art and Design.
On December 29, 1998, we entered into an agreement to acquire the Brooks
Institute of Photography. Brooks Institute is an internationally known
photography school founded in 1945 which is located in Santa Barbara,
California. As of June 30, 1998, the school had a student population of
approximately 290, approximately 40% of which was foreign students. The
completion of the proposed acquisition is subject to a number of conditions,
including approval by California state regulators. We cannot assure you that
this acquisition will be completed. Brooks Institute is accredited by the
Accrediting Council for Independent Colleges and Schools.
Strategic Relationships
On October 29, 1998, we entered into an agreement with Le Cordon Bleu
Limited granting us exclusive rights to use the "Le Cordon Bleu" name in the
U.S. and Canada in connection with our culinary education programs. We are
developing a curriculum with Le Cordon Bleu for use at our culinary schools,
and the agreement will not take effect until this curriculum is completed and
approved by both of us. We do not expect to implement this curriculum before
May 1999. The initial term of this agreement expires on December 31, 2008.
In January 1999, we began offering professional education loans to students
at our U.S. campuses pursuant to an agreement with Sallie Mae (Student Loan
Marketing Association). This private loan program is available exclusively to
our students and is designed to supplement federal, state and other private
financial aid programs. This program offers variable interest rate loans tied
to the prime rate, determination of eligibility within 24 hours, repayment
deferral until students have been out of school for six months and a single
billing statement with certain other federal student loans serviced by Sallie
Mae.
4
<PAGE>
Summary Consolidated Financial and Other Data
You should read the consolidated financial and other operating data below in
conjunction with the consolidated financial statements and notes thereto
appearing elsewhere in this prospectus. See "Unaudited Pro Forma Condensed
Financial Data" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
<TABLE>
<CAPTION>
Year Ended December 31, Nine Months Ended September 30,
---------------------------------------- ------------------------------------
1997 1998
-------------------- ------------------------
Pro Pro
1995 1996 Historical Forma (1) 1997 Historical Forma (2)
-------- -------- ---------- --------- ---------- ------------ -----------
(Dollars in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Revenue:
Tuition and
registration fees,
net................... $ 16,330 $ 29,269 $ 74,842 $100,672 $ 45,615 $ 91,659 $ 94,191
Other, net............. 3,066 4,311 7,756 9,483 5,152 8,257 8,729
-------- -------- -------- -------- ---------- ---------- ----------
Total net revenue.... 19,396 33,580 82,598 110,155 50,767 99,916 102,920
Depreciation and
amortization (3)....... 1,330 2,134 8,121 11,562 5,000 9,328 9,522
Income (loss) from
operations............. 404 2,420 2,315 2,641 (354) 1,047 1,591
Net income (loss) (4)... $ 69 $ 1,495 $ (880) $ 881 $ (1,810) $ 35 $ 274
======== ======== ======== ======== ========== ========== ==========
Net income (loss)
attributable
to common stockholders
(5).................... $ (804) $ 137 $ (9,307) $ 713 $ (3,981) $ (2,392) $ 176
======== ======== ======== ======== ========== ========== ==========
Net income per diluted
share attributable
to common stockholders
(6).................... $ 0.12 $ 0.02
======== ==========
Other Data:
EBITDA (7).............. $ 1,734 $ 4,554 $ 10,436 $ 14,203 $ 4,646 $ 10,375 $ 11,113
EBITDA margin (7)....... 8.9% 13.6% 12.6% 12.9% 9.2% 10.4% 10.8%
Cash flow provided by
(used in):
Operating activities... 235 5,275 (194) (4,745) 9,852
Investing activities... (3,478) (9,518) (45,214) (39,587) (8,381)
Financing activities... 4,566 8,076 56,659 41,975 (351)
Capital expenditures,
net.................... 897 1,231 3,822 2,077 3,449
Student population (8).. 3,347 4,537 10,889 10,951 13,655
Number of campuses (9).. 4 5 18 18 20
</TABLE>
<TABLE>
<CAPTION>
September 30,
1998
-------------
(Dollars in
thousands)
<S> <C>
Balance Sheet Data:
Cash.............................................................. $ 19,739
Working capital................................................... 18,739
Total assets...................................................... 129,890
Long-term debt.................................................... 27,931
Total stockholders' investment.................................... 79,976
</TABLE>
- --------
(1) Gives effect to (i) our acquisitions of Gibbs, IAMD, IAD and Scottsdale,
(ii) the use of proceeds from our initial public offering of common stock
to retire indebtedness and (iii) the conversion of all classes of preferred
stock into common stock and the exercise of warrants in connection with our
initial public offering as if they had occurred on January 1, 1997. See
"Unaudited Pro Forma Condensed Consolidated Financial Data" and Note 2 of
the Notes to our Consolidated Financial Statements.
(2) Gives effect to (i) our acquisition of Scottsdale, (ii) the use of proceeds
from our initial public offering of common stock to retire indebtedness and
(iii) the conversion of all classes of preferred stock into common stock
and the exercise of warrants in connection with our initial public offering
as if they had occurred on January 1, 1998. See "Unaudited Pro Forma
Condensed Consolidated Financial Data" and Note 2 of the Notes to our
Consolidated Financial Statements.
5
<PAGE>
(3) 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.
(4) For the year ended December 31, 1997 and the nine months ended September
30, 1997, net income includes an extraordinary loss of $418, which is net
of a $233 tax benefit, resulting from the early extinguishment of debt. See
Note 5 of the Notes to our Consolidated Financial Statements.
(5) Includes reductions to net income (loss) 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 3 of the Notes to our
Consolidated Financial Statements.
(6) Pro forma net income per diluted share is based upon the weighted average
number of common and common stock equivalent shares outstanding totalling
6,011,000 and 7,269,000 for the year ended December 31, 1997 and the nine
months ended September 30, 1998, respectively. These numbers include (i)
outstanding shares of common stock and common stock equivalents, (ii)
2,869,000 and 368,000 shares, for the respective periods, of common stock
assumed to have been issued in our initial public offering in order to
repay indebtedness as if our initial public offering occurred at the
beginning of each period presented and (iii) approximately 2,280,000 and
390,000 weighted average shares, for the respective periods, of common
stock issued upon conversion of preferred stock and the exercise of
warrants which occurred in connection with our initial public offering.
(7) 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. We have included information concerning EBITDA and EBITDA
margin because we believe they allow for a more complete analysis of our
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.
(8) Represents the total number of students attending our schools (a) in the
case of each full year, as of October 31, or (b) for the nine months ended
September 30, 1997 and 1998, as of September 30.
(9) Represents the total number of campuses operated by us as of the end of the
period.
6
<PAGE>
RISK FACTORS
Before you invest in our common stock, you should be aware that there are
various risks, including those described below. You should carefully consider
these risk factors, and all of the other information included in this
prospectus before you decide whether to purchase shares of our common stock.
Any of the following risks could materially adversely affect our business,
results of operation or financial condition and could result in a complete loss
of your investment.
Extensive Regulation of U.S. Schools Due to Substantial Dependence on Federal
Funding
We derive a majority of our revenue from U.S. federal student financial aid
programs. To participate in such programs, a U.S. institution must obtain and
maintain authorization by the appropriate state education agencies,
accreditation by an accrediting agency recognized by the Department of
Education, and certification by the Department of Education. As a result, our
U.S. schools are subject to extensive regulation by these agencies. These
regulations cover virtually all phases of our operations, including our
educational programs, facilities, instructional and administrative staff,
administrative procedures, financial operations and financial strength. They
also affect our ability to acquire or open additional schools or change our
corporate structure. These regulatory agencies periodically revise their
requirements and modify their interpretations of existing requirements.
If one of our schools were to violate any of these regulatory requirements,
we could suffer a financial penalty. The regulatory agencies could also place
limitations on or terminate our schools' operations, including our receipt of
federal student financial aid funds, which could have a material adverse effect
on our business, results of operations or financial condition. We believe that
we substantially comply with the requirements of these regulatory agencies, but
we cannot predict with certainty how all of these requirements will be applied,
or whether we will be able to comply with all of the requirements in the
future. Some of the most significant regulatory requirements and risks that
apply to our U.S. schools are described in the following paragraphs. See
"Financial Aid and Regulation."
Legislative Action. The U.S. Congress regularly reviews and revises the laws
governing the federal student financial aid programs and annually determines
the funding level for each of these programs. Any action by Congress that
significantly reduces funding for the federal student financial aid programs or
the ability of our schools or students to participate in these programs could
have a material adverse effect on our business, results of operations or
financial condition. Legislative action may also increase our administrative
costs and burden and require us to modify our practices in order for our
schools to comply fully with applicable requirements, which could have a
material adverse effect on our business, results of operations or financial
condition. See "Financial Aid and Regulation--Nature of Federal Support for
Postsecondary Education in the U.S." and "--Regulation of Federal Financial Aid
Programs for U.S. Schools--Legislative Action."
Financial Responsibility Standards. To participate in the federal student
financial aid programs, an institution must either satisfy certain numeric
standards of financial responsibility or post a letter of credit in favor of
the Department of Education and possibly accept other conditions on its
participation in the federal student financial aid programs. The Department of
Education has determined that we and some of our institutions did not satisfy
the numeric standards and has required us to post letters of credit for eleven
of our institutions totalling approximately $17.6 million. The Department of
Education has also placed limits on the total amount of federal student
financial aid available to students at SCSCA. We intend to file our 1998
financial statements with the Department of Education in early 1999 and to ask
it to release most, if not all, of our outstanding letters of credit and to
increase or eliminate the funding limitation for SCSCA. We cannot assure you
that we or our institutions will satisfy the numeric standards or that the
Department of Education will take any action with respect to the letters of
credit or funding limitation.
7
<PAGE>
See "Financial Aid and Regulation--Regulation of Federal Financial Aid Programs
for U.S. Schools--Financial Responsibility Standards."
Student Loan Defaults. An institution may lose its eligibility to
participate in some or all of the federal student financial aid programs, if
defaults by its students on their federal student loans exceed specified rates.
None of our schools have student loan default rates that exceed those
thresholds. See "Financial Aid and Regulation--Regulation of Federal Financial
Aid Programs for U.S. Schools--Cohort Default Rates."
The "85/15 Rule." A propriety institution loses its eligibility to
participate in the federal student financial aid programs if it derives more
than 85% of its revenue (on a cash basis) from these programs in any fiscal
year ending before October 1998 or 90% of its revenue (on a cash basis) from
these programs in any fiscal year ending after October 1998. In 1997, none of
our institutions received more than 82% of its revenues (on a cash basis) from
the federal student financial aid programs. See "Financial Aid and Regulation--
Regulation of Federal Financial Aid Programs for U.S. Schools--The "85/15
Rule.' "
Change of Ownership or Control Based on an Acquisition. When we acquire an
institution, the Department of Education and most applicable state education
agencies and accrediting agencies consider that institution to undergo a change
of ownership or control. A change of ownership or control of an institution
under the standards of the Department of Education generally results in the
suspension of the institution's participation in the federal student financial
aid programs until the Department of Education reviews and recertifies the
institution. If we were unable to reestablish the state authorization,
accreditation or Department of Education certification of an institution we
acquired, depending on the size of that acquisition, that failure could have a
material adverse effect on our business, results of operations or financial
condition. See "Financial Aid and Regulation--Regulation of Federal Financial
Aid Programs for U.S. Schools--Change of Ownership or Control."
Change of Ownership or Control Based on this Offering. We believe that this
offering will be considered a change of control under the standards of certain
state education agencies, but not under the standards of the other applicable
state education agencies, the Department of Education or applicable accrediting
agencies. We have submitted a letter to the Department of Education seeking
confirmation that this offering will not be a change of ownership or control
under its standards, but we have not yet received a response to that letter. If
any affected campus were unable to reestablish its state authorization,
depending on the size of the campus, that failure could have a material adverse
effect on our business, results of operations or financial condition. See
"Financial Aid and Regulation--Regulation of Federal Financial Aid Programs for
U.S. Schools--Change of Ownership or Control."
State Authorization and Accreditation. An institution that grants degrees,
diplomas or certificates must be authorized by the relevant education agencies
of the state in which it is located and, in some cases, other states.
Requirements for authorization vary substantially among the states. State
authorization and accreditation by an accrediting agency recognized by the
Department of Education are also required for an institution to participate in
the federal student financial aid programs. Loss of state authorization or
accreditation by any of our campuses, depending on the size of the campus,
could have a material adverse effect on our business, results of operations or
financial condition. See "Financial Aid and Regulation--State Authorization for
U.S. Schools" and "--Accreditation for U.S. Schools."
Dependence on Canadian Financial Aid; Potential Adverse Effects of Canadian
Regulation
A substantial majority of students enrolled at our Canadian schools receives
assistance from Canadian governmental financial aid programs. Depending on
their province of residence, Canadian students may receive loans under the
Canada Student Loan Program, the Ontario Student Loans Plan and the Quebec
Loans and Bursaries Program.
8
<PAGE>
Our Canadian schools must meet certain eligibility standards to administer
these programs and must comply with extensive statutes, regulations and other
requirements. We believe our Canadian schools currently hold all necessary
registrations, approvals and permits and meet all eligibility requirements to
administer these governmental financial aid programs. Our IAD school in Toronto
may be required to share the cost of student loan defaults if defaults by its
students on their Ontario Student Assistance Plan loans exceeds specified
rates. Our Toronto school currently does not have a default rate that exceeds
the applicable threshold. If our Canadian schools cannot meet these and other
eligibility standards or fail to comply with applicable requirements, it could
have a material adverse effect on our business, results of operations or
financial condition.
The Canadian, Ontario and Quebec governments are currently in the process of
changing the legislative, regulatory and other requirements relating to student
financial assistance programs due to political and budgetary pressures.
Although we do not anticipate a significant reduction in the funding for these
programs, any change that significantly reduces funding or the ability of our
schools to participate in these programs could have a material adverse effect
on our business, results of operations or financial condition. See "Financial
Aid and Regulation--Canadian Regulation."
Limited Operating History; Risks of Integrating Acquisitions
We have grown rapidly since our incorporation in January 1994. Our rapid
growth could place a strain on our management, operations, employees or
resources. We cannot assure you that we will be able to maintain or accelerate
our current growth rate, effectively manage our expanding operations or achieve
planned growth on a timely or profitable basis. If we are unable to manage our
growth effectively, our business, results of operations or financial condition
could be materially adversely affected. The anticipated benefits of our most
recent acquisitions may not be achieved unless we successfully integrate these
schools into our operations and effectively manage, market and apply our
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 our business
strategy to these schools could interrupt, or cause loss of momentum in, our
other ongoing activities, which could have a material adverse effect on our
business, results of operations or financial condition. See "Business--
Overview."
History of Losses
Since our inception in 1994, we have experienced a net loss for 1994 and
1997; and a net loss attributable to common stockholders for 1994, 1995 and
1997. To the extent that we earned net income or income attributable to common
stockholders for any prior periods, the amounts earned were not substantial.
See "Selected Historical Consolidated Financial and Other Data," "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
our Consolidated Financial Statements and the related notes thereto appearing
elsewhere in this prospectus. We cannot assure that we will be profitable in
the future.
Reliance on and Risks of Acquisition Strategy
We expect to continue to rely on acquisitions as a key component of our
growth. From time to time, we engage in, and we are currently engaged in,
evaluations of, and discussions with, possible acquisition candidates,
including evaluations and discussions relating to acquisitions that may be
material in size or scope. We cannot assure that we will continue to be able to
identify suitable acquisition opportunities or to acquire any such schools on
favorable terms. Furthermore, we cannot assure that any acquired schools can be
successfully integrated into our 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 schools, 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
9
<PAGE>
also subject us to unanticipated business or regulatory uncertainties or
liabilities. We cannot assure that any potential acquisition will enhance our
business and will not ultimately have a material adverse effect on us. See
"Business--Growth Strategy."
When we acquire an existing school, we typically allocate a significant
portion of the purchase price to fixed assets, goodwill and intangibles (e.g.,
covenants not-to-compete). For our acquisitions to date, we have amortized
goodwill over a period of 40 years and intangible assets over periods of three
to five years. In addition, our acquisition of a school in the U.S. would be a
change of ownership, which may result in the suspension of that school's
participation in the federal student financial aid programs until it obtains
the Department of Education's approval. If we fail to manage our acquisition
program effectively, it could have a material adverse effect on our business,
results of operations or financial condition. See "--Extensive Regulation of
U.S. Schools Due to Substantial Dependence on Federal Funding," "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Financial Aid and Regulation--Regulation of Federal Financial Aid Programs for
U.S. Schools--Opening Additional Schools and Adding Educational Programs."
Risks Associated with Expansion Plans
To date, we have added new schools only through acquisitions. However, in
the future we expect to open and operate new schools, most likely as additional
locations of existing schools, but possibly also as separate, freestanding
institutions. Establishing new schools poses unique challenges and would
require us 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. To open a new
school, we would be required to obtain appropriate state or provincial and
accrediting agency approvals. In addition, to be eligible for federal student
financial aid programs, such a school would have to be certified by the
Department of Education. We have never established a new school, and we cannot
assure you that we will be able to do so successfully or profitably.
While we expect that our career-oriented school business will continue to
provide the substantial majority of our revenue in the near term, we plan to
expand our contract training business, currently offered to a limited extent by
a few of our schools, and may also decide to provide other education-related
services, such as distance learning. We cannot be certain which, if any, new
service areas we will decide to enter or whether we will succeed in markets
beyond our current career-oriented school business.
Our failure to effectively manage the operations of newly established
schools or service areas, or any diversion of management's attention from our
core career-oriented school operating activities, could have a material adverse
effect on our business, results of operations or financial condition. See
"Business--Growth Strategy" and "Financial Aid and Regulation--Regulation of
Federal Financial Aid Programs for U.S. Schools--Opening Additional Schools and
Adding Educational Programs." We may also consider acquiring or establishing
operations outside of the U.S. and Canada. See "--Risks of International
Operations."
Risk Associated with Changes in Market Needs and Technology
Prospective employers of our graduates increasingly demand that their entry-
level employees possess appropriate technological skills. Educational programs
at our schools, particularly programs in computer technologies and visual
communications, must keep pace with these evolving requirements. If we cannot
respond to changes in industry requirements, it could have a material adverse
effect on our business, results of operations or financial condition. See
"Business--Technology."
Seasonality
Our results of operations fluctuate primarily as a result of changes in the
level of student enrollment at our schools. Our 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 we
10
<PAGE>
encourage year-round attendance at all schools, certain of our schools have
summer breaks for some of their programs. 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 our fiscal year. Our costs and expenses do not, however, fluctuate as
significantly on a quarterly basis. We anticipate that these seasonal trends
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. Our 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 our schools. Although tuition at private nonprofit
institutions is, on average, higher than tuition at our schools, some public
institutions are able to charge lower tuition than our 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 our competitors in both the public and private sectors have
substantially greater financial and other resources than us. See "Business--
Competition."
Risks of International Operations
Although we currently operate only in the U.S. and Canada, we intend to
explore opportunities outside those markets. There may be difficulties and
complexities associated with our expansion into international markets, and we
cannot assure you that our 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, we would be required to
comply with different, and potentially more onerous, regulatory requirements.
We cannot assure you that such factors will not have a material adverse effect
on our business, results of operations or financial condition in the future.
See "Business--Growth Strategy."
Significant Ownership and Influence of Principal Stockholder
After the offering Heller Equity Capital Corporation will own approximately
18.2% of our common stock on a fully diluted basis. Heller is currently
entitled to designate, and has designated, two members of our Board of
Directors. As a result, Heller can exercise considerable influence over our
operations and business strategy. See "Management--Arrangements for Nomination
as Director," "Principal and Selling Stockholders" and "Description of Capital
Stock."
Possible Need for Additional Financing to Implement Growth Strategy
We believe that funds from operations, cash, investments and borrowings
under our $60 million credit facility pursuant to our credit agreement will be
adequate to fund our current operating plans for the foreseeable future.
However, we may need additional debt or equity financing in order to carry out
our strategy of growth through acquisitions. The amount and timing of such
additional financing will vary principally depending on the timing and size of
acquisitions and the sellers' willingness to provide financing themselves. To
the extent that we require additional financing in the future and are unable to
obtain such additional financing, we may not be able to fully implement our
growth strategy. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources."
Limitations Under Our Credit Agreement
Our credit agreement limits our ability to take certain actions, including
paying dividends, disposing of assets and incurring certain additional
indebtedness. Accordingly, we may be restricted from taking certain actions
which management believes would be desirable and in the best interests of us
and our stockholders. The
11
<PAGE>
credit agreement also requires us to maintain specified financial ratios and
satisfy certain financial tests. We were in compliance with all ratios and
financial tests as of December 31, 1998, and believe that we remain in
compliance. However, a breach of any covenants contained in the credit
agreement could result in an event of default under that agreement and allow
the lenders to accelerate the indebtedness, which could have a material adverse
effect on our business, results of operations or financial condition. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
Dependence on Key Personnel
Our success to date has depended, and will continue to depend, largely on
the skills and efforts of John M. Larson, our President and Chief Executive
Officer, William A. Klettke, our Senior Vice President and Chief Financial
Officer, and our other key personnel. Our success also depends, in large part,
upon our ability to attract and retain highly qualified faculty, school
presidents and administrators and corporate management. Due to the nature of
our business, we may have difficulty locating and hiring qualified personnel,
and retaining such personnel once hired. None of our employees is subject to an
employment or noncompetition agreement other than Mr. Larson. We do not
maintain key man life insurance on any of our employees. The loss of the
services of any of our key personnel, or our failure to attract and retain
other qualified and experienced personnel on acceptable terms, could have a
material adverse effect on our business, results of operations or financial
condition. See "Management."
Common Stock Price Volatility
The market price for our common stock has fluctuated significantly. Factors
such as quarterly variations in our operating results, announcements of
acquisitions by us or our competitors, new regulations or interpretations of
regulations applicable to our schools, changes in accounting treatments or
principles and changes in earnings estimates by securities analysts, as well as
general political economic and market conditions, could cause the market price
of our common stock to fluctuate significantly. The market price for our common
stock may also be affected by our 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 our 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.
Antitakeover Effects of Our Certificate of Incorporation and By-Laws
Our Certificate of Incorporation, our By-Laws and Delaware law contain
provisions that may delay, defer or inhibit a future acquisition of us not
approved by our Board of Directors. These provisions are intended to encourage
any person interested in acquiring us to negotiate with and obtain the approval
of our Board of Directors in connection with the transaction. Our Certificate
of Incorporation also permits our Board of Directors to issue shares of
preferred stock with such voting, conversion and other rights as it determines,
without any further vote or action by our stockholders. By using preferred
stock, we could (i) discourage a proxy contest, (ii) make the acquisition of a
substantial block of our common stock more difficult or (iii) limit the price
investors may be willing to pay in the future for shares of our common stock.
In addition, our By-Laws provide that (i) special meetings of our stockholders
may be called only by our Board of Directors and (ii) only two of our six
Directors may be elected at such special meetings. These provisions also could
discourage bids for your shares of common stock at a premium and could have a
material adverse effect on the market price of your shares. See "Description of
Capital Stock."
Shares Eligible for Future Sale
The sale of a substantial number of shares of our common stock, or the
perception that such sales could occur, could adversely affect prevailing
market prices for our common stock. We currently have approximately 7,152,896
shares of common stock outstanding. Substantially all of these shares are
eligible for immediate sale
12
<PAGE>
in the public market without restriction unless such shares are held by
"affiliates" of us within the meaning of Rule 144 under the Securities Act of
1933, as amended (the "Securities Act"). Upon completion of the offering,
1,615,253 shares will be held by our affiliates. Approximately 1,971,759 shares
of common stock are subject to lock-up agreements between the holders of our
shares and the representatives of the underwriters, pursuant to which the
holders have agreed 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 90 days after the date of the offering without the prior written consent of
Credit Suisse First Boston Corporation. Upon expiration of this period
substantially all of the shares subject to the lock-up agreements will be
eligible for sale under Rule 144, subject to volume and other limitations
(other than the holding period requirement) of such rule. An additional 902,384
shares of common stock are issuable at various dates upon exercise of options
granted to certain of our employees, officers, directors and consultants
pursuant to stock option agreements. Our affiliates holding 1,463,007 shares of
our common stock have been granted registration rights. We cannot predict 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 our ability to raise capital through an offering of our
equity securities. See "Description of Capital Stock," "Shares Eligible for
Future Sale" and "Underwriting."
Year 2000 Compliance
Most companies face potentially serious problems because many software
applications and operational programs written in the past may not properly
recognize calendar dates beginning in the Year 2000. This problem could force
information systems to either shut down or provide incorrect data and
information. We began the process of identifying the necessary changes to our
computer programs and hardware as well as assessing the progress of our
significant vendors in their remediation efforts in late 1997.
We are unable at this time to fully assess the possible impact on our
financial condition, results of operations and cash flows that may result from
any disruptions to our business caused by Year 2000 problems in any systems
controlled by us or any third party with whom we have a material relationship.
These third parties primarily include the Department of Education, state
education agencies, accrediting agencies, guaranty agencies and student loan
lenders. We do not believe that the cost to remedy our internal Year 2000
problems will have a material adverse effect on our business, results of
operations or financial condition. We cannot assure you, however, that our
systems or those of third parties with whom we interact will be free of Year
2000 problems. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Year 2000 Compliance."
13
<PAGE>
USE OF PROCEEDS
We will not receive any of the proceeds from the sale of common stock by the
Selling Stockholders. If the underwriters exercise their over-allotment option
in full, the net proceeds to us, after deduction of the estimated underwriting
discounts and commissions and offering expenses payable by us, are estimated to
be approximately $ million. If the over-allotment option is exercised, we
will use our net proceeds for general corporate purposes.
DIVIDEND POLICY
We have never paid a cash dividend on our common stock. We do not anticipate
paying any cash dividends on our common stock in the foreseeable future and we
plan to retain our earnings to finance future growth. The declaration and
payment of dividends on our common stock are subject to the discretion of our
Board of Directors. Our Board's decision to pay future dividends will depend on
general business conditions, the effect on our financial condition and other
factors our Board may consider to be relevant. Our ability to pay dividends on
our common stock is limited if we are not in compliance with the terms of our
credit agreement or we fail to meet a specified leverage ratio.
PRICE RANGE OF COMMON STOCK
The following table sets forth the range of high and low sales prices per
share for our common stock as reported on The Nasdaq National Market, where the
stock trades under the symbol "CECO," for the periods indicated. The initial
public offering price of our common stock on January 28, 1998 was $16.00 per
share.
<TABLE>
<CAPTION>
Price Range
of Common
Stock
-------------
High Low
------ ------
<S> <C> <C>
1998:
First Quarter (from January 28, 1998).......................... $22.12 $17.62
Second Quarter................................................. 27.50 21.50
Third Quarter.................................................. 26.75 17.37
Fourth Quarter................................................. 30.00 14.12
1999:
First Quarter (through January 15, 1999)....................... $30.62 $28.87
</TABLE>
On January 15, 1999, the last sale price of the common stock as reported on
The Nasdaq National Market was $30.50 per share. As of January 15, 1999, there
were 26 holders of record of the common stock.
14
<PAGE>
CAPITALIZATION
The following table sets forth our cash and cash equivalents and
capitalization (long-term debt plus stockholders' investment) as of September
30, 1998. We will not receive any of the proceeds of the sale of common stock
by the Selling Stockholders. The information set forth below should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and our financial statements and the related notes
thereto included elsewhere in this prospectus.
<TABLE>
<CAPTION>
September 30, 1998
----------------------
(Dollars in thousands)
<S> <C>
Cash.................................................... $ 19,739
========
Long-term debt.......................................... $ 27,931
Stockholders' investment:
Common stock, $.01 par value, 50,000,000 shares
authorized;
7,144,806 shares issued and outstanding (1).......... 71
Additional paid-in capital............................ 95,084
Foreign currency translation.......................... (823)
Accumulated deficit................................... (14,356)
--------
Total stockholders' investment...................... 79,976
--------
Total capitalization................................ $107,907
========
</TABLE>
- --------
(1) Does not include (i) 907,384 shares of common stock issuable upon the
exercise of outstanding options at a weighted average exercise price of
$16.31 per share and (ii) 191,774 shares of common stock reserved for
issuance under our stock plans. See "Management--Stock Plans," "Description
of Capital Stock" and Notes 9 and 16 of the Notes to our Consolidated
Financial Statements.
15
<PAGE>
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL DATA
The unaudited pro forma condensed consolidated statements of operations of
CEC for the year ended December 31, 1997 and the nine months ended September
30, 1998 give effect to (i) the acquisitions of Gibbs, IAMD, IAD and Scottsdale
and (ii) events occurring at the time of our initial public offering of common
stock, including the use of proceeds to retire indebtedness, 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,
1997 was prepared from the audited historical statements of operations of CEC
and Scottsdale for the year ended December 31, 1997, and the unaudited
statements of operations of Gibbs for the five months ended May 31, 1997 and
IAMD and IAD for the six months ended June 30, 1997.
The unaudited pro forma condensed consolidated statement of operations for
the nine months ended September 30, 1998 was prepared from the unaudited
historical statements of operations of CEC for the nine months ended September
30, 1998 and Scottsdale for the seven months ended July 31, 1998.
All unaudited pro forma condensed consolidated financial data includes all
adjustments necessary (consisting only of normal recurring entries) for a fair
presentation thereof and, in the opinion of management, have been prepared on
the same basis as the audited financial statements. 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 anticipated changes to be made by us to the historical
operations, are presented for informational purposes only and should not be
construed to be indicating (i) the results of our operations or financial
position that actually would have occurred had the acquisitions and the initial
public offering been consummated as of the date indicated or (ii) the results
of our operations or our financial position in the future.
The unaudited pro forma condensed consolidated financial data reflect the
acquisitions using the purchase method of accounting. The acquired assets and
assumed liabilities of Gibbs, IAMD and IAD are stated at values representing an
allocation of the purchase price based upon the estimated fair market value at
the date of their acquisitions. The acquired assets and assumed liabilities of
Scottsdale are stated at values representing a preliminary allocation of the
purchase price based upon the estimated fair market value at the date of the
acquisition. The final purchase accounting allocations will be determined based
on the final appraised values, which could differ from the estimates used
herein.
The following unaudited pro forma condensed consolidated financial
statements 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 and Scottsdale and the other
historical financial information included elsewhere in this prospectus.
16
<PAGE>
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
STATEMENT OF OPERATIONS
For the Twelve Months Ended December 31, 1997
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Historical
--------------------------------------------------
Gibbs IAMD IAD
(through (through (through
May 31, June 30, June 30, Pro Forma
CEC 1997) 1997) 1997) Scottsdale Adjustments Pro Forma
-------- -------- -------- -------- ---------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenue:
Tuition and
registration fees,
net.................. $ 74,842 $ 11,606 $ 4,119 $ 5,677 $ 4,428 $ -- $ 100,672
Other, net............ 7,756 1,222 63 27 415 -- 9,483
-------- -------- ------- ------- ------- -------- ---------
Total net revenue... 82,598 12,828 4,182 5,704 4,843 -- 110,155
Operating Expenses:
Educational services
and facilities....... 34,620 3,029 1,966 2,177 2,627 -- 44,419
General and
administrative....... 37,542 8,043 2,091 2,565 1,292 -- 51,533
Depreciation and
amortization......... 8,121 901 387 470 94 1,589 (1) 11,562
-------- -------- ------- ------- ------- -------- ---------
Total operating
expenses........... 80,283 11,973 4,444 5,212 4,013 1,589 107,514
-------- -------- ------- ------- ------- -------- ---------
Income (loss) from
operations............. 2,315 855 (262) 492 830 (1,589) 2,641
Interest (expense)
income, net............ (3,108) (242) (103) (235) 62 2,504 (2) (1,122)
-------- -------- ------- ------- ------- -------- ---------
Income (loss) before
provision (benefit) for
income taxes........... (793) 613 (365) 257 892 915 1,519
Provision (benefit) for
income taxes........... (331) -- (146) 103 -- 1,012 (3) 638
-------- -------- ------- ------- ------- -------- ---------
Net income (loss) (4)... (462) 613 (219) 154 892 (97) 881
Dividends paid or
accrued on preferred
stock................ (2,159) -- -- -- -- 2,159 (5) --
Accretion to
redemption value of
preferred stock and
warrants............. (6,268) -- -- -- -- 6,100 (5) (168)
-------- -------- ------- ------- ------- -------- ---------
Net income (loss)
attributable to common
stockholders (4)....... $ (8,889) $ 613 $ (219) $ 154 $ 892 $ 8,162 $ 713
======== ======== ======= ======= ======= ======== =========
Net income (loss) per
share attributable to
common stockholders:
Basic................. $ (11.58) $ 0.12
======== =========
Diluted............... $ (11.58) $ 0.12
======== =========
Weighted average number
of shares outstanding:
Basic................. 768 5,149 (6) 5,917
======== ======== =========
Diluted............... 768 5,243 (6)(7) 6,011
======== ======== =========
</TABLE>
17
<PAGE>
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
STATEMENT OF OPERATIONS
For the Nine Months Ended September 30, 1998
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Historical
------------------------
Scottsdale
(through Pro Forma
CEC July 31, 1998) Adjustments Pro Forma
-------- -------------- ----------- ---------
<S> <C> <C> <C> <C>
Revenue:
Tuition and registration
fees, net............... $ 91,659 $ 2,532 $ -- $ 94,191
Other, net............... 8,257 472 -- 8,729
-------- ------- ------- --------
Total net revenue...... 99,916 3,004 -- 102,920
Operating Expenses:
Educational services and
facilities.............. 41,419 1,445 -- 42,864
General and
administrative.......... 46,161 821 -- 46,982
Depreciation and
amortization............ 9,328 54 140 (1) 9,522
Compensation expense
related to the initial
public offering......... 1,961 -- -- 1,961
-------- ------- ------- --------
Total operating
expenses.............. 98,869 2,320 140 101,329
-------- ------- ------- --------
Income (loss) from
operations................ 1,047 684 (140) 1,591
Interest (expense) income,
net....................... (987) 12 (144) (2) (1,119)
-------- ------- ------- --------
Income (loss) before
provision for income
taxes..................... 60 696 (284) 472
Provision (benefit) for
income taxes.............. 25 -- 173 (3) 198
-------- ------- ------- --------
Net Income (Loss).......... 35 696 (457) 274
Dividends paid or accrued
on preferred stock...... (274) -- 274 (5) --
Accretion to redemption
value
of preferred stock and
warrants................ (2,153) -- 2,055 (5) (98)
-------- ------- ------- --------
Net income (loss)
attributable to
common stockholders....... $ (2,392) $ 696 $ 1,872 $ 176
======== ======= ======= ========
Net income (loss) per share
attributable to common
stockholders:
Basic.................... $ (0.38) $ 0.02
======== ========
Diluted.................. $ (0.38) $ 0.02
======== ========
Weighted average number of
shares outstanding:
Basic.................... 6,309 758 (6) 7,067
======== ======= ========
Diluted.................. 6,309 960 (6)(7) 7,269
======== ======= ========
</TABLE>
18
<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) Depreciation of property and equipment, based on appraised values and
estimated useful lives (which range from five to 31 years) in excess of the
historical amounts (which was only recorded from the date of the
acquisitions to the end of each period), is recorded as an adjustment. The
adjustment also gives effect to the amortization of goodwill and covenants
not-to-compete. 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 Gibbs, IAMD, IAD and Scottsdale include goodwill of
approximately $30.1 million and covenants not-to-compete of approximately
$11.0 million. Goodwill is amortized on a straight-line basis over its
estimated useful life of 40 years. Covenants not-to-compete for the Gibbs,
IAMD and IAD acquisitions are amortized over their estimated useful lives,
which range from three to five years, using the sum of years' digits
method. Amortization expense, reflecting the new values and amortization of
these intangible assets for the entire periods presented in excess of
historical amounts, has been recorded as an adjustment.
(2) Reflects (i) additional interest expense (at an imputed average interest
rate of 9% for the year ended December 31, 1997 and nine months ended
September 30, 1998) of approximately $1.0 million and $0.5 million for the
year ended December 31, 1997 and the nine months ended September 30, 1998,
respectively, associated with debt incurred to finance the acquisitions of
Gibbs, IAMD, IAD and Scottsdale and (ii) a reduction of interest expense of
approximately $3.5 million and $0.3 million for the year ended December 31,
1997 and the nine months ended September 30, 1998, respectively, associated
with proceeds from our initial public offering used to repay outstanding
indebtedness, at an assumed weighted average interest rate of 9.0%.
(3) Reflects an adjustment to record a provision for federal and state income
taxes at an effective income tax rate of 42%.
(4) Excludes the extraordinary loss on early extinguishment of debt of $418,
which is net of a $233 tax benefit.
(5) Shares of redeemable preferred stock (including accrued paid-in-kind
dividends) were converted into common stock and substantially all warrants
were exercised in connection with our initial public offering. Accrued
dividends and any accretion to redemption value related to those shares of
preferred stock and warrants, assumed to have been issued at the beginning
of each period presented to consummate the acquisitions, have been added
back to net income attributable to common stockholders to derive pro forma
income attributable to common stockholders. Therefore, such amounts are
eliminated.
(6) Represents an adjustment of (i) approximately 2,869,000 and 368,000 shares
of common stock for the year ended December 31, 1997 and the nine months
ended September 30, 1998, assumed to have been issued in our initial public
offering to repay indebtedness and (ii) approximately 2,280,000 and 390,000
shares of common stock for the year ended December 31, 1997 and the nine
months ended September 30, 1998, related to the conversion of preferred
stock and exercise of warrants which occurred in connection with our
initial public offering as if both events occurred at the beginning of each
period presented.
(7) Includes an adjustment for common stock equivalents of 94,000 shares and
202,000 shares for the year ended December 31, 1997 and the nine months
ended September 30, 1998, respectively.
19
<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, our
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 years ended December 31, 1995, 1996 and
1997 and the balance sheet data as of December 31, 1996 and 1997 are derived
from our audited consolidated financial statements included elsewhere in this
prospectus. Our selected statement of operations data set forth below for the
nine months ended September 30, 1997 and 1998 and the balance sheet data as of
September 30, 1998 are derived from our unaudited consolidated financial
statements included elsewhere in this prospectus. Our unaudited statements
include all adjustments, consisting only of normal recurring adjustments,
necessary for a fair presentation of our 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 and 1995 and statement of operations data
for the year ended December 31, 1994 are derived from our audited financial
statements which are not included in this prospectus.
<TABLE>
<CAPTION>
Nine Months Ended
Year Ended December 31, September 30,
-------------------------------------- ------------------
1994(1) 1995 1996 1997 1997 1998
-------- -------- -------- -------- -------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Revenue:
Tuition and
registration fees,
net................... $ 5,794 $ 16,330 $ 29,269 $ 74,842 $ 45,615 $ 91,659
Other, net............. 1,692 3,066 4,311 7,756 5,152 8,257
-------- -------- -------- -------- -------- --------
Total net revenue..... 7,486 19,396 33,580 82,598 50,767 99,916
Operating Expenses:
Educational services
and facilities........ 3,074 8,565 14,404 34,620 22,269 41,419
General and
administrative........ 4,887 9,097 14,622 37,542 23,852 46,161
Depreciation and
amortization.......... 980 1,330 2,134 8,121 5,000 9,328
Compensation expense
related to the initial
public offering....... -- -- -- -- -- 1,961
-------- -------- -------- -------- -------- --------
Total operating
expenses............ 8,941 18,992 31,160 80,283 51,121 98,869
-------- -------- -------- -------- -------- --------
Income (loss) from
operations............. (1,455) 404 2,420 2,315 (354) 1,047
Interest expense........ 134 311 717 3,108 2,046 987
-------- -------- -------- -------- -------- --------
Income (loss) before
provision for taxes and
extraordinary item..... (1,589) 93 1,703 (793) (2,400) 60
Provision (benefit) for
income taxes........... -- 24 208 (331) (1,008) 25
-------- -------- -------- -------- -------- --------
Income (loss) before
extraordinary item..... (1,589) 69 1,495 (462) (1,392) 35
Extraordinary loss on
early extinguishment of
debt (net of taxes of
$233).................. -- -- -- (418) (418) --
-------- -------- -------- -------- -------- --------
Net income (loss)....... $ (1,589) $ 69 $ 1,495 $ (880) $ (1,810) $ 35
======== ======== ======== ======== ======== ========
Income (loss)
attributable to common
stockholders:
Income (loss) before
extraordinary item, as
reported.............. $ (1,589) $ 69 $ 1,495 $ (462) $ (1,392) $ 35
Dividends on preferred
stock (2)............. (393) (777) (1,128) (2,159) (1,444) (274)
Accretion to redemption
value of preferred
stock and warrants
(3)................... -- (96) (230) (6,268) (727) (2,153)
-------- -------- -------- -------- -------- --------
Income (loss) before
extraordinary item,
attributable to common
stockholders........... (1,982) (804) 137 (8,889) (3,563) (2,392)
Extraordinary loss, net. -- -- -- (418) (418) --
-------- -------- -------- -------- -------- --------
Net income (loss)
attributable to common
stockholders........... $ (1,982) $ (804) $ 137 $ (9,307) $ (3,981) $ (2,392)
======== ======== ======== ======== ======== ========
Net income (loss)
attributable to common
stockholders:
Basic.................. $ (1.06) $ 0.18 $ (12.12) $ (5.18) $ (0.38)
======== ======== ======== ======== ========
Diluted................ $ (1.06) $ 0.13 $ (12.12) $ (5.18) $ (0.38)
======== ======== ======== ======== ========
</TABLE>
20
<PAGE>
<TABLE>
<CAPTION>
Nine Months
Ended September
Year Ended December 31, 30,
--------------------------------- ----------------
1994(1) 1995 1996 1997 1997 1998
------- ------ ------ ------- ------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Other Data:
EBITDA (4)............... $ (475) $1,734 $4,554 $10,436 $ 4,646 $10,375
EBITDA margin (4)........ (6.3)% 8.9% 13.6% 12.6% 9.2% 10.4%
Cash flow provided by
(used in):
Operating activities.... (1,000) 235 5,275 (194) (4,745) 9,852
Investing activities.... (2,372) (3,478) (9,518) (45,214) (39,587) (8,381)
Financing activities.... 6,014 4,566 8,076 56,659 41,975 (351)
Capital expenditures,
net..................... 153 897 1,231 3,822 2,077 3,449
Student population (5)... 1,131 3,347 4,537 10,889 10,951 13,655
Number of campuses (6)... 2 4 5 18 18 20
</TABLE>
<TABLE>
<CAPTION>
December 31,
----------------------------------- September 30,
1994 1995 1996 1997 1998
------- ------- ------- -------- -------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash and cash equivalents... $ 2,642 $ 3,965 $ 7,798 $ 18,906 $ 19,739
Working capital............. 578 1,314 1,379 13,806 18,739
Total assets................ 11,704 23,584 36,208 117,617 129,890
Long-term debt.............. 2,313 8,034 16,459 64,035 27,931
Redeemable preferred stock
and warrants............... 8,243 13,628 14,561 40,160 --
Total stockholders'
investment................. (1,982) (2,756) (2,589) (7,404) 79,976
</TABLE>
- --------
(1) Commencing January 5, 1994, the date of our incorporation.
(2) Represents the dividends paid on, or added to, the redemption value of
outstanding preferred stock. See Note 3 of the Notes to our Consolidated
Financial Statements.
(3) See Note 3 of the Notes to our 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. We have included information concerning EBITDA and EBITDA
margin because we believe they allow for a more complete analysis of our
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.
(5) Represents the total student population at our 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, 1997 and 1998, as of September 30.
(6) Represents the total number of campuses operated by us as of the end of the
period.
21
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
You should read the following discussion together with the financial
statements and related notes included elsewhere in this prospectus. The results
discussed below are not necessarily indicative of the results to be expected in
any future periods. This discussion contains forward-looking statements. See
"Special Note Regarding Forward-Looking Statements."
Background and Overview
We are one of the largest providers of private, for-profit postsecondary
education in North America, with approximately 15,900 students enrolled as of
October 31, 1998. We operate 12 schools, with 21 campuses located in 13 states
and two Canadian provinces. Our schools enjoy long operating histories and
offer a variety of bachelor's degree, associate degree and non-degree programs
in career-oriented disciplines within our core curricula of (i) computer
technologies, (ii) visual communication and design technologies, (iii) business
studies and (iv) culinary arts.
We have experienced significant growth both internally and through
acquisitions. Net revenue and EBITDA have increased in each of the years we
have operated. Our net revenue increased to $82.6 million in 1997, from $7.5
million in 1994 and EBITDA increased to $10.4 million in 1997, from a loss of
$0.5 million in 1994. For the first nine months of 1998, our net revenue was
$99.9 million. We have invested significant amounts of capital in the hiring of
additional personnel and increased marketing and capital improvements at each
of the schools we have acquired. We have also hired additional corporate staff
to support our continued growth. The increased costs of personnel and marketing
are expensed as incurred and are reflected in general and administrative
expenses. Additional depreciation and amortization is reflected as a result of
the capital improvements.
We believe that EBITDA, while not a substitute for generally accepted
accounting principles' measures of operating results, is an important measure
of our financial performance and that of our schools. Our management believes
that EBITDA is particularly meaningful due principally to the role acquisitions
have played in our development. Our rapid growth through acquisitions has
resulted in significant non-cash depreciation and amortization expense, because
a significant portion of the purchase price of a school acquired by us is
generally allocated to fixed assets, goodwill and other intangible assets. As a
result of our ongoing acquisition strategy, non-cash amortization expense may
continue to be substantial.
Our principal source of revenue is tuition collected from our 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, we refund the portion of 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.
Our 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 our campuses typically
implements one or more tuition increases annually.
Other revenue consists of bookstore sales, placement fees, dormitory and
cafeteria fees and restaurant revenue. Other revenue is recognized during the
period services are rendered.
Educational services and facilities expense includes costs directly
attributable to the educational activity of our schools, including salaries and
benefits of faculty, academic administrators and student support personnel.
22
<PAGE>
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
and all other physical plant and occupancy costs, with the exception of costs
attributable to our 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 the previous owners of our schools.
Acquisitions
On February 28, 1997, we acquired all of the outstanding capital stock of
SCT for a purchase price of approximately $4.9 million. In addition, we paid
approximately $1.8 million to the former owners of SCT pursuant to non-
competition agreements.
Effective May 31, 1997, we acquired all of the outstanding capital stock of
Gibbs for a purchase price of approximately $19.0 million. In addition, we paid
$7.0 million to the former owner of Gibbs pursuant to a non-competition
agreement.
On June 30, 1997, we acquired all of the outstanding capital stock of IAMD
for an initial purchase price of $3.0 million, which amount was further
increased by $4.7 million during 1998, based on the results of IAMD operations
and the calculation of the final purchase price adjustment. In addition, we
paid $2.0 million to the former owners of IAMD pursuant to covenants not-to-
compete.
Also on June 30, 1997, we acquired all of the capital stock of IAD for a
purchase price of $6.5 million. In addition, we paid $2.0 million to the former
owners of IAD pursuant to covenants not-to-compete.
On March 13, 1998, we acquired all of the outstanding capital stock of SCSCA
for a purchase price of approximately $1.0 million.
On July 31, 1998, we acquired certain assets and assumed certain liabilities
of Scottsdale. The purchase price was approximately $9.9 million.
On January 4, 1999, we acquired all of the outstanding capital stock of
Harrington for a purchase price of approximately $2.9 million, subject to
adjustment.
23
<PAGE>
Results of Operations
The following table summarizes our operating results as a percentage of net
revenue for the periods indicated.
<TABLE>
<CAPTION>
Nine Months
Year Ended Ended
December 31, September 30,
-------------------- ---------------
1995 1996 1997 1997 1998
----- ----- ----- ------ ------
<S> <C> <C> <C> <C> <C>
Revenue:
Tuition and registration, net....... 84.2% 87.2% 90.6% 89.9% 91.7%
Other, net.......................... 15.8 12.8 9.4 10.1 8.3
----- ----- ----- ------ ------
Net revenue........................ 100.0 100.0 100.0 100.0 100.0
----- ----- ----- ------ ------
Operating expenses:
Educational services and facilities. 44.2 42.9 41.9 43.9 41.5
General and administrative.......... 46.8 43.5 45.5 47.0 46.2
Depreciation and amortization....... 6.9 6.4 9.8 9.8 9.3
Compensation expense related to the
initial public offering............ -- -- -- -- 2.0
----- ----- ----- ------ ------
Total operating expenses........... 97.9 92.8 97.2 100.7 99.0
----- ----- ----- ------ ------
Income (loss) from operations........ 2.1 7.2 2.8 (0.7) 1.0
Interest expense, net................ 1.6 2.1 3.8 4.0 1.0
----- ----- ----- ------ ------
Income (loss) before provision for
taxes and extraordinary item........ 0.5 5.1 (1.0) (4.7) 0.0
Provision (benefit) for income taxes. 0.1 0.6 (0.4) (2.0) 0.0
----- ----- ----- ------ ------
Income (loss) before extraordinary
item................................ 0.4 4.5 (0.6) (2.7) 0.0
Extraordinary loss on early
extinguishment of debt (net of
taxes).............................. -- -- (0.5) (0.9) 0.0
----- ----- ----- ------ ------
Net income (loss).................... 0.4 4.5 (1.1) (3.6) 0.0
===== ===== ===== ====== ======
Net income (loss) attributable to
common stockholders................. (4.1)% 0.4% (11.3)% (7.8)% (2.4)%
===== ===== ===== ====== ======
</TABLE>
Nine Months Ended September 30, 1998 Compared to Nine Months Ended September
30, 1997
Revenue. Net tuition revenue increased 101% from $45.6 million in the first
nine months of 1997 to $91.7 million in the first nine months of 1998, due to
an approximately 21% increase in the average number of students attending the
schools which were owned by us during the 1997 period and tuition increases
effective in 1998 for these schools, as well as added net tuition revenue of
$48.4 million for schools acquired during and after the 1997 period. Other net
revenue increased 60%, from $5.2 million in the first nine months of 1997 to
$8.3 million in the first nine months of 1998, due to an increase in student
population for schools owned during the 1997 period.
Educational Services and Facilities Expense. Educational services and
facilities expense increased 86%, from $22.3 million in the first nine months
of 1997 to $41.4 million in the first nine months of 1998. Of this increase,
$4.7 million was attributable to the increase in student population for schools
owned during the 1997 period and $14.4 million was attributable to the addition
of educational services and facilities for schools acquired during and after
the 1997 period.
General and Administrative Expense. General and administrative expense
increased 94%, from $23.9 million in the first nine months of 1997 to $46.2
million in the first nine months of 1998. The increase was primarily
attributable to $16.3 million of expenses for schools acquired during and after
the 1997 period, costs totalling $2.1 million related to increased personnel at
the corporate level to enhance our infrastructure, and increased advertising
and marketing (including admissions) of $2.6 million for schools owned during
the 1997 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 us.
Depreciation and Amortization Expense. Depreciation and amortization expense
increased 87%, from $5.0 million in the first nine months of 1997 to $9.3
million in the first nine months of 1998. The increase was due
24
<PAGE>
to increased capital expenditures for schools owned during the 1997 period and
related increased depreciation expense of $0.4 million in the first nine months
of 1998. Additionally, depreciation expense increased $2.1 million due to the
depreciation expense for schools acquired during and after the 1997 period.
Amortization expense increased from $2.0 million in the first nine months of
1997 to $3.8 million in the first nine months of 1998, primarily due to
additional amortization of non-competition agreements and goodwill for the
acquisition of schools after the 1997 period.
Compensation Expense Related to the Initial Public Offering. Pursuant to
certain amended stock option agreements with two stockholders, compensation
expense totalling approximately $2.0 million was recognized upon consummation
of our initial public offering in 1998.
Interest Expense. Interest expense decreased 52% from $2.0 million in the
first nine months of 1997 to $1.0 million in the first nine months of 1998. The
decrease was primarily due to a reduction of indebtedness resulting from the
application of the net proceeds of our initial public offering in February
1998.
Provision (Benefit) for Income Taxes. The provision (benefit) for income
taxes increased from a $1.0 million benefit in the first nine months of 1997 to
a $0.03 million provision in the first nine months of 1998 as a result of
changes in pretax income (loss).
Net Income (Loss) before Extraordinary Item. Net income (loss) before
extraordinary item increased to a net income of $0.04 million in the first nine
months of 1998 from a net loss of $1.4 million in the first nine months of
1997.
Extraordinary Item. During 1997, we 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 our current credit
facility.
Net Income (Loss). Net income (loss) increased to a net income of $0.04
million in the first nine months of 1998 from a net loss of $1.8 million in the
first nine months of 1997.
Net Income (Loss) Attributable to Common Stockholders. Net loss attributable
to common stockholders decreased from $4.0 million in the first nine months of
1997 to $2.4 million in the first nine months of 1998. The primary reason for
this decrease was due to the increase in net income (loss) discussed above.
Year Ended December 31, 1997 Compared to Year Ended December 31, 1996
Revenue. Net tuition revenue increased 156% from $29.3 million in 1996 to
$74.8 million in 1997, due to an approximately 18% increase in the average
number of students attending the schools which were owned by us during 1996 and
tuition increases effective in 1997 for these schools, as well as added net
tuition revenue of $34.2 million for schools acquired after 1996. Other net
revenue increased 80%, from $4.3 million in 1996 to $7.8 million in 1997, due
to an increase in student population for schools owned during 1996 and the
addition of $2.0 million from schools acquired after 1996.
Educational Services and Facilities Expense. Educational services and
facilities expense increased 140%, from $14.4 million in 1996 to $34.6 million
in 1997. Of this increase, $5.2 million was attributable to the increase in
student population and associated facility costs for schools owned during 1996
and $15.0 million was attributable to the addition of educational services and
facilities for schools acquired after 1996.
General and Administrative Expense. General and administrative expense
increased 157%, from $14.6 million in 1996 to $37.5 million in 1997. The
increase was primarily attributable to costs totalling $1.1 million related to
increased personnel at the corporate level to enhance our infrastructure and
increased advertising and marketing (including admissions) of $1.9 million for
schools owned during 1996, as well as the addition of
25
<PAGE>
$17.9 million of expenses for schools acquired after 1996. The increase in
advertising and marketing expenses reflected, in part, the fact that the former
owners of the acquired schools had reduced their expenditures in these areas
prior to their acquisition by us.
Depreciation and Amortization Expense. Depreciation and amortization expense
increased 281%, from $2.1 million in 1996 to $8.1 million in 1997. The increase
was due to increased capital expenditures for schools owned during 1996 and
related increased depreciation expense of $0.2 million in 1997. Additionally,
depreciation expense increased $2.3 million due to the depreciation expense for
schools acquired after 1996. Amortization expense increased from an immaterial
amount in 1996 to $3.5 million in 1997, primarily due to additional
amortization of non-competition agreements for the acquisition of schools after
1996.
Interest Expense. Interest expense increased 333% from $0.7 million in 1996
to $3.1 million in 1997. The increase was primarily due to interest expense on
borrowings used to finance the acquisition of schools after 1996.
Provision (Benefit) for Income Taxes. The benefit for income taxes increased
from a provision in 1996 of $0.2 million to a benefit of $0.3 benefit in 1997.
Income (Loss) before Extraordinary Item. Net income (loss) before
extraordinary item decreased to a net loss of $0.5 million in 1997 from net
income before extraordinary item of $1.5 million in 1996, due to the factors
noted above.
Extraordinary Item. During 1997, we 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 our current credit
facility.
Net Income (Loss). Net income (loss) decreased to a net loss of $0.9 million
in 1997 from net income of $1.5 million in 1996, due to the factors noted
above.
Net Income (Loss) Attributable to Common Stockholders. Net income
attributable to common stockholders decreased from $0.1 million in 1996 to a
loss of $9.3 million in 1997. The primary reasons for this decrease were the
extraordinary item referred to above; increased dividends on preferred stock,
primarily due to the issuance of additional shares; and increased accretion in
the redemption value of preferred stock and warrants as a result of our growth.
All outstanding preferred stock converted into common stock and all outstanding
warrants were exercised prior to the consummation of our initial public
offering.
Year Ended December 31, 1996 Compared to Year Ended December 31, 1995
Revenue. Net tuition revenue increased 79%, from $16.3 million in 1995 to
$29.3 million in 1996, due to an 18% increase in the average number of students
attending the schools which were owned by us 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 Expense. 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 us.
26
<PAGE>
Depreciation and Amortization Expense. Depreciation and amortization expense
increased 61%, from $1.3 million in 1995 to $2.1 million in 1996. The increase
was due to increased capital expenditures for schools owned during 1995 and
related increased depreciation expense of $0.6 million in 1996. Additionally,
depreciation expense increased $0.1 million due to the depreciation expense for
schools acquired in 1996. Amortization expense increased 14%, from $0.4 million
in 1995 to $0.5 million in 1996, primarily due to additional amortization of
non-competition agreements for the acquisition of schools in 1996.
Interest Expense. Interest expense increased 131%, from $0.3 million in 1995
to $0.7 million in 1996. The increase was primarily due to interest expense on
borrowings used to finance the acquisition of schools in 1996.
Provision for Income Taxes. The provision for income taxes increased to $0.2
million in 1996 from an immaterial amount in 1995.
Net Income. Net income increased from an immaterial amount in 1995 to $1.5
million in 1996, due to the factors discussed above.
Net Income (Loss) Attributable to Common Stockholders. In 1996, net income
attributable to common stockholders was $0.1 million, as compared to a net loss
attributable to common stockholders of $0.8 million in 1995. This change was
attributable to the factors discussed above, offset in part by increased
dividends on preferred stock and increased accretion in the redemption value of
preferred stock and warrants.
Seasonality
Our results of operations fluctuate primarily as a result of changes in the
level of student enrollment at our schools. Our 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 we encourage year-round attendance at all schools, certain schools
have summer breaks for some of their programs. 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 our fiscal year. Our costs and expenses do not, however,
fluctuate as significantly on a quarterly basis. We anticipate that these
seasonal trends will continue.
Liquidity and Capital Resources
On February 4, 1998, we sold 3,277,500 of our shares of common stock at
$16.00 per share pursuant to our initial public offering. The net proceeds from
our initial public offering totalling $45.6 million were used to repay
borrowings of $41.5 million under our former credit facility and amounts owed
to former owners of acquired businesses of $4.1 million which were outstanding
at that time. Prior to our initial public offering, we financed our operating
activities through cash generated from operations. Acquisitions were financed
through a combination of additional equity investments and credit facilities.
Net cash provided by operating activities increased to $9.9 million in the
first nine months of 1998 from net cash used of $4.7 million in the first nine
months of 1997, due primarily to increases in depreciation and amortization and
the result of the non-cash compensation expense related to our initial public
offering.
Capital expenditures increased to $3.4 million in the first nine months of
1998 from $2.1 million in the first nine months of 1997. 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 current
facilities and equipment are upgraded and expanded.
Our net receivables as a percentage of net revenue decreased to 14% in 1998
from 26% in 1997. This change was primarily due to student receivables at
acquired schools. Based upon past experience and judgment, we establish 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. Our historical bad debt
expense as a percentage of revenue for the years ended December 31, 1996 and
1997 was 2%.
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In October 1998, we refinanced our credit agreement. We can borrow up to $60
million under a revolving credit facility ($10 million of which may be drawn in
Canadian Dollars), such amount is reduced by outstanding letters of credit. We
can obtain up to $35 million in letters of credit. The credit agreement matures
on October 26, 2003. Our borrowings under the credit agreement bear interest,
payable quarterly, at either (i) the bank's base or prime rate (depending on
whether the particular loan is denominated in U.S. or Canadian dollars), plus a
specified number of basis points (ranging from 0 to 75), based upon our
leverage ratio or (ii) LIBOR, plus a specified number of basis points (ranging
from 75 to 200) based upon our leverage ratio. Under the credit agreement, we
are required, among other things, to maintain certain financial ratios with
respect to debt to EBITDA and interest coverage and to maintain a specified
level of net worth. We are also subject to limitations on, among other things,
payment of dividends, disposition of assets and incurrence of certain
additional indebtedness. We have pledged the stock of our subsidiaries as
collateral for the repayment of our obligations under the credit agreement. At
December 31, 1998, we had approximately $28.9 million of outstanding letters of
credit and $11.3 million of outstanding borrowings under our credit facility.
As a result, at December 31, 1998, our remaining credit availability under the
credit agreement was approximately $19.8 million.
Year 2000 Compliance
The Year 2000 Issue. Most companies face potentially serious problems
because many software applications and operational programs written in the past
may not properly recognize calendar dates beginning in the Year 2000. This
problem could force information systems to either shut down or provide
incorrect data and information. We began the process of identifying the
necessary changes to our computer programs and hardware as well as assessing
the progress of our significant vendors in their remediation efforts in late
1997. The discussion below details our efforts to ensure Year 2000 compliance.
Our State of Readiness. We have identified and evaluated the readiness of
our internal and third party informational and non-informational technology
systems, which, if not Year 2000 compliant, could have a direct major impact on
us. Our evaluation has identified the following areas of concern: (i) our
accounting and financial reporting system, (ii) our student database system,
(iii) the systems of third party vendors which process student financial aid
applications and loans for us, (iv) the Department of Education's systems for
processing and disbursing student financial aid and (v) financial institutions
which provide loans to our students.
Based on our assessment and vendors' representations, we believe that the
systems of our significant third party vendors (financial and accounting
systems, including financial aid) will be Year 2000 compliant by mid-year 1999.
We are highly dependent on student funding provided through federal student
financial aid programs. Processing of student applications for this funding and
actual disbursement of a significant portion of these funds are accomplished
through the Department of Education's computer systems. According to the
Department of Education, its systems should be brought into certifiable
compliance in early 1999.
The Risks of Our Year 2000 Issues. We believe the greatest Year 2000
compliance risk, in terms of magnitude, is that the Department of Education may
fail to complete its remediation efforts in a timely manner and federal student
aid financial program funding for our students could be interrupted for a
period of time. Other than public comments provided by the Department of
Education, we are unable to predict the likelihood of this risk occurring.
Contingency Plans. At this time, we fully expect to be Year 2000 compliant
and are satisfied that our significant vendors are or will be compliant. While
we fully expect all of our informational and non-informational technology
systems to be compliant by the Year 2000, we are beginning to develop
contingency plans in the event one or more of our identified areas of concern
are not compliant. We do not believe that the total costs of such Year 2000
compliance activities will be material.
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New Accounting Standards
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131 "Disclosures about Segments of an
Enterprise and Related Information" ("SFAS 131"), which is effective for the
fiscal years beginning after December 15, 1997. SFAS 131 establishes standards
for the way that public business enterprises report information about operating
segments. It also establishes standards for related disclosures about products
and services, geographic areas and major customers. We believe that the
adoption of SFAS 131 will not have a material impact on our future reported
results.
In April 1998, the American Institute of Certified Public Accountants issued
Statement of Position (SOP) 98-5, "Reporting on the Costs of Start-Up
Activities." This SOP provides guidance on the financial reporting of start-up
costs (which include organization costs). It requires that all nongovernmental
entities expense the costs of start-up activities as those costs are incurred.
Nongovernmental entities are required to adopt this SOP by no later than
January 1, 1999. Earlier adoption is permitted. We expense all non-
organizational start-up costs as incurred. At December 31, 1997, we have
unamortized organizational costs of approximately $354,000. We are adopting the
SOP in the fourth quarter of 1998, to be effective as of January 1, 1998.
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BUSINESS
The discussion below contains certain forward-looking statements (as such
term is defined in Section 21E of the Securities Exchange Act of 1934) that are
based on the beliefs of our management, as well as assumptions made by, and
information currently available to, our management. Our actual growth, results,
performance and business prospects and opportunities could differ materially
from those expressed in, or implied by, any such forward-looking statements.
See "Special Note Regarding Forward-Looking Statements" and "Risk Factors."
Overview
We are one of the largest providers of private, for-profit postsecondary
education in North America, with approximately 15,900 students enrolled as of
October 31, 1998. We operate 12 schools, with 21 campuses located in 13 states
and two Canadian provinces. Our schools enjoy long operating histories and
offer a variety of bachelor's degree, associate degree and non-degree programs
in career-oriented disciplines within our core curricula of (i) computer
technologies, (ii) visual communication and design technologies, (iii) business
studies and (iv) culinary arts. We have experienced significant growth both
internally and through acquisitions with our net revenue increasing from $7.5
million in 1994 to $82.6 million in 1997. For the first nine months of 1998,
our net revenue was $99.9 million.
CEC was founded in January 1994 by John M. Larson, our President and Chief
Executive Officer, who has over 24 years of experience in the career-oriented
education industry. We were formed to capitalize on opportunities in the large
and highly fragmented postsecondary school industry. Since our inception, we
have completed 12 acquisitions. We have acquired schools that we believe
possess strong curricula, leading reputations and broad marketability but that
have been undermanaged from a marketing and financial standpoint. We seek to
apply our expertise in operations, marketing and curricula development, as well
as our financial strength, to improve the performance of these schools.
Our 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 us 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
technical support, computer network operation, computer information
management and computer programming.
. Visual Communication and Design Technologies: These programs include
desktop publishing, graphic design, fashion design, interior design,
graphic imaging, webpage design and animation.
. Business Studies: These programs include business administration and
business operations.
. Culinary Arts: These programs include culinary arts, culinary arts and
restaurant management and pastry arts.
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The schools acquired by us are summarized in the following table:
<TABLE>
<CAPTION>
Year Month Principal Degree
School Founded Acquired Curricula(1) Granting
------ ------- -------- ------------ --------
<S> <C> <C> <C> <C>
Al Collins Graphic Design School 1978 1/94 CT, VC Yes
Tempe, AZ
Brooks College 1970 6/94 VC Yes
Long Beach, CA
Allentown Business School 1869 7/95 B, CT, Yes
Allentown, PA S, VC
Brown Institute 1946 7/95 CA, CT, Yes
Mendota Heights, MN E, RTB, VC
Western Culinary Institute 1983 10/96 CA No
Portland, OR
School of Computer Technology 1967 2/97 CA, CT Yes
Fairmont, WV
Pittsburgh, PA
The Katharine Gibbs Schools 1911 5/97 B, CT, Yes
Boston, MA S, VC
Melville, NY
Montclair, NJ
New York, NY
Norwalk, CT (2)
Piscataway, NJ (3)
Providence, RI (3)
International Academy of Merchandising & Design 1977 6/97 VC Yes
Chicago, IL
Tampa, FL
International Academy of Design 1983 6/97 VC No
Montreal, PQ
Toronto, ON
Southern California School of Culinary Arts 1994 3/98 CA No
South Pasadena, CA
Scottsdale Culinary Institute 1986 7/98 CA Yes
Scottsdale, AZ
Harrington Institute of Interior Design 1931 1/99 VC Yes
Chicago, IL
</TABLE>
- --------
(1) The programs offered by our schools include business ("B"), culinary arts
("CA"), computer technologies ("CT"), electronics ("E"), radio and
television broadcasting ("RTB"), secretarial studies ("S") and visual
communication and design technologies ("VC").
(2) The Gibbs campus in Norwalk, Connecticut is now using the name Gibbs
College.
(3) Does not offer degree programs.
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Industry Background
Based on estimates for 1996 by the Department of Education's National Center
for Education Statistics (the "NCES"), postsecondary education is a $220
billion industry in the U.S., with over 14 million students obtaining some form
of postsecondary education. Of this total, approximately 2.3 million students
are enrolled in approximately 2,000 proprietary postsecondary schools. Federal
funds available to support postsecondary education exceed $40 billion each year
and have grown steadily over the last two decades. Additionally, the federal
government guaranteed over $92 billion in student loans in 1996 and is expected
to guarantee loans at comparable levels in the future. State, local and private
funds for career-oriented training are also available.
Several national economic, demographic and social trends are converging to
contribute to growing demand for career-oriented school education:
Changes in Workplace Demands. The workplace is becoming increasingly
knowledge-intensive. Rapid advances in technology have increased demands on
employers and their employees, requiring many new workers to have some form of
training or education beyond the high school level. The increasing
technological skills required for 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 19% between 1996 and 2006. 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, U.S. high school
graduates represent over 2.6 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 14.7% from
approximately 14.3 million in the fall of 1996.
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 65% of all 1996 high school
graduates continued their education that same year, compared with 53% a decade
earlier. The Department of Labor projects the number of jobs requiring at least
an associate degree or higher to grow by more than 14% between 1996 and 2006.
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 U.S.
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. We believe that
prospective students are increasingly recognizing the income premium and other
improvements in career prospects associated with a postsecondary education. On
average, a person with an associate's degree earns 25% more than a high school
graduate, while a person with a bachelor's degree earns 54% more than a high
school graduate. Independent research studies have demonstrated that
prospective students consider these benefits in making their education
decisions.
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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 military personnel has declined by 32% since
1987, with the aggregate number of individuals on active duty in the 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.
We believe that private, for-profit, career-oriented schools are uniquely
positioned to take advantage of these national trends. We also believe that
similar factors are creating a favorable climate for career-oriented
postsecondary education in Canada and other international markets.
Business and Operating Strategy
We were founded based upon a business and operating strategy which we
believe has enabled us to achieve significant improvements in the performance
of our schools. We believe this strategy will enable us to continue to
capitalize on the favorable economic, demographic and social trends which are
driving demand for career-oriented education, thereby strengthening our
position as a premier, professionally managed system of career-oriented
postsecondary educational institutions. The key elements of our business and
operating strategy are as follows:
Focusing on Core Curricula. Our schools offer educational programs
principally in four career-related fields of study: (i) computer technologies
(including Internet and intranet technologies) (offered at 12 campuses); (ii)
visual communication and design technologies (offered at 14 campuses); (iii)
business studies (offered at eight campuses) and (iv) culinary arts (offered at
five campuses). We perceive a growing demand by employers for individuals
possessing skills in these particular fields. We also believe there are many
entry-level positions and ongoing career and salary advancement potential for
individuals who have received advanced training in these areas. We recognize
that these employment opportunities have attracted 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 knowledge and skills. Our experience and
expertise in these attractive areas of study enable us to differentiate ourself
from many of our competitors and to effectively tailor our acquisition and
marketing plans.
Adapting and Expanding Educational Programs. We strive to meet the changing
needs of our students and the employment market. We continually refine and
adapt our courses to ensure that both students and employers are satisfied with
the quality and breadth of our educational programs. Through various means,
including student and employer surveys and curriculum advisory boards comprised
of business and community members, our 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 our core
curricula. We selectively duplicate programs that have been successful
elsewhere in our school system. In 1998, we successfully duplicated eight
programs and plan to continue this curricula transfer in the future. For
example, we introduced computer technology programs at Gibbs similar to those
already offered at Brown and culinary arts programs at Brown like those offered
at Western.
Investing for Future Growth. We make substantial investments in our people,
facilities, management information systems and classroom technologies to
prepare our company for continued growth. We devote particular attention to
attracting and retaining both corporate and school level management, and focus
on employee development in order to facilitate internal promotions. We make
substantial investments in facilities
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and classroom technologies to attract, retain and prepare students for the
increasing technical demands of the workplace. Additionally, we have made
significant investments in our management information systems to standardize
applications and processes across our schools in order to maintain effective
and expedient communication between our schools and corporate management, as
well as to ensure the smooth integration of newly acquired schools.
Emphasizing School Management Autonomy and Accountability. We provide
significant autonomy and appropriate performance-based incentives to our
campus-level managers, which we believe offers important benefits for the
organization. We believe these policies foster an important sense of personal
responsibility for achieving campus performance objectives. We also believe our
willingness to grant local autonomy provides us and our schools with a
significant advantage in recruiting and retaining highly-motivated individuals
with an entrepreneurial spirit. Management of each of our 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 our
executive offices in Hoffman Estates, Illinois. When a new school is acquired,
we evaluate the capabilities of existing campus management personnel, and
typically retain a significant portion, which contributes to our ability to
rapidly integrate acquired schools into our system. We also determine the
acquired school's needs for additional or stronger managers in key areas and,
where necessary, take appropriate action by hiring new managers or assigning
experienced staff to the school's campuses.
Direct Response Marketing. We seek to increase school enrollment and
profitability through intensive local, regional and national direct response
marketing programs designed to maximize each school's market penetration. We
also use the Internet to attract potential students and believe that this
medium will be an increasingly important marketing tool. Because many of our
schools have been significantly undermarketed prior to their acquisition, we
believe that major benefits can result from carefully crafted, targeted
marketing programs that leverage schools' curriculum strength and brand name
recognition. After every school acquisition, we design a marketing program
tailored to the particular school to highlight its strengths and to improve
student lead generation and student enrollment rates. Our 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 potential students. We place
particular emphasis on high school recruitment because it produces a steady
supply of new students.
Improving Student Retention. We emphasize the retention of students, from
initial enrollment to completion of their courses of study, at each of our
schools. Because, as at any postsecondary educational institution, a
substantial portion of our 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. Our costs to keep current students in school are much less than the
expense of the marketing efforts associated with attracting new students;
therefore, student retention efforts, if successful, are extremely beneficial
to operating results. We strive to improve retention by treating students as
valued customers. We consider student retention the responsibility of the
entire staff of each school, from admissions to faculty and administration to
career counseling services, and provide resources and support for the retention
efforts developed by our 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, our 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. We believe that the high rates of
employment for graduates of our schools enhance the overall reputation of the
schools as well as their ability to attract new students. High placement rates
also lead to low student loan default rates, which are necessary to allow our
schools to continue to participate in the federal student financial aid
programs. We consider student placement to be a high priority and allocate a
significant amount of time and resources to placement services. Due at least in
part to this
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<PAGE>
emphasis, 92.5% of our graduates for the 1998 academic year who were available
for employment had found employment relating to their fields of study within
six months of graduation. We are committed to maintaining or improving these
graduate employment rates and newly acquired schools will be expected to meet
similar graduate employment success standards.
Growth Strategy
We believe we 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. We believe we can
achieve additional growth in the future by establishing new campuses and also
by entering new service areas and expanding internationally.
Expanding Existing Operations. We believe that our existing 21 campuses can
achieve significant internal growth in enrollment, revenue and profitability.
We are executing our business and operating strategy, including all of the
elements described above, to accomplish this growth. We believe that expansion
of operations at our existing schools, along with acquisitions of new schools,
will be the primary generators of our growth in the near term.
Acquiring Additional North American Schools. To date, we have grown by
acquiring new schools in the U.S. and Canada and then applying our expertise in
marketing and school management to increase enrollment, revenue and
profitability at those schools. We expect that this process will continue to be
one of the most important elements of our growth strategy. We have an active
acquisition program and from time to time engage in, and are currently engaged
in, evaluations of, and discussions with, possible acquisition candidates,
including evaluations and discussions relating to acquisitions that may be
material in size or scope. See "Prospectus Summary--Recent Developments" and
"Management's Discussion and Analysis of Financial Conditions and Results of
Operations--Acquisitions."
We make selective acquisitions of for-profit, career-oriented schools which
have capable faculty and operations staff, as well as quality educational
programs, which stand to benefit from our educational focus, marketing and
operating strengths. We target schools which we believe have the potential to
generate superior financial performance. Generally, such schools demonstrate
the following characteristics:
. "Schools of Choice"--Possessing leading reputations in career-oriented
disciplines within local, regional and national markets
. Success--Demonstrating the ability to attract, retain and place students,
while meeting applicable federal and state regulatory criteria and
accreditation standards
. 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
. Attractive Facilities and Geographic Locations--Providing geographically
desirable locations and modern facilities to attract and prepare students
for the demands of the increasingly competitive workplace
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We believe 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. We believe that a substantial number of schools
exhibiting the characteristics described above exist in the U.S. and Canadian
markets and that such schools can be successfully integrated into our marketing
and administrative structure. We believe that competition in Canada is not
currently as intense as in the U.S. Few of the largest U.S. operators of
postsecondary career-oriented schools presently have a significant Canadian
presence. We believe that, given our existing Canadian operations, we are well-
positioned to take advantage of these opportunities.
We analyze 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. We carefully investigate
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 will generally remove a school from our
consideration as an acquisition candidate.
After we have completed an acquisition, we immediately begin to apply our
business strategy to boost enrollment and improve the acquired schools'
profitability. We assist acquired schools in achieving their potential through
a highly focused and active management role, as well as through capital
contributions. We selectively commit resources to improve marketing,
advertising, administration and regulatory compliance at each acquired school.
Further resources may also be committed to enhance management depth. We retain
acquired schools' brand names to take advantage of their established reputation
in local, regional and national markets as "schools of choice."
By acquiring new schools, we are also able to realize economies of scale in
terms of our management information systems, accounting and audit functions,
employee benefits and insurance procurement. We also benefit from the exchange
of ideas among school administrators regarding faculty development, student
retention programs, recruitment, curriculum, financial aid and student
placement programs.
Establishing New Campuses. Although, to date, we have added new campuses
only through acquisitions, in the future we expect to develop, open and operate
new campuses ourselves. 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 us 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 our core curricula areas. We believe that this strategy
will allow us to continue to grow rapidly even if appropriate acquisition
opportunities are not readily available. We have not yet developed specific
plans for any new campuses, nor made any determination as to when we will first
develop, open and operate a new campus.
Entering New Service Areas. While we expect that our current career-oriented
school operations will continue to provide the substantial majority of our
revenue in the near term, we plan to develop new education-related services
which we believe offer strong long-term growth potential. Among the service
areas being actively considered is distance learning (offering educational
products and services through video, Internet and other distribution channels).
We also plan to expand our contract training business (providing customized
training on a contract basis for business and government organizations), which
is currently a limited part of the operations of a few of our schools. Although
we have not yet actively targeted the growing market for contract training
services, we believe that contract training can become a much more significant
part of our business.
Expanding Internationally. Although all of our current operations are
located in North America, we believe 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, we believe that there may be
significant international opportunities in private, for-profit postsecondary
education. To take advantage of these opportunities, we may at some time in the
future elect to acquire or establish operations outside North America.
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Student Recruitment
Our 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 our schools engages in a wide variety of marketing
activities.
We believe that the reputation of our 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. We work to further enhance the qualities that make our schools
"schools of choice" within their geographic locations. Each school's admissions
office is charged with marketing the school's programs through a combination of
admissions representatives, direct mailings and radio, Internet, television and
print media advertising, in addition to providing the information needed by
prospective students to assist them in making their enrollment decisions.
As of December 31, 1998, our schools employed approximately 200 admissions
representatives, each of whom focuses his or her efforts on the following
areas: (i) out-of-area (correspondence) recruiting, (ii) high school recruiting
or (iii) in-house recruiting (local). 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. We believe we are 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 our school campus. The
interpersonal relationships formed with high school counselors and faculty may
have significant influence over a potential student's choice of school. We
believe that the relationships of our schools' representatives with the
counseling departments of high schools are good and that the brand awareness
and placement rates of our 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 Department of Education prevent us from giving our U.S. employees
incentive compensation based, directly or indirectly, upon the number of
students recruited.
We also engage 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. We believe 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. We have 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. We also believe that
the personal flavor of the presentation typical of infomercials is well-suited
to attracting potential applicants. As an additional marketing tool, all of our
schools have established web sites, which can be easily accessed for
information about these schools and their educational programs. Although we
retain independent advertising agencies, we design and produce a portion of our
direct marketing and multi-media advertising and communications in-house,
through Market Direct, Inc., a wholly-owned subsidiary. While a majority of
Market Direct's operations involve designing and producing advertising for us,
Market Direct also provides these services to other businesses outside of the
postsecondary education industry as opportunities arise.
We closely monitor the effectiveness of our marketing efforts. We estimate
that, in 1998, admissions representatives were responsible for attracting
approximately 37% of student enrollments, direct mailings were responsible for
approximately 13%, television, radio and print media advertising were
responsible for approximately 37%, and the remaining approximately 13% was
attributable to various other methods.
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<PAGE>
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. We believe 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 our schools, each
applicant must have a high school diploma or a General Education Development
(GED) certificate. Many of our schools also require that applicants obtain
certain minimum scores on academic assessment examinations. For 1998,
approximately 39% of entering students at our campuses enrolled directly from
high school.
We recognize that our ability to retain students until graduation is an
important indicator of our 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 our students do
not complete their programs for a variety of personal, financial or academic
reasons. As a result, student retention is considered an entire school's
responsibility, from admissions to faculty and administration to career
counseling services. To minimize student withdrawals, faculty and staff members
at each of our 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, our corporate
staff regularly tracks retention rates at each campus and provides feedback and
support to appropriate local campus administrators.
Curriculum Development and Faculty
We believe that curriculum is the single most important component of our
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 our schools are a product of their
operating partnership with students and the business and industrial
communities.
The relationship of each of our schools with the business community plays a
significant role in the development and adaptation of school curriculum. Each
school has one or more program advisory boards composed of members of the local
and regional business community who are engaged in businesses directly related
to the educational offerings provided by the school. These boards provide
valuable input to the school's education department, which allows the school to
keep our programs current and provide graduates with the training and skills
that these employers seek.
We also endeavor to enhance and maintain the relevancy of our curricula by
soliciting ideas through student and employer surveys and by requiring students
in selected programs to complete an internship during their school experience.
We have 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.
Our schools are in continuous contact with employers through their faculty,
many of whom 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 our schools. Unlike traditional four-year colleges,
instructors in our schools are not awarded tenure and are evaluated, in part,
based upon student evaluations. As of December 31, 1998, our schools employed
approximately 1,460 faculty and staff members, of which approximately 32% were
full-time employees and approximately 68% had been hired on a part-time,
adjunct basis.
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<PAGE>
School Administration
We provide significant operational autonomy and appropriate performance-
based compensation to local school administrators who have demonstrated the
ability to undertake such responsibility, based on our belief that success is
driven by performance at the local level through enrollment growth, student
retention rates and placement rates. In addition, each of our schools 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 our schools is principally in the hands of a school
president who has accountability for the school's operations and profitability.
Each of our schools has five primary operating departments: admissions,
financial aid, education, placement and accounting.
Business strategy, finance and consolidation accounting functions are
centralized at our corporate headquarters. Our 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 our
strategy. We maintain 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 leads, enrollments, retention rates, placements,
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.
We use a number of quality and financial controls. Information is tracked
through an advanced, PC-based management information system, which currently
runs on a decentralized basis, but also allows centralized access to account
information.
Tuition and Fees
Currently, total tuition for completion (on a full-time basis) of a
diploma/certificate program offered by our schools ranges from $5,400 to
$23,000, for completion of an associate degree program ranges from $13,000 to
$23,000, and for completion of a bachelor's degree program ranges from $32,000
to $49,500. In addition to these tuition amounts, students at our schools
typically must purchase textbooks and supplies as part of their educational
programs.
Our 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 Department of Education and such institution's state and
accrediting agencies. Generally, under the Department of Education'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 was charged but did not attend. After a student
has attended 60% or more of such period of enrollment, 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. In certain
circumstances, institutions must apply state refund requirements when
determining refunds for students.
Graduate Employment
We believe that employment of graduates of our 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. We believe that
our 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.
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<PAGE>
We devote a significant amount of time and resources to student placement,
which we believe to be the ultimate indicator of our success. We believe that
our average placement rate is attractive to prospective students and provides a
competitive advantage. Student placement is a top priority of each of our
schools 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 of our schools includes career development instruction in our
curricula, which includes the preparation of resumes, cover letters, networking
and other essential job-search tools. Placement office resources are regularly
available to our graduates. With such assistance, our graduates find employment
with a wide variety of businesses located not only in the schools' local
markets but also regionally and nationally.
Each campus' placement department also plays a role in marketing the campus'
curriculum to the business community to produce job leads for graduates. As of
December 31, 1998, approximately 65 employees work in the placement departments
of our 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 survey information received from graduating students and employers,
we believe that of the 6,615 students graduating from our schools during the
1998 academic year, 92.5% of the 6,088 available graduates (available graduates
excludes students who are continuing their education, are in active military
service or are disabled or deceased, as well as students from foreign countries
who are legally ineligible to work in the U.S.) obtained employment in fields
related to their program of study within six months following their graduation.
The reputation of Gibbs allows it to charge fees to employers upon placement
of many of its students. Our other schools do not currently receive such
placement fees, nor, we believe, do any of our principal proprietary
competitors. We believe that, as an additional source of revenue, we may be
able to replicate the Gibbs' placement fee program at certain of our other
schools.
Technology
We are committed to providing our 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,
we ensure that all our 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 December 31, 1998, CEC and our schools had a total of approximately
1,200 full-time and 985 part-time employees. Neither CEC nor any of our schools
has any collective bargaining agreements with our employees. We consider our
relations with our employees to be good.
Competition
The postsecondary education market is highly fragmented and competitive,
with no single institution having a significant market share. Our 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
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<PAGE>
employment and military service. Certain private and public colleges and
universities may offer courses of study similar to those of our schools. Some
public institutions are able to charge lower tuition than our 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 our schools. Other proprietary career-
oriented schools also offer programs that compete with those of our schools. We
believe that our 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 our competitors in both the public and private sectors may
have substantially greater financial and other resources than us.
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 strict standards for
student loan default rates, required intensified scrutiny by state education
agencies and accrediting agencies and created more stringent standards for the
evaluation of an institution'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
Our corporate headquarters are located in Hoffman Estates, Illinois, near
Chicago, and our 21 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 and Scottsdale lease and operate
restaurants in conjunction with their culinary arts program.
We lease all of our facilities, except the primary Gibbs facility in
Montclair, New Jersey, which we own. As of December 31, 1998, we owned
approximately 19,000 square feet and leased approximately 809,000 square feet.
The leases have remaining terms ranging from less than one year to eleven
years.
We actively monitor facility capacity in light of our current utilization
and projected enrollment growth. We have plans to lease at least 90,000
additional square feet in 1999 to accommodate our growth. We believe that our
schools can acquire any necessary additional capacity on reasonably acceptable
terms. We devote capital resources to facility improvements and expansions as
necessary.
Legal Proceedings
We and our institutions are subject to occasional lawsuits, investigations
and claims arising out of the ordinary conduct of our business, including the
following:
On February 24, 1997, 30 former and current students in Brown's PC/LAN
program brought a suit entitled Peter Alsides, et al. v. Brown Institute, Ltd.
(Fourth Judicial District, Hennepin County, Minnesota) against Brown alleging
breach of contract, fraud, misrepresentation, violation of the Minnesota
Consumer Fraud Act, violation of the Minnesota Deceptive Trade Practices Act
and negligent misrepresentation. Plaintiffs allege that Brown failed to provide
them with the education for which they contracted and which had been
represented to them upon enrollment. There are currently 41 plaintiffs, who are
seeking to recover their tuition, interest and costs. Brown believes that all
of these claims are frivolous and without merit and is vigorously contesting
the allegations. Brown's motion for summary judgment was granted in May 1998.
Plaintiffs have appealed the motion and the appeal is pending.
Although outcomes cannot be predicted with certainty, we do not believe that
the above-described matter or any other legal proceeding to which we are a
party will have a material adverse effect on our business, results of
operations or financial condition.
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<PAGE>
FINANCIAL AID AND REGULATION
Our schools and students in the U.S. and Canada participate in a wide
variety of government-sponsored (federal, state or provincial) financial aid
programs. For this reason, our schools are subject to extensive regulatory
requirements imposed by government funding agencies and other bodies. For the
1997-98 award year (July 1, 1997 to June 30, 1998), we derived approximately
70% of our total net revenue (on a cash basis) from such financial aid received
by our students. We estimate that over 70% of our students receive government-
sponsored financial aid. Our students also finance their education through
family contributions and individual resources.
Nature of Federal Support for Postsecondary Education in the U.S.
While many 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 those funds at any institution that has been certified as
eligible by the Department of Education. These federal programs are authorized
by Title IV of the Higher Education Act of 1965, as amended (the "HEA"), and
are collectively referred to as the "Title IV Programs."
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 the institution 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.
Students at our schools receive grants, loans and work opportunities to fund
their education under the following Title IV Programs (although not every
campus participates in all programs): the Federal Family Education Loan
("FFEL") program, the William D. Ford Federal Direct Loan ("FDL") program, the
Federal Pell Grant ("Pell") program, the Federal Supplemental Educational
Opportunity Grant ("FSEOG") program, the Federal Perkins Loan ("Perkins")
program and the Federal Work-Study ("FWS") program .
FFEL. Loans made under the FFEL program are federally guaranteed. Loans are
made by banks and other lending institutions, but if a student or parent
defaults on a loan, payment is guaranteed by a federally recognized guaranty
agency, which is then reimbursed by the Department of Education. Students with
financial need qualify for interest subsidies while in school and during grace
periods. Our 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 and guarantee FFEL loans.
FDL. Under the FDL program, students or their parents may obtain loans
directly from the Department of Education rather than from commercial lenders.
The conditions on FDL loans are generally the same as on loans made under the
FFEL program.
Pell. Under the Pell program, the Department of Education makes grants to
students who demonstrate financial need.
FSEOG. FSEOG awards are designed to supplement Pell grants for the neediest
students. An institution is required to make a 25% matching contribution for
all federal funds received under this program.
Perkins. Perkins loans are made from a revolving institutional account, 75%
of which is capitalized by the Department of Education and the remainder by the
institution. Each institution is responsible for collecting payments on Perkins
loans from its former students and lending those funds to currently enrolled
students.
FWS. Under the FWS program, federal funds are used to pay up to 75% of the
cost of part-time employment of eligible students to perform work for the
institution or certain off-campus organizations. The remaining 25% is paid by
the institution or the employer.
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Regulation of Federal Financial Aid Programs for U.S. Schools
To participate in the Title IV Programs, an institution must be authorized
to offer its programs of instruction by the relevant agencies of the state in
which it is located, accredited by an accrediting agency recognized by the
Department of Education and certified as eligible by the Department of
Education. The Department of Education will certify an institution to
participate in the Title IV Programs only after the institution has
demonstrated compliance with the HEA and the Department of Education's
extensive regulations regarding institutional eligibility. An institution must
also demonstrate its compliance to the Department of Education on an ongoing
basis. These standards are applied primarily on an institutional basis, with
an institution defined as a main campus and its additional locations, if any.
Under this definition, each of our U.S. campuses is a separate institution,
except for Gibbs-Piscataway, which is an additional location of Gibbs-
Montclair, and SCT-Fairmont, which is an additional location of SCT-
Pittsburgh. All of our U.S. schools currently participate in the Title IV
Programs, except for Scottsdale and Harrington, which we recently acquired.
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, Congress has required the Department of Education to
increase its level of regulatory oversight of institutions to ensure that
public funds are properly used. 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 of our
institutions is subject to frequent reviews and detailed oversight and must
comply with a complex framework of laws and regulations. Because the
Department of Education periodically revises its regulations and changes its
interpretation of existing laws and regulations, we cannot assure you that the
Department of Education will agree with our understanding of each Title IV
Program requirement. See "--Compliance with Regulatory Standards and Effect of
Regulatory Violations."
Significant factors relating to the Title IV Programs that could adversely
affect us include the following:
Legislative Action. Political and budgetary concerns significantly affect
the Title IV Programs. Congress must reauthorize the HEA approximately every
six years. The most recent reauthorization in October 1998 reauthorized the
HEA for an additional five years (the "1998 HEA Reauthorization"). Congress
reauthorized all of the Title IV Programs in which our schools participate,
generally in the same form and at funding levels no less than for the prior
year. While the 1998 HEA Reauthorization made numerous changes to Title IV
Program requirements, we believe that these changes will not have a material
adverse effect on our business, results of operations or financial condition.
Changes made by the 1998 HEA Reauthorization include (i) expanding the adverse
effects on schools of high student loan default rates, (ii) increasing from
85% to 90% the portion of a proprietary school's revenue that may be derived
each year from the Title IV Programs, (iii) revising the refund standards that
require an institution to return a portion of the Title IV Program funds for
students who withdraw from school, (iv) giving the Department of Education
flexibility to continue an institution's Title IV participation without
interruption in some circumstances following a change of ownership or control,
(v) changing the formula for calculating the interest rate on FFEL and FDL
loans, and (vi) modifying the definition of default from 180 days to 270 days
past due for loans payable in monthly installments. See "--Cohort Default
Rates," "--The "85/15 Rule,' " and "--Change of Ownership or Control."
In addition, Congress reviews and determines federal appropriations for the
Title IV Programs on an annual basis. Congress can also make changes in the
laws affecting the Title IV Programs in those annual appropriations bills and
in other laws it enacts between HEA reauthorizations. Since a significant
percentage of our revenue is derived from the Title IV Programs, any action by
Congress that significantly reduces Title IV Program funding or the ability of
our schools or students to participate in the Title IV Programs could have a
material adverse effect on our business, results of operations or financial
condition. Legislative action may also increase our administrative costs and
require us to adjust our practices in order for our schools to comply fully
with the Title IV Program requirements.
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Cohort Default Rates. A significant component of Congress' initiative to
reduce abuse in the Title IV Programs has been the imposition of limitations on
institutions whose former students default on the repayment of their federally
guaranteed or funded student loans above specific rates. All of our
institutions have implemented aggressive student loan default management
programs aimed at reducing the likelihood of students failing to repay their
loans in a timely manner. Those programs emphasize the importance of students
meeting loan repayment requirements and provide for extensive loan counseling,
methods to increase student persistence and completion rates and graduate
employment rates, and proactive borrower contacts after students cease
enrollment.
An institution's cohort default rate under the FFEL and FDL programs is
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 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, and beginning with fiscal
year 1996 cohort default rates, the Pell program, for the remainder of the
federal fiscal year in which the Department of Education determines that such
institution has lost its eligibility and for the two subsequent federal fiscal
years. An institution whose cohort default rate under the FFEL or FDL program
for any federal fiscal year exceeds 40% may have its eligibility to participate
in all of the Title IV Programs limited, suspended or terminated by the
Department of Education. None of our institutions has FFEL or FDL cohort
default rates of 25% or greater for three consecutive years.
The following table sets forth the FFEL and FDL cohort default rates for our
institutions for federal fiscal years 1994, 1995 and 1996, the most recent
years for which the Department of Education has published such rates:
<TABLE>
<CAPTION>
FFEL and FDL
Cohort Default
School Rate
------ ----------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Al Collins Graphic Design School
Tempe, AZ 15.4% 13.8% 19.3%
Allentown Business School
Allentown, PA 9.7 10.7 7.1
Brooks College
Long Beach, CA 21.1 17.8 18.3
Brown Institute
Mendota Heights, MN 17.4 18.1 19.6
Harrington Institute of Interior Design
Chicago, IL 8.9 5.6 0.0
International Academy of Merchandising & Design
Chicago, IL 13.8 15.5 13.3
Tampa, FL 12.0 13.3 15.0
The Katharine Gibbs Schools
Boston, MA 16.2 16.9 16.7
Melville, NY 12.7 15.8 17.7
Montclair, NJ and Piscataway, NJ 14.5 15.8 16.2
New York, NY 17.3 14.5 18.9
Norwalk, CT 16.0 27.0 17.8
Providence, RI 14.9 14.8 13.1
School of Computer Technology
Pittsburgh, PA and Fairmont, WV 12.9 11.2 9.3
Scottsdale Culinary Institute
Scottsdale, AZ 4.0 6.1 5.6
Western Culinary Institute
Portland, OR 9.8 14.3 11.4
</TABLE>
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An institution whose cohort default rate under the FFEL or FDL program
equals or exceeds 25% for any one of the three most recent federal fiscal
years, or whose cohort default rate under the Perkins program exceeds 15% for
any year, may be placed on provisional certification status by the Department
of Education for up to four years. Nine of our 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. The Perkins cohort default rates for these
nine institutions ranged from 20.7% to 100.0%. To date, the Department of
Education has placed on provisional certification for their Perkins cohort
default rates only two of these institutions, Gibbs-Melville and Gibbs-
Montclair, either alone or in combination with other reasons. Total Perkins
loans disbursed during 1997-98 represented less than 1% of our total net
revenue. See "--Eligibility and Certification Procedures."
Financial Responsibility Standards. All institutions participating in the
Title IV Programs must satisfy specific standards of financial responsibility.
The Department of Education evaluates institutions for compliance with these
standards each year, based on the institution's annual audited financial
statements and following a change of ownership of the institution.
Under new regulations which took effect July 1, 1998, the Department of
Education calculates the institution's composite score based on its (i) equity
ratio, which measures the institution's capital resources, ability to borrow
and financial viability; (ii) primary reserve ratio, which measures the
institution's ability to support current operations from expendable resources;
and (iii) net income ratio, which measures the institution's ability to operate
at a profit. An institution that does not meet the Department of Education's
minimum composite score may demonstrate its financial responsibility by posting
a letter of credit in favor of the Department of Education in an amount equal
to at least 50% of the Title IV Program funds received by the institution
during its prior fiscal year and possibly accepting other conditions on its
participation in the Title IV Programs.
In periodic reviews of our financial statements for 1997 and prior years, as
well as our February 28, 1998 balance sheet reflecting the results of our
initial public offering, the Department of Education has questioned certain
accounting issues and has found that we and certain of our institutions when
measured on an individual basis failed the numeric tests under the Department
of Education's former and current standards of financial responsibility. To
satisfy the Department of Education's concerns, we have posted letters of
credit on behalf of all institutions we have acquired since October 1996. The
Department of Education reduced the number and amount of our letters of credit
in September 1998 following its review of our 1997 financial statements and our
February 28, 1998 balance sheet. The Department of Education also noted that
the funds derived from our initial public offering, shortly after the close of
our 1997 fiscal year, would have a positive effect on our financial
responsibility. As a result, we currently have posted letters of credit
totaling approximately $17.6 million on behalf of the following schools
(representing 11 institutions as defined by the Department of Education):
<TABLE>
<S> <C> <C>
. Gibbs -- $8.9 million
. IAMD -- $3.4 million
. Scottsdale -- $1.3 million
. SCSCA -- $2.0 million
. Western -- $2.0 million
</TABLE>
In addition, in December 1998 when the Department of Education certified
SCSCA to participate in the Title IV Programs under our ownership, it imposed a
condition providing that SCSCA may not disburse more than $2.0 million in Title
IV Program funds during its initial period of certification ending June 30,
2000. We believe the Department of Education added this condition because SCSCA
had not participated in the Title IV Programs under its prior owner. For a
period of time during 1997 and 1998, the Department of Education
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imposed a similar limitation on the total Title IV Program funding at three of
our other schools: Gibbs, SCT and IAMD. In June 1998, the Department of
Education removed the limitation on Title IV Program funding for these three
schools.
We believe our 1998 audited financial statements will conform with generally
accepted accounting principles and demonstrate that we and most if not all of
our institutions satisfy the Department of Education's composite score for
financial responsibility, without any conditions. We intend to file our 1998
financial statements with the Department of Education early in 1999 and to ask
it to release most, if not all, of our outstanding letters of credit and to
increase or eliminate the Title IV Program funding limitation for SCSCA. We
cannot assure you that we or our institutions will satisfy the numeric
standards or that the Department of Education will take any action with respect
to the letters of credit or funding limitation.
Under a separate standard of financial responsibility, an institution that
has made late student refunds in either of its last two fiscal years must post
a letter of credit with the Department of Education 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, we currently have posted a total of
$120,000 in letters of credit with respect to two Gibbs campuses and one IAMD
campus.
Change of Ownership or Control. When we acquire an institution that is
eligible to participate in the Title IV Programs, that institution undergoes a
change of ownership resulting in a change of control ("change of control") as
defined by the Department of Education. Upon a change of control, an
institution's eligibility to participate in the Title IV Programs is generally
suspended until it has applied for and been recertified by the Department of
Education as an eligible institution under our ownership, which requires that
the institution also reestablish its state authorization and accreditation. The
time required to act on such an application may vary substantially. Pending
recertification by the Department of Education, the institution may receive and
disburse Title IV Program funds to its students only if those funds were
committed prior to the change of control. If an institution is recertified
following a change of control, it will be on a provisional basis. See "--
Eligibility and Certification Procedures."
The 1998 HEA Reauthorization provides that the Department of Education may
provisionally and temporarily certify an institution undergoing a change of
control under certain circumstances while the Department of Education reviews
the institution's application. The Department of Education has not yet issued
regulations or guidance regarding how it will interpret or apply this amendment
to the HEA.
Each of the U.S. institutions we have acquired has undergone a certification
review under our ownership and has been certified to participate in the Title
IV Programs, with the exception of Scottsdale and Harrington. We acquired
Scottsdale in July 1998 and expect to receive Department of Education
certification in January 1999. We acquired Harrington in January 1999 and have
recently submitted a preliminary application to the Department of Education.
Seven of our U.S. institutions are presently participating in the Title IV
Programs under provisional certification and the remaining eight have been
granted regular certification.
Certain types of transactions by a school or its parent corporation can also
cause a change of control. The Department of Education, the state education
agencies and the accrediting agencies that accredit our schools have their own
definitions of when a transaction is deemed a change of control. With respect
to a publicly traded corporation, such as us, Department of Education
regulations provide that a change of 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 disclosing a change of control. Most of the
states and accrediting agencies include the sale of a controlling interest of
common stock in the definition of a change of control. A change of control
under the definition of one of these agencies would require the affected
institution to reaffirm its state authorization or accreditation. The
requirements to obtain such reaffirmation from the states and accrediting
agencies with jurisdiction over our schools vary widely.
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We believe that this offering will be a change of control under the
standards of the Arizona State Board for Private Postsecondary Education
("ASBPPE") and the Illinois State Board of Education ("ISBE"), but will not be
a change of control under the standards of any other applicable state education
agencies, the accrediting agencies that accredit our schools, or the Department
of Education. We have submitted a letter to the Department of Education seeking
confirmation that this offering will not be a change of control under its
standards, but we have not yet received a response to our letter. As a result,
Collins and Scottsdale, our only campuses in Arizona, and IAMD-Chicago, our
only campus authorized by ISBE, will be required to be reauthorized by ASBPPE
and ISBE, respectively. We believe that this offering will not affect the
ability of those three campuses to participate in the Title IV Programs unless
ASBPPE or ISBE fails to reauthorize any of those campuses in a timely manner.
The failure of any of those campuses to reobtain state authorization could have
a material adverse effect on our business, results of operations or financial
condition. We believe this offering will not affect the ability of our other
institutions to participate in the Title IV Programs.
The potential adverse effects of a change of control could influence future
decisions by us and our stockholders regarding the sale, purchase, transfer,
issuance or redemption of our capital stock.
Opening Additional Schools and Adding Educational Programs. 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. Our expansion plans are based,
in part, on our ability to open new campuses as additional locations of our
existing institutions.
Generally, an institution that is eligible to participate in the Title IV
Programs may add a new educational program without Department of Education
approval if that new program leads to an associate level or higher degree and
the institution already offers programs at that level, or if it prepares
students for gainful employment in the same or related occupation as an
educational program that has previously been designated as an eligible program
at that institution and meets certain minimum length requirements. If an
institution erroneously determines that an educational program is eligible for
the Title IV Programs, the institution would likely be liable for repayment of
the Title IV Program funds provided to students in that educational program. We
do not believe that current Department of Education regulations will create
significant obstacles to our plans to add new programs.
Certain state education agencies and accrediting agencies with jurisdiction
over our campuses also have requirements that may, in certain instances, limit
our ability to open a new campus, acquire an existing campus, establish an
additional location of an existing institution or begin offering a new
educational program. We do not believe that these standards will have a
material adverse effect on our 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 our institutions,
would cease being eligible to participate in the Title IV Programs if, on a
cash accounting basis, it derived more than 85% of its revenue for any fiscal
year from the Title IV Programs. Any institution that violates this rule
becomes ineligible to participate in the Title IV Programs as of the first day
of the fiscal year following the fiscal year in which it exceeds 85%, and is
unable to apply to regain its eligibility until the next fiscal year. If one of
our institutions violated the 85/15 Rule and became ineligible to participate
in the Title IV Programs but continued to disburse Title IV Program funds, the
Department of Education would require the institution to repay all Title IV
Program funds received by the institution after the effective date of the loss
of eligibility.
We have calculated that, since this requirement took effect in 1995, none of
our 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 1997 the range for
our institutions was from approximately 46% to approximately 82%. The 1998 HEA
Reauthorization increased the percentage of applicable revenue that a for-
profit institution can derive from the
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<PAGE>
Title IV Programs from 85% to 90%. We regularly monitor compliance with this
requirement to minimize the risk that any of our institutions would derive more
than the maximum percentage of its revenue from the Title IV Programs for any
fiscal year. If an institution appeared likely to approach the maximum
percentage threshold, we would evaluate making changes in student funding and
financing to ensure compliance with the rule.
Administrative Capability. The Department of Education assesses the
administrative capability of each institution that participates in the Title IV
Programs under a series of separate standards. Failure to satisfy any of the
standards may lead the Department of Education to find the institution
ineligible to participate in the Title IV Programs or to place the institution
on provisional certification as a condition of its participation. One standard
which applies to programs with the stated objective of preparing students for
employment requires the institution to show a reasonable relationship between
the length of the program and the entry-level job requirements of the relevant
field of employment. We believe we have made the required showing for each of
our applicable programs. Short-term educational programs that provide less than
600 clock hours of instruction must demonstrate that 70% of all students who
enroll in such programs complete them within a prescribed time and 70% of the
graduates of such programs obtain employment in the occupation for which they
were trained within a prescribed time. Certain of the Gibbs institutions offer
such short-term programs, but students enrolled in these programs represent a
small percentage of our total enrollment. To date, the applicable institutions
have been able to establish that their short-term educational programs meet the
required completion and placement percentages.
Other standards provide that an institution may be found to lack
administrative capability and be placed on provisional certification if its
student loan default rate under the FFEL and FDL programs is 25% or greater for
any of the three most recent federal fiscal years, or if its Perkins cohort
default rate exceeds 15% for any federal award year. Two of our institutions
have been placed on provisional certification or determined by the Department
of Education to lack administrative capability due to their Perkins default
rates, either alone or in conjunction with other reasons. See "--Cohort Default
Rates" and "--Eligibility and Certification Procedures."
An additional standard 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. We believe that our current compensation plans are in compliance with
HEA standards, although the regulations of the Department of Education do not
establish clear criteria for compliance.
Eligibility and Certification Procedures. The HEA and its implementing
regulations require each institution to apply to the Department of Education
for continued certification to participate in the Title IV Programs at least
every six years, or when it undergoes a change of control, opens an additional
location or raises the highest academic credential it offers. The Department of
Education may place an institution on provisional certification status if it
finds that the institution does not fully satisfy all of the eligibility and
certification standards. The Department of Education may withdraw an
institution's provisional certification without advance notice if the
Department of Education determines that the institution is not fulfilling all
material requirements, and may more closely review an institution that is
provisionally certified if it applies for approval to open a new location or
make any other significant change. Provisional certification does not otherwise
limit an institution's access to Title IV Program funds.
An institution seeking certification to participate in the Title IV Programs
after a change of control will be provisionally certified for a limited period,
following which the institution must reapply for continued certification. If at
that time the institution satisfies all conditions for full certification, the
Department of Education will recertify the institution and remove the
provisional status. Otherwise, the Department of Education may recertify the
institution on a continued provisional basis. Each institution that we have
acquired and that has been certified by the Department of Education for
participation in the Title IV Programs under our ownership was initially
certified on a provisional basis. Five of our institutions remain on
provisional certification status because the initial period of their
provisional certification has not expired. Two institutions
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<PAGE>
have been recertified by the Department of Education upon the expiration of
their initial provisional period, but remain on provisional status for other
reasons. Gibbs-Melville is on provisional certification status because its
Perkins cohort default rate at the time of the Department of Education's review
was above 30%, and the institution was told that it would remain on provisional
certification until it reduced its Perkins default rate below 30%. Gibbs-
Montclair is on provisional certification status because its Perkins cohort
default rate is above 30% and because of other reasons that we believe are now
fully resolved.
Compliance with Regulatory Standards and Effect of Regulatory Violations.
Our schools are subject to audits and program compliance reviews by various
external agencies, including the Department of Education, state education
agencies, guaranty agencies and accrediting agencies. The HEA and its
implementing regulations also require that an institution's administration of
Title IV Program funds be audited annually by an independent accounting firm,
and the resulting audit report submitted to the Department of Education for
review. If the Department of Education or another regulatory agency determined
that one of our institutions improperly disbursed Title IV Program funds or
violated a provision of the HEA or the Department of Education's regulations,
that institution could be required to repay such funds, and could be assessed
an administrative fine. The Department of Education could also subject the
institution to heightened cash monitoring, under which the institution's
federal funding requests are more carefully reviewed by the Department of
Education, or the Department of Education could transfer the institution from
the advance system of receiving Title IV Program funds to the reimbursement
system, under which a institution must disburse its own funds to students and
document the students' eligibility for Title IV Program funds before receiving
such funds from the Department of Education. Violations of Title IV Program
requirements could also subject us or our schools to other civil and criminal
penalties.
Significant violations of Title IV Program requirements by us or any of our
institutions could be the basis for a proceeding by the Department of Education
to limit, suspend or terminate the participation of the affected institution in
the Title IV Programs. Generally, such a termination extends for 18 months
before the institution may apply for reinstatement of its participation. There
is no proceeding pending to fine any of our institutions or to limit, suspend
or terminate any of our institutions' participation in the Title IV Programs,
and we have no reason to believe that any such proceeding is contemplated. Any
such action that substantially limited our schools' participation in the Title
IV Programs could have a material adverse effect on our business, results of
operations or financial condition.
State Authorization for U.S. Schools
We are subject to extensive regulation in each of the 13 states in which we
currently operate schools and in certain other states in which our schools
recruit students. Each of our campuses must be authorized by the applicable
state agency or agencies to operate and grant degrees or diplomas to its
students. In addition, state authorization is required for an institution to
become and remain eligible to participate in the Title IV Programs. Currently,
each of our U.S. campuses is authorized by the applicable state agency or
agencies.
The level of regulatory oversight varies substantially from state to state.
In some states, the campuses are subject to licensure by an agency that
regulates proprietary schools 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 other operational
matters. State laws and regulations may limit our ability 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 Department of Education. We believe that each of our
campuses is in substantial compliance with state authorizing and licensure
laws. If any one of our campuses lost its state authorization, the campus would
be unable to offer its programs and we would be forced to close that campus.
Closing one of our campuses for any reason could have a material adverse effect
on our business, results of operations or financial condition.
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Accreditation for U.S. Schools
Accreditation is a non-governmental process through which an institution
submits to a qualitative review by an organization of peer institutions.
Accrediting agencies primarily examine the academic quality of the
institution's instructional programs, and a grant of accreditation is generally
viewed as confirmation 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.
Accreditation by an accrediting agency recognized by the Department of
Education is required for an institution to be certified to participate in the
Title IV Programs. Accrediting agencies must adopt certain standards in
connection with their review of postsecondary institutions to be recognized by
the Department of Education. All of our U.S. campuses are accredited by an
accrediting agency recognized by the Department of Education. Thirteen of our
campuses are accredited by the Accrediting Council for Independent Colleges and
Schools ("ACICS"), four of our campuses are accredited by the Accrediting
Commission of Career Schools and Colleges of Technology ("ACCSCT"), one of our
campuses is accredited by the Accrediting Commission for Community and Junior
Colleges of the Western Association of Schools and Colleges and one of our
campuses is accredited by the National Association of Schools of Art and
Design. In addition, four of our campuses' interior design programs are
accredited by the Foundation for Interior Design Education Research and two of
our campuses' culinary arts programs are accredited by the American Culinary
Federation Educational Institute Accrediting Commission, accrediting agencies
which are not recognized by the Department of Education.
An accrediting agency may place a campus on "reporting" status to monitor
one or more specified areas of performance. A campus placed on reporting status
is required to report periodically to its accrediting agency on that campus'
performance in the specified areas. ACICS has placed five campuses (IAMD-
Chicago, IAMD-Tampa, Gibbs-Boston, Gibbs-Melville, and Gibbs-Providence) on
financial reporting status, and one campus (Gibbs-Montclair) on placement
reporting status. ACCSCT has placed two campuses (Brown and Collins) on
completion and placement reporting status. Each of these campuses has submitted
all requested data in the identified area to its accrediting agency. The
placement of these eight campuses on reporting status by their accrediting
agencies has not had a material adverse effect on our business, results of
operations or financial condition, and we do not believe that it will have that
effect in the future.
Canadian Regulation
Depending on their province of residence, our Canadian students may receive
loans under the Canada Student Loan Program, the Ontario Student Loans Plan and
the Quebec Loans and Bursaries Program. Canadian schools must meet certain
eligibility standards to administer these programs and must comply with
extensive statutes, rules, regulations and requirements. We believe our
Canadian schools currently hold all necessary registrations, approvals and
permits and meet all eligibility requirements to administer these governmental
financial aid programs. If our Canadian schools cannot meet these and other
eligibility standards or fail to comply with applicable requirements, it could
have a material adverse effect on our business, results of operations or
financial condition.
Ontario. The Ontario Ministry of Education and Training provides financial
assistance to eligible students through the Ontario Student Assistance Plan
("OSAP"). This plan includes two main components, the Canada Student Loan
Program and the Ontario Student Loans Plan. For our IAD school in Toronto to
maintain its right to administer OSAP it must, among other things, be
registered and in good standing under the Ontario Private Vocational Schools
Act and abide by the rules, regulations and administrative manuals of the
Canada Student Loan Program, Ontario Student Loans Plan and other OSAP-related
programs. In order to attain initial eligibility, our IAD school in Toronto had
to establish that it had (i) been in good standing under the Ontario Private
Vocational Schools Act for at least 12 months, (ii) offered an eligible program
for at least 12 months, and (iii) graduated at least one class in an eligible
program that satisfied specific requirements with respect to
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class size and graduation rate. Pursuant to Ontario Ministry rules, during the
first two years of initial eligibility, our IAD school in Toronto had its
administration of OSAP independently audited, and full eligibility was not
granted until these audits confirmed that the school was properly administering
OSAP. Our IAD school in Toronto has been granted full eligibility. Under
Ontario Ministry rules, our Toronto school must advise the Ontario Ministry
before the school 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 our IAD school in Toronto to establish a new branch, it must
obtain OSAP-designation from the Ontario Ministry. We do not believe that
OSAP's requirements will create significant obstacles to our plans to acquire
additional institutions or open new branches in Ontario.
Our IAD school in Toronto may submit applications for loans only to students
enrolled in educational programs that have been designated as OSAP-eligible by
the Ontario Ministry. To be eligible, among other things, a program must be
registered with the Private Vocational Schools Unit of the Ontario Ministry,
must be of a certain minimum length and must lead to a diploma or certificate.
We do not anticipate that these program approval requirements will create
significant problems with respect to our plans to add new educational programs.
Under Ontario Ministry rules, an institution cannot automatically acquire
OSAP designation through the 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, the Ontario Ministry
will require evidence of the institution's continued capacity to properly
administer the program before extending OSAP designation to the new owner. We
do not believe that this offering will be considered a change of ownership for
purposes of OSAP. Given that the Ontario Ministry periodically revises its
regulations and other requirements and changes its interpretations of existing
laws and regulations, we cannot assure you that the Ontario Ministry will agree
with our understanding of each requirement.
Our IAD school in Toronto is required to audit its OSAP administration
annually and the Ontario Ministry is authorized to conduct its own audits of
our administration of these programs. We have complied with these requirements
on a timely basis. Based on the most recent annual compliance audits, our IAD
school in Toronto is in substantial compliance with OSAP requirements and we
believe that the school continues to be in substantial compliance with these
requirements.
The Ontario Ministry has the authority to take any measures it deems
necessary to protect the integrity of the administration of OSAP. If the
Ontario Ministry deems a failure to comply to be minor, the Ontario Ministry
will advise us of the deficiency and provide us with an opportunity to remedy
it. If the Ontario Ministry deems the failure to comply to be serious in
nature, the Ontario Ministry has the authority to: (i) condition our continued
OSAP designation upon our meeting specific requirements during a specific time
frame; (ii) suspend our OSAP designation; or (iii) revoke our OSAP designation.
When the Ontario Ministry determines that any non-compliance in our OSAP
administration is serious, the Ontario Ministry has the authority to contract
with an independent auditor, at our expense, to conduct a full audit in order
to quantify the deficiencies and to require repayment of all loan amounts. In
addition, the Ontario Ministry may impose a penalty up to the amount of the
damages assessed in the independent audit.
Adopting a practice similar to that of the Department of Education, the
Ontario Ministry now calculates for each school student loan default rates on
the basis of incidences of default (expressed as a percentage of the total
number of loans issued to students attending that school). Beginning with loans
issued in the 1998-99 award year (August 1, 1997 to July 31, 1998),
institutions with a 1997 default rate which is 15 percentage points or more
above the 1997 provincial average of 23.5% will be required to share the cost
of defaults. In the 1999-2000 award year, this policy will also apply to
institutions with a 1997 default rate 10 percentage points or more above 23.5%.
Our IAD school in Toronto had an average program-wide total default rate for
1998 of 23.8%.
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We may only operate a private vocational school in Ontario if the school is
registered under the Ontario Private Vocational Schools Act. Upon payment of
the prescribed fee and satisfaction of the conditions prescribed by the
regulations under the Ontario Private Vocational Schools Act and by the Private
Vocational Schools Unit of the Ontario Ministry, an applicant or registrant
such as our IAD school in Toronto is entitled to registration or renewal of
registration to conduct or operate a private vocational school unless: (i) the
school cannot reasonably be expected to be financially responsible in the
conduct of the private vocational school; (ii) the past conduct of the officers
or directors provides reasonable grounds for belief that the operations of the
school 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 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
(iv) the applicant is carrying on activities that are, or will be, if the
applicant is registered, in contravention of the Ontario Private Vocational
Schools Act or the regulations under that Act. 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 Ontario Private Vocational Schools Act. Our IAD school in Toronto is
currently registered under the Ontario Private Vocational Schools Act for both
of its locations, and we do not believe that there will be any impediment to
renewal of such registrations on an annual basis.
The Ontario Private Vocational Schools Act provides that a "registration" is
not transferable. However, the Private Vocational Schools Unit of the Ontario
Ministry takes the position that a purchase of shares of a private vocational
school does not invalidate the school's registration under the Ontario Private
Vocational Schools Act. We do not believe that this offering will invalidate
the registrations of our IAD school in Toronto.
If our IAD school in Toronto is convicted of violating the Ontario Private
Vocational Schools Act or the regulations under that Act, the corporation can
be fined up to $CDN 25,000.
Quebec. Our Quebec students may receive loans under the Quebec Loans and
Bursaries Program subject to certain student eligibility criteria. Under an Act
Respecting Private Education, our IAD school in Montreal may not operate as a
private educational institution without holding a permit issued by the Quebec
Minister of Education. Permits cannot be transferred without the written
authorization of the Quebec Minister and we must notify that Minister of any
amalgamation, sale or transfer affecting our Quebec school. The Quebec Minister
can modify or revoke our permit in certain circumstances, such as if we do not
comply with the conditions, restrictions or prohibitions of the permit or if we
are to become insolvent. We must be provided with a chance to present our views
before our permit can be revoked.
We do not believe that this offering will be considered a "sale or transfer"
affecting our IAD school in Montreal, for the purposes of applicable law;
however, because the Quebec Minister periodically revises its legal
requirements and changes its interpretation of existing law, we cannot assure
you that the Quebec Minister will agree with our understanding of each
requirement. We also do not believe that there will be any impediment to
renewal of the permit issued to our IAD school in Montreal or that the Quebec
Minister's requirements will create significant obstacles to our plans to open
new branches or add new educational programs at our IAD school in Montreal, or
to acquire additional schools in Quebec.
The Canadian, Ontario and Quebec governments are currently in the process of
changing the legislative, regulatory and other requirements relating to student
financial assistance programs due to political and budgetary pressures.
Although we do not anticipate a significant reduction in the funding for these
programs, any change that significantly reduces funding or the ability of our
schools to participate in these programs could have a material adverse effect
on our business, results of operations or financial condition.
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MANAGEMENT
Directors and Executive Officers
The following table sets forth certain information with respect to our
executive officers and directors:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
John M. Larson.......... 47 President, Chief Executive Officer, Secretary and Director
William A. Klettke...... 46 Senior Vice President, Chief Financial Officer and Treasurer
Robert E. Dowdell....... 53 Director
Thomas B. Lally......... 54 Director
Wallace O. Laub......... 73 Director
Keith K. Ogata.......... 44 Director
Patrick K. Pesch........ 42 Director
</TABLE>
John M. Larson has served as our President and Chief Executive Officer and
one of our Directors since January 1994. From July 1993 until our formation,
Mr. Larson served as a consultant to Heller Equity Capital Corporation
("Heller"), working with Heller to establish CEC. 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, 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 our Senior Vice President and Chief
Financial Officer 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, management information systems, 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 and a
Master's Degree in Management from Northwestern University.
Robert E. Dowdell has been one of our Directors since our 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, a software provider and LaQuinta Spring,
L.P., in which he is the general partner.
Thomas B. Lally has been one of our Directors since January 28, 1998. Mr.
Lally was designated to be a director by Heller. He has been the President of
Heller since 1996 and an Executive Vice President of Heller Financial, Inc.
("HFI"), the parent of Heller, 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.
Wallace O. Laub has been one of our Directors since October 1994. Mr. Laub
was a co-founder of National Education Centers, Inc., 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.
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Keith K. Ogata has been one of our Directors since January 28, 1998. Mr.
Ogata is currently president of, and a private investor in, 3-K Financial
Corporation. From 1995 to 1997, Mr. Ogata 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.
Patrick K. Pesch has been one of our Directors since 1995. Mr. Pesch was
designated as director by Heller. Since 1992, Mr. Pesch has served as a Senior
Vice President of HFI, and also as an officer of Heller, managing a portfolio
of loan and equity investments, as well as serving as a credit officer of one
of HFI's principle business units. Mr. Pesch also serves as a director of
Kimpex, Inc., a Canadian company and as an officer and director of Amersig
Graphics, Inc.
None of our executive officers or directors are related to one another.
Certain Other Significant Employees of the Company
The following table sets forth certain information with respect to certain
other significant employees of the Company:
<TABLE>
<CAPTION>
Name Position
- ---- --------
<S> <C>
J. Patrick Andrews............... Director of Advertising
Jon R. Coover.................... National Director of Marketing
Mari-Ann Deering................. Director of Human Resources
Nick Fluge....................... Managing Director
John Fraccaro.................... Director of Information Technology
Jacob P. Gruver.................. Managing Director
Patricia Kapper.................. Director of Education
James R. McEllhiney.............. Director of Regulatory Compliance
Carol A. Menck................... Managing Director
Robert W. Nachtsheim............. Controller
Steve B. Sotraidis............... Managing Director
Todd H. Steele................... Director of Strategic Planning and Development
Mark J. Tobin.................... Director of Student Finance
</TABLE>
J. Patrick Andrews has served as our Director of Advertising since October
1995. From 1994 until he joined our corporate management, Mr. Andrews was
Advertising Manager for two of our schools, Collins and Brooks. For
approximately 12 years prior to joining us, 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 has served as our National Director of Marketing since May
1997, after serving for 14 months as Director of Education at our 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 in Business
Administration and an M.B.A. from California Western University and a Ph.D. in
Business from California Coast University.
Mari-Ann Deering has served as our Director of Human Resources since July
1998. Ms. Deering joined our corporate management with 19 years of human
resources experience in the veterinary pharmaceutical industry. Ms. Deering
served as the Director of Human Resources--North America for Fort Dodge Animal
Health, Overland Park, Kansas (a division of American Home Products) from 1997
until 1998. She was Vice
54
<PAGE>
President of Human Resources and Administration of Southwest Technologies, a
medical device company, from 1996 until 1997. Her prior experience also
includes 16 years in human resource management with Sanofi Animal Health from
1979 until 1995 where her final position was Vice President of Human Resources.
Ms. Deering holds a Bachelor's of Science degree in Business Administration
from AVILA College, Kansas City, Missouri and an M.B.A. from Rockhurst College,
Kansas City, Missouri.
Nick Fluge has served as one of our Managing Directors since July 1997. Mr.
Fluge has served as Director and President of Western since 1989. From 1984
until 1988, Mr. Fluge was Director of Retail/Restaurants and a member of the
management team of Western. 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.
John Fraccaro has served as our Director of Information Technology since
March 1998. Mr. Fraccaro has held Consulting and Principal Consulting positions
with New Resources Corporation from 1997 until 1998 and with Coopers & Lybrand
L.L.C. from 1993 until 1996. Mr. Fraccaro was a Director of Information
Technology for Sara Lee Hosiery from 1996 until 1997 and Manager of Database
Development and Support for Kraft General Food from 1990 until 1993. Mr.
Fraccaro has held several positions with software vendors including
ComputerVision, Ingres and CompuGraphic. Mr. Fraccaro holds a Bachelor's of
Science in Education from Northern Illinois University.
Jacob P. Gruver has served as one of our Managing Directors since May 1997.
From August 1994 to May 1997, Mr. Gruver served as our Director of Finance.
From 1989 until joining our management team, 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 of Science in Accounting
from National College.
Patricia Kapper, Ed.D, has served as our Director of Education since August
1997. From 1990 until joining our management team, Dr. Kapper was Dean of
Academic Affairs (Chief Academic Officer) of DeVry Institute of Technology,
Addison, Illinois. From 1986 until 1990, Dr. 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. Dr. Kapper holds a Bachelor's of Arts in Business
Education from the University of Wisconsin--Eau Claire, a Master's of Science
in Teaching from the University of Wisconsin--Whitewater, and a doctorate in
Adult Education from Northern Illinois University.
James R. McEllhiney has served as our Director of Regulatory Compliance
since August 1997. Mr. McEllhiney served as our Director of Education from
August 1994 until August 1997. Prior to joining our 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 Master's of Science in Psychology from
Indiana State University.
55
<PAGE>
Carol A. Menck has served as one of our Managing Directors since January
1999. From 1997 to 1999, Ms. Menck served as the President of The School of
Computer Technology--Pittsburgh with oversight responsibility over the campus
in Fairmont. From 1993 until joining us, Ms. Menck was Director of an ITT
Technical Institute. From 1991 until 1993, she served as Director of Phillips
Junior College--Spokane, Washington. From 1987 to 1991 she served as President
of Bradford School--Portland, Oregon. From 1976 until 1987, she held various
positions at Trend Colleges--Vancouver, Washington. Her final position at Trend
was Operations Manager. Ms. Menck received a Bachelor's of Arts in Political
Science from Gonzaga University in Spokane, Washington and a Juris Doctorate
from Gonzaga Law School in Spokane, Washington.
Robert W. Nachtsheim has served as our Controller since December 1995. Mr.
Nachtsheim joined our 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 in Accountancy from the University of Missouri
and an M.B.A. in Finance from DePaul University.
Steve B. Sotraidis has served as one of our Managing Directors since July 1,
1997. Mr. Sotraidis joined our 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's of Science in
Psychology and completed two years of graduate work in Industrial Psychology at
California State University at Long Beach.
Todd H. Steele has served as our Director of Strategic Planning and
Development since March 1998. Mr. Steele served as a director from our
inception in January 1994 until March 1998. From December 1996 until joining
our management team, he served as a 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 HFI and Heller, also
making equity investments in private companies. Mr. Steele holds a Bachelor's
of Arts in Economics from Northwestern University and an M.B.A. in finance from
the University of Chicago.
Mark J. Tobin has served as our Director of Student Finance since March
1996. Mr. Tobin joined DeVry, Inc., in 1984 and, from 1989 until joining our
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. from
1984 until 1996, Mr. Tobin was Director of Financial Aid at Carthage College
from 1978 until 1984 and Marian College from 1973 until 1978. Mr. Tobin holds a
Bachelor's of Arts in Psychology from Northeastern Illinois State College and a
Master's of Education degree in Student Personnel Work in Higher Education from
Loyola University of Chicago.
Board of Directors
Our 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 our stockholders in 1999, the terms of Messrs. Laub and Ogata expire at the
annual meeting of our stockholders in 2000, and the terms of Messrs. Lally and
Larson expire at the annual meeting of our stockholders in 2001. At each annual
meeting of our stockholders, the successors to the directors whose terms expire
will be elected for a three-year term.
Arrangements for Nomination as Director
We have entered into an agreement with Heller pursuant to which Heller is
entitled to designate two individuals for nomination to our Board of Directors.
This agreement provides that we will cause these Heller
56
<PAGE>
designees to be nominated and solicit proxies from our stockholders to vote in
favor of them, and will appoint the Heller designees to the Compensation and
Audit Committees of the Board. The number of directors Heller is entitled to
designate will be reduced to one if Heller no longer owns at least 25% of our
capital stock, and the agreement will terminate if Heller no longer owns at
least 10% of our capital stock. Messrs. Pesch and Lally are the current
designees of Heller.
Committees of the Board of Directors
The Board of Directors has established an Audit Committee and a Compensation
Committee. Both the Audit Committee and the Compensation Committee are
currently composed entirely of directors who are not our officers or employees.
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 our 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, Lally, Ogata and Pesch.
The Compensation Committee generally has responsibility for recommending to
the Board guidelines and standards relating to the determination of executive
compensation, reviewing our executive compensation policies and reporting to
the Board of Directors regarding the foregoing. The Compensation Committee also
has responsibility for administering our incentive compensation plans,
determining the number of options to be granted to our executive officers
pursuant to such plans and reporting to the Board of Directors regarding the
foregoing. The members of the Compensation Committee are Messrs. Lally, Laub
and Pesch.
Compensation of Directors
All directors who are not employees are paid an annual fee of $6,000 and are
paid $1,000 for each board meeting attended and $500 for each board committee
meeting attended. Non-employee directors are also reimbursed for their
reasonable out-of-pocket expenses incurred in attending board and committee
meetings. In addition, the Career Education Corporation 1998 Non-Employee
Directors' Stock Option Plan provides for annual option grants to each director
who is not an employee. See "--Stock Plans--Career Education Corporation 1998
Non-Employee Directors' Stock Option Plan."
Compensation Committee Interlocks and Insider Participation
Thomas B. Lally, Wallace O. Laub, Patrick K. Pesch and Scott D. Steele, who
resigned as a director on January 23, 1998, served as the members of the
Compensation Committee during 1998. Scott Steele resigned due to time
constraints imposed by his work for Electra Fleming, Inc., of which Mr. Steele
serves as a principal, and because of a general policy of Electra Fleming
against its principals serving on the boards of publicly-held corporations in
which Electra Fleming (or an affiliate) has an equity interest.
We entered into a Registration Rights Agreement with Heller, dated as of
February 3, 1998. Under this agreement, Heller is entitled, subject to certain
exceptions, to demand that we register shares of common stock held by Heller on
up to three occasions and to cause us to register such shares in any
registration by us for our own account or for the account of other security
holders.
Executive Compensation
The following table sets forth information with respect to all compensation
paid by us for services rendered during the fiscal years ended December 31,
1997 and 1998, to our Chief Executive Officer and our other executive officer
(each, a "Named Executive Officer").
57
<PAGE>
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Annual Long Term
Compensation Compensation
------------------ ------------
Securities
Name and Principal Underlying All Other
Positions Year Salary($) Bonus($) Options(#) Compensation
------------------ ---- --------- -------- ------------ ------------
<S> <C> <C> <C> <C> <C>
John M. Larson,
President and Chief
Executive Officer....... 1998 $308,333 $ (1) 180,000 $ 7,659(2)
1997 $229,167 $143,000 21,105 $17,018(3)
William A. Klettke,
Senior Vice President and
Chief Financial Officer.. 1998 $169,167 $ (1) 45,000 $ 6,491(4)
1997 $152,500 $ 47,580 9,844 $ 6,771(5)
</TABLE>
- --------
(1) Bonuses for 1998 have not yet been finalized.
(2) Includes $6,000 in 401(k) matching contributions by the Company and $1,659
in term life insurance premium payments by the Company.
(3) Includes $8,594 in 401(k) matching contributions by the Company and $8,424
in term life insurance premium payments by the Company.
(4) Includes $6,400 in 401(k) matching contributions by the Company and $91 in
term life insurance premium payments by the Company.
(5) Includes $6,100 in 401(k) matching contributions by the Company and $671 in
term life insurance premium payments by the Company.
OPTION GRANTS IN 1998
The following table contains information concerning the grant of stock
options by us to our Named Executive Officers during 1998.
<TABLE>
<CAPTION>
Percentage
Number of of Total Potential Realizable Value
Shares Options at Assumed Annual Rates of
Underlying Granted to Stock Price Appreciation
Options Employees Exercise or for Option Term (2)
Granted in Fiscal Base Price Expiration ---------------------------
Name (#) (1) Year ($/Sh) Date 5% ($) 10% ($)
---- ---------- ---------- ----------- ---------- ------------ --------------
<S> <C> <C> <C> <C> <C> <C>
John M. Larson.......... 60,000 10.4% $16.00 1/28/2008 $ 603,739 $ 1,529,993
120,000 20.9% $26.25 7/28/2008 $ 990,509 $ 2,510,144
William A. Klettke...... 15,000 2.6% $16.00 1/28/2008 $ 150,935 $ 382,498
30,000 5.2% $26.25 7/28/2008 $ 247,627 $ 627,536
</TABLE>
- --------
(1) These options were granted under the Career Education Corporation 1998
Employee Incentive Compensation 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 date grant. See "--Stock Plans--Career
Education Corporation 1998 Employee Incentive Compensation Plan."
(2) 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, compounded annually, for the
term of the option. The 0%, 5% and 10% assumed rates of appreciation are
mandated by the rules of the Securities and Exchange Commission and do not
represent our estimate or projection of future increases in the price of
our common stock. Actual gains are dependent on the future performance of
our common stock and the option holder's continued employment throughout
the vesting periods. The amounts reflected in the table may not necessarily
be achieved.
58
<PAGE>
FISCAL YEAR-END OPTION VALUES
The following table contains information regarding the Named Executive
Officers' unexercised options as of December 31, 1998. Neither of the Named
Executive Officers exercised any options during 1998.
<TABLE>
<CAPTION>
Number of Shares
Underlying
Unexercised Options Value of Unexercised in-the-Money
as of December 31, Options as of December 31,
1998(#) 1998($)(1)
------------------------- ---------------------------------
Name Exercisable/Unexercisable Exercisable/Unexercisable
---- ------------------------- ---------------------------------
<S> <C> <C>
John M. Larson..... 131,878/185,840 $3,689,796/$1,465,142
William A. Klettke. 19,104/51,774 $466,923/$426,074
</TABLE>
- --------
(1) The value per option is calculated by subtracting the exercise price of the
option from the closing price of our common stock of $30.00 per share on
December 31, 1998.
Employment Agreement
We have entered into an Employment and Non-Competition Agreement with Mr.
Larson, dated as of October 9, 1997, which has an initial term ending July 31,
2000. This agreement is subject to successive, automatic employer extensions if
we give written notice at least 90 days prior to the expiration date. The
agreement provides for an initial base salary of $250,000 plus bonus
compensation established by our Board of Directors. Effective July 29, 1998,
Mr. Larson's base salary was increased to $350,000 per annum. The agreement
provides for continuation of salary, bonus and benefits for one year following
Mr. Larson's termination of employment with us, other than termination by us
for "Cause" (as defined in the agreement) or termination by Mr. Larson without
"Good Reason" (as defined in the agreement). Good Reason includes a Change of
Control (as defined in the agreement) of us. The agreement also prohibits Mr.
Larson from disclosing confidential information and prohibits him from engaging
in activities competitive with us for a period which includes the term of his
employment with us or service as one of our directors and continues for two
years thereafter. However, if Mr. Larson's employment with us is terminated by
us 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 us or six months after the termination of his employment. In such
case, we may extend the non-competition period up to an additional 18 months if
we pay Mr. Larson's base salary, a portion of his bonus and benefits during
this additional period. If the term of the agreement expires and we refuse 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, we may extend
the non-competition period for up to an additional two years if we pay 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, our Board of Directors adopted the Career
Education Corporation 1995 Stock Option Plan (the "1995 Plan"), pursuant to
which options to acquire shares of common stock may be granted to employees,
advisors, consultants and non-employee directors as may be determined by a
committee of the Board of Directors (the "Option Committee"). As of December
31, 1998, options to acquire 145,022 shares of common stock were outstanding
under the 1995 Plan, and an additional 12,990 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 our
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 Internal
59
<PAGE>
Revenue 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 our stock (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
Our Board of Directors has adopted, and our stockholders have approved, the
Career Education Corporation 1998 Employee Incentive Compensation Plan (the
"Employee Plan"). 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 us or any of our subsidiaries who, in the opinion
of the Committee, contribute to the growth and success. The purpose of the
Employee Plan is to promote our overall financial objectives by motivating
eligible participants to achieve long-term growth in stockholder equity 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 remain unissued upon
termination of such award, are forfeited or are received by us 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 our assets, reorganization or other similar event, the
Compensation Committee will adjust the aggregate number of shares of common
stock subject to the Employee Plan and the number, class and price of shares
subject to outstanding awards.
Career Education Corporation 1998 Non-Employee Directors' Stock Option Plan
Our Board of Directors has adopted, and our stockholders have approved, the
Career Education Corporation 1998 Non-Employee Directors' Stock Option Plan
(the "Directors' Plan"). The Directors' Plan grants nonqualified stock options
for the purchase of common stock to directors who are not our employees.
The purpose of the Directors' Plan is to promote our overall financial
objectives by motivating directors to achieve long-term growth in our
stockholder equity, to further align the interest of such directors with those
of our 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
on January 28, 1998 or, if after such date, the date such individual is first
elected or appointed as a non-employee director 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.
60
<PAGE>
Career Education Corporation 1998 Employee Stock Purchase Plan
Our Board of Directors has adopted, and our 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 permits our eligible employees 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 our 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. 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 us or a designated subsidiary. 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 our stock.
Limitation of Liability and Indemnification Matters
Our Certificate of Incorporation contains provision which eliminate the
personal liability of our directors to us or our stockholders for monetary
damages for breach of their fiduciary duty as a director to the fullest extent
permitted by the Delaware General Corporation Law except for liability (i) for
any breach of their duty of loyalty to us or our 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. These provisions will not affect
a director's responsibilities under any other laws, such as the federal
securities laws or state or federal environmental laws.
Our Certificate of Incorporation also contains provisions which require us
to indemnify our directors, and permit us to indemnify our officers and
employees, to the fullest extent permitted by Delaware law, including those
circumstances in which indemnification would otherwise be discretionary, except
that we are not 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 us without our prior written consent. We have
obtained directors' and officers' liability insurance and has entered into
indemnity agreements with each of our directors providing for the
indemnification described above.
61
<PAGE>
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of our common stock as of December 31, 1998 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 us to beneficially own
more than 5% of the outstanding shares of common stock, (ii) each of our
directors, (iii) each of our Named Executive Officers, (iv) each of the Selling
Stockholders and (v) all of our 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 Number of
Stock Beneficially Shares of Shares of Common Stock
Owned Prior to the Common Stock Beneficially Owned After
Offering (1) Being Offered the Offering (1)
------------------------------------- ---------------------------
Number Percent Number Number Percent
----------- ---------------------- -------------- ------------
<S> <C> <C> <C> <C> <C>
Heller Equity Capital
Corporation (2)........ 2,549,944 35.6 1,086,937 1,463,007 20.4
Electra Investment Trust
P.L.C. and Electra
Associates, Inc. (3)... 962,511 13.5 700,000 262,511 3.7
John M. Larson.......... 165,350(4) 2.3 30,000 135,350 1.9
William A. Klettke (5).. 52,307 * -- 52,307 *
Robert E. Dowdell (6)... 101,441 1.4 -- 101,441 1.4
Thomas B. Lally (7)..... 6,333 * -- 6,333 *
Wallace O. Laub (8)..... 32,151 * -- 32,151 *
Keith K. Ogata (7)...... 30,333 * -- 30,333 *
Patrick K. Pesch (9).... 10,133 * -- 10,133 *
Mark A. Bounds.......... 16,063 * 6,000 10,063 *
Brian A. Demkowicz...... 3,012 * 1,000 2,012 *
John M. Goense.......... 45,179 * 10,000 35,179 *
Howard E. Jessen........ 45,179 * 10,000 35,179 *
John H. Underwood....... 16,063 * 6,063 10,000 *
All directors and
executive officers as a
group
(7 persons)............ 398,048 5.4 30,000 368,048 5.0
</TABLE>
- --------
* Less than 1%.
(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange 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 held by that person that are currently
exercisable or exercisable within 60 days of December 31, 1998 (including
options that will become exercisable upon consummation of the offering).
(2) The address of Heller is 500 West Monroe Street, Chicago, Illinois 60661.
(3) Electra Investment Trust P.L.C. and Electra Associates, Inc. are affiliated
entities, and their address is c/o Electra Investment Trust P.L.C., 65
Kingsway, London, England WC2B 6QT.
(4) Includes 149,718 shares of common stock which may be acquired by Mr. Larson
upon the exercise of currently exercisable stock options. Mr. Larson has
also agreed to offer up to 20,000 additional shares in the over-allotment
option.
(5) Includes 22,104 shares of common stock which may be acquired by Mr. Klettke
upon the exercise of currently exercisable stock options.
62
<PAGE>
(6) Includes 2,834 shares of common stock held by Mr. Dowdell, as Custodian for
Brian M. Dowdell under the Uniform Transfers to Minors Act; 2,834 shares of
common stock held by Mr. Dowdell, as Custodian for Sharon T. Dowdell under
the Uniform Transfers to Minors Act; 3,825 shares of common stock held by
Robert E. Dowdell Defined Benefit Plan and Trust, under Agreement dated
12/9/96; and 47,313 shares of common stock which may be acquired by Mr.
Dowdell upon the exercise of currently exercisable stock options.
(7) Includes 5,333 shares of common stock which may be acquired upon the
exercise of currently exercisable stock options.
(8) Includes 10,668 shares of common stock which may be acquired upon the
exercise of currently exercisable stock options.
(9) Includes 2,700 shares of common stock held by Mr. Pesch's individual
retirement account, 1,100 shares of common stock held by Cathy Pesch's
individual retirement account (Cathy Pesch is Mr. Pesch's spouse), 1,000
shares of common stock held in a joint account with Cathy Pesch and 5,333
shares of common stock which may be acquired upon the exercise of currently
exercisable stock options.
63
<PAGE>
DESCRIPTION OF CAPITAL STOCK
Our authorized capital stock consists of 50,000,000 shares of common stock,
$.01 par value per share, and 1,000,000 shares of preferred stock, $.01 par
value per share.
The following summary does not purport to be complete and is subject to, and
qualified by applicable law, and the provisions of our Certificate of
Incorporation and Bylaws that are included as exhibits to the registration
statement of which this prospectus is a part.
Common Stock
As of December 31, 1998, 7,152,896 shares of common stock were outstanding
and held by 27 holders of record. 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 our liquidation, dissolution or winding up, any assets legally
available for distribution to stockholders as such are to be distributed
ratably among the holders of our common stock at that time outstanding. All
shares of common stock currently outstanding are, and all shares of common
stock offered by 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 us 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
our 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 our 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 us. We have no present
intention to issue shares of preferred stock.
Certain Corporate Provisions
We are subject to the provisions of Section 203 of the Delaware General
Corporation Law. 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 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
64
<PAGE>
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 us
with Heller or Electra would not be prohibited by Section 203.
Our Certificate of Incorporation and By-Laws 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 us.
These provisions include (i) a requirement that stockholder action may be taken
only at stockholder meetings; (ii) notice requirements in the By-Laws 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--Directors and Executive Officers."
Transfer Agent and Registrar
The transfer agent and registrar for our common stock is Harris Trust and
Savings Bank.
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the offering, we will have an aggregate of approximately
7,182,896 shares of common stock outstanding, assuming no exercise of the
underwriters' over-allotment option and no exercise of outstanding options.
Substantially all of these shares will be freely tradable without restriction
or further registration under the Securities Act, unless held by our
"affiliates," as that term is defined in Rule 144 promulgated under the
Securities Act. Upon completion of the offering 1,615,253 shares will be held
by our affiliates.
All Selling Stockholders, directors, executive officers and certain of our
other current stockholders have agreed with the underwriters that, for a period
of 90 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 our shares, may not be accompanied
by an advance public announcement by us. See "Underwriting."
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 our "affiliate," 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 our 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 us. In
addition, a person who is not deemed to have been our affiliate 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. We
are 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
our common stock, the personal circumstances of the seller and other factors.
65
<PAGE>
Upon consummation of the offering, options to purchase 865,487 shares of
common stock will be issued and outstanding, of which options to purchase
280,978 shares of common stock will be exercisable. See "Management--Stock
Plans."
Registration Rights
Under a registration rights agreement, Electra is entitled, subject to
certain exceptions, to demand that we register shares of common stock held by
Electra on up to two occasions (plus, in certain circumstances, one additional
occasion) and to cause us to register such shares in any registration by us for
our own account or for the account of other security holders. Additionally, at
any time that we are eligible to use Commission Form S-3 for registration of
securities, Electra will be entitled, subject to certain exceptions, to cause
us to register 964,073 shares held by Electra on registration statement on Form
S-3. Upon consummation of the offering, Electra will hold 262,511 shares
covered by the registration rights agreement.
Under a registration rights agreement, Heller will be entitled, subject to
certain exceptions, to demand that we register shares of common stock held by
Heller on up to three occasions and to cause us to register such shares in any
registration by us for our own account or for the account of other security
holders. Additionally, at any time that we are eligible to use Form S-3 for
registration of securities, Heller will be entitled, subject to certain
exceptions, to cause us to register shares held by Heller on a registration
statement on Form S-3. Upon consummation of the offering, Heller will hold
1,463,007 shares which will be covered by the registration rights agreement.
See "Management--Compensation Committee Interlocks and Insider Participation."
66
<PAGE>
UNDERWRITING
Under the terms and subject to the conditions contained in an Underwriting
Agreement dated , 1999, the underwriters named below, for whom Credit
Suisse First Boston Corporation, Salomon Smith Barney Inc. and NationsBanc
Montgomery Securities LLC are acting as representatives, have severally but not
jointly agreed to purchase from the Selling Stockholders the following
respective numbers of shares of common stock. Their obligations are subject to
certain conditions contained in the Underwriting Agreement.
<TABLE>
<CAPTION>
Number of
Underwriter Shares
----------- ---------
<S> <C>
Credit Suisse First Boston Corporation..........................
Salomon Smith Barney Inc........................................
NationsBanc Montgomery Securities LLC...........................
Legg Mason Wood Walker, Incorporated............................
---------
Total....................................................... 1,850,000
=========
</TABLE>
The Underwriting Agreement provides that the underwriters will be obligated
to purchase all the shares of common stock in this offering (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.
We and a Selling Stockholder have granted to the underwriters an option,
expiring at the close of business on the 30th day after the date of this
prospectus, to purchase up to 277,500 additional shares at the 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. 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.
We and the Selling Stockholders have been advised by the representatives
that the underwriters propose to offer shares of common stock to the public
initially at the public offering price set forth on the cover page of this
prospectus and, through the representatives, to certain dealers at such price
less a concession of $ per share, and the underwriters and such dealers may
allow a discount of $ per share on sales to certain other dealers. After the
initial public offering, the public offering price and concession and discount
to dealers may be changed by the representatives.
The following table summarizes the compensation to be paid to the
underwriters by the Selling Stockholders and us, and the expenses payable by
us.
<TABLE>
<CAPTION>
Total
-------------------
Without With
Per Over- Over-
Share allotment allotment
-------- --------- ---------
<S> <C> <C> <C>
Underwriting Discounts and Commissions paid by
CEC.............................................. $ $ $
Expenses payable by CEC........................... $ $ $
Underwriting Discounts and Commissions paid by
Selling Stockholders............................. $ $ $
</TABLE>
We, our executive officers and directors and certain other of our current
stockholders have agreed not to offer, sell, contract to sell, announce an
intention to sell, pledge or otherwise dispose of, directly or indirectly, or
file with the Securities and Exchange Commission a registration statement under
the Securities Act relating to, any shares of our common stock or securities or
other rights convertible into or exchangeable or exercisable for any shares of
our common stock without the prior written consent of Credit Suisse First
Boston
67
<PAGE>
Corporation, for a period of 90 days after the date of this prospectus, except
that such restrictions will not apply to (i) our ability to grant employee or
director stock options pursuant to the terms of a plan in effect on the date of
this prospectus or issuance of common stock pursuant to the exercise of such
options and (ii) issuances of common stock to Le Cordon Bleu pursuant to its
agreement with us.
The underwriters have reserved for sale, at the public offering price, up to
60,000 shares of our common stock in this offering for employees, directors and
certain other persons associated with us who have expressed an interest in
purchasing such shares of our common stock in this offering. The number of
shares available for sale to the general public in this offering will be
reduced to the extent such persons purchase such reserved shares. Any reserved
shares not so purchased will be offered by the Underwriters to the general
public on the same terms as the other shares offered hereby.
We and the Selling Stockholders have agreed to indemnify the underwriters
against certain liabilities, including civil liabilities under the Securities
Act, or to contribute to payments which the underwriters may be required to
make in respect thereof.
The representatives, on behalf of the underwriters, may engage in over-
allotment, stabilizing transactions, syndicate covering transactions, penalty
bids and "passive" market making in accordance with Regulation M under the
Securities Exchange Act of 1934. 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 our common stock so
long as the stabilizing bids do not exceed a specified maximum. Syndicate
covering transactions involve purchases of our 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 our common stock originally sold by such syndicate
member is purchased in a stabilizing transaction or syndicate covering
transaction to cover syndicate short positions. In "passive" market making,
market makers in our common stock who are underwriters or prospective
underwriters may, subject to certain limitations, make bids for or purchases of
our common stock until the time, if any, at which a stabilizing bid is made.
Such stabilizing transactions, syndicate covering transactions and penalty bids
may cause the price of our 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.
68
<PAGE>
NOTICE TO CANADIAN RESIDENTS
Resale Restrictions
The distribution of our common stock in Canada is being made only on a
private placement basis exempt from the requirement that the Company and the
Selling Stockholders prepare and file a prospectus with the securities
regulatory authorities in each province where trades of common stock are
effected. Accordingly, any resale of our 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 our 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, the Selling
Stockholders and the dealer from whom such purchase confirmation is received
that (i) such purchaser is entitled under applicable provincial securities laws
to purchase such common stock without the benefit of a prospectus qualified
under such securities laws, (ii) where required by law, that such purchaser is
purchasing as principal and not as agent, and (iii) such purchaser has reviewed
the text above under "Resale Restrictions."
Rights of Action (Ontario Purchasers)
The securities being offered are those of a foreign issuer and Ontario
purchasers will not receive the contractual right of action prescribed by
Ontario securities law. 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 Company's directors and officers as well as the experts named
herein and the Selling Stockholders may be located outside of Canada and, as a
result, it may not be possible for Canadian purchasers to effect service of
process within Canada upon the Company or such persons. All or a substantial
portion of the assets of the Company and such persons may be located outside of
Canada and, as a result, it may not be possible to satisfy a judgment against
the Company or such persons in Canada or to enforce a judgment obtained in
Canadian courts against such Company 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 our common
stock in their particular circumstances and with respect to the eligibility of
our common stock for investment by the purchaser under relevant Canadian
legislation.
69
<PAGE>
LEGAL MATTERS
The validity of our common stock offered hereby and certain other legal
matters will be passed upon for us by Katten Muchin & Zavis, Chicago, Illinois.
Certain legal matters in connection with this offering will be passed upon for
the underwriters by Sidley & Austin, Chicago, Illinois.
EXPERTS
The consolidated financial statements of CEC and its subsidiaries as of
December 31, 1996 and 1997, and for each of the three years in the period ended
December 31, 1997, and the financial statements of Scottsdale Culinary
Institute, Inc. as of December 31, 1996 and 1997, and for each of the two years
in the period ended December 31, 1997, included in this prospectus and
elsewhere in the registration statement, have been audited by Arthur Andersen
LLP, independent public accountants, as indicated in their reports with respect
thereto, and are included herein in reliance upon the authority of said firm as
experts in giving said reports.
The consolidated financial statements of The Katharine Gibbs Schools, Inc.
as of December 31, 1995 and 1996 and for the two years then ended included in
this prospectus have been audited by Deloitte & Touche LLP, independent
auditors, as stated in their report appearing herein and is included in
reliance upon the report of such firm given upon their authority as experts in
accounting and auditing.
WHERE YOU CAN FIND MORE INFORMATION
This prospectus is part of a registration statement we filed with the SEC.
This prospectus does not contain all of the information contained in the
registration statement and all of the exhibits and schedules thereto. For
further information about us, please see the complete registration statement.
Summaries of agreements or other documents in this prospectus are not
necessarily complete. Please refer to the exhibits to the registration
statement for complete copies of such documents.
We file annual, quarterly and special reports, proxy statements and other
information with the SEC under the Exchange Act. The Exchange Act file number
for our SEC filings is 0-23245. You may read and copy any document we file at
the following SEC public reference rooms:
450 Fifth Street, N.W. Seven World Trade Center Room 3190
Judiciary Plaza Suite 1300 Citicorp Center
Room 1024 New York, NY 10048 500 West Madison Street
Washington, D.C. 20549 Suite 1400
Chicago, IL 60661
You may also inspect and copy our SEC filings, the complete registration
statement and other information at the offices of The Nasdaq Stock Market
located at 1735 K Street, N.W., Washington, D.C. 20006-1500.
You may obtain information on the operation of the public reference room in
Washington, D.C. by calling the SEC at 1-800-SEC-0330.
We file information electronically with the SEC. Our SEC filings also are
available from the SEC's Internet site at http://www.sec.gov, which contains
reports, proxy and information statements, and other information regarding
issuers that file electronically.
70
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Consolidated Financial Statements of Career Education Corporation and
Subsidiaries:
Report of Independent Public Accountants................................ F-2
Consolidated Balance Sheets as of December 31, 1996 and 1997 and
September 30, 1998 (unaudited)......................................... F-3
Consolidated Statements of Operations for the years ended December 31,
1995, 1996 and 1997, and the nine months ended September 30, 1997
(unaudited) and September 30, 1998 (unaudited)......................... F-6
Consolidated Statements of Cash Flows for the years ended December 31,
1995, 1996 and 1997, and the nine months ended September 30, 1997
(unaudited) and September 30, 1998 (unaudited)......................... F-7
Consolidated Statements of Stockholders' Investment for the years ended
December 31, 1995, 1996 and 1997, and the nine months ended September
30, 1998 (unaudited)................................................... F-8
Notes to Consolidated Financial Statements.............................. F-10
Consolidated Financial Statements of The Katharine Gibbs Schools, Inc. and
Subsidiaries:
Report of Independent Auditors.......................................... F-35
Consolidated Balance Sheets as of December 31, 1995 and 1996............ F-36
Statements of Consolidated Operations for the years ended December 31,
1995 and 1996.......................................................... F-37
Statements of Shareholder's Deficiency for the years ended December 31,
1995 and 1996.......................................................... F-38
Statements of Consolidated Cash Flows for the years ended December 31,
1995 and 1996.......................................................... F-39
Notes to Consolidated Financial Statements.............................. F-40
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-45
Unaudited Condensed Consolidated Statements of Operations for the six
months ended June 30, 1996 and five months ended May 31, 1997.......... F-46
Unaudited Condensed Consolidated Statements of Cash Flows for the six
months ended June 30, 1996 and five months ended May 31, 1997.......... F-47
Notes to Unaudited Condensed Consolidated Financial Statements.......... F-48
Financial Statements of Scottsdale Culinary Institute, Inc.:
Report of Independent Public Accountants................................ F-49
Balance Sheets as of December 31, 1996 and 1997 and June 30, 1998
(unaudited)............................................................ F-50
Statements of Operations and Retained Earnings for the years ended
December 31, 1996 and 1997 and the six months ended June 30, 1997
(unaudited) and 1998 (unaudited)....................................... F-51
Statements of Cash Flows for the years ended December 31, 1996 and 1997
and for the six months ended June 30, 1997 (unaudited) and 1998
(unaudited)............................................................ F-52
Notes to Financial Statements........................................... F-53
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders of
Career Education Corporation:
We have audited the accompanying consolidated balance sheets of CAREER
EDUCATION CORPORATION (a Delaware corporation) AND SUBSIDIARIES as of December
31, 1996 and 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, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Career
Education Corporation and Subsidiaries as of December 31, 1996 and 1997 and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1997 in conformity with generally
accepted accounting principles.
Arthur Andersen LLP
Chicago, Illinois
February 13, 1998 (except
with respect to the matters
discussed in the fourth,
fifth, sixth, seventh,
eighth, ninth, tenth and
eleventh paragraphs of Note
16, as to which the dates
are March 13, 1998, May 13,
1998, July 31, 1998,
September 8, 1998, October
5, 1998, October 26, 1998,
October 29, 1998 and
January 4, 1999)
F-2
<PAGE>
CAREER EDUCATION CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
<TABLE>
<CAPTION>
December 31,
---------------------------
1997
-------------------
Pro Forma
(Notes 2 September 30,
1996 Actual and 15) 1998
------- -------- ---------- -------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash.............................. $ 7,798 $ 18,906 $ 21,199 $ 19,739
Receivables--
Students, net of allowance for
doubtful accounts of $455,
$1,516 and $3,800 at December
31, 1996 and 1997 and September
30, 1998, respectively......... 2,159 10,812 10,812 13,130
From former owners of acquired
businesses..................... 523 -- -- --
Stockholder..................... 100 -- -- --
Other........................... 120 1,346 1,346 1,297
Inventories....................... 213 634 634 658
Prepaid expenses and other current
assets........................... 725 1,598 1,598 3,728
Deferred offering costs........... -- 2,900 -- --
Deferred income tax assets........ 194 406 406 1,208
------- -------- -------- --------
Total current assets.......... 11,832 36,602 35,995 39,760
------- -------- -------- --------
PROPERTY AND EQUIPMENT, net of
accumulated depreciation and
amortization....................... 19,560 45,555 45,555 45,086
INTANGIBLE ASSETS, net.............. 3,407 33,579 33,579 44,169
OTHER ASSETS........................ 1,409 1,881 1,881 875
------- -------- -------- --------
TOTAL ASSETS........................ $36,208 $117,617 $117,010 $129,890
======= ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE>
CAREER EDUCATION CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS--(Continued)
(Dollars in thousands)
<TABLE>
<CAPTION>
December 31,
--------------------------
1997
------------------
Pro Forma
(Notes 2 September 30,
1996 Actual and 15) 1998
------- ------- ---------- -------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
LIABILITIES AND STOCKHOLDERS'
INVESTMENT
CURRENT LIABILITIES:
Current maturities of long-term
debt.............................. $ 2,676 $ 3,888 $ 3,888 $ 652
Book overdraft..................... 683 -- -- --
Accounts payable................... 502 3,580 3,580 4,549
Accrued expenses--
Payroll and related benefits..... 678 1,605 1,605 --
Accrued offering costs........... -- 2,447 -- --
Other............................ 1,658 3,800 3,800 7,557
Deferred tuition revenue........... 4,256 7,476 7,476 8,263
------- ------- ------- -------
Total current liabilities...... 10,453 22,796 20,349 21,021
------- ------- ------- -------
LONG-TERM DEBT, net of current
maturities shown above.............. 13,783 60,147 16,112 27,279
OTHER LONG-TERM LIABILITIES.......... -- 703 703 1,027
DEFERRED INCOME TAX LIABILITIES...... -- 1,215 1,215 587
COMMITMENTS AND CONTINGENCIES........
REDEEMABLE PREFERRED STOCK AND
WARRANTS
Redeemable Series A preferred
stock, $0.01 par value; 50,000
shares authorized; 7,852 shares
outstanding at December 31, 1996
and 1997, respectively, at
liquidation value (stated value
plus accumulated dividends), and
no shares outstanding at September
30, 1998.......................... 9,432 10,112 -- --
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, 1996
and 1997, at liquidation value
(stated value plus accumulated
dividends), and no shares
outstanding at September 30, 1998. 4,259 4,784 -- --
Redeemable Series D preferred
stock, $0.01 par value; 25,000
shares authorized; none and 22,500
shares outstanding at December 31,
1996 and 1997, at liquidation
value (stated value plus
accumulated dividends), and no
shares outstanding at September
30, 1998.......................... -- 22,175 -- --
Warrants exercisable into 257,690
shares of Class D common stock at
December 31, 1996, and 202,297
shares of Class D common stock at
December 31, 1997, at an exercise
price of $0.01 per share, at
estimated redemption value; and no
warrants outstanding at September
30, 1998.......................... 870 2,659 -- --
Warrants exercisable into 32,947
shares of Class E common stock at
December 31, 1997, at an exercise
price of $0.01 per share, at
estimated redemption value; and no
warrants outstanding at September
30, 1998.......................... -- 430 430 --
------- ------- ------- -------
Total redeemable preferred
stock and warrants............ 14,561 40,160 430 --
------- ------- ------- -------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
CAREER EDUCATION CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS--(Continued)
(Dollars in thousands)
<TABLE>
<CAPTION>
December 31,
-----------------------------
1997
--------------------
Pro Forma
(Notes 2 September 30,
1996 Actual and 15) 1998
------- -------- ---------- -------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
STOCKHOLDERS' INVESTMENT:
Class A common stock, $0.01 par
value; 5,625,600 shares
authorized; 49,224 shares
issued and outstanding at
December 31, 1996 and 1997; and
no shares outstanding at
September 30, 1998............. 1 1 -- --
Class B common stock, $0.01 par
value; 937,600 shares
authorized; 47,818 shares
issued and outstanding at
December 31, 1996 and 1997; and
no shares outstanding at
September 30, 1998............. -- 1 -- --
Class C common stock, $0.01 par
value; 937,600 shares
authorized; 655,382 shares
issued and outstanding at
December 31, 1996 and 1997; and
no shares outstanding at
September 30, 1998............. 7 7 -- --
Class D common stock, $0.01 par
value; 937,600 shares
authorized; no shares issued
and outstanding at , December
31, 1996 and 1997 and September
30, 1998....................... -- -- -- --
Class E common stock, $0.01 par
value; 1,875,200 shares
authorized; 15,452 and 16,380
shares issued and outstanding
at December 31, 1996 and 1997;
and no shares outstanding at
September 30, 1998............. -- -- -- --
Common stock, $0.01 par value;
50,000,000 shares authorized;
7,042,995 pro forma and
7,144,806 actual shares issued
and outstanding at December 31,
1997, and September 30, 1998... -- -- 70 71
Warrants........................ -- 4,777 -- --
Additional paid-in capital...... 60 71 90,392 95,084
Foreign currency translation.... -- (297) (297) (823)
Accumulated deficit............. (2,657) (11,964) (11,964) (14,356)
------- -------- -------- --------
Total stockholders'
investment................. (2,589) (7,404) 78,201 79,976
------- -------- -------- --------
TOTAL LIABILITIES AND
STOCKHOLDERS'
INVESTMENT....................... $36,208 $117,617 $117,010 $129,890
======= ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-5
<PAGE>
CAREER EDUCATION CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
For the Nine
For the Years Ended Months Ended
December 31, September 30,
------------------------- -----------------------
1995 1996 1997 1997 1998
------- ------- ------- ----------- -----------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C>
REVENUE:
Tuition and registration
fees, net................. $16,330 $29,269 $74,842 $45,615 $91,659
Other, net................. 3,066 4,311 7,756 5,152 8,257
------- ------- ------- ------- -------
Total net revenue...... 19,396 33,580 82,598 50,767 99,916
OPERATING EXPENSES:
Educational services and
facilities................ 8,565 14,404 34,620 22,269 41,419
General and
administrative............ 9,097 14,622 37,542 23,852 46,161
Depreciation and
amortization.............. 1,330 2,134 8,121 5,000 9,328
Compensation expense
related to the initial
public offering........... -- -- -- -- 1,961
------- ------- ------- ------- -------
Total operating
expenses.............. 18,992 31,160 80,283 51,121 98,869
------- ------- ------- ------- -------
Income from operations. 404 2,420 2,315 (354) 1,047
INTEREST EXPENSE............ 311 717 3,108 2,046 987
------- ------- ------- ------- -------
Income (loss) before
provision for income
taxes and
extraordinary item.... 93 1,703 (793) (2,400) 60
PROVISION (BENEFIT) FOR
INCOME TAXES............... 24 208 (331) (1,008) 25
------- ------- ------- ------- -------
Income (loss) before
extraordinary item........ 69 1,495 (462) (1,392) 35
EXTRAORDINARY LOSS ON EARLY
EXTINGUISHMENT OF DEBT,
net of taxes of $233....... -- -- (418) (418) --
------- ------- ------- ------- -------
NET INCOME (LOSS)........... $ 69 $ 1,495 $ (880) $(1,810) $ 35
======= ======= ======= ======= =======
INCOME (LOSS) ATTRIBUTABLE
TO COMMON STOCKHOLDERS:
Income (loss) before
extraordinary item........ $ 69 $ 1,495 $ (462) $(1,392) $ 35
Dividends on preferred
stock..................... (777) (1,128) (2,159) (1,444) (274)
Accretion to redemption
value of preferred stock
and warrants.............. (96) (230) (6,268) (727) (2,153)
------- ------- ------- ------- -------
Income (loss) before
extraordinary item
attributable to common
stockholders.......... (804) 137 (8,889) (3,563) (2,392)
Extraordinary loss......... -- -- (418) (418) --
------- ------- ------- ------- -------
Net income (loss)
attributable to common
stockholders.......... $ (804) $ 137 $(9,307) $(3,981) $(2,392)
======= ======= ======= ======= =======
INCOME (LOSS) PER SHARE
ATTRIBUTABLE TO COMMON
STOCKHOLDERS:
Basic--
Income (loss) before
extraordinary item...... $ (1.06) $ 0.18 $(11.58) $ (4.64) $ (0.38)
Extraordinary loss....... $ -- $ -- $ (0.54) $ (0.54) $ --
------- ------- ------- ------- -------
Net income (loss)...... $ (1.06) $ 0.18 $(12.12) $ (5.18) $ (0.38)
======= ======= ======= ======= =======
Diluted--
Income (loss) before
extraordinary item...... $ (1.06) $ 0.13 $(11.58) $ (4.64) $ (0.38)
Extraordinary loss....... $ -- $ -- $ (0.54) $ (0.54) $ --
------- ------- ------- ------- -------
Net income (loss)...... $ (1.06) $ 0.13 $(12.12) $ (5.18) $ (0.38)
======= ======= ======= ======= =======
WEIGHTED AVERAGE SHARES
OUTSTANDING:
Basic...................... 755 761 768 768 6,309
======= ======= ======= ======= =======
Diluted.................... 755 1,030 768 768 6,309
======= ======= ======= ======= =======
PRO FORMA (unaudited):
Income (loss) attributable
to common stockholders--
Income (loss) before
extraordinary item
attributable to common
stockholders, as
reported................ $ (804) $ 137 $(8,889) $(3,563) $(2,392)
Dividends on preferred
stock................... 777 1,128 2,159 1,444 274
Accretion to redemption
value of preferred stock
and warrants............ 96 230 6,100 698 2,055
------- ------- ------- ------- -------
Pro forma income (loss)
before extraordinary item
attributable to common
stockholders.............. $ 69 $ 1,495 $ (630) $(1,421) $ (63)
Extraordinary loss......... -- -- (418) (418) --
------- ------- ------- ------- -------
Pro forma net income
(loss) attributable to
common stockholders... $ 69 $ 1,495 $(1,048) $(1,839) $ (63)
======= ======= ======= ======= =======
Pro forma diluted income
(loss) per share
attributable to common
stockholders--
Income (loss) before
extraordinary item...... $ 0.05 $ 0.78 $ (0.20) $ (0.51) $ (0.01)
Extraordinary item....... $ -- $ -- $ (0.14) $ (0.15) $ --
------- ------- ------- ------- -------
Net income (loss)........ $ 0.05 $ 0.78 $ (0.34) $ (0.66) $ (0.01)
======= ======= ======= ======= =======
Pro forma diluted weighted
average number of common
and common stock
equivalent shares
outstanding............... 1,529 1,909 3,048 2,788 6,699
======= ======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-6
<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,
------------------------- -----------------------
1995 1996 1997 1997 1998
------ ------- -------- ----------- -----------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net income (loss)........ $ 69 $ 1,495 $ (880) $(1,810) $ 35
Adjustments to reconcile
net income (loss) to net
cash provided by (used
in) operating
activities--
Depreciation,
amortization and debt
discount.............. 1,351 2,188 8,239 5,083 9,328
Warrants issued to a
bank.................. -- -- 180 180 --
Deferred income taxes.. -- (208) (1,013) (1,008) (918)
Extraordinary loss on
early extinguishment
of debt............... -- -- 418 418 --
Compensation expense
related to the initial
public offering....... -- -- -- -- 1,961
Gain on sale of
property and
equipment............. -- -- -- -- (14)
Changes in operating
assets and
liabilities, net of
acquisitions--
Receivables, net..... (869) 385 (5,208) (6,116) (2,145)
Inventories, prepaid
expenses and other
current assets...... (213) (237) (3,959) (1,196) 975
Accounts payable..... 118 (138) 4,808 2,297 748
Accrued expenses and
other liabilities... (233) 752 392 (611) 279
Deferred tuition
revenue............. 12 1,038 (3,171) (1,982) (397)
------ ------- -------- ------- --------
Net cash provided by
(used in) operating
activities......... 235 5,275 (194) (4,745) 9,852
------ ------- -------- ------- --------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Business acquisitions,
net of cash............. (1,622) (8,250) (39,855) (36,054) (4,964)
Acquisition and
organizational costs.... (959) -- (1,516) (1,450) (244)
Purchase of property and
equipment, net.......... (897) (1,231) (3,822) (2,077) (3,449)
Other assets............. -- (37) (21) (6) (56)
Proceeds from sale of
property and equipment.. -- -- -- -- 332
------ ------- -------- ------- --------
Net cash used in
investing
activities......... (3,478) (9,518) (45,214) (39,587) (8,381)
------ ------- -------- ------- --------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Issuance of common stock. 30 -- 30 30 180
Issuance of warrants..... -- -- 4,789 4,788 --
Issuance of redeemable
preferred stock and
warrants................ 5,070 -- 17,556 17,782 --
Redemption of preferred
stock................... (200) -- -- -- --
Dividends paid on
preferred stock......... (207) (495) (495) (372) (47)
Equity and debt financing
costs................... (535) (553) (1,021) (1,190) (6,868)
Book overdraft........... -- 683 (683) (683) --
Payments of long-term
debt.................... (6,363) (1,309) (513) (276) (4,021)
Net proceeds (payments
on) from revolving
credit facility......... 6,771 1,500 (8,239) (8,239) --
Proceeds from term loan
facility................ -- 8,250 3,400 3,400 --
Repayments of term loan
facility................ -- -- (11,650) (11,650) --
Net proceeds (payments
on) from revolving loans
under Credit Agreement.. -- -- 39,985 25,885 (24,485)
Proceeds from issuance of
term loans under Credit
Agreement............... -- -- 15,000 12,500 --
Payments on term loans
under Credit Agreement.. -- -- (1,500) -- (13,500)
Proceeds from initial
public offering......... -- -- -- -- 52,440
Payments of amounts due
and notes payable to
former owners of
acquired businesses..... -- -- -- -- (4,050)
------ ------- -------- ------- --------
Net cash provided by
(used in) financing
activities......... 4,566 8,076 56,659 41,975 (351)
------ ------- -------- ------- --------
EFFECT OF EXCHANGE RATE
CHANGES ON CASH.......... -- -- (143) 7 (287)
------ ------- -------- ------- --------
NET INCREASE (DECREASE) IN
CASH..................... 1,323 3,833 11,108 (2,350) 833
CASH, beginning of year... 2,642 3,965 7,798 7,798 18,906
------ ------- -------- ------- --------
CASH, end of year......... $3,965 $ 7,798 $ 18,906 $ 5,448 $ 19,739
====== ======= ======== ======= ========
SUPPLEMENTAL DISCLOSURES
OF CASH FLOW INFORMATION:
Cash paid for--
Interest............... $ 327 $ 407 $ 3,008 $ 1,944 $ 1,234
Taxes, excluding a
refund of $900 in
1998.................. -- 80 2,446 2,306 974
====== ======= ======== ======= ========
NON-CASH INVESTING AND
FINANCING ACTIVITIES:
Accretion to redemption
value of preferred stock
and warrants............ $ 96 $ 230 $ 6,268 $ (727) $ (2,153)
Dividends on preferred
stock added to
liquidation value....... 570 632 1,663 (1,072) (227)
====== ======= ======== ======= ========
SUPPLEMENTAL DISCLOSURE OF
NON-CASH SHAREHOLDERS'
ACTIVITIES:
</TABLE>
On February 4, 1998, all Class A, B, C, and E common stockholders and all
series of redeemable preferred stockholders converted their shares into
3,849,304 shares of common stock in connection with the IPO. The value of the
redeemable preferred stock at the date on conversion was $38,775,752.
The accompanying notes are an integral part of these consolidated statements.
F-7
<PAGE>
CAREER EDUCATION CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' INVESTMENT
<TABLE>
<CAPTION>
Common Stock
-------------------------------------------------------------------------------------------------------------
Class A Class B Class C Class D Class E Common Stock
---------------- ---------------- ------------------ ---------------- ---------------- ------------------
5,625,600 $0.01 937,600 $0.01 937,600 $0.01 937,600 $0.01 1,875,200 $0.01 50,000,000 $0.01
Shares Par Shares Par Shares Par Shares Par Shares Par Shares Par
Authorized Value Authorized Value Authorized Value Authorized Value Authorized Value Authorized Value
---------- ----- ---------- ----- ---------- ------- ---------- ----- ---------- ----- ---------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, December
31, 1994......... 49,224 $ 492 47,818 $ 478 655,382 $ 6,554 -- $-- -- $ -- -- $ --
Issuance of
stock........... -- -- -- -- -- -- -- -- 7,726 78
Dividends paid.. -- -- -- -- -- -- -- -- -- -- -- --
Dividends on
preferred stock
for the year.... -- -- -- -- -- -- -- -- -- -- -- --
Preferred stock
and warrant
accretion....... -- -- -- -- -- -- -- -- -- -- -- --
Net income...... -- -- -- -- -- -- -- -- -- -- -- --
------- ----- ------- ----- -------- ------- --- ---- ------- ----- --------- -------
BALANCE, December
31, 1995......... 49,224 492 47,818 478 655,382 6,554 -- -- 7,726 78 -- --
Issuance of
stock........... -- -- -- -- -- -- -- -- 7,726 77 -- --
Dividends paid.. -- -- -- -- -- -- -- -- -- -- -- --
Dividends on
preferred stock
for the year.... -- -- -- -- -- -- -- -- -- -- -- --
Preferred stock
and warrant
accretion....... -- -- -- -- -- -- -- -- -- -- -- --
Net income...... -- -- -- -- -- -- -- -- -- -- -- --
------- ----- ------- ----- -------- ------- --- ---- ------- ----- --------- -------
BALANCE, December
31, 1996......... 49,224 492 47,818 478 655,382 6,554 -- -- 15,452 155 -- --
Issuance of
warrants........ -- -- -- -- -- -- -- -- -- -- -- --
Exercise of
warrants........ -- -- -- -- -- -- -- -- 928 9 -- --
Dividends paid.. -- -- -- -- -- -- -- -- -- -- -- --
Dividends on
preferred stock
for the period.. -- -- -- -- -- -- -- -- -- -- -- --
Preferred stock
and warrant
accretion....... -- -- -- -- -- -- -- -- -- -- -- --
Net loss........ -- -- -- -- -- -- -- -- -- -- -- --
------- ----- ------- ----- -------- ------- --- ---- ------- ----- --------- -------
BALANCE, December
31, 1997......... 49,224 492 47,818 478 655,382 6,554 -- -- 16,380 164 -- --
Preferred stock
and warrant
accretion....... -- -- -- -- -- -- -- -- -- -- -- --
Dividends paid.. -- -- -- -- -- -- -- -- -- -- -- --
Options granted. -- -- -- -- -- -- -- -- -- -- -- --
Conversion of
stock........... (49,224) (492) (47,818) (478) (655,382) (6,554) -- -- (16,380) (164) 3,849,304 38,493
Sales of common
stock........... -- -- -- -- -- -- -- -- -- -- 3,277,500 32,775
Options
exercised....... -- -- -- -- -- -- -- -- -- -- 18,002 180
Foreign currency
translation..... -- -- -- -- -- -- -- -- -- -- -- --
Net income...... -- -- -- -- -- -- -- -- -- -- -- --
------- ----- ------- ----- -------- ------- --- ---- ------- ----- --------- -------
BALANCE,
September 30,
1998 (Unaudited). -- $ -- -- $ -- -- $ -- -- $-- -- $ -- 7,144,806 $71,448
======= ===== ======= ===== ======== ======= === ==== ======= ===== ========= =======
<CAPTION>
Total
Amount
-------
<S> <C>
BALANCE, December
31, 1994......... $ 7,524
Issuance of
stock........... 78
Dividends paid.. --
Dividends on
preferred stock
for the year.... --
Preferred stock
and warrant
accretion....... --
Net income...... --
-------
BALANCE, December
31, 1995......... 7,602
Issuance of
stock........... 77
Dividends paid.. --
Dividends on
preferred stock
for the year.... --
Preferred stock
and warrant
accretion....... --
Net income...... --
-------
BALANCE, December
31, 1996......... 7,679
Issuance of
warrants........ --
Exercise of
warrants........ 9
Dividends paid.. --
Dividends on
preferred stock
for the period.. --
Preferred stock
and warrant
accretion....... --
Net loss........ --
-------
BALANCE, December
31, 1997......... 7,688
Preferred stock
and warrant
accretion....... --
Dividends paid.. --
Options granted. --
Conversion of
stock........... 30,805
Sales of common
stock........... 32,775
Options
exercised....... 180
Foreign currency
translation..... --
Net income...... --
-------
BALANCE,
September 30,
1998 (Unaudited). $71,448
=======
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-8
<PAGE>
CAREER EDUCATION CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' INVESTMENT (Continued)
<TABLE>
<CAPTION>
Warrants
---------- Foreign
Class E Additional Currency Total
Common Paid-in Translation Accumulated Stockholders'
Stock Capital Adjustment Deficit Investment
---------- ----------- ----------- ------------ -------------
<S> <C> <C> <C> <C> <C>
BALANCE, December 31,
1994................... $ -- $ -- $ -- $ (1,989,477) $(1,981,953)
Issuance of stock..... -- 29,904 -- -- 29,982
Dividends paid........ -- -- -- (206,800) (206,800)
Dividends on preferred
stock for the Year... -- -- -- (570,277) (570,277)
Preferred stock and
warrant accretion.... -- -- -- (95,822) (95,822)
Net income............ -- -- -- 68,543 68,543
---------- ----------- --------- ------------ -----------
BALANCE, December 31,
1995................... -- 29,904 -- (2,793,833) (2,756,327)
Issuance of stock..... -- 29,905 -- -- 29,982
Dividends paid........ -- -- -- (495,400) (495,400)
Dividends on preferred
stock for the Year... -- -- -- (632,417) (632,417)
Preferred stock and
warrant accretion.... -- -- -- (229,975) (229,975)
Net income............ -- -- -- 1,494,666 1,494,666
---------- ----------- --------- ------------ -----------
BALANCE, December 31,
1996................... -- 59,809 -- (2,656,959) (2,589,471)
Issuance of warrants.. 4,788,563 -- -- -- 4,788,563
Exercise of warrants.. (11,136) 11,127 -- -- --
Dividends paid........ -- -- -- (495,400) (495,400)
Dividends on preferred
stock for the Period. -- -- -- (1,663,137) (1,663,137)
Preferred stock and
warrant accretion.... -- -- -- (6,268,478) (6,268,478)
Net loss.............. -- -- -- (879,608) (879,608)
Foreign currency
translation.......... -- -- (296,602) -- (296,602)
---------- ----------- --------- ------------ -----------
BALANCE, December 31,
1997................... 4,777,427 70,936 (296,602) (11,963,582) (7,404,133)
Preferred stock and
warrant accretion.... -- -- -- (2,152,834) (2,152,834)
Dividends paid........ -- -- -- (274,208) (274,208)
Options granted....... -- 1,960,614 -- -- 1,960,614
Conversion of stock... (4,777,427) 47,286,372 -- -- 42,539,750
Sale of common stock.. -- 45,586,425 -- -- 45,619,200
Options exercised..... -- 179,682 -- -- 179,862
Foreign currency
translation.......... -- -- (526,685) -- (526,685)
Net income............ -- -- -- 34,856 34,856
---------- ----------- --------- ------------ -----------
BALANCE, September 30,
1998 (Unaudited)....... $ -- $95,084,029 $(823,287) $(14,355,768) $79,976,422
========== =========== ========= ============ ===========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-9
<PAGE>
CAREER EDUCATION CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995, 1996 and 1997
1. DESCRIPTION OF THE COMPANY
Career Education Corporation ("CEC", collectively with its subsidiaries "we"
or "our") was incorporated in January 1994, for the purpose of acquiring
operations of various for-profit postsecondary schools. We manage and operate
educational institutions acquired through our 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"), School of
Computer Technology, Inc. ("SCT"), The Katharine Gibbs Schools, Inc. ("Gibbs"),
IAMD, Limited and Subsidiaries ("IAMD") and International Academy of Design
(Canada) Ltd. and Subsidiary ("IAD").
Our Collins campus is located in Tempe, Arizona, and offers associate and
bachelor degrees in visual communications and a certificate in desktop
publishing. Our Brooks campus, located in Long Beach, California, offers
associate degrees in fashion design, fashion merchandising, interior design and
visual communications. Our 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. Our Brown campus is located in Mendota Heights,
Minnesota, and offers certificates and/or associate degrees in visual
communications, business administration, information systems management,
computer programming, electronics technology and radio/television broadcasting.
Our Western campus, located in Portland, Oregon, offers diplomas in culinary
arts. SCT is headquartered in Pittsburgh, Pennsylvania and has campuses in
Pittsburgh, Pennsylvania and Fairmont, West Virginia and offers associate
degrees and diplomas in computer technology, laser technology and specialized
culinary arts. Gibbs has campuses located in various cities throughout New
York, New Jersey, and New England and offers associate degrees in secretarial
arts, business administration and PC TEC. IAMD has campuses located in Chicago,
Illinois and Tampa, Florida. IAD has campuses located in Toronto, Canada and
Montreal, Canada. Both IAMD and IAD offer associate and bachelor degrees in
various fields of merchandising management, fashion design, interior design and
computer graphics.
2. INITIAL PUBLIC OFFERING
On February 4, 1998, we sold 3,277,500 shares of our common stock at $16.00
per share pursuant to an initial public offering ("IPO"). The net proceeds from
the offering of $45.6 million were used to repay borrowings under the Credit
Agreement (Note 5) totaling $41.5 million and amounts owed to former owners of
acquired businesses of $4.1 million (Note 5) which were outstanding at that
time. Prior to the consummation of the IPO, all outstanding shares of all
series of preferred stock and accumulated dividends were converted into
2,423,485 shares of common stock and warrants (except for redeemable warrants
exercisable into 32,947 shares of Class E common stock) to purchase 624,320
shares of common stock were exercised. Subsequent to December 31, 1997 and
prior to the consummation of the IPO, we also authorized one class of preferred
stock and one class of common stock, increased the number of authorized shares
of common stock to 50,000,000 and completed a 9.376-for-1 stock split. The
effect of the split has been retroactively reflected for all periods presented
in the accompanying consolidated financial statements.
3. SIGNIFICANT ACCOUNTING POLICIES
The financial statements for the nine months ended September 30, 1998 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
F-10
<PAGE>
CAREER EDUCATION CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1995, 1996 and 1997
September 30 1998 is not necessarily indicative of results that may be expected
for the fiscal year ended December 31, 1998. Our principal accounting policies
are as follows:
a. Principles of Consolidation
The consolidated financial statements include the accounts of CEC and our
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
We extend unsecured credit for tuition to a significant portion of the
students who are in attendance at the campuses operated by our subsidiaries. A
substantial portion of credit extended to students is repaid through the
students' participation in various federally funded financial aid programs
under Title IV of the Higher Education Act of 1965, as amended ("Title IV
Programs"). The following table presents the amounts and percentages of the
Company's U.S. institutions' cash receipts collected from Title IV Programs for
the years ended December 31, 1995, 1996 and 1997 (such amounts were determined
based upon each U.S. institution's cash receipts for the twelve-month period
ended December 31, pursuant to the regulations of the United States Department
of Education ("DOE") at 34 C.F.R. (S) 600.5):
<TABLE>
<CAPTION>
For the Years Ended December 31,
-----------------------------------
1995 1996 1997
----------- ----------- -----------
<S> <C> <C> <C>
Total Title IV funding............... $17,885,111 $26,931,030 $54,963,232
Total cash receipts.................. $26,380,681 $38,036,509 $85,046,951
Total Title IV funding as a
percentage of total cash receipts... 68% 71% 65%
</TABLE>
We generally complete and approve the financial aid packet of each student
who qualifies for financial aid prior to the student's beginning class in an
effort to enhance the collectibility of our unsecured credit. Transfers of
funds from the financial aid programs are made in accordance with DOE
requirements. Changes in DOE funding of Title IV Programs could impact our
ability to attract students.
c. Marketing and Advertising Costs
Marketing and advertising costs are expensed as incurred. Marketing and
advertising costs included in general and administrative expenses were
$2,715,000, $3,494,000 and $10,640,000 for the years ended December 31, 1995,
1996 and 1997, respectively.
d. Inventories
Inventories consisting principally of program materials, books and supplies
are stated at the lower of cost, determined on a first-in, first-out basis, or
market.
e. Property and Equipment
Property and equipment are stated at cost. Depreciation and amortization are
recognized utilizing the straight-line method over the useful lives of the
related assets. Leasehold improvements and assets recorded under capital leases
are amortized on a straight-line basis over their estimated useful lives or
lease terms,
F-11
<PAGE>
CAREER EDUCATION CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1995, 1996 and 1997
whichever is shorter. Maintenance, repairs and minor renewals and betterments
are expensed; major improvements are capitalized. The estimated cost basis and
useful lives of property and equipment at December 31, 1996 and 1997, are as
follows (dollars in thousands):
<TABLE>
<CAPTION>
December 31,
---------------
1996 1997 Life
------- ------- ----------
<S> <C> <C> <C>
Buildings..................................... $ 350 $ 1,190 31 years
Classroom equipment, courseware and other
instructional materials...................... 17,905 38,882 3-15 years
Furniture, fixtures and equipment............. 2,926 8,888 3-10 years
Leasehold improvements........................ 1,296 3,841 1-7 years
Vehicles...................................... 40 17 5 years
------- -------
22,517 52,818
Less--Accumulated depreciation and
amortization................................. 2,957 7,263
------- -------
$19,560 $45,555
======= =======
</TABLE>
The gross cost of assets recorded under capital leases included above
amounts to $39,000 and $2,075,000 at December 31, 1996 and 1997, respectively.
f. Intangible Assets
Intangible assets include the excess of cost over fair market value of
identifiable assets acquired through the business purchases described in Note
4. Goodwill and student contracts are being amortized on a straight-line basis
over their estimated useful lives. Covenants not-to-compete entered into before
1997 are being amortized on a straight-line basis over their useful lives.
Those entered into after 1996 are being amortized on an accelerated method over
their estimated useful lives. At December 31, 1996 and 1997, the cost basis and
useful lives of intangible assets consist of the following (dollars in
thousands):
<TABLE>
<CAPTION>
December 31,
-------------- Estimated
1996 1997 Lives
------ ------- ---------
<S> <C> <C> <C>
Goodwill......................................... $3,470 $24,358 40 years
Covenants not-to-compete......................... 500 13,250 3-5 years
Student contracts................................ 1,107 -- 1 year
------ -------
5,077 37,608
Less--Accumulated amortization................... 1,670 4,029
------ -------
$3,407 $33,579
====== =======
</TABLE>
On an ongoing basis, we review 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, we will
recognize an impairment loss if the undiscounted future cash flows expected to
be generated by the asset (or acquired business) are less than the carrying
value of the related asset. The impairment loss would adjust the asset to its
fair value.
g. Revenue Recognition
Revenue is derived primarily from courses taught at our schools. Tuition
revenue is recognized on a straight-line basis over the length of the
applicable course. Dormitory and cafeteria revenues charged to
F-12
<PAGE>
CAREER EDUCATION CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1995, 1996 and 1997
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
the refund due to the student. Refunds are calculated in accordance with
federal, state and accrediting agency standards. Deferred tuition revenue
represents the portion of payments received but not earned and is reflected as
a current liability in the accompanying consolidated balance sheets as such
amount is expected to be earned within the next year.
h. Management's Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make certain estimates
and assumptions that affect the reported amounts of assets and liabilities and
the disclosure of contingent liabilities at the date of the financial
statements and reported amounts of revenues and expenses during the reported
period. Actual results could differ from those estimates.
i. Income Taxes
We file a consolidated federal income tax return and provide for deferred
income taxes under the asset and liability method of accounting. This method
requires the recognition of deferred income taxes based upon the tax
consequences of "temporary differences" by applying enacted statutory tax rates
applicable to future years to differences between the financial statement
carrying amounts and the tax basis of existing assets and liabilities.
j. Fair Value of Financial Instruments
The carrying value of current assets and liabilities reasonably approximates
their fair value due to their short maturity periods. The carrying value of our
debt obligations reasonably approximates their fair value as the stated
interest rate approximates current market interest rates of debt with similar
terms.
k. Accretion to Redemption Value of Preferred Stock and Warrants
Accretion to redemption value of redeemable preferred stock and warrants
represents the change in the redemption value of outstanding preferred stock
and warrants, which is being accreted over the earliest period redemption can
occur using the effective interest method. The redemption values are based on
the estimated fair market values of the classes of stock and consider the
amounts we have received for the sale of equity instruments, prices paid for
acquired businesses and our operations.
l. Income (Loss) Per Share Attributable to Common Stockholders
In February 1997, the Financial Accounting Standards Board issued Financial
Accounting Standard No. 128 ("SFAS No. 128"), addressing earnings per share.
SFAS No. 128 changed the methodology of calculating earnings per share and
renamed the two calculations to basic earnings per share and diluted earnings
per share. The calculations primarily differ by excluding dilutive common stock
equivalents and convertible securities (such as stock options, warrants, and
convertible preferred stock) using the treasury method, when computing basic
earnings per share. We adopted SFAS No. 128 in December 1997 and have
retroactively restated all periods presented. The weighted average number of
common shares used in determining basic and diluted
F-13
<PAGE>
CAREER EDUCATION CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1995, 1996 and 1997
income (loss) per share attributable to common stockholders for the years ended
December 31, 1995, 1996 and 1997 is as follows (in thousands):
<TABLE>
<CAPTION>
For the Years
Ended December
31,
---------------
1995 1996 1997
---- ----- ----
<S> <C> <C> <C>
Common shares outstanding (basic)......................... 755 761 768
Common stock equivalents.................................. -- 269 --
--- ----- ---
Diluted................................................... 755 1,030 768
=== ===== ===
</TABLE>
For the years ending December 31, 1995 and 1997, antidilutive options and
warrants excluded from diluted weighted average number of common shares
outstanding were 112,906 and 568,332, respectively.
Supplemental pro forma diluted income (loss) before extraordinary item and
net loss per share attributable to common stockholders, had the debt retirement
in connection with the consummation of the IPO occurred at the beginning of the
year, would have been $(2.59) and $(2.73), respectively, for the year ended
December 31, 1997. This earnings per share data is computed based upon the pro
forma loss before extraordinary item and after the extraordinary item
attributable to common stockholders adjusted for the reduction in interest
expense resulting from the application of net proceeds from the IPO to reduce
our indebtedness and pro forma weighted average number of shares of common
stock outstanding which reflect our assumed sale of approximately 2,314,688
shares of common stock in the IPO resulting in net proceeds sufficient to pay
indebtedness as described in Note 2 (after considering certain cash on hand) in
1997.
m. Pro Forma Diluted Loss per Share Attributable to Common Stockholders
Pro forma diluted loss before extraordinary item and net loss per share
attributable to common stockholders is based on the weighted average number of
shares of common stock and common stock equivalents outstanding after giving
retroactive adjustments for (i) the stock split described in Notes 2 and 6 for
all periods presented, (ii) shares of redeemable preferred stock converted into
shares of common stock (determined by dividing the liquidation value, including
paid-in-kind dividends, by the initial public offering price of $16.00 per
share), (iii) the exercise of warrants to purchase shares of common stock, (iv)
the conversion of all existing classes of common stock into a single new class
of common stock and (v) common stock equivalents (if dilutive). Common stock
equivalents represent stock options and warrants using the treasury stock
method for all periods presented.
Supplemental pro forma diluted loss before extraordinary item and net loss
per share attributable to common stockholders, had the debt retirement in
connection with the consummation of the IPO occurred at the beginning of the
year and after considering the conversion of preferred stock and exercise of
warrants, would have been $(1.49) and $(1.57), respectively, for the year ended
December 31, 1997.
n. Stock-Based Compensation
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-
Based Compensation" ("SFAS No. 123"), was issued in October, 1995 by the
Financial Accounting Standards Board. SFAS No. 123 provides an alternative
method of accounting for stock-based compensation arrangements, based on fair
value of the stock-based compensation utilizing various assumptions regarding
the underlying attributes of the options and stock, rather than the existing
method of accounting for stock-based compensation which is provided in
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" ("APB No. 25").
F-14
<PAGE>
CAREER EDUCATION CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1995, 1996 and 1997
The Financial Accounting Standards Board encourages entities to adopt the fair-
value based method but does not require adoption of this method. We will
continue our current accounting policy and have adopted the disclosure-only
provisions of SFAS No. 123 for options and warrants issued to employees and
directors. Expense associated with stock options and warrants issued to non-
employees/non-directors is recorded in accordance with SFAS No. 123.
o. Accounting Pronouncements to Be Adopted During 1998
Comprehensive Income
In June 1997, the Financial Accounting Standards Board issued SFAS No. 130,
"Reporting Comprehensive Income" ("SFAS No. 130"), which establishes standards
for the 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. We will adopt SFAS No. 130
in 1998. As of December 31, 1997, the impact of adopting this pronouncement has
not been determined; however, we will be affected by it because we maintain 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 we
evaluate regularly 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. We will adopt
SFAS No. 131 in 1998. We believe that the adoption of SFAS No. 131 will not
have a material impact on our future results.
p. Foreign Currency Translation
We acquired IAD, an entity with operations in Canada, on June 30, 1997. At
December 31, 1997, revenues and expenses related to these operations have been
translated at average exchange rates in effect at the time the underlying
transactions occurred. Transaction gains or losses are included in income.
Assets and liabilities of this subsidiary have been translated at the year-end
exchange rate, with gains and losses resulting from such translation being
included in stockholders' investment at December 31, 1997.
4. BUSINESS ACQUISITIONS
Western
On October 21, 1996, we 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
F-15
<PAGE>
CAREER EDUCATION CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1995, 1996 and 1997
values at the date of the acquisition. The purchase price, as adjusted, of
approximately $7,477,000 exceeded the fair market value of net assets acquired,
resulting in goodwill of approximately $646,000. In connection with the
purchase, the former owner of the school entered into a four-year covenant not-
to-compete agreement with us for a total price of $400,000.
At closing, we paid $7,000,000 to the former owner with funds obtained
through bank financing, assumed a $150,000 obligation and deposited $1,250,000
into escrow. At December 31, 1996, we estimated that the former owner owed us
approximately $523,000 as a result of purchase price adjustments and have
reflected such amount as due from former owners of acquired businesses in the
accompanying December 31, 1996 consolidated balance sheet. This amount was
collected in January 1997.
SCT
On February 28, 1997, through SCT Acquisition, Ltd., we acquired 100% of the
outstanding shares of capital stock of School of Computer Technology, Inc. This
acquisition was accounted for as a purchase and, accordingly, the acquired
assets and assumed liabilities have been recorded at their estimated fair
market values at the date of the acquisition. The purchase price, as adjusted,
of approximately $4,944,000 exceeded the estimated fair market value of net
assets acquired and liabilities assumed, resulting in goodwill of approximately
$3,111,000. In connection with the purchase, we entered into a three-year
covenant not-to-compete agreement with each of the former owners of the school
for a total price of $1,750,000.
At closing, we paid $400,000 to the former owners, deposited $5,000,000 into
escrow, and assumed a $1,800,000 note payable due to the former owners. Funds
paid were raised through the issuance of $2,000,000 of Series D preferred stock
and warrants and $3,400,000 of bank borrowings. The note, secured by letters of
credit, bears interest payable quarterly at 7% per annum and is due February
28, 2001.
Gibbs
On May 31, 1997, we acquired 100% of the outstanding shares of capital stock
of The Katharine Gibbs Schools, Inc. The Katharine Gibbs Schools, Inc. has
seven wholly-owned subsidiaries, each of which owns and operates separate
campuses. This acquisition was accounted for as a purchase and, accordingly,
the acquired assets and assumed liabilities have been recorded at their
estimated fair market values at the date of the acquisition. The estimated fair
market values of certain assets are based upon preliminary appraisal reports.
The purchase price, as adjusted, of approximately $19,029,000 exceeded the fair
market value of net assets acquired and liabilities assumed, resulting in
goodwill of approximately $8,434,000. In connection with the purchase, we also
entered into a covenant not-to-compete agreement with the former owner of the
schools 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, we paid $5,400,000 to the former owner and deposited $18,850,000
into escrow with borrowings of $12,500,000 from a new bank financing
arrangement and $15,000,000 which was raised through the issuance of Series D
preferred stock.
IAMD
On June 30, 1997, through IAMD, Acquisition I, Ltd. we acquired 100% of the
outstanding shares of capital stock of IAMD for $3,000,000. Subsequent to the
purchase, IAMD Acquisition I, Ltd. merged with and into IAMD and assumed its
name. The purchase price may be increased by up to $5,000,000 based upon the
F-16
<PAGE>
CAREER EDUCATION CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1995, 1996 and 1997
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 generated revenue of $7,493,000 for
the year ended June 30, 1997 (see Note 16 for subsequent event). This
acquisition was accounted for as a purchase and, accordingly, the acquired
assets and assumed liabilities have been recorded at their estimated fair
market values at the date of the acquisition. The estimated fair market values
of certain assets are based upon preliminary appraisal reports. The purchase
price, subject to certain modifications, exceeded the fair market value of net
assets acquired and liabilities assumed, resulting in goodwill of approximately
$3,695,000.
In connection with the purchase, we also entered into covenant not-to-
compete agreements with the former owners of the school 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, we paid $100,000 to the former owners, issued $1,500,000
in notes payable to the former owners and issued letters of credit totaling
$3,400,000 to secure amounts owed to the former owners to consummate these
transactions. The funds to consummate these transactions were obtained through
the issuance of Series D preferred stock and warrants and bank borrowings. The
notes, secured by letters of credit, bear interest payable quarterly at 7% per
annum, and were paid upon the consummation of the IPO (Note 2).
IAD
On June 30, 1997, we purchased 100% of the capital stock of IAD for
$6,500,000. This acquisition was accounted for as a purchase and, accordingly,
the acquired assets and assumed liabilities have been recorded at their
estimated fair market values at the date of the acquisition. The estimated fair
market values of certain assets are based upon preliminary appraisal reports.
The purchase price, subject to certain modifications, exceeded the fair market
value of net assets acquired and liabilities assumed, resulting in goodwill of
approximately $5,648,000.
In connection with the purchase, we entered into covenant not-to-compete
agreements with the former owners of the school 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, we paid $3,820,000 to the former owners, deposited
$2,120,000 into escrow, and issued $2,550,000 in notes payable to the former
owners to consummate these transactions. The funds to consummate these
transactions were obtained through the issuance of Series D preferred stock and
warrants and bank borrowings. The notes are secured by letters of credit, bear
interest payable quarterly at 7% per annum, and were paid upon consummation of
the IPO (Note 2).
Pro Forma Results of Operations
The following unaudited pro forma results of operations (in thousands,
except per share amounts) for the years ended December 31, 1995, 1996 and 1997,
assume that the business acquisitions subsequent to January 1, 1996 described
above occurred at the beginning of the year preceding the year of the
acquisition. The
F-17
<PAGE>
CAREER EDUCATION CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1995, 1996 and 1997
pro forma results below are based on historical results of operations, include
adjustments for depreciation, amortization, interest and taxes and do not
necessarily reflect actual results that would have occurred.
<TABLE>
<CAPTION>
For the Years Ended
December 31
-------------------------
1995 1996 1997
------- ------- --------
(Unaudited)
<S> <C> <C> <C>
Net revenue......................................... $32,175 $87,476 $106,467
Income (loss) before extraordinary item............. 1,137 (5,051) (3,506)
Net income (loss)................................... 1,137 (5,051) (3,924)
Income (loss) before extraordinary item attributable
to common stockholders............................. 264 (6,409) (11,933)
Net income (loss) attributable to common
stockholders....................................... 264 (6,409) (12,351)
======= ======= ========
Basic income (loss) per share attributable to common
stockholders--
Income (loss) before extraordinary item........... $ 0.35 $ (8.42) $ (15.53)
======= ======= ========
Net income (loss)................................. $ 0.35 $ (8.42) $ (16.08)
======= ======= ========
Diluted income (loss) per share attributable to
common stockholders--
Income (loss) before extraordinary item........... $ 0.30 $ (8.42) $ (15.53)
======= ======= ========
Net income (loss)................................. $ 0.30 $ (8.42) $ (16.08)
======= ======= ========
</TABLE>
5. DEBT
Our long-term debt at December 31, 1996 and 1997, consists of the following:
<TABLE>
<CAPTION>
December 31
---------------
1996 1997
------- -------
(in thousands)
<S> <C> <C>
Borrowings under Credit Agreement with a syndicate of banks as
discussed below--
Revolving loans.............................................. $ -- $39,985
Term loans................................................... -- 13,500
Revolving credit notes with a bank, as discussed below, net of
debt discount of $57,000...................................... 8,182 --
Bank term loan, as discussed below............................. 8,250 --
Notes payable to former owners of SCT, secured by bank letters
of credit, bearing annual interest of 7%, interest only
payable quarterly, principal due February 28, 2001............ -- 1,800
Notes payable to former owners of IAMD, secured by bank letters
of credit, bearing annual interest of 7%, interest only
payable quarterly, repaid in connection with the consummation
of the IPO.................................................... -- 1,500
Amounts due to former owners of IAMD, currently payable, non-
interest-bearing, secured by bank letters of credit........... -- 3,400
Notes payable to former owners of IAD, secured by bank letters
of credit, bearing annual interest of 7%, interest only
payable quarterly, repaid in connection with the consummation
of the IPO.................................................... -- 2,550
Equipment under capital leases, secured by related equipment,
discounted at a weighted average interest rate of 9.58%....... 27 1,279
Other.......................................................... -- 21
------- -------
16,459 64,035
Less--Current portion.......................................... 2,676 3,888
------- -------
$13,783 $60,147
======= =======
</TABLE>
F-18
<PAGE>
CAREER EDUCATION CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1995, 1996 and 1997
On May 30, 1997, we 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 our previous
credit agreement. On September 25, 1997, the Credit Agreement was amended and
syndicated. We can borrow, under the amended Credit Agreement, 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 can obtain up to $30,000,000 in outstanding
letters of credit. Outstanding letters of credit reduce the revolving credit
facility availability under the amended Credit Agreement. The amended Credit
Agreement matures on May 30, 2002; however, availability under the revolving
credit facility is reduced by $10,000,000 on May 30, 2001. The Term Loan is
payable in equal quarterly installments of $750,000. Borrowings under the
amended Credit Agreement bear interest, payable quarterly, at the Base Rate
(defined as the greater of the bank's prime rate plus 0.75%, 9.25% at December
31, 1997, or the Federal Funds Rate plus 0.50%, 7.00% at December 31, 1997) or
at LIBOR plus 2% (7.84% at December 31, 1997), at our election. Interest rates
are subject to change based upon our funded debt levels relative to
consolidated earnings before interest, taxes, depreciation and amortization on
a pro forma basis for the last four fiscal quarters. We are also required to
pay annual commitment fees of 0.375% on unused availability (Note 16).
At December 31, 1997, we had outstanding, $39,985,000 in revolving credit
borrowings, a $13,500,000 term loan and outstanding letters of credit totaling
approximately $25,005,000 (to meet certain Department of Education financial
responsibility requirements and to guarantee certain purchase price payments)
under the Credit Agreement. At December 31, 1997, borrowings totaling
$17,485,000 were at the bank's prime rate plus 0.75%, and borrowings totaling
$36,000,000 were at LIBOR plus 2%.
During 1995, we entered into a credit agreement (the "Agreement") with a
bank. The Agreement permitted us 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, we also issued warrants to purchase 20,618
shares of Class D common stock and recorded a debt discount of $79,977 for the
value of the warrants. The debt discount is amortized over the five year
maturity of the related debt. On May 30, 1997, in connection with entering into
the Credit Agreement and prepaying all amounts outstanding under the Agreement,
we expensed the remaining unamortized debt discount totaling $51,000,
prepayment penalty fees totaling $294,000 and the remaining unamortized
deferred financing costs totaling $306,000. The loss on the early
extinguishment of debt of $651,000, net of related tax benefit of $233,000, has
been reflected as an extraordinary item in the accompanying consolidated
statement of operations for the year ended December 31, 1997.
At December 31, 1996, we 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
under the Agreement). 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, we had $8,250,000 outstanding under the term loan.
CEC and our subsidiaries have collectively guaranteed repayment of amounts
outstanding under the Credit Agreement. In addition, we have pledged the stock
of our subsidiaries as collateral for repayment of the debt. We may voluntarily
make principal prepayments. Mandatory principal prepayments are required if we
generate
F-19
<PAGE>
CAREER EDUCATION CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1995, 1996 and 1997
excess cash flows, as defined, sell certain assets, or upon the occurrence of
certain other events. Under the Credit Agreement we are limited in our ability
to take certain actions, including paying dividends, as defined, selling or
disposing of certain assets or subsidiaries, making annual rental payments in
excess of $14,000,000, and issuing subordinated debt in excess of $5,000,000,
among other things. We are required to maintain certain financial ratios,
including a quarterly fixed coverage ratio of at least 1.25:1, a quarterly
interest coverage ratio of at least 3:1, certain levels of consolidated
tangible net worth, consolidated net worth, and funded debt to consolidated
earnings before interest, taxes, depreciation, and amortization, on a pro forma
basis for the last four fiscal quarters, of 3.75:1 through June 30, 1998, among
others. At December 31, 1997, we were either in compliance with or had obtained
a waiver for the covenants of the Credit Agreement, as amended.
We intend to refinance amounts owed to former owners of acquired businesses
as noted above through availability under our Credit Agreement and, therefore,
such amounts have been classified as long-term.
At December 31, 1997, future annual principal payments of long-term debt are
as follows (in thousands):
<TABLE>
<S> <C>
1998............................. $ 3,888
1999............................. 3,300
2000............................. 3,070
2001............................. 8,869
2002............................. 44,908
-------
$64,035
=======
</TABLE>
6. STOCKHOLDERS' INVESTMENT
In connection with the consummation of the IPO on February 4, 1998, we
amended and restated our certificate of incorporation to authorize a total of
50,000,000 shares of common stock ("Common Stock") and authorize 1,000,000
shares of preferred stock and converted all classes of common stock described
below into one class of Common Stock, with a par value of $0.01, at a rate of
9.376 shares of Common Stock for every share of existing common stock. The
shares of common stock disclosed in these financial statements and notes hereto
retroactively reflect this split.
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, we 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, we 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-20
<PAGE>
CAREER EDUCATION CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1995, 1996 and 1997
Preferred Stock
In connection with the IPO consummated on February 4, 1998, all classes of
redeemable preferred stock described in Note 7 were converted into 2,423,485
shares of common stock by dividing the liquidation value on that date
(including all accrued paid-in-kind dividends) of preferred stock by $16.00,
the initial public offering price of the common stock. We also authorized
1,000,000 shares of Preferred Stock with a par value of $0.01 per share.
7. Redeemable Preferred Stock
Subsequent to year-end, all shares of redeemable preferred stock described
below were converted into Common Stock in connection with the IPO, as discussed
in Notes 2 and 6.
Series A
Series A preferred stock has a stated value of $1,000 per share, and its
holders are entitled to receive dividends at an annual rate of 7% of the
liquidation value per share ($1,000 per share plus dividends as defined).
Dividends are paid in equal semiannual installments on January 31 and July 31
of each year by increasing the liquidation value of the Series A preferred
stock. The mandatory redemption value of the Series A preferred stock has been
increased to reflect these dividends.
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. We may
call the Series B preferred stock at any time and we are required to redeem
them at their liquidation value ($1,000 per share) on August 31, 2003. At
December 31, 1997, there were no shares of Series B preferred stock issued or
outstanding.
Series C
Series C preferred stock has a stated value of $1,000 per share, and its
holders are entitled to receive cash dividends at an annual rate of 10% of the
liquidation value per share ($1,000 per share plus undeclared dividends as
defined). Dividends are payable in equal quarterly installments on each March
31, June 30, September 30 and December 31. To the extent dividends are declared
and not paid, they are added to the liquidation value. The Company has paid all
dividends through December 31, 1997 on Series C preferred stock.
In July 1995, we issued shares of Series C preferred stocks and redeemable
warrants described in Note 8. The proceeds, totaling $5,000,000, have been
allocated to preferred stock and warrants based upon their relative market
values after considering issuance costs.
In July 1996, we increased the number of authorized shares of Series C
preferred stock and completed a 10-for-1 stock split. The stock split has been
retroactively reflected in the accompanying financial statements.
Series D
Series D preferred stock has a stated value of $1,000 per share, and its
holders are entitled to receive dividends at an annual rate of 7% of the
liquidation value per share ($1,000 per share plus dividends, as defined).
Dividends are paid in equal semiannual installments on January 31 and July 31
of each year by increasing the liquidation value of the Series D preferred
stock. The mandatory redemption value of the Series D preferred stock has been
increased to reflect these dividends.
F-21
<PAGE>
CAREER EDUCATION CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1995, 1996 and 1997
On February 28, 1997, we entered into a securities purchase agreement with
existing common and preferred stockholders to raise funds for acquisitions. The
securities purchase agreement gives the stockholders the right to purchase up
to 7,500 shares of Series D preferred stock for $1,000 per share and receive
warrants, currently exercisable, for the purchase of 83,671 shares of Class E
common stock at an exercise price of $.01 per share.
Under the February 28, 1997, securities purchase agreement, we issued 2,000
shares of Series D preferred stock and warrants to purchase 22,315 shares of
Class E common stock to existing stockholders in connection with the
acquisition of SCT. On May 30, 1997, we issued the remaining 5,500 shares of
Series D preferred stock and warrants to purchase 61,357 shares of Class E
common stock to existing stockholders. The proceeds (totaling $7,500,000) were
used for the acquisition of SCT and Gibbs and have been allocated to preferred
stock and warrants based upon their relative market values after considering
issuance costs.
On May 30, 1997, we also entered into another securities purchase agreement
with existing common and preferred stockholders to raise funds for additional
acquisitions. The securities purchase agreement gives them the right to
purchase up to an additional 15,000 shares of Series D preferred stock for
$1,000 per share and receive warrants, currently exercisable, for the purchase
of 339,280 shares of Class E common stock at an exercise price of $.01 per
share.
Under the May 30, 1997, securities purchase agreement, we issued 15,000
shares of Series D preferred stock and warrants to purchase 339,280 shares of
Class E common stock to existing stockholders in connection with the
acquisitions of Gibbs, IAMD and IAD. The proceeds, totaling $15,000,000, have
been allocated to preferred stock and warrants based upon their relative market
values after considering issuance costs.
8. REDEEMABLE WARRANTS
In connection with the issuance of Series C preferred stock during 1995, we
issued warrants exercisable into 237,072 shares of Class D common stock. These
warrants, which are exercisable at any time, have an exercise price of $.01 per
share and expire in July 2005. The number of warrants is subject to adjustment
upon the occurrence of certain events. In any event, the total number of shares
the warrant may be exercised into may not be reduced by more than 92,766
shares. Based upon the results of operations through December 31, 1997, the
total number of shares of Class D common stock into which these warrants are
exercisable was adjusted to be 202,297. Subsequent to year-end, these warrants
were exercised in connection with the IPO (Note 2). We are accreting the
difference between the value of the warrants at the date of issuance and the
IPO date using the effective interest method.
In connection with the credit agreement we entered into during 1995 (Note
5), we issued warrants exercisable into 20,618 shares of Class D common stock.
The warrants, which are exercisable at any time, have an exercise price of $.01
per share and expire in July 2005. The number of warrants is subject to
adjustment under certain circumstances. Based upon the terms and provisions of
the credit and warrant agreements, we 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 our common stock at the date
the warrants were issued (considering its recent sale of stock to third
parties) and the period the warrants can be exercised. In connection with the
sales of Series D preferred stock through the various securities purchase
agreements, the outstanding warrants to purchase 20,618 shares of Class D
common stock were exchanged for warrants (with similar put and call features)
to purchase 20,618 shares of Class E common stock and also increased to include
additional warrants to purchase 12,329 shares of Class E common stock. The
value of these additional warrants, totaling
F-22
<PAGE>
CAREER EDUCATION CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1995, 1996 and 1997
approximately $180,000 (based upon a Black-Scholes option pricing model with
assumptions as described in Note 9) was recorded as interest expense in 1997.
On January 22, 1998, the holder of warrants to purchase 32,947 shares of
Common Stock notified us that it was exercising its right to cause us to
repurchase the warrants. We determined that the appropriate purchase price for
the warrants was approximately $525,000 and offered to pay such amount to the
holder of the warrants. This offer has not yet been accepted (See Note 16 for
subsequent event). To the extent that we are required to purchase the warrants
for an amount in excess of $525,000, such excess amount would be reflected as
additional accretion to the redemption value of these warrants when calculating
our earnings per share attributable to the common stockholders. The difference
between the value of the warrants at the date of issuance and their currently
estimated value is being accreted using the effective interest method.
9. STOCK OPTIONS AND WARRANTS
Stock Options
During 1994, certain stockholders were granted options to purchase up to a
total of approximately 13.5% of the outstanding shares of our 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 20,618 shares of common stock
at $0.01 per share. The supplemental option vests over a five year period.
Under the supplemental option agreement, additional options to purchase a total
of 8,579 shares of common stock at an exercise price of $0.01 per share were
issued in 1997. These options vest over the same period as the initial
supplemental option. At December 31, 1996, and 1997, 8,251 and 17,514 of the
supplemental options, respectively, had vested.
On October 20, 1997, the original option agreements were further amended to
fix the number of shares that the stockholders may exercise only upon
completion of the IPO. Under these amended agreements, in addition to the
options issued under the supplemental option agreement, the stockholders may
purchase an aggregate of 122,615 shares of our common stock at any time after
the IPO closing, but prior to January 1, 2004. The options (other than the
supplemental options) fully vested upon the IPO closing. We recorded
compensation expense of approximately $2.0 million in February 1998 related to
these agreements.
During 1995, we adopted the 1995 Stock Option Plan. Under this plan we can
grant up to 160,568 options exercisable into shares of Class E common stock to
certain members of management. The options vest and become exercisable in five
equal annual installments commencing with the first anniversary of the grant,
and expire 10 years from the date of grant, or earlier under certain
circumstances. Options issued under the 1995 Stock Option Plan to purchase
92,101 shares of common stock were fully vested upon the consummation of the
IPO.
F-23
<PAGE>
CAREER EDUCATION CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1995, 1996 and 1997
Stock option activity under our 1995 Stock Option Plan for the years ended
December 31, 1995, 1996 and 1997, was as follows:
<TABLE>
<CAPTION>
Weighted
Average
Exercise
Shares Price Range Price
------- ------------ --------
<S> <C> <C> <C>
Outstanding as of January 1, 1995.............. -- $ -- $ --
Granted...................................... 63,672 3.88 3.88
Cancelled.................................... (9,338) 3.88 3.88
-------
Outstanding as of December 31, 1995............ 54,334 3.88 3.88
Granted...................................... 30,922 3.88 3.88
-------
Outstanding as of December 31, 1996............ 85,256 3.88 3.88
Granted...................................... 68,782 13.85-14.71 14.59
Cancelled.................................... (2,672) 3.88 3.88
-------
Outstanding as of December 31, 1997............ 151,366 $ 3.88-14.71 $8.75
======= ============ =====
Stock options exercisable at
December 31, 1996............................ 10,332 $3.88 $3.88
======= ============ =====
December 31, 1997............................ 26,853 $3.88 $3.88
======= ============ =====
</TABLE>
The following table summarizes information about all stock options
outstanding as of December 31, 1997:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------------------- --------------------------------
Number Weighted Number
Outstanding Weighted Average Exercisable Weighted
as of Average Remaining at Average
Exercise Price Ranges December 31, 1997 Exercise Price Contractual Life December 31, 1997 Exercise Price
- --------------------- ----------------- -------------- ---------------- ----------------- --------------
<S> <C> <C> <C> <C> <C>
$0.01-$0.10............. 29,197 $ 0.01 6.1 17,514 $0.01
$3.88................... 82,584 3.88 8.0 26,853 3.88
$13.85-$14.71........... 68,782 14.59 9.5 -- --
------- ------
$0.01-$14.71............ 180,563 $ 7.33 8.2 44,367 $2.35
======= ====== === ====== =====
</TABLE>
For purposes of determining the pro forma effect of these options, the fair
value of each option is estimated on the date of grant based on the Black-
Scholes option pricing model assuming, among other things, no dividend yield,
a range of risk-free interest rates of 5.7% to 6.8%, no volatility and an
expected life of 10 years. The weighted average fair value of the options
granted during the years ended December 31, 1996 and 1997, was approximately
$1.80 and $2.58, respectively.
On January 29, 1998, we issued options to employees for the purchase of
207,100 shares of Common Stock at an exercise price of $16.00 per share.
Warrants
During 1997, in connection with the issuance of Class D preferred stock
through the various securities purchase agreements, we issued warrants
exercisable into a total of 422,951 shares of Class E common stock. These
warrants, which are exercisable at any time, have an exercise price of $.01
per share and expire in July 2005. The holders of these warrants exercised
them in connection with the consummation of the IPO (Note 2).
F-24
<PAGE>
CAREER EDUCATION CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1995, 1996 and 1997
A summary of warrant activity, including redeemable warrants, for the years
ended December 31, 1995, 1996 and 1997, is as follows:
<TABLE>
<CAPTION>
Shares Under Warrant
-----------------------------
Class D Class E
Common Stock Common Stock
-------------- --------------
Shares Price Shares Price
------- ----- ------- -----
<S> <C> <C> <C> <C>
Outstanding as of January 1, 1995.............. -- $ -- -- $ --
Issued....................................... 257,690 0.01 -- --
------- ----- ------- -----
Outstanding as of December 31, 1995............ 257,690 0.01 -- --
Issued....................................... -- -- -- --
------- ----- ------- -----
Outstanding as of December 31, 1996............ 257,690 0.01 -- --
Issued....................................... -- -- 435,281 0.01
Cancelled.................................... (34,776) 0.01 -- --
Exercised.................................... -- -- (928) 0.01
Exchanged.................................... (20,618) 0.01 20,618 0.01
------- ----- ------- -----
Outstanding as of December 31, 1997............ 202,296 0.01 454,971 0.01
======= ===== ======= =====
Warrants exercisable at December 31, 1996...... 257,690 $0.01 -- $ --
======= ===== ======= =====
Warrants exercisable at December 31, 1997...... 202,296 $0.01 454,971 $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 $3.88. As of
December 31, 1997, the remaining contractual life of these warrants was
approximately 7.6 years. The weighted average fair value of warrants to
purchase Class E common stock issued for the year ended December 31, 1997 was
approximately $14.67. As of December 31, 1997, the remaining contractual life
of these warrants was approximately 7.6 years.
Pro Forma Results
Had we accounted for our stock options in accordance with FASB No. 123, pro
forma income (loss) before extraordinary item and net income (loss), and pro
forma income (loss) before extraordinary item and net income (loss)
attributable to common stockholders would have been as follows (in thousands,
except per share data):
<TABLE>
<CAPTION>
December 31
-----------------------
1995 1996 1997
------ ------- -------
<S> <C> <C> <C>
Pro forma income (loss) before extraordinary
item........................................... $ 64 $ 1,475 $ (505)
Pro forma net income (loss)..................... 64 1,475 (923)
Pro forma income (loss) before extraordinary
item attributable to common stockholders....... (809) 117 (8,932)
Pro forma net income (loss) attributable to
common stockholders............................ (809) 117 (9,350)
====== ======= =======
Pro forma diluted income (loss) before
extraordinary item per share attributable to
common stockholders............................ $(1.07) $ 0.11 $(11.63)
====== ======= =======
Pro forma diluted net income (loss) per share
attributable to common stockholders............ $(1.07) $ 0.11 $(12.17)
====== ======= =======
</TABLE>
F-25
<PAGE>
CAREER EDUCATION CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1995, 1996 and 1997
Pro forma basic amounts per share attributable to common stockholders are
the same as diluted disclosed above except in 1996, where basic income before
extraordinary item and net income attributable to common stockholders was
$0.15.
The pro forma disclosure is not likely to be indicative of pro forma results
which may be expected in future years because of the fact that options vest
over several years, pro forma compensation expense is recognized as the options
vest and additional awards may also be granted. At December 31, 1997, the
unamortized compensation expense under FASB No. 123 to be recognized for
options that vested upon the IPO was approximately $192,000.
10. INCOME TAXES
The provision (benefit) for income taxes for the years ended December 31,
1995, 1996 and 1997, consists of the following (in thousands):
<TABLE>
<CAPTION>
For the Year Ended
December 31
-------------------
1995 1996 1997
----- ---- -------
<S> <C> <C> <C>
Current--
Federal........................................... $ -- $150 $ 685
State and local................................... 24 260 (3)
Foreign........................................... -- -- --
----- ---- -------
Total current................................... 24 410 682
----- ---- -------
Deferred--
Federal........................................... -- (172) (578)
State and local................................... -- (30) (76)
Foreign........................................... -- -- (359)
----- ---- -------
Total deferred.................................. -- (202) (1,013)
----- ---- -------
Total provision (benefit) for income taxes.......... $ 24 $208 $ (331)
===== ==== =======
</TABLE>
A reconciliation of the statutory U.S. federal income tax rate to the
effective income tax rate for the years ended December 31, 1995, 1996 and 1997,
is as follows:
<TABLE>
<CAPTION>
Year Ended
December 31
---------------------
1995 1996 1997
----- ----- -----
<S> <C> <C> <C>
Statutory U.S. Federal
income tax rate........ 34.0 % 34.0 % (34.0)%
Foreign taxes........... -- % -- % (8.7)%
State income taxes, net
of Federal benefit..... 17.0 % 10.0 % (6.6)%
Permanent differences
and other.............. (11.2)% 4.8 % 7.6 %
Valuation allowance..... (14.0)% (36.6)% -- %
----- ----- -----
Effective income tax
rate................... 25.8 % 12.2 % (41.7)%
===== ===== =====
</TABLE>
F-26
<PAGE>
CAREER EDUCATION CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1995, 1996 and 1997
Components of deferred income tax assets and liabilities consist of the
following at December 31, 1996 and 1997 (in thousands):
<TABLE>
<CAPTION>
December 31
-----------
1996 1997
---- ------
<S> <C> <C>
Deferred income tax assets:
Tax net operating loss carryforwards............................ $281 $ 891
Allowance for doubtful accounts................................. 182 285
Amortization on covenants not to compete........................ -- 926
Other........................................................... 49 121
---- ------
Total deferred income tax assets.............................. 512 2,223
---- ------
Deferred income tax liabilities:
Depreciation and amortization................................... 86 3,032
Other........................................................... 37 --
---- ------
Total deferred income tax liabilities......................... 123 3,032
Valuation allowance............................................. -- --
---- ------
Net deferred income tax (liability) asset..................... $389 $ (809)
==== ======
</TABLE>
We have generated a tax net operating loss carryforward and also purchased
certain tax net operating loss carryforwards in connection with our business
acquisitions. At December 31, 1997, such tax net operating loss carryforwards
totaled $2,123,000 and begin to expire in 2010. We have not recorded a
valuation allowance because we believe that deferred income tax assets will be
realized in the future.
11. COMMITMENTS AND CONTINGENCIES
Litigation
We are subject to occasional lawsuits, investigations and claims arising out
of the normal conduct of our business. In certain cases, claims against
acquired businesses relating to events which occurred during the periods we did
not own them are indemnified by the former owners. Management does not believe
the outcome of any pending claims will have a material adverse impact on our
financial position or results of operations.
Leases
We rent most of our school facilities and certain equipment under non-
cancelable operating leases expiring at various dates through March 2009. The
facility leases require us 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, 1995, 1996 and 1997 was approximately $1,589,000, $2,649,000, $8,049,000,
respectively.
F-27
<PAGE>
CAREER EDUCATION CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1995, 1996 and 1997
Future minimum lease payments under these leases as of December 31, 1997,
are as follows (in thousands):
<TABLE>
<CAPTION>
Capital Operating
Leases Leases Total
------- --------- -------
<S> <C> <C> <C>
1998........................................... $1,018 $11,678 $12,696
1999........................................... 345 10,650 10,995
2000........................................... 68 9,627 9,695
2001........................................... 20 8,069 8,089
2002........................................... 5 5,751 5,756
2003 and thereafter............................ -- 20,248 20,248
------ ------- -------
1,456 $66,023 $67,479
======= =======
Less--Portion representing interest at a
weighted average rate of 9.58%................ 177
------
Principal payments............................. 1,279
Less--Current portion.......................... 868
------
$ 411
======
</TABLE>
12. REGULATORY
CEC and our 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 our 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 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 us or any of our U.S. institutions. To minimize
risks associated with noncompliance with DOE requirements, we conduct periodic
financial and compliance reviews of our subsidiaries.
An institution that is determined by the DOE not to meet any one of the
standards of financial responsibility is nonetheless entitled to participate in
the Title IV Programs if it can demonstrate to the DOE that it is financially
responsible on an alternative basis. An institution may do so by posting surety
either in an amount equal to 50% (or greater, as the DOE may require) of the
total Title IV Program funds received by students enrolled at such institution
during the prior year or in an amount equal to 10% (or greater, as the DOE may
require) of such prior year's funds if the institution also agrees to transfer
to the reimbursement system of payment for its Title IV Program funds. The DOE
has interpreted this surety condition to require the posting of an irrevocable
letter of credit in favor of the DOE.
F-28
<PAGE>
CAREER EDUCATION CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1995, 1996 and 1997
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. We do not believe that
these new regulations will have a material effect on our compliance with the
DOE's financial responsibility standards.
The process of reauthorizing the HEA by the U.S. Congress, which takes place
approximately every five years, has begun and is expected to be completed by
1998. It is not possible to predict the outcome of the reauthorization process.
Although there is no present indication that the Congress will decline to
reauthorize the Title IV Programs, there can be no assurance that government
funding for the Title IV Programs will continue to be available or maintained
at current levels, nor can there be assurance that current requirements for
student and institutional participation in the Title IV Programs will be
unchanged. Thus, the reauthorization process could result in revisions to the
HEA that increase the compliance burden on our institutions. A reduction in
funding levels for federal student financial assistance programs could impact
our 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 our 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 our U.S. campuses is accredited by an accrediting agency recognized by
the DOE.
With each acquisition of an institution that is eligible to participate in
the Title IV Programs, that institution undergoes a change of ownership that
results in a change of control, as defined in the HEA and applicable
regulations. In such event, that institution becomes ineligible to participate
in the Title IV Programs and may receive and disburse only previously committed
Title IV Program funds to its students until it has applied for and received
from the DOE recertification under our ownership.
In reviewing our acquisitions since September 1996, it has been the DOE's
practice to measure financial responsibility on the basis of the financial
statements of both our institutions and CEC on a consolidated basis. In its
review of our 1996 annual financial statements and interim 1997 balance sheets,
as filed with the DOE in connection with our 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
our accounting for certain direct marketing costs and the valuation of
courseware and other instructional materials of our recently acquired
institutions. The audited financial statements included herein have been
restated to expense as incurred all direct marketing and advertising costs
which had previously been deferred.
As a result of the DOE's concerns regarding our accounting for direct
marketing costs and courseware and instructional materials, the DOE has offered
us the alternative of posting an irrevocable letter of credit in favor of the
Secretary of Education with respect to each institution we acquired since
September 1996 in a sum
F-29
<PAGE>
CAREER EDUCATION CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1995, 1996 and 1997
sufficient to secure the DOE's interest in the Title IV Program funds
administered by the applicable institution. While we continue 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, we posted, and currently had
outstanding, a letter of credit in the amount of $1.9 million, which expires on
September 30, 1998, with respect to Western; 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 (See Note 16
for subsequent event).
The original letters of credit for Western 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 at, 75% of the Title IV Program funds that students
enrolled at each such institution received in the previous award year. The DOE
also has stated that, prior to a determination that we satisfy the standards of
financial responsibility, the DOE will not consider applications to resume
Title IV Program participation on behalf of any institutions that we may
acquire in the future or applications that seek approval of any action that
would expand the Title IV Program participation of any of our U.S. institutions
which are already certified for such participation.
Beginning in October 1997, the DOE has imposed a condition that, through
September 30, 1998, SCT, Gibbs and IAMD 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 (See Note 16 for subsequent event). 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. 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 we so request and with
the understanding that we 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. SCT
currently participates in the FDL Program, the Gibbs schools are eligible to
participate in the FDL Program, and the IAMD schools are applying for such
eligibility.
We have determined that the Title IV funding disbursed to students enrolled
at each of SCT, Gibbs and IAMD is approaching the funding limitation imposed by
the DOE for each such school. We believe we can stay within such limitation at
Gibbs and IAMD for at least the next calendar quarter by utilizing Federal
Direct Loans at such schools. Based on current trends, we believe SCT could
reach its Title IV funding limitation in the second quarter of 1998, but, if
that occurs, we believe we can provide alternative sources of financial aid to
students at SCT. We have initiated discussions with the DOE to consider an
increase in the Title IV funding limitation for SCT, Gibbs and IAMD, at least
until the DOE can conclude its next financial review of us, based on our
ability to expand the letters of credit that it has posted on behalf of each
such school. If IAMD cannot begin participation in the FDL program early in the
next quarter, it could significantly reduce our ability to provide financial
assistance to additional students at IAMD which in turn could reduce our
ability to enroll such additional students. If we were unable to increase
aggregate enrollment at SCT, Gibbs and IAMD and unable for an extended period
to file applications with the DOE for other newly acquired U.S. institutions to
seek Title IV Program participation, it could have a material adverse effect on
our 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.
F-30
<PAGE>
CAREER EDUCATION CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1995, 1996 and 1997
In accordance with applicable law, the DOE will be required to rescind the
letters of credit and related requirements if CEC and our U.S. institutions
demonstrate that they satisfy the standards of financial responsibility, using
accounting treatments that are acceptable to the DOE. We changed our accounting
to eliminate deferred marketing costs from our 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 CEC and our U.S. institutions, the DOE will consider financial information
reflecting the results of the IPO, as well as the 1997 audited financial
statements of each entity. Accordingly, we intend to seek the DOE's review of
CEC and our U.S. institutions' audited 1997 financial statements and our
audited post-IPO balance sheet on a expedited basis in April 1998 (See Note 16
for subsequent event).
At December 31, 1997, we believe, based on our audited 1997 financial
statements, that we satisfy each of the DOE's standards of financial
responsibility, except for the tangible net worth ratio. However, we believe
that based upon the DOE's review of our audited 1997 financial statements and
our audited post-IPO balance sheet, we will also satisfy the tangible net worth
ratio. Certain of our institutions acquired during 1997 (IAMD and four of the
Gibbs schools) will show an operating loss for the portion of 1997 fiscal year
that they were owned and operated by us. In the event that the DOE considers a
part-year operating loss material, and if the DOE does not measure the
financial responsibility of such institutions on the basis of the financial
position of CEC, the DOE may require us to post letters of credit on behalf of
such institutions, but management does not believe there would be any basis for
the DOE to impose a further Title IV funding limitation on such institutions.
Such letters of credit, which would be calculated on an institution-specific
basis, would be in amounts substantially less than the letters of credit we
currently have outstanding. To the extent the outstanding letters of credit are
reduced or eliminated based upon the DOE's review, we will have additional
availability under the Credit Agreement. After considering the IPO proceeds and
use thereof, we had unused availability under its Credit Agreement of
approximately $55.1 million which provides it with liquidity to increase the
letters of credit should the DOE so require.
In Canada, there are several government programs which provide students
attending eligible institutions with government funding. The provisions
governing an eligible institution vary by province and generally require an
institution's programs qualifying for funding to meet certain rules and
regulations and also to have the administration of the program independently
audited.
13. RELATED-PARTY TRANSACTIONS
We maintain short-term employment and consulting agreements with certain
stockholders. Total expenses under these agreements were approximately
$292,000, $298,000 and $367,000, for the years ended December 31, 1995, 1996
and 1997, respectively.
In July 1995, we entered into an agreement with a stockholder whereby the
stockholder provides certain consulting services for us. Total expenses under
this agreement were $31,000, $75,000, and $75,000 for the years ended December
31, 1995, 1996 and 1997. The agreement was terminated upon the consummation of
the IPO.
We have also entered into a stock subscription agreement with an employee,
as discussed in Note 6.
14. EMPLOYEE BENEFIT PLAN
We maintain a contributory profit sharing plan established pursuant to the
provisions of Section 401(k) of the Internal Revenue Code that provides
retirement benefits for our eligible employees. This plan requires
F-31
<PAGE>
CAREER EDUCATION CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1995, 1996 and 1997
matching contributions to eligible employees. Our matching contributions were
$89,000, $279,000, and $400,000 for the years ended December 31, 1995, 1996 and
1997, respectively.
15. PRO FORMA DATA (UNAUDITED)
The unaudited pro forma consolidated balance sheet information gives effect
to the transactions discussed in Note 2 as if they had occurred on December 31,
1997 and therefore would have resulted in the repayment of outstanding
indebtedness totaling $44,035,000 which existed at that time.
16. SUBSEQUENT EVENTS
On February 4, 1998, we approved the 1998 Non-Employee Directors' Stock
Option Plan. The plan provides for us to grant options 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, such director 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. We have reserved 200,000 shares of common
stock for issuance under the plan.
On February 4, 1998, we approved the 1998 Employee Incentive Compensation
Plan. The plan provides for us 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 our directors, officers, employees and consultants. 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. We will fix the period of each stock option and the
term of the stock appreciation right, 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. We have reserved 600,000 shares of common stock for distribution
pursuant to awards issued under the plan.
On February 4, 1998, we approved the 1998 Employee Stock Purchase Plan,
which is effective April 1, 1998. The plan provides for the issuance of up to
500,000 shares of common stock to be purchased by our eligible employees
through periodic offerings. Our employees may purchase common stock through
payroll deductions (not to exceed $20,000 per person within any calendar year)
at 85% of the fair market value.
On March 13, 1998, we purchased 100% of the outstanding shares of capital
stock of Southern California School of Culinary Arts for $1,000,000. The
acquisition will be accounted for as a purchase and based upon preliminary
estimates, the purchase price in excess of the fair value of assets acquired
and liabilities assumed is anticipated to be approximately $850,000. In
connection with the acquisition, we entered into covenant not-to-compete
agreements with the former owners of the school for a total price of $150,000.
On May 13, 1998, we entered into an agreement with the holder of redeemable
warrants to purchase 32,947 shares of common stock who had previously notified
us that it was exercising its right requiring us to repurchase the warrants.
The agreement permitted the warrant holder to exercise the warrants (a right
previously given up when they exercised their right to put the warrants to CEC)
in exchange for not requiring us to repurchase the warrants as provided under
the warrant holders put right. The warrant holder did exercise the warrants.
F-32
<PAGE>
CAREER EDUCATION CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Concluded)
December 31, 1995, 1996 and 1997
On July 31, 1998, we acquired certain assets and assumed certain liabilities
of Scottsdale Culinary Institute, Inc. for approximately $9.9 million. The
acquisition is accounted for as a purchase and the purchase price in excess of
the fair value of assets acquired and liabilities assumed is approximately $8.4
million.
In connection with the DOE's recent reviews of our compliance with the
standards of financial responsibility, it has considered both ours and our
institutions' financial statements as of and for the year then ended December
31, 1997 and balance sheets as of February 28, 1998. Based on such reviews, the
DOE reduced the letters of credit we have been required to file with the DOE to
maintain our institutions' participation in the Title IV Programs such that we
are required to post and maintain and have posted and maintain irrevocable
letters of credit of $3.4 million for IAMD, $8.9 million for Gibbs and $2.0
million for Western. The DOE also has removed its prior condition that limited
the amount of Title IV funds that SCT, IAMD and Gibbs could disburse to their
students.
During 1998, we recorded approximately $4.7 million in additional goodwill
related to the acquisition of IAMD, based upon the contingent earn-out
provision of the purchase agreement.
In October 1998, we refinanced our Credit Agreement. Under the new Credit
Agreement, we can borrow up to $60 million under a revolving line of credit,
such amount reduced by outstanding letters of credit. We can obtain up to $35
million in letters of credit. All other terms of the Credit Agreement remained
substantially the same, except that the new Credit Agreement expires on October
26, 2003.
On October 29, 1998, we entered into an agreement with Le Cordon Bleu
Limited granting us exclusive rights to use the "Le Cordon Bleu" name in the
United States and Canada in connection with our culinary education programs. We
are developing a curriculum with Le Cordon Bleu for use at our culinary schools
and the agreement will not take effect until this curriculum is approved by
both of us. Upon approval of the curriculum, we will pay $1 million in common
stock to Le Cordon Bleu. An additional payment of $1 million in common stock is
due one year later. We will pay Le Cordon Bleu royalties based on tuition
collected from students enrolled in Le Cordon Bleu programs at our schools. The
agreement expires on December 31, 2008 but can be renewed for two successive
terms of five years each.
On January 4, 1999, we acquired 100% of the outstanding shares of capital
stock of the Harrington Institute of Interior Design, Inc. for $2.9 million,
subject to adjustment. The acquisition will be accounted for as a purchase,
with the excess of the purchase price over the net assets acquired being
recorded as goodwill.
F-33
<PAGE>
17. COMPREHENSIVE INCOME (Unaudited)
On January 1, 1998, we adopted Statement of Financial Accounting Standards
No. 130, "Reporting Comprehensive Income" ("SFAS No. 130"), which requires
companies to report all changes in equity during a period, expect those
resulting from investment by owners and distributions to owners, in a financial
statement for the period in which they are recognized. The disclosure of
comprehensive income and accumulated other comprehensive income, which
encompasses net income and foreign currency translation adjustments, is as
follows:
<TABLE>
<CAPTION>
Accumulated Other
Comprehensive Income
(Loss)--Foreign
Comprehensive Currency Translation
Loss Adjustment
------------- --------------------
(in thousands)
<S> <C> <C>
Balance December 31, 1996................... $ --
Net Income for the year ended December 31,
1997..................................... $ (880) --
Other Comprehensive Income (Loss)--Foreign
currency translation adjustment.......... (297) (297)
------- -----
Comprehensive loss for the year ended
December 31, 1997........................ $(1,177) $(297)
------- -----
Balance December 31, 1997................... -- $(297)
Net income for the nine months ended
September 30, 1998....................... $ 35 --
Other Comprehensive Income (Loss)--Foreign
currency translation adjustment.......... (526) (526)
------- -----
Comprehensive loss for the nine months
ended September 30, 1998................. $ (491)
=======
Balance, September 30, 1998................. $(823)
=====
</TABLE>
The accumulated other comprehensive income (loss) balance as of January 1,
1997 has been restated in connection with our adoption of SFAS No. 130.
F-34
<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
PRIMEDIA Inc., formerly 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 years
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 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, and
for the years then ended in conformity with generally accepted accounting
principles.
DELOITTE & TOUCHE LLP
New York, New York
October 27, 1997
F-35
<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 PRIMEDIA Inc. ................................. 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-36
<PAGE>
THE KATHARINE GIBBS SCHOOLS, INC. AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED OPERATIONS
For the Years Ended December 31, 1995 and 1996
(Dollars In Thousands)
<TABLE>
<CAPTION>
1995 1996
------- -------
<S> <C> <C>
REVENUES:
Tuition and registration fees, net......................... $22,343 $25,831
Other, net................................................. 2,507 2,932
------- -------
Total revenues........................................... 24,850 28,763
------- -------
OPERATING COSTS AND EXPENSES:
Instruction................................................ 5,945 6,427
Selling, general and administrative........................ 16,937 18,991
Depreciation and amortization.............................. 2,400 2,235
Management fees charged by PRIMEDIA Inc.................... 354 397
------- -------
Total operating costs and expenses....................... 25,636 28,050
------- -------
INCOME (LOSS) FROM OPERATIONS................................ (786) 713
INTEREST EXPENSE............................................. 1,394 1,038
------- -------
NET LOSS..................................................... $(2,180) $ (325)
======= =======
</TABLE>
See notes to consolidated financial statements.
F-37
<PAGE>
THE KATHARINE GIBBS SCHOOLS, INC. AND SUBSIDIARIES
STATEMENTS OF SHAREHOLDER'S DEFICIENCY
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 January 1, 1995............................ 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-38
<PAGE>
THE KATHARINE GIBBS SCHOOLS, INC. AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED CASH FLOWS
For the Years Ended December 31, 1995 and 1996
(Dollars In Thousands)
<TABLE>
<CAPTION>
1995 1996
------- -------
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss.................................................... $(2,180) $ (325)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation and amortization.............................. 2,400 2,235
Changes in operating assets and liabilities:
(Increase) decrease in:
Accounts receivable--students............................ 463 397
Accounts receivable--other............................... (195) (174)
Prepaid expenses and other current assets................ (121) 496
Other non-current assets................................. (29) (75)
Increase (decrease) in:
Accounts payable and accrued expenses.................... 1,087 (209)
Advance student payments and other current liabilities... (1,158) 14
Deferred tuition revenue................................. 639 (655)
Other non-current liabilities............................ 199 152
------- -------
Net cash provided by operating activities............. 1,105 1,856
------- -------
INVESTING ACTIVITIES:
Purchases of property and equipment......................... (1,025) (1,157)
Investment in Perkins loan program, net..................... 9 21
------- -------
Net cash used in investing activities................. (1,016) (1,136)
------- -------
FINANCING ACTIVITIES:
Principal payments under capital lease obligations.......... (85) (103)
Increase in payable to PRIMEDIA Inc......................... 1,666 172
------- -------
Net cash provided by financing activities............. 1,581 69
------- -------
NET INCREASE IN CASH......................................... 1,670 789
CASH, BEGINNING OF PERIOD.................................... 3,837 5,507
------- -------
CASH, END OF PERIOD.......................................... $ 5,507 $ 6,296
======= =======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Interest paid............................................... $ 26 $ 16
======= =======
NON-CASH INVESTING AND FINANCING ACTIVITIES--
Equipment acquired under capital lease obligations.......... $ 57 $ 86
======= =======
</TABLE>
See notes to consolidated financial statements.
F-39
<PAGE>
THE KATHARINE GIBBS SCHOOLS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 PRIMEDIA
Inc. (formerly K-III Communications Corporation) (the ultimate parent company,
"PRIMEDIA").
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 62% and 63% of the Company's net revenue was
collected from funds distributed under these programs for 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 $4,282 and $5,687 for 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 lives.
Leasehold improvements are amortized over their useful lives or lease term,
whichever is shorter.
F-40
<PAGE>
THE KATHARINE GIBBS SCHOOLS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
For the Years Ended December 31, 1995 and 1996
(Dollars In Thousands)
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.
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.
F-41
<PAGE>
THE KATHARINE GIBBS SCHOOLS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
For the Years Ended December 31, 1995 and 1996
(Dollars In Thousands)
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 PRIMEDIA. 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, PRIMEDIA 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 $26 and $16 for
1995 and 1996, respectively.
F-42
<PAGE>
THE KATHARINE GIBBS SCHOOLS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Concluded)
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 1995 and 1996,
was approximately $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-43
<PAGE>
THE KATHARINE GIBBS SCHOOLS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Concluded)
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 PRIMEDIA includes a note payable to PRIMEDIA of $13,865 and
$11,413 as of December 31, 1995 and 1996, respectively. Interest accrues on the
note payable at PRIMEDIA's weighted average borrowing rate. Interest expense of
$1,368 and $1,022 on the note payable to PRIMEDIA has been recorded for 1995
and 1996, respectively. The note payable to PRIMEDIA is payable on demand,
however, PRIMEDIA has no intention of demanding payment in the next twelve
months. The Company pays PRIMEDIA management fees for costs and expenses
incurred by PRIMEDIA 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 PRIMEDIA 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 $12, and $23 for 1995 and 1996,
respectively.
8. SUBSEQUENT EVENTS
On May 31, 1997, PRIMEDIA 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, PRIMEDIA also entered into a covenant not-to-compete agreement with
CEC for proceeds totaling $7,000. The covenant not-to-compete restricts
PRIMEDIA's ability to own or operate certain types of post-secondary vocational
schools for a period of five years.
F-44
<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 PRIMEDIA Inc...................................... 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-45
<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
PRIMEDIA, Inc............ 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-46
<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 PRIMEDIA, Inc........... 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-47
<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, PRIMEDIA, Inc. (formerly K-III Communications Corporation)
("PRIMEDIA"), 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, PRIMEDIA also entered into a covenant
not-to-compete agreement with CEC for proceeds totaling $7,000,000. The
covenant not-to-compete restricts PRIMEDIA'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-48
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders of
Scottsdale Culinary Institute, Inc.:
We have audited the accompanying balance sheets of SCOTTSDALE CULINARY
INSTITUTE, INC. (a Delaware corporation) as of December 31, 1996 and 1997, and
the related statements of operations and retained earnings and cash flows for
the years 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 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 Scottsdale Culinary
Institute, Inc. as of December 31, 1997 and 1996, and the results of its
operations and its cash flows for the years then ended in conformity with
generally accepted accounting principles.
Arthur Andersen LLP
Chicago, Illinois
September 25, 1998 (except
with respect to the matter
discussed in Note 7, as to
which the date is December
17, 1998)
F-49
<PAGE>
SCOTTSDALE CULINARY INSTITUTE, INC.
BALANCE SHEETS
(Dollars in thousands)
<TABLE>
<CAPTION>
December 31
----------- June 30
1996 1997 1998
----- ----- -----------
ASSETS (Unaudited)
<S> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents................................. $ 359 $ 288 $ 766
Receivables, net of allowance for doubtful accounts of $5. 264 388 375
Inventories and other current assets...................... 62 63 64
----- ----- ------
Total current assets.................................. 685 739 1,205
PROPERTY AND EQUIPMENT, net of accumulated depreciation and
amortization............................................... 270 201 187
OTHER ASSETS................................................ 14 15 15
----- ----- ------
TOTAL ASSETS................................................ $ 969 $ 955 $1,407
===== ===== ======
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
<S> <C> <C> <C>
CURRENT LIABILITIES:
Accounts payable, accrued expenses and other current
liabilities.............................................. $ 251 $ 199 $ 163
Deferred tuition revenue.................................. 355 338 299
----- ----- ------
Total current liabilities............................. 606 537 462
LONG-TERM DEBT, net of current portion...................... 31 17 15
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Common stock, no par value; 1,000,000 shares authorized;
51,000 shares issued and outstanding at December 31,
1997, December 31, 1996 and June 30, 1998................ 51 51 51
Additional paid-in capital................................ 145 145 145
Retained earnings......................................... 136 205 734
----- ----- ------
Total shareholders' equity............................ 332 401 930
----- ----- ------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY.................. $ 969 $ 955 $1,407
===== ===== ======
</TABLE>
The accompanying notes are an integral part of these statements.
F-50
<PAGE>
SCOTTSDALE CULINARY INSTITUTE, INC.
STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
(Dollars in thousands)
<TABLE>
<CAPTION>
For the Years For the Six Months
Ended December 31 Ended June 30
------------------ --------------------
1996 1997 1997 1998
-------- -------- --------- ---------
(Unaudited)
<S> <C> <C> <C> <C>
REVENUE:
Tuition and registration fees, net. $ 3,823 $ 4,428 $ 2,272 $ 2,469
Other, net......................... 408 415 221 232
-------- -------- --------- ---------
Total net revenue.............. 4,231 4,843 2,493 2,701
OPERATING EXPENSES:
Educational services and
facilities........................ 2,445 2,565 1,323 1,168
General and administrative......... 1,097 1,292 565 575
Depreciation and amortization...... 107 94 46 38
Rent paid to related party......... -- 62 -- 162
-------- -------- --------- ---------
Total operating expenses....... 3,649 4,013 1,934 1,943
-------- -------- --------- ---------
Income from operations......... 582 830 559 758
OTHER INCOME, net.................... 33 62 5 11
-------- -------- --------- ---------
NET INCOME........................... 615 892 564 769
Retained earnings, beginning of
period.............................. 250 136 136 205
Distributions to shareholders........ (729) (823) (206) (240)
-------- -------- --------- ---------
RETAINED EARNINGS, END OF PERIOD..... $ 136 $ 205 $ 494 $ 734
======== ======== ========= =========
</TABLE>
The accompanying notes are an integral part of these statements.
F-51
<PAGE>
SCOTTSDALE CULINARY INSTITUTE, INC.
STATEMENTS OF CASH FLOWS
(Dollars in thousands)
<TABLE>
<CAPTION>
For the Six
For the Years Ended Months
December 31 Ended June 30
-------------------- --------------
1996 1997 1997 1998
--------- --------- ------ ------
(Unaudited)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income............................. $ 615 $ 892 $ 564 $ 769
Adjustments to reconcile net income to
net cash provided by operating
activities--
Depreciation and amortization........ 107 94 46 38
Loss on disposal of asset............ 1 3 1 --
Changes in operating assets and
liabilities--
Receivables, net................... (21) (124) (69) 13
Inventories and other current
assets............................ 7 (1) (2) (1)
Accounts payable, accrued expenses
and other current liabilities..... 95 (44) (29) (36)
Deferred tuition revenue........... (286) (17) 62 (39)
--------- --------- ------ ------
Net cash provided by operating
activities...................... 518 803 573 744
--------- --------- ------ ------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment..... (134) (28) (3) (24)
Other assets........................... 2 (1) 1 --
--------- --------- ------ ------
Net cash used in investing
activities...................... (132) (29) (2) (24)
--------- --------- ------ ------
CASH FLOWS FROM FINANCING ACTIVITIES:
Distributions to shareholders.......... (729) (823) (206) (240)
Repayments of long-term debt........... (14) (22) (10) (2)
Proceeds from issuance of long-term
debt.................................. 31 -- -- --
--------- --------- ------ ------
Net cash used in financing
activities...................... (712) (845) (216) (242)
--------- --------- ------ ------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS............................. (326) (71) 355 478
CASH AND CASH EQUIVALENTS, beginning of
period.................................. 685 359 359 288
--------- --------- ------ ------
CASH AND CASH EQUIVALENTS, end of period. 359 288 714 766
========= ========= ====== ======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid during the period for
interest.............................. 2 2 -- 16
========= ========= ====== ======
</TABLE>
The accompanying notes are an integral part of these statements.
F-52
<PAGE>
SCOTTSDALE CULINARY INSTITUTE, INC.
NOTES TO FINANCIAL STATEMENTS
(Information for the Six Months Ended June 30, 1997 and 1998 is Unaudited)
1. DESCRIPTION OF THE BUSINESS
Scottsdale Culinary Institute, Inc. (the "Company" or the "School") was
incorporated in June 1986 for the purpose of operating a school to provide
professional culinary education. The School, located in Scottsdale, Arizona,
provides professional culinary education leading to an Associate of
Occupational Studies degree in Culinary Arts and Sciences and Restaurant
Management. The School also operates a restaurant open to the public.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The financial statements and related notes thereto for the six months ended
June 30, 1997 and 1998 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
information set forth herein. Operating results for the six months ended June
30, 1998 are not necessarily indicative of results that may be expected for the
fiscal year ending December 31, 1998. The principal accounting policies of the
Company are as follows:
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 students' participation in
federally funded financial aid programs under Title IV of the Higher Education
Act of 1965, as amended ("Title IV Programs"). Approximately 58%, 55%, 57% and
55% of the Company's net revenue was collected from Title IV Program funds for
the years ended December 31, 1996 and 1997 and for the six months ended June
30, 1997 and 1998, respectively. The Company generally completes and approves
the financial aid packet of each student who qualifies for financial aid prior
to the student's beginning class in an effort to enhance the collectibility of
its unsecured credit. Transfers of funds from the financial aid programs to the
Company are made in accordance with DOE requirements. Changes in DOE funding of
federal student financial aid programs could impact the Company's ability to
attract students.
Cash and Cash Equivalents
Cash and cash equivalents consists of cash in banks and money market funds.
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. There is no restricted cash
included in the cash and cash equivalents balance at December 31, 1996,
December 31, 1997 and June 30, 1998.
Inventories
Inventories consisting principally of food and beverage, program materials,
books and supplies are stated at the lower of cost, determined on a first-in,
first-out basis or market.
F-53
<PAGE>
SCOTTSDALE CULINARY INSTITUTE, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
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 capital leases are
amortized on a straight-line basis over the shorter of the estimated useful
life of the asset or the lease term. The cost basis and estimated useful lives
of property and equipment at December 31, 1996, December 31, 1997 and June 30,
1998, are as follows (dollars in thousands):
<TABLE>
<CAPTION>
December 31
----------- June 30
Asset Description 1996 1997 1998 Life
----------------- ----- ----- ------- ----------
<S> <C> <C> <C> <C>
Classroom equipment and other instructional
materials...................................... $ 492 $ 469 $478 5-10 years
Leasehold improvements.......................... 266 265 280 3-10 years
----- ----- ----
758 734 758
Less--Accumulated depreciation and amortization. 488 533 571
----- ----- ----
$ 270 $ 201 $187
===== ===== ====
</TABLE>
The Company reviews 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.
Revenue Recognition
Revenue is derived primarily from courses taught at the School. Tuition
revenue is recognized on a straight-line basis during the period of instruction
provided by the School. Other revenues consist of restaurant revenues and 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 tuition payments received but not
earned and is reflected as a current liability on the balance sheet as such
amount is expected to be earned within the next year.
Marketing and Advertising Costs
Marketing and advertising costs are expensed as incurred. Marketing and
advertising costs included in general and administrative expenses were
approximately $221,000, $191,000, $93,000 and $113,000 for the years ended
December 31, 1996 and 1997 and the six months ended June 30, 1997 and 1998,
respectively.
Income Taxes
The Company has elected to be treated as an S Corporation under the
provisions of Subchapter S of the Internal Revenue Code. Accordingly, the
shareholders of the Company are responsible for the federal taxes arising from
its operations. Therefore, no provision or liability for federal income taxes
has been included in these financial statements.
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.
F-54
<PAGE>
SCOTTSDALE CULINARY INSTITUTE, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
3. LINE OF CREDIT
At December 31, 1996 and December 31, 1997, the Company had available a line
of credit providing for borrowings of up to $200,000, bearing interest at the
bank's reference rate plus 1.5%. The line of credit contains certain financial
covenants and is guaranteed by the shareholders. The line of credit was not
utilized at December 31, 1996 and December 31, 1997, and expired in April 1998.
4. COMMITMENTS AND CONTINGENCIES
Regulatory
The Company has federal financial assistance programs that are subject to
ongoing program reviews by the DOE and Title IV program audits by external
auditors. Based upon the results of such audits and reviews, the Company may
have to repay funds previously granted to its students through loans and
grants, and pay interest, fines and/or penalties. Management believes such
amounts would be minimal and does not expect them to have a material effect on
the results of operations of the Company.
The Company is also required to meet certain financial and other standards
in order to qualify to participate in Title IV programs. These include
maintaining an acid test ratio (defined as cash, cash equivalents, and current
accounts receivable to current liabilities) of at least 1:1, having a positive
tangible net worth at the end of each fiscal year, to collect less than 85% of
its education revenues from Title IV funds on an annual basis, not to have
cumulative net operating losses during the most recent fiscal years that result
in a decline of more than 10% of the Company's tangible net worth at the
beginning of that two-year period, and a student default rate on their federal
loans of not more than 25% for any three-year consecutive period, amongst
others.
Leases
The Company leases equipment under capital leases expiring at various dates
through 2002. In addition, the Company leases its school facility and certain
equipment under noncancellable operating leases expiring at various dates
through 2008. Rent expense, exclusive of taxes, insurance and maintenance of
the facility and equipment for the years ended December 31, 1996 and 1997 and
the six months ended June 30, 1997 and 1998 was approximately $369,000,
$436,000, $220,000 and $191,000, respectively.
Future minimum lease payments under these capital and operating leases as of
June 30, 1998 are as follows:
<TABLE>
<CAPTION>
Capital Operating
Leases Leases Total
------- ---------- ----------
<S> <C> <C> <C>
Remainder of 1998........................... $ 3,153 $ 166,742 $ 169,895
1999........................................ 6,304 320,307 326,611
2000........................................ 6,304 318,792 325,096
2001........................................ 6,304 318,792 325,096
2002........................................ 3,341 318,792 322,133
2003........................................ -- 318,066 318,066
2004 and thereafter......................... -- 1,205,750 1,205,750
------- ---------- ----------
25,406 $2,967,241 $2,992,647
========== ==========
Less--portion attributable to interest...... 6,904
-------
Principal payments.......................... 18,502
Less--Current portion....................... 3,527
-------
$14,975
=======
</TABLE>
F-55
<PAGE>
Litigation
The Company is subject to occasional lawsuits, investigations and claims
arising out of the normal conduct of its business. At June 30, 1998, the
Company is not a party to any material legal action.
5. RELATED-PARTY TRANSACTIONS
Effective October 15, 1997, the Company leases its office and school space
from an affiliated company operated by the Company's shareholders. Total rent
expense under this agreement was approximately $62,000 and $162,000 for the
year ended December 31, 1997 and the six months ended June 30, 1998,
respectively. In addition, the Company loaned the affiliated company $6,500.
This amount is included in receivables at December 31, 1997.
As of June 30, 1998, the Company has guaranteed a $750,000 bank loan of an
affiliated company. The Company's equipment serves as collateral for the loan.
6. EMPLOYEE BENEFIT PLAN
The Company maintains a contributory profit sharing plan established
pursuant to the provisions of Section 401(k) of the Internal Revenue Code that
provides retirement benefits for eligible employees of the Company. This plan
requires matching contributions to eligible employees. The Company's matching
contributions were approximately $9,600, $12,500, $0 and $9,300 for the years
ended December 31, 1996 and 1997 and the six months ended June 30, 1997 and
1998, respectively.
7. SUBSEQUENT EVENT
On July 31, 1998, SCI Acquisition, Ltd., a wholly owned subsidiary of Career
Education Corporation ("CEC"), purchased certain assets and assumed certain
liabilities of the Company for a sales price of approximately $9,900,000.
Subsequent to the purchase, SCI Acquisition, Ltd. changed its name to
Scottsdale Culinary Institute, Ltd.
F-56
<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>
<PAGE>
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
Item 13. Other Exepnses 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 our common stock
pursuant to the prospectus contained in this Registration Statement. The
Registrant will pay all of these expenses.
<TABLE>
<CAPTION>
Approximate
Amount
-----------
<S> <C>
Securities and Exchange Commission registration fee........... $17,374
NASD filing fee............................................... 6,750
Accountants' fees and expenses................................ *
Blue Sky fees and expenses.................................... *
Legal fees and expenses....................................... *
Transfer Agent and Registrar fees and expenses................ *
Printing and engraving........................................ *
Miscellaneous expenses........................................ *
-------
Total..................................................... $ *
=======
</TABLE>
- --------
* To be provided by amendment
All expenses other than the Securities and Exchange Commission registration
fee and NASD filing fee are estimated.
Item 14. Indemnification of Directors and Officers
Article XII of the Registrant's Amended and Restated Certificate of
Incorporation provides 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. The Registrant has entered 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 provides 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.
The Registrant has purchased a directors' and officers' liability insurance
policy.
II-1
<PAGE>
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 Registrant within the meaning of
the Securities Act of 1933, as amended (the "Securities Act"), against certain
liabilities.
Item 15. Recent Sales of Unregistered Securities
Prior to the consummation of our initial public offering in February 1998,
the Registrant's outstanding capital stock consisted of (i) four classes of
common stock: Class A Voting Common Stock, $.01 par value (the "Class A Common
Stock"); Class B Voting Common Stock, $.01 par value (the "Class B Common
Stock"); Class C Non-voting Common Stock, $.01 par value (the "Class C Common
Stock"); and Class E Non-voting Common Stock, $.01 par value (the "Class E
Common Stock") (the Class A Common Stock, Class B Common Stock, Class C Common
Stock and Class E Common Stock are collectively referred to as the "Existing
Common Stock"); and (ii) three classes of preferred stock: preferred stock,
Series A, $.01 par value (the "Series A Preferred Stock"); preferred stock,
Series C, $.01 par value (the "Series C Preferred Stock"); and Series D
Preferred Stock, $.01 par value (the "Series D Preferred Stock") (the Series A
Preferred Stock, Series C Preferred Stock and Series D Preferred Stock are
collectively referred to as the "Existing Preferred Stock").
The following information reflects a 100-for-one split of the Registrant's
common stock effected as of July 31, 1995 and a 10-for-one split of our Series
C Preferred Stock effected as of July 26, 1996. It does not reflect the
following transactions effected immediately prior to the consummation of the
initial public offering: (i) the Amended and Restated Certificate of
Incorporation of the Registrant was amended to provide, among other things, for
(a) only two classes of capital stock, consisting of our common stock and
preferred stock, $.01 par value, (b) the conversion of all shares of Existing
Common Stock into Common Stock at the rate of 9.376 shares of Common Stock for
every share of Existing Common Stock, and (c) the conversion (the "Preferred
Stock Conversion") of all Existing Preferred Stock (including all accrued paid-
in-kind dividends thereon) into common stock at a rate determined by dividing
the liquidation value of the Existing Preferred Stock (including the
liquidation value of the accrued paid-in-kind dividends) by the initial public
offering price of our common stock in the initial public offering (converting
into 2,423,481 shares of common stock); and then (ii) all outstanding warrants
to purchase Class D Non-Voting Common Stock, $.01 par value (the "Class D
Common Stock"), and Class E Common Stock were exercised for an aggregate of
624,062 shares of common stock.
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 and (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 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 and (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.
II-2
<PAGE>
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 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 Registrant issued
1,375 shares of Series D Preferred Stock and warrants to purchase 3,317 shares
of Class E Common Stock to Electra in exchange for total consideration
of $1,375,000.
No underwriters were involved in any of the transactions described above.
All of the securities issued in the foregoing transactions were issued by the
Registrant in reliance upon the exemption from registration available under
Section 4(2) of the Securities Act, including Regulation D promulgated
thereunder.
Item 16. Exhibits and Financial Statement Schedules
(a) Exhibits.
<TABLE>
<C> <S>
1* Form of Underwriting Agreement.
2.1** Asset Purchase Agreement dated as of September 30, 1996, among
the Registrant, WCI Acquisition, Ltd., Phillips Educational
Group of Portland, Inc., and Phillips Colleges, Inc.
2.2** Stock Sale Agreement dated as of April 7, 1997, between K-III
Prime Corporation, Inc. and the Registrant.
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.
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.
2.5*** Asset Purchase Agreement dated as of July 1, 1998 by and among
Scottsdale Institute, Inc., an Arizona corporation, The Frank G.
and Elizabeth S. Leite Revocable Trust dated April 14, 1992,
Frank G. Leite and Elizabeth S. Leite, and SCI Acquisition I,
Ltd., a Delaware Corporation.
3.1+ Amended and Restated Certificate of Incorporation of the
Registrant.
3.2+ Amended and Restated By-laws of the Registrant.
4.1** Specimen stock certificate representing common stock.
4.3 Credit Agreement dated as of October 26, 1998 among the
Registrant, as borrower, the Co-Borrowers named therein, the
lenders named therein, LaSalle National Bank, as administrative
agent and The Bank of Nova Scotia as foreign currency agent.
5* Opinion of Katten Muchin & Zavis as to the legality of the
securities being registered (including consent).
10.1** Career Education Corporation 1995 Stock Option Plan, as amended.
10.2** Form of Option Agreement under the Registrant's 1995 Stock
Option Plan.
10.3** Career Education Corporation 1997 Employee Incentive
Compensation Plan.
10.4** Form of Option Agreement under the Registrant's 1997 Employee
Incentive Compensation Plan.
</TABLE>
II-3
<PAGE>
<TABLE>
<C> <S>
10.5** Career Education Corporation 1997 Non-Employee Directors' Stock
Option Plan.
10.6** Form of Option Agreement under the Registrant's 1997 Non-
Employee Directors' Stock Option Plan.
10.7** Career Education Corporation 1998 Employee Stock Option Plan.
10.8** Amended and Restated Option Agreement dated July 31, 1995,
between the Registrant and John M. Larson.
10.9** Supplemental Option Agreement dated July 31, 1995, between the
Registrant and John M. Larson.
10.10** Amended and Restated Option Agreement dated July 31, 1995,
between the Registrant and Robert E. Dowdell.
10.11** Employment and Non-Competition Agreement 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 Agreements dated as of July 31, 1995,
between the Registrant, Electra Investment Trust P.L.C. and
Electra Associates, Inc.
10.15** 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").
10.16** 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").
10.17** 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").
10.18** Form of Management Fee Agreement between the Registrant and each
of its subsidiaries.
10.19** Form of Tax Sharing Agreement between the Registrant and each of
its subsidiaries.
10.20+ Registration Rights Agreement between the Registrant Heller
Equity Capital Corporation dated as of February 3, 1998.
10.21+ Agreement between the Registrant and Heller Equity Capital
Corporation, regarding designation of directors of the
Registrant.
10.22++ Stock Purchase Agreement dated as of November 25, 1998 by and
between the Registrant, and Robert C. Marks and the Robert C.
Marks Trust dated October 9, 1997.
11+++ Statement regarding computation of per share earnings.
21.1 Subsidiaries of the Registrant.
23.1 Consent of Arthur Andersen LLP with respect to financial
statements of the Registrant.
23.2 Consent of Arthur Andersen LLP with respect to financial
statements of Scottsdale Culinary Institute, Inc.
23.3 Consent of Deloitte & Touche LLP with respect to financial
statements of The Katharine Gibbs Schools, Inc.
</TABLE>
II-4
<PAGE>
<TABLE>
<C> <S>
23.6* Consent of Katten Muchin & Zavis (contained in its opinion to be
filed as Exhibit 5 hereto).
24 Power of Attorney (included on signature page hereto).
27+++ Financial Data Schedule.
</TABLE>
- --------
* To be filed by amendment.
** Incorporated by reference to the Exhibit of the same number to our
Registration Statement No. 333-37601 on Form S-1, effective as of January
28, 1998.
*** Incorporated by reference to our Report on Form 8-K dated August 14, 1998.
+ Incorporated by reference to the Exhibit of the same number to our Annual
Report on Form 10-K for the year ended December 31, 1997.
++ Incorporated by reference to our Report on Form 8-K dated January 15, 1999.
+++ Incorporated by reference to the Exhibit of the same number to each of our
Quarterly Reports on Form 10-Q for the quarterly periods ended March 31,
June 30 and September 30, 1998.
(b) Financial Statement Schedules.
<TABLE>
<CAPTION>
Page
----
<S> <C>
Schedule II--Valuation and Qualifying Accounts....................... S-1
</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 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 18th day of January, 1999.
Career Education Corporation
/s/ John M. Larson
By: _________________________________
John M. Larson
President and Chief Executive
Officer
Each person whose signature appears below hereby constitutes and appoints
John M. Larson and William A. Klettke, and each of them, his true and lawful
attorneys-in-fact and agents, with full power of substitution, to sign on his
behalf, individually and in each capacity stated below, all amendments and
post-effective amendments to this Registration Statement on Form S-1 (including
any registration statement filed pursuant to Rule 462(b) under the Securities
Act of 1933, and all amendments thereto) and to file the same, with all
exhibits thereto and any other documents in connection therewith, with the
Securities and Exchange Commission under the Securities Act of 1933, granting
unto said attorneys-in-fact and agents full power and authority to do and
perform each and every act and thing requisite and necessary to be done in and
about the premises, as fully and to all intents and purposes as each might or
could do in person, hereby ratifying and confirming each act that said
attorneys-in-fact and agents may lawfully do or cause to be done by virtue
thereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities indicated on January 18, 1999.
<TABLE>
<CAPTION>
Signature Title
--------- -----
<S> <C>
/s/ John M. Larson President, Chief Executive Officer
___________________________________________ (Principal Executive Officer) and a
John M. Larson Director
/s/ William A. Klettke Senior Vice President and Chief Financial
___________________________________________ Officer (Principal Financial and
William A. Klettke Accounting Officer)
/s/ Robert E. Dowdell Director
___________________________________________
Robert E. Dowdell
/s/ Thomas B. Lally Director
___________________________________________
Thomas B. Lally
/s/ Wallace O. Laub Director
___________________________________________
Wallace O. Laub
/s/ Keith K. Ogata Director
___________________________________________
Keith K. Ogata
/s/ Patrick K. Pesch Director
___________________________________________
Patrick K. Pesch
</TABLE>
II-6
<PAGE>
CAREER EDUCATION CORPORATION AND SUBSIDIARIES
FINANCIAL STATEMENT SCHEDULE
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders of Career Education Corporation:
We have audited, in accordance with generally accepted auditing standards,
the consolidated financial statements of Career Education Corporation and
Subsidiaries and issued our unqualified opinion thereon dated February 13,
1998, except with respect to the matters discussed in the fourth, fifth, sixth,
seventh, eighth, ninth, tenth and eleventh paragraphs of Note 16, as to which
the dates are March 13, 1998, May 13, 1998, July 31, 1998, September 8, 1998,
October 5, 1998, October 26, 1998, October 29, 1998 and January 4, 1999. Our
audits were made for the purpose of forming an opinion on the basic financial
statements taken as a whole. The Valuation and Qualifying Account Schedule is
presented for purposes of additional analysis and is not a required part of the
basic financial statements. This information has been subjected to the auditing
procedures applied in our audits of the basic financial statements and, in our
opinion, is fairly stated in all material respects in relation to the basic
financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Chicago, Illinois
February 13, 1998
S-1
<PAGE>
CAREER EDUCATION CORPORATION AND SUBSIDIARIES
FINANCIAL STATEMENT SCHEDULE
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
Balance at Charges to Increase Due Balance at
Beginning Operating to Amounts End of
of Period Expenses Acquisitions Written-off Period
---------- ---------- ------------ ----------- ----------
(in thousands)
<S> <C> <C> <C> <C> <C>
Student receivable
allowance activity for
the year ended
December 31, 1995..... $ 533 $ 479 $ 158 $ (912) $ 258
Student receivable
allowance activity for
the year ended
December 31, 1996..... 258 760 30 (593) 455
Student receivable
allowance activity for
the year ended
December 31, 1997..... 455 1,400 1,040 (1,379) 1,516
Student receivable
allowance activity for
the nine months ended
September 30, 1998
(unaudited)........... 1,516 2,267 17 -- 3,800
</TABLE>
S-2
<PAGE>
EXHIBIT 4.3
-----------
================================================================================
AMENDED AND RESTATED
CREDIT AGREEMENT
dated as of October 26, 1998
among
CAREER EDUCATION CORPORATION,
as Parent,
THE CO-BORROWERS NAMED HEREIN,
THE LENDERS NAMED HEREIN,
LASALLE NATIONAL BANK,
as Administrative Agent,
and
THE BANK OF NOVA SCOTIA,
as Foreign Currency Agent
================================================================================
<PAGE>
The following Table of Contents has been inserted for convenience only and does
not constitute a part of this Agreement.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
SECTION 1. DEFINITIONS AND ACCOUNTING TERMS............................... 1
1.1 Certain Defined Terms............................................ 1
1.2 Other Definitional Provisions.................................... 21
1.3 Accounting and Financial Determinations.......................... 22
1.4 Currency Equivalents Generally................................... 22
SECTION 2. THE COMMITMENTS................................................ 22
2.1 Revolving Loan Commitment........................................ 22
2.2 LC Commitment.................................................... 23
2.3 Commitments and Other Terms...................................... 23
2.4 Canadian Dollar Loans............................................ 23
SECTION 3. THE LOANS...................................................... 24
3.1 Various Types of Loans........................................... 24
3.2 Notice of Borrowing.............................................. 24
3.3 Funding.......................................................... 24
3.4 Funding Reliance................................................. 25
3.5 Conversion and Continuation of Loans............................. 25
3.6 Repayment of Revolving Loans; Notes.............................. 27
3.7 Recordkeeping.................................................... 27
SECTION 4. THE LETTERS OF CREDIT.......................................... 27
4.1 Request for Issuance of Letters of Credit........................ 27
4.2 Expiration and other Terms....................................... 28
4.3 Participation.................................................... 28
4.4 Notification of Demand for Payment............................... 28
4.5 Funding by Administrative Agent.................................. 28
4.6 Funding By Lenders............................................... 28
4.7 Non-Conforming Demand For Payment................................ 29
4.8 Return of Funds Related to Non-Conforming Demand................. 29
4.9 Return of Letter of Credit....................................... 29
4.10 Reimbursement Agreement of the Parent........................... 30
4.11 Obligation to Reimburse for or Participate in Letter of
Credit Payments................................................. 30
4.12 Mandatory Payment to Administrative Agent of LC Obligations..... 31
4.13 Existing Letters of Credit...................................... 31
4.14 Limited Participation and Funding of Letters of Credit.......... 32
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
SECTION 5. INTEREST AND FEES, ETC......................................... 32
5.1 Interest Rates................................................... 32
5.2 Default Interest Rate............................................ 33
5.3 Interest Payment Dates........................................... 33
5.4 Interest Periods................................................. 34
5.5 Setting and Notice of Rates...................................... 34
5.6 Computation of Interest.......................................... 34
5.7 Fees............................................................. 34
SECTION 6. REDUCTION OR TERMINATION OF THE COMMITMENTS; PAYMENTS AND
PREPAYMENTS............................................... 37
6.1 Voluntary Reduction or Termination of the Revolving Loan
Commitments...................................................... 37
6.2 Voluntary Reduction of the LC Commitments........................ 37
6.3 Voluntary Prepayments............................................ 37
6.4 Making of Payments............................................... 37
6.5 Due Date Extension............................................... 38
6.6 Sharing of Payments.............................................. 38
6.7 Setoff........................................................... 39
6.8 Net Payments..................................................... 39
SECTION 7. CHANGES IN CIRCUMSTANCES....................................... 40
7.1 Increased Costs.................................................. 40
7.2 Change in Rate of Return......................................... 41
7.3 Basis for Determining Interest Rate Inadequate or Unfair......... 42
7.4 Changes in Law Rendering Certain Loans Unlawful.................. 43
7.5 Funding Losses................................................... 43
7.6 Right of Lenders to Fund Through Other Offices................... 43
7.7 Discretion of Lenders as to Manner of Funding.................... 44
7.8 Conclusiveness of Statements; Survival of Provisions............. 44
7.9 Alternative Lending Office....................................... 44
SECTION 8. COLLATERAL AND OTHER SECURITY.................................. 44
8.1 Security Documents............................................... 44
8.2 Termination...................................................... 46
8.3 Further Assurances............................................... 46
SECTION 9. REPRESENTATIONS AND WARRANTIES................................. 46
9.1 Organization, etc. .............................................. 47
9.2 Authorization.................................................... 47
9.3 No Conflict...................................................... 47
9.4 Governmental Consents............................................ 47
9.5 Validity......................................................... 48
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9.6 Financial Statements............................................ 48
9.7 Material Adverse Change......................................... 48
9.8 Litigation and Contingent Obligations........................... 48
9.9 Liens........................................................... 48
9.10 Subsidiaries.................................................... 49
9.11 Pension and Welfare Plans....................................... 49
9.12 Investment Company Act.......................................... 50
9.13 Public Utility Holding Company Act.............................. 50
9.14 Margin Regulation............................................... 50
9.15 Collateral...................................................... 50
9.16 Taxes........................................................... 50
9.17 Accuracy of Information......................................... 51
9.18 Environmental Warranties........................................ 51
9.19 Proceeds........................................................ 52
9.20 Insurance....................................................... 52
9.21 Securities Laws................................................. 53
9.22 Governmental Authorizations..................................... 53
9.23 Representations in Other Agreements True and Correct............ 53
9.24 Business Locations; Trade Names................................. 53
9.25 Solvency........................................................ 53
9.26 Title IV Compliance............................................. 53
9.27 No Burdensome Restrictions...................................... 55
9.28 Copyrights, Patents, Trademarks and Licenses, etc. ............. 56
9.29 Title to Assets; Leases......................................... 56
9.30 Labor Disputes.................................................. 56
9.31 Year 2000....................................................... 56
SECTION 10. AFFIRMATIVE COVENANTS......................................... 57
10.1 Reports, Certificates and Other Information..................... 57
10.2 Corporate Existence; Foreign Qualification...................... 62
10.3 Books, Records and Inspections.................................. 62
10.4 Insurance....................................................... 62
10.5 Taxes and Liabilities........................................... 62
10.6 Pension Plans and Welfare Plans................................. 63
10.7 Compliance with Laws............................................ 63
10.8 Title IV Compliance............................................. 63
10.9 Maintenance of Permits.......................................... 65
10.10 Environmental Compliance....................................... 66
SECTION 11. NEGATIVE COVENANTS............................................ 66
11.1 Limitation on Indebtedness...................................... 66
11.2 Liens........................................................... 67
11.3 Consolidation, Merger, etc. .................................... 68
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11.4 Asset Disposition, etc. ........................................ 69
11.5 Dividends, etc. ................................................ 69
11.6 Investments..................................................... 70
11.7 Rental Obligations.............................................. 70
11.8 Subordinated Debt............................................... 70
11.9 Take or Pay Contracts........................................... 71
11.10 Regulation U.................................................... 71
11.11 Subsidiaries.................................................... 71
11.12 Other Agreements................................................ 72
11.13 Business Activities............................................. 72
11.14 Change of Location or Name...................................... 72
11.15 Transactions with Affiliates.................................... 73
11.16 Limitation on Sales and Leasebacks.............................. 73
11.17 Modification of Certain Documents............................... 73
SECTION 12. FINANCIAL COVENANTS........................................... 73
12.1 Minimum Interest Coverage Ratio................................. 73
12.2 Maximum Leverage Ratio.......................................... 74
12.3 Minimum Net Worth............................................... 74
SECTION 13. CONDITIONS.................................................... 74
13.1 Initial Borrowing............................................... 74
13.2 Conditions of each Letter of Credit............................. 76
13.3 All Loans and Letters of Credit................................. 76
13.4 Loans for Permitted Acquisitions................................ 77
SECTION 14. EVENTS OF DEFAULT AND THEIR EFFECT............................ 77
14.1 Events of Default............................................... 77
14.2 Effect of Event of Default...................................... 80
SECTION 15. THE ADMINISTRATIVE AGENT AND FOREIGN CURRENCY AGENT
15.1 Authorization and Action........................................ 80
15.2 Liability of the Administrative Agent........................... 81
15.3 LaSalle and Affiliates.......................................... 82
15.4 Lender Credit Decision.......................................... 82
15.5 Indemnification................................................. 82
15.6 Successor Administrative Agent or Foreign Currency Agent,
as the case may be.............................................. 83
15.7 Collateral Matters.............................................. 84
SECTION 16. ASSIGNMENTS AND PARTICIPATIONS................................ 84
16.1 Assignments..................................................... 84
16.2 Participations.................................................. 86
16.3 Disclosure of Information....................................... 86
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16.4 Foreign Transferees............................................. 87
SECTION 17. MISCELLANEOUS................................................. 88
17.1 Waivers and Amendments.......................................... 88
17.2 Notices......................................................... 88
17.3 Regulation U.................................................... 89
17.4 Payment of Costs and Expenses................................... 89
17.5 Indemnity....................................................... 90
17.6 Subsidiary References........................................... 90
17.7 Captions........................................................ 90
17.8 Governing Law................................................... 90
17.9 Counterparts.................................................... 91
17.10 SUBMISSION TO JURISDICTION; WAIVER OF VENUE..................... 91
17.11 Service of Process.............................................. 92
17.12 WAIVER OF JURY TRIAL............................................ 92
17.13 Successors and Assigns.......................................... 92
17.14 Judgment Currency............................................... 93
17.15 Joint and Several Liability..................................... 94
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<PAGE>
SCHEDULES AND EXHIBITS
SCHEDULES
- ---------
SCHEDULE 2.1 Schedule of Lenders and Percentages
SCHEDULE 4.13 Existing Letters of Credit
SCHEDULE 9.1 Stockholders
SCHEDULE 9.6 Financial Statements
SCHEDULE 9.8 Material Litigation
SCHEDULE 9.10 Subsidiaries
SCHEDULE 9.11 ERISA
SCHEDULE 9.15 Collateral
SCHEDULE 9.16 Taxes
SCHEDULE 9.18 Environmental Warranties
SCHEDULE 9.20 Insurance
SCHEDULE 9.24 Business Locations; Trade Names
SCHEDULE 9.26(c) Title IV Compliance Information
SCHEDULE 9.26(f) Title IV Compliance Disclosure
SCHEDULE 9.26(g) Cohort Default Rate
SCHEDULE 9.28 Intellectual Property
SCHEDULE 9.29 Material Leases
SCHEDULE 11.1 Indebtedness
SCHEDULE 11.2 Liens
SCHEDULE 11.6 Investments
SCHEDULE 11.11 Guarantors
EXHIBITS
- --------
EXHIBIT A Form of Revolving Note
EXHIBIT B Form of Borrowing Request
EXHIBIT C Form of Continuation/Conversion Notice
EXHIBIT D Form of LC Application
EXHIBIT E Form of Affirmation of Borrower Pledge Agreement
EXHIBIT F Form of Affirmation of Gibbs Pledge Agreement
EXHIBIT G Form of Affirmation of Subsidiary Guaranty
EXHIBIT H Form of Officer's Certificate
EXHIBIT I Form of Compliance Certificate
EXHIBIT J-1 Form of Opinion of Katten, Muchin & Zavis, counsel to the Parent
and its domestic Subsidiaries
EXHIBIT J-2 Form of Opinion of Fraser & Beatty, counsel to the Co-Borrowers
EXHIBIT J-3 Form of Opinion of McMaster Gervais, counsel to the Co-Borrowers
EXHIBIT K Form of Assignment Agreement
EXHIBIT L Form of Financing Request
<PAGE>
EXHIBIT M Form of Affirmation of IAMD (Canada) Pledge Agreement
EXHIBIT N Form of Affirmation of IAMD, Limited Pledge Agreement
<PAGE>
AMENDED AND RESTATED
CREDIT AGREEMENT
THIS AMENDED AND RESTATED CREDIT AGREEMENT, dated as of October 26, 1998,
is made by and among CAREER EDUCATION CORPORATION, a Delaware corporation (the
"Parent"), ACADEMIE INTERNATIONALE dU DESIGN INC., a Quebec corporation ("IAMD-
Montreal") and INTERNATIONAL ACADEMY OF MERCHANDISING & DESIGN (CANADA) LTD., an
Ontario corporation ("IAMD (CANADA)"; and together with IAMD Montreal
collectively called the "Co-Borrowers"), the lenders party hereto (herein,
together with any Eligible Assignees thereof, collectively called the "Lenders",
and each individually called a "Lender"), LASALLE NATIONAL BANK ("LaSalle"), as
administrative agent for the Lenders (herein, in such capacity, together with
any successor thereto in such capacity, called the "Administrative Agent"), and
THE BANK OF NOVA SCOTIA ("Scotia Bank"), as foreign currency agent for the
Lenders (herein, in such capacity, together with any successor thereto in such
capacity, called the "Foreign Currency Agent").
Background
----------
1. The Parent, the Administrative Agent and certain of the Lenders are
parties to that certain Credit Agreement dated as of May 30, 1997 (as heretofore
amended or modified, the "Original Credit Agreement") pursuant to which the
Lenders made loans and issued, or participated in the issuance of, Letters of
Credit for the account of the Parent from time to time.
2. The Parent, the Co-Borrowers, the Administrative Agent, the Foreign
Currency Agent and the Lenders now desire to amend and restate the Original
Credit Agreement to, among other things, (i) extend the Revolving Loan
Termination Date, (ii) decrease the Revolving Commitment Amount, and (iii)
provide for the making of Loans and issuance of Letters of Credit denominated in
Canadian Dollars.
NOW, THEREFORE, in consideration of the mutual promises herein contained
and for other good and valuable consideration, the receipt and sufficiency of
which is hereby acknowledged, the parties hereto agree as follows:
SECTION 1. DEFINITIONS AND ACCOUNTING TERMS
<PAGE>
SECTION 1.1 Certain Defined Terms. As used in this Agreement, the
following terms shall have the following meanings (such meanings to be equally
applicable to both the singular and plural forms of the terms defined):
"Accrediting Body" shall mean, with respect to any Educational Institution,
any entity or organization, whether governmental, government-chartered, inter-
governmental, private or quasi-private, which engages in granting or withholding
licensing, accreditation or similar approval for such Educational Institution,
in accordance with standards relating to the performance, operation, financial
condition and/or academic standing of private post-secondary schools, including,
without limitation, as applicable, the Accrediting Commission of Career Schools
and Colleges of Technology, the Accrediting Council for Independent Colleges and
Schools and the Western Association of Schools and Colleges.
"Acquired Person" shall mean any Person acquired or the Person holding the
assets acquired upon the consummation of an Acquisition permitted by the terms
of this Agreement.
"Acquisition" shall mean any transaction or series of transactions for the
purpose of or resulting, directly or indirectly, in (a) the acquisition (in one
or a series of related transactions) of all or substantially all of the assets
of a Person, or of any business or division of a Person, (b) the acquisition (in
one or a series of related transactions) of in excess of 50% of the capital
stock, partnership interests, membership interests or other equity securities of
any Person, or otherwise causing any Person to become a Subsidiary of the
Parent, or (c) a merger or consolidation or any other combination of the Parent
or one of its Subsidiaries with another Person (other than a Person that is a
Subsidiary of the Parent immediately prior to such merger or consolidation);
provided that the Parent or such Subsidiary, as the case may be, is the
surviving entity (unless otherwise consented to by the Administrative Agent), in
each case subject to and to the extent permitted by the terms of this Agreement.
"Administrative Agent" shall mean LaSalle in its capacity as administrative
agent for the Lenders hereunder, and any successor administrative agent in
accordance with the terms of Section 15.6.
"Affected Lender" - see Section 7.4.
<PAGE>
"Affiliate" of any Person shall mean any other Person which, directly or
indirectly, controls, is controlled by or is under common control with such
Person (excluding any trustee under, or any commitment with responsibility for
administering, any Pension Plan). A Person shall be deemed to be "controlled
by" any other Person if such other Person possesses, directly or indirectly,
power (a) to vote 5% or more of the securities (on a fully diluted basis) having
ordinary voting power for the election of directors or managing general
partners; or (b) to direct or cause the direction of the management and policies
of such Person whether through the ownership of voting securities, membership
interests, by contract, or otherwise.
"Agreement" shall mean this Amended and Restated Credit Agreement, as
hereafter amended, modified, restated, refinanced, refunded or renewed from time
to time in whole or in part.
"Applicable Base/Prime Rate Margin" - see Section 5.1.
"Applicable Currency" shall mean, as to any particular payment or Loan,
Dollars or Canadian Dollars in which it is denominated or is payable.
"Applicable LIBOR Rate Margin" - see Section 5.1.
"Assignment Agreement" - see Section 16.1.
"Base Rate" shall mean, for any day, a fluctuating rate of interest per
annum equal to the greater of (a) the rate of interest in effect for such day as
publicly announced from time to time by LaSalle in Chicago, Illinois, as its
"prime rate", or (b) a rate of interest per annum (rounded upward to the next
higher 1/16th of 1% if not already an integral multiple of 1/16th of 1%) equal
to the Federal Funds Rate in effect at the commencement of business on such day
plus 1/2% per annum. The "prime rate" is a rate of interest set by LaSalle
based upon various factors including LaSalle's costs and desired return, general
economic conditions and other factors, and is used as a reference point for
pricing some loans, which may be priced at, above, or below such announced rate.
If for any reason the Administrative Agent shall have determined (which
determination shall be conclusive in the absence of manifest error) that it is
unable to ascertain the Federal Funds Rate for any reason (including, without
limitation, the inability or failure of the Administrative Agent to obtain
sufficient bids or publications in accordance with the terms hereof), the Base
Rate shall be
<PAGE>
determined in accordance with clause (a) of this definition until the
circumstances giving rise to such inability no longer exist.
"Base Rate Loan" shall mean any Loan which bears interest at or by
reference to the Base Rate.
"Beneficiary" shall mean the beneficiary under any Letter of Credit.
"Borrower Pledge Agreement" - see Section 8.1.
"Borrowing" shall mean a borrowing hereunder consisting of Loans made to
the Parent or, with respect to any Canadian Dollar Loan, a Co-Borrower at the
same time by the Lenders pursuant to Section 2, and with respect to LIBOR Rate
Loans having the same Interest Period. A Borrowing may be a Base Rate
Borrowing, a LIBOR Rate Borrowing or, with respect to any Canadian Dollar Loan,
a Prime Rate Borrowing.
"Borrowing Request" - see Section 3.2.
"Business Day" shall mean: (a) in the case of a Business Day which relates
to a LIBOR Rate Loan, any day of the year on which banks are open for business
in Chicago, Illinois and on which dealings are carried on in the London
eurodollar market; (b) in the case of a Business Day which relates to a Base
Rate Loan, any day of the year on which banks are open for business in Chicago,
Illinois; and (c) in the case of a Business Day which relates to a Canadian
Dollar Loan any day of the year on which banks are open for business in Chicago,
Illinois and Toronto, Canada.
"Canadian Dollar" shall mean the lawful money of Canada.
"Canadian Dollar Loan" means any Revolving Loan which is denominated in
Canadian Dollars and which bears interest at or by reference to the Prime Rate.
"Capitalized Lease Liabilities" shall mean, with respect to any Person, all
monetary obligations of such Person under any leasing or similar arrangement
which, in accordance with GAAP, would be classified as a capitalized lease, and,
for purposes of this Agreement, the amount of such obligations shall be the
capitalized amount thereof, determined in accordance with GAAP, and the stated
maturity thereof shall be the date of the last payment of rent or any other
amount due under such lease prior to
<PAGE>
the first date upon which such lease may be terminated by the lessee without
payment of a penalty.
"Cash Equivalents" shall mean (a) securities with maturities of three (3)
months or less from the date of acquisition issued and fully guaranteed or
insured by the United States Government or any agency thereof, (b) certificates
of deposit, eurodollar time deposits, overnight bank deposits, bankers'
acceptances and repurchase agreements of any Lender or any other commercial bank
organized under the laws of the United States or any state thereof having
capital and surplus and undivided profits aggregating at least $250,000,000 and
whose unsecured long-term debt obligations are rated at least A-1 by S&P or A3
by Moody's having maturities of three (3) months or less from the date of
acquisition, and (c) commercial paper rated at least A-1 by S&P or P-1 by
Moody's.
"CEC Management" shall mean CEC Management, Inc., an Illinois corporation.
"CERCLA" shall mean the Comprehensive Environmental Response Compensation
and Liability Act of 1980, as amended.
"CERCLIS" shall mean the Comprehensive Environmental Response Compensation
Liability Information System List.
"C.F.R." shall mean the Code of Federal Regulations.
"Change in Control" shall mean the time at which (a) any Person (including
a Person's Affiliates and associates) or group (as that term is understood under
Section 13(d) of the Securities Exchange Act of 1934, as amended, and the rules
and regulations thereunder), other than the Control Group, has become the
beneficial owner of a percentage (based on voting power, in the event different
classes of stock shall have different voting powers) of the voting stock of the
Parent greater than twenty-five percent (25%), (b) the Control Group no longer
has the ability to control the appointment or election of a majority of the
directors of the Parent, (c) there shall be consummated any consolidation or
merger of the Parent or any of its Subsidiaries pursuant to which the Parent's
or such Subsidiary's common stock (or other capital stock) would be converted
into cash, securities or other property, other than a merger or consolidation of
the Parent or such Subsidiary in which the holders of such common stock (or such
other capital stock) immediately prior to the merger have the same proportionate
ownership, directly or indirectly, of common stock of the surviving corporation
<PAGE>
immediately after the merger as they had of the Parent's or such Subsidiary's
common stock immediately prior to such merger, (d) all or substantially all of
the Parent's or any of its Subsidiary's assets shall be sold, leased, conveyed
or otherwise disposed of as an entirety or substantially as an entirety to any
Person (including an Affiliate or associate of the Parent or its Subsidiaries)
in one or a series of transactions, (e) Jack M. Larson shall cease to perform
his duties as President and CEO of the Parent, unless within one hundred and
twenty (120) days thereafter, a replacement for him acceptable to the
Administrative Agent (in its reasonable judgment) is found, unless the Parent is
diligently pursuing appointment of a replacement chief executive officer, but in
any event such replacement is appointed within 150 days, or (f) the Parent
ceases to own free and clear of all Liens (other than Permitted Liens), at least
100% of the outstanding shares of voting stock of any of its Subsidiaries
existing on the Restatement Effective Date on a fully diluted basis and, with
respect to any Subsidiary created or acquired after the Restatement Effective
Date, at least 66-2/3% of the outstanding shares of voting stock of such
Subsidiary on a fully diluted basis, except in connection with a disposition
permitted by Section 11.3.
"Charges" - see Section 6.8.
"Closing Date" shall mean May 30, 1997.
"Co-Borrower(s)" - see Preamble.
"Code" shall mean the Internal Revenue Code of 1986, as amended.
"Collateral" shall mean all of the collateral security described or
provided for in Section 8 together with all property and/or rights on or in
which a Lien is now or hereafter granted by any Person to the Administrative
Agent (or to any agent, trustee or other party acting on behalf of the
Administrative Agent), for the benefit of the Lenders, pursuant to the Borrower
Pledge Agreement, the Gibbs Pledge Agreement, the IAMD, Limited Pledge
Agreement, the IAMD (Canada) Pledge Agreement, the Subsidiary Guaranty or any
other instruments or documents provided for herein or delivered hereunder or in
connection herewith or therewith.
"Commitment Fee" - see Section 5.7(a).
"Commitments" - see Section 2.3.
<PAGE>
"Compliance Certificate" - see Section 10.1.4.
"Compliance Reports" - see Section 9.27(f).
"Consolidated Capital Expenditures" shall mean, for any period, the capital
expenditures of the Parent and its Subsidiaries for such period, as the same are
(or would in accordance with GAAP be) set forth in the consolidated statement of
changes in financial position of the Parent and its Subsidiaries for such
period, and including in any event the amount of any Investment during such
period pursuant to Sections 11.6(d) and 11.6(e).
"Consolidated EBITDA" shall mean, for any period, Consolidated Net Income
for such period, plus (a) Consolidated Interest Expense for such period, plus
(b) the aggregate amounts deducted in determining Consolidated Net Income in
respect of (i) cash Income Taxes paid, (ii) depreciation and amortization, and
(iii) interest income, less (c) any Non-Recurring Items.
"Consolidated Interest Expense" shall mean, for any period, the aggregate
interest expense (net of interest income) of the Parent and its Subsidiaries for
such period including, without limitation, (a) the portion of any obligation
under Capital Leases allocable to interest expense in accordance with GAAP, and
(b) the portion of any debt discount that shall be amortized in such period.
"Consolidated Net Income" shall mean, for any period, the consolidated net
income (or loss) of the Parent and its Subsidiaries for such period.
"Consolidated Net Worth" shall mean the consolidated net worth of the
Parent and its Subsidiaries as determined in accordance with GAAP.
"Contingent Obligation" shall mean any agreement, undertaking or
arrangement by which any Person guarantees, endorses or otherwise becomes or is
contingently liable upon (by direct or indirect agreement, contingent or
otherwise, to provide funds for payment, to supply funds to, or otherwise to
invest in, a debtor, or otherwise to assure a creditor against loss) the debt,
obligation or other liability of any other Person (other than by endorsements of
instruments in the course of collection), or guarantees the payment of dividends
or other distributions upon the shares of any other Person. The amount of any
Person's obligation under any Contingent Obligation shall (subject to any
<PAGE>
limitation set forth therein) be deemed to be the outstanding principal amount
(or maximum outstanding principal amount, if larger) of the debt, obligation or
other liability guaranteed thereby.
"Continuation/Conversion Notice" - see Section 3.5.
"Control Group" shall mean, the Parent, the Management Stockholders, and
Affiliates thereof.
"Controlled Group" shall mean all members of a controlled group of
corporations and all members of a controlled group of trades or businesses
(whether or not incorporated) under common control which, together with the
Parent, are treated as a single employer under section 414(b) or section 414(c)
of the Code or section 4001 of ERISA. For purposes of this definition, the term
Parent shall be deemed to include any and all Subsidiaries of the Parent.
"Default" shall mean any condition or event which with the giving of notice
or lapse of time or both would, unless cured or waived, become an Event of
Default.
"Disposition" - see Section 6.4(b).
"DOE" shall mean the United States Department of Education and any
successor agency administering federal student financial assistance under Title
IV.
"Dollar Equivalent" shall mean, at any time, (a) as to any amount
denominated in Dollars, the amount thereof at such time, and (b) as to any
amount denominated in Canadian Dollars, the equivalent amount in Dollars as
determined by the Foreign Currency Agent at such time on the basis of the Spot
Rate for the purchase of Dollars with Canadian Dollars.
"Dollars" and the sign "$" shall mean lawful money of the United States of
America.
"Educational Institution" shall mean each of the Subsidiaries of the Parent
(other than CEC Management, International Academy of Merchandising & Design,
Ltd., Market Direct and Gibbs) and any other Acquired Person acquired after the
Restatement Effective Date pursuant to a Permitted Acquisition, in each case,
which constitutes an Eligible Facility and satisfies clauses (c)-(e) of the
definition of Permitted Acquisition.
<PAGE>
"Effective Date" shall mean May 30, 1997.
"Eligible Assignee" shall mean any bank (including, without limitation, any
Federal Reserve Bank), insurance company, pension fund, mutual fund, investment
fund, or other financial institution.
"Eligible Facility" shall mean a vocational or similar educational
institution or any institution involved in the offering of short-term or long-
term educational corporate seminar training.
"Environmental Laws" shall mean all federal, state or local laws, statutes,
common law duties, rules, regulations, ordinances and codes, together with all
administrative orders, directed duties, requests, licenses, authorizations and
permits of, and agreements with, any Governmental Authorities, in each case
relating to environmental, health, safety and land use matters.
"ERISA" shall mean the Employee Retirement Income Security Act of 1974, as
amended.
"Eurocurrency Reserve Percentage" shall mean, with respect to any LIBOR
Rate Loan for any Interest Period, a percentage (expressed as a decimal) equal
to the daily average during such Interest Period, as prescribed by the Federal
Reserve Board, for determining the aggregate maximum reserve requirements
(including all basic, supplemental, marginal and other reserves) applicable to
"Eurocurrency liabilities" pursuant to Regulation D or any other then-applicable
regulation of the Federal Reserve Board which prescribes reserve requirements
applicable to "Eurocurrency liabilities," as defined in Regulation D, as
applicable to the class of banks of which the Administrative Agent is a member.
Without limiting the effect of the foregoing, the Eurocurrency Reserve
Percentage shall reflect any other reserves required to be maintained by the
Administrative Agent against (a) any category of liabilities that includes
deposits by reference to which the LIBOR Rate (Reserve Adjusted) is to be
determined, or (b) any category of extensions of credit or other assets that
includes LIBOR Rate Loans. For purposes of this Agreement, any LIBOR Rate Loan
hereunder shall be deemed to be "Eurocurrency liabilities," as defined in
Regulation D, and, as such, shall be deemed to be subject to such reserve
requirements without the benefit of, or credit for, proration, exceptions or
offsets which may be available to the Administrative Agent from time to time
under Regulation D.
<PAGE>
"Event of Default" shall mean any of the events described in Section 14.1.
"Existing Letters of Credit" shall mean each letter of credit listed on
Schedule 4.13.
"Existing Revolving Note(s)" shall mean, collectively, the promissory notes
evidencing Revolving Loans issued under the Original Credit Agreement prior to
the Restatement Effective Date.
"Federal Funds Rate" shall mean, for any day, the rate set forth in the
weekly statistical release designated as H.15(519), or any successor
publication, published by the Federal Reserve Bank of New York (including any
such successor, "H.15(519)") on the preceding Business Day opposite the caption
"Federal Funds (Effective)"; or, if for any relevant day such rate is not so
published on any such preceding Business Day, the rate for such day will be the
arithmetic mean as determined by the Administrative Agent of the rates for the
last transaction in overnight Federal funds arranged prior to 9:00 a.m. (New
York City time) on that day by each of three leading brokers of Federal funds
transactions in New York City selected by the Administrative Agent.
"Fiscal Quarter" or "FQ" shall mean any fiscal quarter of a Fiscal Year.
"Fiscal Year" or "FY" shall mean any period of twelve consecutive calendar
months ending on December 31; references to a Fiscal Year with a number
corresponding to any calendar year (e.g., the "1996 Fiscal Year") refer to the
Fiscal Year ending on the December 31 occurring during such calendar year.
"FX Trading Office" means the Toronto, Canada office of the Foreign
Currency Agent, or such other of the Foreign Currency Agent's offices as it may
designate from time to time.
"GAAP" - see Section 1.3.
"Gibbs" shall mean The Katharine Gibbs Schools, Inc.
"Gibbs Pledge Agreement" - see Section 8.1.
"Guarantor" shall mean collectively, (or individually each a "Guarantor")
each of the entities set forth on Schedule 11.11,
<PAGE>
and any other Subsidiary of the Parent that becomes a guarantor pursuant to
Section 11.11.
"Hazardous Material" shall mean: (a) any "hazardous substance," as defined
by CERCLA; (b) any "hazardous waste," as defined by the Resource Conservation
and Recovery Act, as amended; (c) any petroleum product; or (d) any pollutant or
contaminant or hazardous, dangerous or toxic chemical, material or substance
within the meaning of any other applicable federal, state or local law,
regulation, ordinance or requirement (including consent decrees and
administrative orders) relating to or imposing liability or standards of conduct
concerning any hazardous, toxic or dangerous waste, substance or material, all
as amended or hereafter amended.
"Hedging Obligations" shall mean, with respect to any Person, all
liabilities of such Person under interest rate swap agreements, interest rate
cap agreements and interest rate collar agreements or agreements designed to
protect such Person against fluctuations in interest rates or currency exchange
rates, net of any payment obligations owed by the issuer of any such agreements
to such Person.
"IAMD (Canada)" - see Preamble.
"IAMD-Montreal" - see Preamble.
"IAMD (Canada) Pledge Agreement" shall mean that certain pledge agreement
dated as of June 30, 1997 between IAMD (Canada) and the Administrative Agent
whereby IAMD (Canada) pledged the capital stock of its Subsidiaries to the
Administrative Agent under the Original Credit Agreement.
"IAMD, Limited Pledge Agreement" shall mean that certain pledge agreement
dated as of June 30, 1997 between IAMD, Limited and the Administrative Agent
whereby IAMD, Limited pledged all the capital stock of its subsidiaries to the
Administrative Agent under the Original Credit Agreement.
"Income Taxes" shall mean, with respect to any Person, any Taxes in which
the base is measured by net income of such Person.
"Indebtedness" shall mean, with respect to any Person at any date, without
duplication: (a) all obligations of such Person for borrowed money or in
respect of loans or advances; (b) all obligations of such Person evidenced by
bonds, debentures, notes or other similar instruments including, without
limitation, all
<PAGE>
obligations comprising Subordinated Debt of such Person; (c) all obligations in
respect of letters of credit, whether or not drawn, and bankers' acceptances
issued for the account of such Person; (d) all Capitalized Lease Liabilities of
such Person; (e) all Hedging Obligations of such Person; (f) all obligations of
such Person secured by a contractual lien; (g) all trade payables of such Person
which are more than thirty (30) days past due; (h) all obligations of such
Person with respect to operating leases; (i) all other items (exclusive of
negative goodwill) which, in accordance with GAAP, would be included as
liabilities on the liability side of the balance sheet of such Person; (j)
whether or not so included as liabilities in accordance with GAAP, all
obligations of such Person to pay the deferred purchase price of property or
services and Indebtedness secured by a Lien on property owned or being purchased
by such Person (including Indebtedness arising under conditional sales or other
title retention agreements) whether or not such Indebtedness shall have been
assumed by such Person or is limited in recourse; (k) all Contingent Obligations
of such Person whether or not in connection with the foregoing.
"Interest Coverage Ratio" shall mean, for any period, the ratio of
Consolidated EBITDA for such period minus depreciation and amortization for such
period, to Consolidated Interest Expense for such period plus any accrued fees
under this Agreement payable during such period.
"Interest Payment Date" shall mean, as to any LIBOR Rate Loan, the last day
of each Interest Period applicable to such Loan and each date such Loan is
converted into another Type of Loan and, as to any Base Rate Loan or Canadian
Dollar Loan, the last Business Day of each Quarterly Payment Date; provided,
however, that if any Interest Period for a LIBOR Rate Loan exceeds three (3)
months, the date that falls three (3) months after the beginning of such
Interest Period and after each Interest Payment Date thereafter is also an
Interest Payment Date.
"Interest Period" - see Section 5.4.
"Investment" shall mean any investment in any Person, whether by means of
share purchase, capital contribution, loan, time deposit or otherwise.
"LaSalle" shall mean LaSalle National Bank, a national banking association
having its principal place of business at 135
<PAGE>
South LaSalle Street, Chicago, Illinois 60603, in its individual capacity.
"LaSalle Fee Letter" - see Section 5.7(d).
"LC Administrative Fees" - see Section 5.7(c).
"LC Application" - see Section 4.1.
"LC Commitment Fee" - see Section 5.7(b).
"LC Commitments" - see Section 2.5.
"LC Obligations" shall mean any and all obligations of every description of
the Parent or any of its Subsidiaries in connection with the Letters of Credit
issued pursuant to this Agreement, including without limitation all
reimbursement obligations (whether absolute or contingent) under any LC
Application, and all obligations in respect of related fees or expenses.
"Lenders" or "Lender" - see Preamble.
"Lending Office" shall mean, with respect to any Lender, any office
designated by such Lender in its sole discretion beneath its signature hereto
(or in an Assignment Agreement) or otherwise from time to time by written notice
to the Parent and the Administrative Agent, as a Lending Office for purposes
hereunder. A Lender may designate separate Lending Offices for the purposes of
making, maintaining or continuing Base Rate Loans, Canadian Dollar Loans or
LIBOR Rate Loans and, with respect to LIBOR Rate Loans, such Lending Office may
be a foreign branch or an Affiliate of such Lender or such Lender's holding
company.
"Letters of Credit" - see Section 2.2.
"Leverage Ratio" shall mean, with respect to any period, the ratio of (a)
the aggregate of all Senior Funded Debt of the Parent and its Subsidiaries for
such period, to (b) Consolidated EBITDA for such period.
"Liabilities" shall mean all obligations of the Parent and/or any of its
Subsidiaries to the Lenders (or any of their Affiliates), the Administrative
Agent and the Foreign Currency Agent howsoever created, arising or evidenced,
whether direct or indirect, joint or several, absolute or contingent, or now or
hereafter existing, or due or to become due, which arise out of
<PAGE>
or in connection with (a) this Agreement, the Notes, the Letters of Credit or
the other Related Documents, or (b) any agreement entered into by the Parent or
any of its Subsidiaries with respect to any Hedging Obligation.
"LIBOR Rate" shall mean, with respect to any LIBOR Rate Loan for any
Interest Period, the rate per annum equal to the average (rounded upward, if
necessary, to the next higher 1/16th of 1%) of the respective rates notified to
the Administrative Agent by LaSalle as the rate per annum at which deposits in
the Applicable Currency in immediately available funds are offered to the
Lending Office of the Administrative Agent used for quoting such LIBOR Rates two
Business Days prior to the beginning of such Interest Period by prime banks in
the London eurodollar market at their request at approximately 11:00 A.M.
(London time), for delivery on the first day of such Interest Period, for the
number of days comprised therein and in an amount equal or comparable to the
amount of the LIBOR Rate Loan of the Administrative Agent for such Interest
Period.
"LIBOR Rate Loan" shall mean any Loan which bears interest at a rate
determined by reference to the LIBOR Rate (Reserve Adjusted).
"LIBOR Rate (Reserve Adjusted)" shall mean, with respect to any LIBOR Rate
Loan for any Interest Period, a rate per annum (rounded upward, if necessary, to
the nearest 1/16th of 1%) determined pursuant to the following formula:
LIBOR Rate = LIBOR Rate
----------
(Reserve Adjusted) 1-Eurocurrency
Reserve Percentage
"Lien" shall mean any security interest, mortgage, pledge, hypothecation,
assignment, deposit arrangement, encumbrance, lien (statutory or other), claim
or other priority or preferential arrangement of any kind or nature whatsoever.
"Litigation" shall mean any litigation, proceeding (including, without
limitation, any governmental proceeding or arbitration proceeding), claim,
lawsuit, and/or investigation pending or threatened against or involving the
Parent or any of its Subsidiaries or any of its or their businesses or
operations.
"Loans" - see Section 2.3.
<PAGE>
"Management Stockholders" shall mean those stockholders of the Parent or
any of its Subsidiaries who are management employees of the Parent.
"Market Direct" shall mean Market Direct, Inc., an Illinois corporation.
"Material Adverse Change" or "Material Adverse Effect" shall mean any
change, event, action, condition or effect which individually or in the
aggregate (a) impairs the validity or enforceability of this Agreement, or any
Related Document, or (b) subjects any officer of the Parent or any of its
Subsidiaries to criminal liability, or (c) materially and adversely affects the
consolidated business, operations, prospects or financial condition of the
Parent and its Subsidiaries, taken as a whole, or (d) impairs the ability of the
Parent or any of its Subsidiaries to perform its respective obligations under
this Agreement and the Related Documents, or (e) materially adversely affects
the perfection or priority of any Lien granted under any Related Document.
"Material Litigation" or "Material Litigation Development" shall mean any
Litigation, or development in any Litigation, as the case may be (a) which
involves this Agreement, any Related Document or other transactions contemplated
hereby, or (b) which could reasonably be expected to have a Material Adverse
Effect.
"Moody's" shall mean Moody's Investors Service, Inc.
"Net Proceeds" shall mean, with respect to the disposition of any asset by
any Person, the aggregate amount of cash and readily marketable Cash Equivalents
received by such Person in respect of such disposition minus the sum of (a)
reasonable costs and expenses (including costs of discontinuance and Taxes other
than Income Taxes) incurred in connection with such disposition and required to
be paid in cash, (b) the estimated Income Tax to be paid by such Person in
connection with such disposition, and (c) any reserves required in accordance
with GAAP relating to any liabilities assumed or incurred by the Parent in
connection with any transaction resulting in Net Proceeds. For purposes of this
definition, the Net Proceeds received by any Person in respect of any
disposition shall include such Cash Equivalents as may be received ("subsequent
cash proceeds") by such Person at any time or from time to time in connection
with the sale, transfer, lease or other disposition, or otherwise in respect of,
any consideration other than cash or readily marketable Cash Equivalents
received by such Person in respect of such
<PAGE>
disposition, less the estimated Taxes and Income Tax to be paid in connection
with the receipt of such subsequent cash proceeds that were not theretofore
deducted in computing Net Proceeds.
"Non-Recurring Items" shall mean any of the following items of gain or loss
to the extent reflected in the determination of Consolidated Net Income for any
period: (a) extraordinary gains and losses under GAAP, and/or amortization of
fees and expenses incurred in connection with the transaction in an aggregate
amount and (b) write-downs or write-offs of assets.
"Notes" shall mean, collectively, the Revolving Notes, together with any
promissory note issued and accepted by any Lender in replacement of or
substitution for any Revolving Note.
"Original Credit Agreement" - see first recital.
"Overnight Rate" shall mean, for any day, the rate of interest per annum at
which overnight deposits in Canadian Dollars, in an amount approximately equal
to the Dollar amount with respect to which such rate is being determined, would
be offered for such day by the Foreign Currency Agent to major banks in the
London or other applicable offshore interbank market.
"Parent" - see Preamble.
"Pension Plan" shall mean a "pension plan," as such term is defined in
section 3(2) of ERISA (including a multiemployer plan as defined in section
4001(a)(3) of ERISA), to which the Parent or any corporation, trade or business
that is, along with the Parent, a member of a Controlled Group, may have
liability, including any liability by reason of having been a substantial
employer within the meaning of section 4063 of ERISA at any time during the
preceding six years, or by reason of being deemed to be a contributing sponsor
under section 4069 of ERISA. For purposes of this definition, the term Parent
shall be deemed to include any and all Subsidiaries of the Parent.
"Percentage" shall mean, relative to any Lender, the percentage set forth
opposite such Lender's name on Schedule 2.1 (or set forth in an Assignment
Agreement), as such Percentage may be adjusted from time to time pursuant
Section 2.1 or pursuant to Assignment Agreement(s) executed by such Lender and
its Eligible Assignee and delivered pursuant to Section 16.1.
<PAGE>
"Permitted Acquisition" shall mean an Acquisition on or after the
Restatement Effective Date which meets all of the following requirements:
(a) neither the Person being acquired nor its board of directors shall
have (i) announced that it will oppose such Acquisition or (ii) commenced
any litigation which alleges that such Acquisition or any other acquisition
involving the Parent or any of its Subsidiaries violates, or will violate,
any applicable law;
(b) the Person being acquired is an Eligible Facility or a holding
company therefor and must demonstrate positive Consolidated EBITDA for the
12 month period immediately prior to the Acquisition;
(c) prior to its Acquisition by the Parent or any of its Subsidiaries,
the Eligible Facility is and, subject to receipt of approval of the
Acquisition by the DOE and/or each other applicable Accrediting Body, will
be accredited by each applicable Accrediting Body, if any, and offers
primarily associate and/or bachelor degree programs or certificate
programs;
(d) prior to its Acquisition by the Parent or any of its Subsidiaries,
the Eligible Facility, if applicable, is eligible, and after DOE review and
approval of the change of control pursuant to the Acquisition, if
applicable, will be eligible, for participation in Title IV Programs;
(e) the Acquisition of the Eligible Facility meets all conditions to
change of ownership under Title IV, if applicable;
(f) the Parent shall have given the Administrative Agent and the
Lenders at least 45 days prior notice of such Acquisition (it being
understood that the Parent and/or such Subsidiary making such Acquisition
shall promptly provide such information as the Administrative Agent or any
Lender may reasonably request regarding such Acquisition);
(g) immediately prior to and after giving effect to such Acquisition
(and the incurrence or assumption of any Indebtedness in connection
therewith), the Parent will be in pro forma compliance with each of the
financial covenants set forth in Section 12, assuming for purposes of
calculating Consolidated Net Income and related items, that
<PAGE>
such Acquisition had occurred one year prior to the last day of the most
recently-ended Fiscal Quarter for which the Parent has delivered financial
statements pursuant to Section 10.1.1 or 10.1.2;
(h) if the total consideration (including without limitation
consideration in the form of cash, assumed liabilities, non-compete
payments or other payments, but excluding consideration paid in the form of
capital stock up to $20,000,000) to be paid to acquire such Acquired Person
is greater than $10,000,000, the Parent shall have received the prior
written consent of the Required Lenders; and
(i) the Administrative Agent shall have received (and the Parent or
the applicable Subsidiary of the Parent shall cause the duly authorized
officers of such Acquired Person to duly execute and deliver to the
Administrative Agent on behalf of such Acquired Person, to the extent
applicable): (i) a subsidiary guaranty from such Acquired Person, if
organized in the United States, and each domestic Subsidiary of such
Acquired Person and the Parent guaranteeing payment of the Liabilities;
(ii) a pledge agreement granting to the Administrative Agent, for the
benefit of the Lenders, a first priority perfected pledge of all or, if
such Acquired Person is organized outside of the United States, 66-2/3% of
the outstanding capital stock of such Acquired Person and all currently
existing and hereafter created, acquired or organized Subsidiaries of such
Acquired Person to secure payment of the Liabilities; and (iii) any and all
other agreements, financing statements and other documents necessary to
create a first priority perfected security interest in favor of the
Administrative Agent, for the benefit of the Lenders, in all or 66-2/3%, as
applicable, of the presently owned or thereafter acquired capital stock of
such Acquired Person and/or its Subsidiaries. All guaranty agreements,
pledge agreements and such other documents shall be in the form prescribed
by the Administrative Agent and acceptable to the Required Lenders.
"Permitted Asset Sale" shall mean the sale of any assets of the Parent and
its Subsidiaries in an amount not to exceed $2,500,000, in the aggregate, in any
Fiscal Year.
"Permitted Liens" - see Section 11.2.
"Person" shall mean an individual, a corporation, a partnership, a sole
proprietorship, a limited liability company
<PAGE>
or partnership, a joint venture, an association, a trust or any other entity or
organization, including a government (whether federal, state, county, city,
municipal or otherwise, including without limitation, any political subdivision
or an agency or instrumentality thereof).
"Prime Rate" shall mean the greater of (a) the variable rate of interest
per annum equal to the rate of interest determined by the Foreign Currency Agent
from time to time as its prime rate for Canadian Dollar Loans made by the
Foreign Currency Agent in Canada from time to time, being a variable per annum
reference rate of interest adjusted automatically upon change by the Foreign
Currency Agent, calculated on the basis of a year of 365-66 days, and (b) the
sum of (i) the rate per annum for Canadian Dollar bankers' acceptance having a
term of 30 days that appears on the Reuters Screen CDOR Page as of 10:00 A.M.
(Toronto time) on the date of determination, as reported by the Foreign Currency
Agent and (ii) 5/8 of 1% per annum.
"Process Agent" - see Section 17.11.
"Qualification" shall mean, with respect to any certificate covering
financial statements, a qualification to such certificate (such as a "subject
to" or "except for" statement therein) (a) resulting from a limitation on the
scope of examination of such financial statements or the underlying data, (b) as
to the capability of the Person whose financial statements are certified to
continue operations as a going concern, or (c) which could be eliminated by
changes in financial statements or notes thereto covered by such certificate
(such as by the creation of or increase in a reserve or a decrease in the
carrying value of assets) and which if so eliminated by the making of any such
change and after giving effect thereto would occasion a Default; provided that
neither of the following shall constitute a Qualification: (i) a consistency
exception relating to a change in accounting principles with which the
independent public accountants for the Person whose financial statements are
being certified have concurred, or (ii) a qualification relating to the outcome
or disposition of threatened Litigation, pending Litigation being contested in
good faith, pending or threatened claims or contingencies which cannot be
determined with sufficient certainty to permit such financial statements to be
qualified.
"Quarterly Payment Date" shall mean the last day of each March, June,
September and December or, if any such day is not a Business Day, the next
succeeding Business Day.
<PAGE>
"Related Documents" shall mean the Notes, the LC Applications, the Letters
of Credit, the Subsidiary Guaranty, the Borrower Pledge Agreement, the Gibbs
Pledge Agreement, the IAMD, Limited Pledge Agreement, the IAMD (Canada) Pledge
Agreement and any and all other documents or instruments furnished or required
to be furnished pursuant to Section 8 or Section 13, as the same may be amended
or modified from time to time in whole or in part.
"Release" shall mean a "release," as such term is defined in CERCLA.
"Reportable Event" shall have the meaning assigned to such term in ERISA.
"Required Lenders" shall mean Lenders having at least 66-2/3% or more of
the Commitments, or if the Commitments have terminated or expired, 66-2/3% of
the aggregate Loans and LC Obligations outstanding at such time.
"Responsible Officer" shall mean, in the case of the Parent or any of its
Subsidiaries, any of the following officers of such Person: the president, the
chief financial officer, the secretary, the treasurer or any vice president.
If any of the titles of the preceding officers are changed after the date
hereof, the term "Responsible Officer" shall thereafter mean any officer
performing substantially the same functions as are presently performed by one or
more of the officers listed in the first sentence of this definition.
"Restatement Closing Date" shall mean the date that the initial Loans are
made under this Agreement after satisfaction of the conditions precedent set
forth in Section 13.
"Restatement Effective Date" shall mean the date of this Agreement as set
forth in the Preamble.
"Revolving Loan(s)" - see Section 2.1.
"Revolving Loan Commitment(s)" - see Section 2.2.
"Revolving Note" shall mean a promissory note, substantially in the form of
Exhibit A with blanks appropriately completed in conformity herewith, evidencing
the Revolving Loans of any Lender.
<PAGE>
"Revolving Loan Termination Date" shall mean the earlier of (a) October 26,
2003, or (b) the date of termination in whole of the Revolving Loan Commitments
pursuant to Sections 6.1, 6.2 and/or 14.2.
"Sale Leaseback Transaction" shall mean any transaction whereby the Parent
or any of its Subsidiaries shall, directly or indirectly, enter into any
arrangement with any Person providing for the Parent or any of its Subsidiaries
to lease or rent property or other assets that the Parent or any such Subsidiary
has or will sell or otherwise transfer to such Person.
"S&P" shall mean Standard & Poor's, a Division of the McGraw Hill
Companies.
"Security Agreement" - see Section 8.1.
"Senior Funded Debt" shall mean Indebtedness as set forth in clauses (a)-
(e) of the definition of Indebtedness, excluding Subordinated Debt set forth in
clause (b) of the definition of Indebtedness.
"Solvent", as to any Person on a particular date, shall mean that on such
date (a) the fair value of the property of such Person is greater than the total
amount of liabilities, including, without limitation, contingent liabilities, of
such Person, (b) the present fair salable value of the assets of such Person is
not less than the amount that will be required to pay the probable liabilities
of such Person on its debts as they become absolute and matured, (c) such Person
is able to realize upon its assets and pay its debts and other liabilities,
contingent obligations and other commitments as they mature in the normal course
of business, (d) such Person does not intend to, and does not believe that it
will, incur debts or liabilities beyond such Person's ability to pay as such
debts and liabilities mature, and (e) such Person is not engaged in business or
a transaction, and is not about to engage in business or a transaction, for
which such Person's property would constitute unreasonably small capital after
giving due consideration to the prevailing practice in the industry in which
such Person is engaged. In computing the amount of any contingent liability at
any time, it is intended that such liability will be computed at the amount
which, in light of all the facts and circumstances existing at such time,
represents the amount that can reasonably be expected to become an actual or
matured liability.
<PAGE>
"Spot Rate" for a currency shall mean the rate quoted by the Foreign
Currency Agent as the Spot Rate for the purchase by the Foreign Currency Agent
of such currency with another currency through its FX Trading Office at
approximately 11:00 A.M. (Chicago time) on the date two Business Days prior to
the date as of which the foreign exchange computation is made.
"Subordinated Debt" shall mean Indebtedness having payment terms and other
terms, and subordinated in form and substance, satisfactory to the Lenders.
"Subsidiary" shall mean, as to any Person, any corporation, partnership,
limited liability company, limited liability partnership, joint venture, trust,
association or other unincorporated organization (other than a limited
partnership in which such Person acts solely as a limited partner) of which or
in which such Person and such Person's Subsidiaries own directly or indirectly
an aggregate of more than 50% of (a) the combined voting power of all classes of
stock having general voting power under ordinary circumstances to elect a
majority of the board of directors, if it is a corporation, (b) the capital
interest or partnership interest, if it is a partnership, joint venture or
similar entity, or (c) the beneficial interest, if it is a trust, association or
other unincorporated organization.
"Subsidiary Guaranty" - see Section 8.1
"Taxes" shall mean all taxes of any nature whatsoever and however
denominated, including, without limitation, excise, import, governmental fees,
duties and all other charges, as well as additions to tax, penalties and
interest thereon, imposed by any government or instrumentality, whether federal,
state, local, foreign or other.
"Title IV" shall mean Chapter 28, Subchapter IV of the Higher Education Act
of 1965, as amended, 20 U.S.C.A. (S)1070, and any amendments or successor
statutes thereto.
"Title IV Programs" shall mean the Title IV Programs as defined in Section
668.1(c) of 34 C.F.R.
"Transferee" - see Section 16.3.
"Type of Loan or Borrowing" - see Section 3.1. The various Types of Loans
or Borrowings under this Agreement are as follows: Base Rate Loans or
Borrowings, Canadian Dollar Loans or Borrowings, and LIBOR Rate Loans or
Borrowings.
<PAGE>
"UCC" shall mean the Uniform Commercial Code or comparable statute or any
successor statutes thereto, as in effect from time to time in the relevant
jurisdiction.
"Welfare Plan" shall mean a "welfare plan," as such term is defined in
section 3(1) of ERISA.
SECTION 1.2 Other Definitional Provisions.
(a) All terms defined in this Agreement shall have the above-defined
meanings when used in any Related Document, or any certificate, report or
other document made or delivered pursuant to this Agreement, unless the
context therein shall clearly otherwise require.
(b) The words "hereof," "herein," "hereunder" and similar terms when
used in this Agreement shall refer to this Agreement as a whole and not to
any particular provision of this Agreement.
(c) The words "amended or modified" when used in this Agreement or
any Related Document shall mean with respect to this Agreement or any
Related Document such document as from time to time, in whole or in part,
amended, modified, supplemented, restated, refinanced, refunded or renewed.
(d) In the computation of periods of time in this Agreement from a
specified date to a later specified date, the word "from" means "from and
including" and the words "to" and "until" each means "to but excluding."
(e) This Agreement and the Related Documents are the result of
negotiations among and have been reviewed by counsel to the Administrative
Agent, the Parent and its Subsidiaries and the other parties, and are the
products of all such Persons. Accordingly, they shall not be construed
against the Administrative Agent, the Foreign Currency Agent or the Lenders
merely because of the Administrative Agent's, the Foreign Currency Agent's
or Lenders' involvement in their preparation.
SECTION 1.3 Accounting and Financial Determinations. For purposes of
this Agreement, unless otherwise specified, all accounting terms used herein or
in any Related Document shall be
<PAGE>
interpreted, all accounting determinations and computations hereunder or
thereunder shall be made, and all financial statements required to be delivered
hereunder or thereunder shall be prepared in accordance with, those generally
accepted accounting principles ("GAAP") applied in the preparation of the
financial statements referred to in Section 9.6, as such principles are modified
from time to time in order to comply with DOE and Title IV standards of
accounting; provided that prior to giving effect to any modification of such
principles for purposes of this Agreement, Parent (individually and on behalf of
the Co-Borrowers) agrees to negotiate in good faith any such changes to the
financial covenants set forth in Section 12 and the definitions related thereto
to the extent the Administrative Agent deems necessary, in its sole discretion,
so that such covenants reflect the financial condition of the Parent and its
Subsidiaries as nearly as possible to that provided by such covenants
immediately prior to the proposed modification of such principles.
SECTION 1.4 Currency Equivalents Generally. For all purposes of this
Agreement (but not for purposes of the preparation of any financial statements
delivered pursuant hereto), the equivalent in Canadian Dollars of an amount in
Dollars, and the equivalent in Dollars of an amount in Canadian Dollars, shall
be determined at the Spot Rate.
SECTION 2. THE COMMITMENTS
Subject to the terms and conditions of this Agreement and relying on the
representations and warranties herein set forth:
SECTION 2.1 Revolving Loan Commitment. Each of the Lenders, severally
and for itself alone, agrees to make loans (herein collectively called
"Revolving Loans" and individually called a "Revolving Loan") to the Parent and,
with respect to Canadian Dollar Loans, the Co-Borrowers, on a revolving basis
from time to time before the Revolving Loan Termination Date in such Lender's
Percentage of such aggregate amounts as the Parent or the Co-Borrowers may from
time to time request from all Lenders. The aggregate Dollar Equivalent
principal amount of Revolving Loans which any Lender shall be committed to have
outstanding to the Parent and the Co-Borrowers, when added to the amount of such
Lender's Dollar Equivalent participation in the Letters of Credit issued and
outstanding pursuant to Section 2.2 or drawn and not reimbursed pursuant to
Section 4.10, shall not at any one time exceed the amount with respect to
Revolving Loans
<PAGE>
set opposite such Lender's name on Schedule 2.1 hereto. The aggregate principal
Dollar Equivalent amount of Revolving Loans which all Lenders shall be committed
to have outstanding hereunder to the Parent and the Co-Borrowers, when added to
the aggregate Dollar Equivalent amount of Letters of Credit issued and
outstanding pursuant to Section 2.2 or drawn and not reimbursed pursuant to
Section 4.10, shall not at any one time exceed $60,000,000; and provided further
that the aggregate principal Dollar Equivalent amount of Canadian Dollar Loans
which all Lenders shall be committed to have outstanding hereunder to the Parent
and the Co-Borrowers, when added to the aggregate Dollar Equivalent amount of
Letters of Credit denominated in Canadian Dollars issued and outstanding
pursuant to Section 2.2 or drawn and not reimbursed pursuant to Section 4.10,
shall not at any one time exceed $10,000,000. The foregoing commitment of each
Lender is herein called its "Revolving Loan Commitment" and collectively the
"Revolving Loan Commitments."
SECTION 2.2 LC Commitment. LaSalle, as Administrative Agent, or, with
respect to Letters of Credit denominated in Canadian Dollars, Scotia Bank, as
Foreign Currency Agent, agrees for itself and the Lenders to issue from time to
time before the Revolving Loan Termination Date such standby letters of credit
(such letters of credit being herein collectively called "Letters of Credit" and
individually a "Letter of Credit") as the Parent, any Co-Borrower or any
Guarantor may request, it being understood that, pursuant to Section 4.3,
concurrently with the issuance of each such Letter of Credit, each Lender shall
be deemed to have automatically purchased from the Administrative Agent a
participation in such Letter of Credit. The aggregate Dollar Equivalent amount
of all Letters of Credit issued and outstanding pursuant to this Section 2.2 or
drawn and not reimbursed pursuant to Section 4.10 shall not at any one time
exceed $35,000,000 (or such reduced amount as may be fixed by the Parent
pursuant to Section 6.2). The foregoing commitment of each Lender is herein
called its "LC Commitment" and collectively the "LC Commitments."
SECTION 2.3 Commitments and Other Terms. The Revolving Loans are herein
sometimes individually called a "Loan" and collectively called "Loans." The
Revolving Loan Commitments and the LC Commitments are herein sometimes
collectively called the "Commitments" and individually as to each Lender called
a "Commitment."
SECTION 2.4 Canadian Dollar Loans. Notwithstanding the foregoing, only
those Lenders set forth on Schedule 2.1 which have commitments to make Canadian
Dollar Loans shall be required
<PAGE>
to make such Loans upon the request of the Parent (in accordance with Section
3.2) in the respective Percentages set forth opposite the names of such Lenders
on such Schedule 2.1.
SECTION 3. THE LOANS
SECTION 3.1 Various Types of Loans. Each Loan shall be either a Base
Rate Loan denominated in Dollars, a Canadian Dollar Loan or a LIBOR Rate Loan
denominated in Dollars (each being herein called a "Type" of Loan) as the Parent
(in accordance with Section 3.2) shall specify in the related Borrowing Request
or Continuation/Conversion Notice pursuant to Section 3.2 or Section 3.5. Base
Rate Loans, Canadian Dollar Loans and LIBOR Rate Loans may be outstanding at the
same time, provided that (a) in the case of LIBOR Rate Loans, not more than five
different Interest Periods shall be outstanding at any one time for all such
Loans, and (b) the Parent (in accordance with Section 3.2) shall specify Loans
and Interest Periods such that no payment or prepayment of any principal on any
Loan shall result in a break-up of any Interest Period.
SECTION 3.2 Notice of Borrowing. The Parent (for itself and, if
applicable, on behalf of the Co-Borrowers) shall give an irrevocable notice
(herein called a "Borrowing Request") to the Administrative Agent, with respect
to any Base Rate Loan, Canadian Dollar Loan or LIBOR Rate Loans and to the
Foreign Currency Agent, with respect to any Canadian Dollar Loan, of each
proposed Borrowing by 10:00 A.M., Chicago time, in the case of a Base Rate
Borrowing, on the proposed date of such Borrowing, and in the case of a LIBOR
Rate Borrowing or a Canadian Dollar Loan, at least three (3) Business Days'
prior to the proposed date of such Borrowing. Each Borrowing Request shall be
effective upon receipt by the Administrative Agent and the Foreign Currency
Agent, as applicable, shall be in writing (or by telephone to be promptly
confirmed in writing, including facsimile) by the Parent, substantially in the
form of Exhibit B, and shall specify the date, amount and Type of Borrowing, and
in the case of a LIBOR Rate Borrowing, the initial Interest Period for such
Borrowing. Notwithstanding the foregoing, the Parent may revoke any Borrowing
Request prior to the funding of the Borrowing so requested; provided that Parent
shall pay all reasonable costs incurred by the Lenders as a result thereof, on
demand of the Administrative Agent, Foreign Currency Agent or such Lender
(together with a written calculation in reasonable detail showing such costs).
<PAGE>
SECTION 3.3 Funding. Promptly upon receipt of a Borrowing Request, the
Administrative Agent or, with respect to any Canadian Dollar Loan, the Foreign
Currency Agent, shall advise each Lender thereof. Not later than 2:00 P.M.,
Chicago time, on the date of a proposed Borrowing, subject to Section 2.4 each
Lender shall provide the Administrative Agent at the Office of the
Administrative Agent in Chicago or, with respect to any Canadian Dollar Loan,
the Foreign Currency Agent at the Office of the Foreign Currency Agent in
Toronto, Canada, with immediately available funds covering such Lender's
Percentage of the Borrowing, and subject to receipt by the Administrative Agent
of the documents required under Section 13 with respect to such Borrowing, the
Administrative Agent or the Foreign Currency Agent, as applicable, shall pay
over such funds to the Parent or the Co-Borrowers, as applicable, on the
requested Borrowing date. Each Borrowing involving Loans of the same Type shall
be on a Business Day and, in the case of Base Rate Loans or Canadian Dollar
Loans, shall be in an aggregate principal amount of at least the lesser of the
amount then available to be borrowed under the Revolving Commitments or a Dollar
Equivalent amount of $1,000,000 or any larger Dollar Equivalent integral
multiple of $250,000 in excess thereof and, in the case of LIBOR Rate Loans
shall be in an aggregate principal amount of at least a Dollar Equivalent amount
of $2,500,000 or any larger integral Dollar Equivalent multiple of $500,000 in
excess thereof. All Borrowings shall be pro rata among the Lenders in
accordance with their respective Commitments.
SECTION 3.4 Funding Reliance. Unless the Administrative Agent or, with
respect to any Canadian Dollar Loan, the Foreign Currency Agent, shall have been
notified by telephone, confirmed in writing, by any Lender by 2:00 P.M., Chicago
time, on the day of the proposed Borrowing that such Lender will not make
available the amount which would constitute its Percentage of such Borrowing on
the date specified therefor, the Administrative Agent or the Foreign Currency
Agent, as applicable, may assume, subject to the satisfactory fulfillment by the
Parent of the conditions precedent set forth in Section 13, that such Lender has
made such amount available to the Administrative Agent or the Foreign Currency
Agent, and, in reliance upon such assumption, make available to the Parent or
the Co-Borrowers, as applicable, a corresponding amount. If and to the extent
that such Lender shall not have made such amount available to the Administrative
Agent or the Foreign Currency Agent, as applicable, such Lender, the Parent and
the Co-Borrowers, severally agree to repay the Administrative Agent or the
Foreign Currency Agent forthwith on demand such corresponding amount together
with interest thereon,
<PAGE>
for each day from the date the Administrative Agent or the Foreign Currency
Agent made such amount available to the Parent or the Co-Borrowers to the date
such amount is repaid to the Administrative Agent or the Foreign Currency Agent,
at the interest rate applicable at the time to Loans comprising such Borrowing.
SECTION 3.5 Conversion and Continuation of Loans. The Parent (for itself
and on behalf of the Co-Borrowers) may, by delivery to the Administrative Agent
of a Continuation/Conversion Notice (herein called a "Continuation/Conversion
Notice"), in the form of Exhibit C attached hereto with appropriate insertions,
before 10:00 A.M., Chicago time, at least: (a) three (3) Business Days prior to
the proposed conversion date to convert Base Rate Loans into LIBOR Rate Loans,
(b) one (1) Business Day prior to the proposed conversion date to convert LIBOR
Rate Loans into Base Rate Loans, and (c) three (3) Business days prior to the
proposed continuation date to continue any LIBOR Rate Loan into a subsequent
Interest Period of the same duration or of any other duration permitted
hereunder in the same Applicable Currency, subject to the following:
(i) the Interest Period applicable to any LIBOR Rate Loan resulting
from a conversion shall be specified by the Parent in the
Continuation/Conversion Notice delivered pursuant to this Section;
provided, however, that if no such Interest Period shall be specified, the
Parent shall be deemed to have selected an Interest Period of one month's
duration. If the Parent shall not have given timely notice to continue any
Loan into a subsequent Interest Period and shall not otherwise have given
notice to convert such Loan, such Loan, unless repaid pursuant to the terms
hereof, shall automatically be converted into a Base Rate Loan denominated
in Dollars;
(ii) if less than all Loans at the time outstanding shall be
converted or continued, such conversion or continuation shall be made pro
rata among the Lenders, as applicable, in accordance with the respective
principal amounts of Loans of such Type (and have the same Interest Period)
held by such Lenders immediately prior to such conversion or continuation;
(iii) in the case of a conversion or continuation of less than all
Loans, the aggregate principal amount of such Loans converted or continued
shall not be less
<PAGE>
than a Dollar Equivalent amount of $2,500,000 or any larger integral Dollar
Equivalent multiple of $500,000 in excess thereof;
(iv) if any LIBOR Rate Loan is converted at a time other than the
last day of an Interest Period applicable thereto, the Parent shall at the
time of conversion pay any loss or expense (including, without limitation,
breakage losses and expenses) associated therewith pursuant to Section 7.5;
(v) any portion of a Loan maturing or required to be repaid in less
than one month may not be converted into, or continued as, a LIBOR Rate
Loan; and
(vi) any portion of a LIBOR Rate Loan required to be paid on any
principal payment date occurring in less than one month after the end of
the then-current Interest Period applicable to such Loan shall be
automatically converted at the end of such Interest Period into a Base Rate
Loan.
Notwithstanding the foregoing, so long as any Default or Event of Default shall
exist, no Loans shall be converted to or continued as LIBOR Rate Loans.
SECTION 3.6 Repayment of Revolving Loans; Notes. The Revolving Loans of
each Lender shall be payable (and the Parent agrees to pay all such Revolving
Loans and the Parent and Co-Borrowers agree, jointly and severally, to pay any
such Revolving Loans constituting a Canadian Dollar Loan) on the Revolving Loan
Termination Date in the Applicable Currency. The Revolving Loans of each Lender
under the Original Credit Agreement were evidenced by the Existing Revolving
Notes. After the Restatement Effective Date, the Revolving Loans of each Lender
shall be evidenced by a Revolving Note, payable to the order of such Lender in
the principal amount of the Revolving Loan Commitment of such Lender (or, if
less, in the aggregate unpaid principal amount of all of such Lender's Revolving
Loans hereunder outstanding on the Revolving Loan Termination Date).
SECTION 3.7 Recordkeeping. Each Lender shall record in its records, or
at its option on the schedule attached to its relevant Note, the date and amount
of each Loan made by such Lender, each repayment or conversion thereof, and in
the case of each LIBOR Rate Loan the dates on which each Interest Period for
such Loan shall begin and end. The information so recorded shall
<PAGE>
be conclusive absent manifest error. The failure to so record any such
information or any error in so recording any such information shall not,
however, limit or otherwise affect the obligations of the Parent or the Co-
Borrowers hereunder or under any Note to repay the principal amount of the Loans
together with all interest accrued thereon.
SECTION 4. THE LETTERS OF CREDIT
SECTION 4.1 Request for Issuance of Letters of Credit. The
Administrative Agent shall receive from the Parent, either Co-Borrower or any
Guarantor at least five (5) Business Days' prior written notice of a request for
issuance of each Letter of Credit, each such request to be accompanied by an
application substantially in the form of Exhibit D (an "LC Application") duly
executed by the Parent (for itself or on behalf of any such Co-Borrower or
Guarantor) and in all respects in form and substance reasonably satisfactory to
the Administrative Agent, together with such other documentation as the
Administrative Agent may reasonably request in support thereof. The
Administrative Agent shall promptly notify each Lender of any request from the
Parent, either Co-Borrower or any such Guarantor that such Letter of Credit be
issued.
SECTION 4.2 Expiration and other Terms. Each Letter of Credit shall
expire on or before thirty (30) days prior to the Revolving Loan Termination
Date.
SECTION 4.3 Participation. Concurrently with the issuance of each Letter
of Credit, subject to Section 4.14 the Administrative Agent shall be deemed to
have sold and transferred to each Lender, and each Lender shall be deemed
irrevocably and unconditionally to have automatically purchased and received
from the Administrative Agent, without recourse or warranty, an undivided
interest and participation, to the extent of such Lender's Percentage, in such
Letter of Credit and the Parent's related LC Obligations and any security
therefor.
SECTION 4.4 Notification of Demand for Payment. The Administrative Agent
shall promptly notify the Parent and each Lender of the amount of each demand
for payment under a Letter of Credit and of the date on which such payment is to
be made.
SECTION 4.5 Funding by Administrative Agent. With respect to each demand
for payment pursuant to a Letter of Credit, the Administrative Agent shall,
promptly following its receipt
<PAGE>
thereof, examine all documents purporting to represent such demand to ascertain
that the same appear on their face to be in conformity with the terms and
conditions of such Letter of Credit. If the Administrative Agent determines (in
accordance with the standards and practices applicable thereto) that a demand
for payment under a Letter of Credit conforms to the terms and conditions of
such Letter of Credit, then the Administrative Agent shall make payment to the
Beneficiary in accordance with the terms of such Letter of Credit.
SECTION 4.6 Funding By Lenders. Not later than 11:00 A.M., Chicago time,
on each date on which payment is to be made under a Letter of Credit, subject to
Section 4.14 each Lender shall make available to the Administrative Agent, in
Dollars and in same day funds, such Lender's Percentage of the amount of such
payment. If and to the extent any Lender shall not have made such amount
available to the Administrative Agent on any such date, such Lender agrees
(without limitation to any rights or remedies then available to any party with
respect to such failure to make payments) to pay interest on such amount to the
Administrative Agent for the account of the Administrative Agent forthwith on
demand for each day from the date on which such payment was to be made to the
date such amount is made available to the Administrative Agent. Such interest
shall be determined at a rate per annum equal to the Federal Funds Rate, or in
the case of payments denominated in Canadian Dollars, the Overnight Rate, from
time to time in effect, based upon a year of 360 days or, in the case of
Canadian Dollar Loans, a year of 365-66 days. Any Lender's failure to make
available to the Administrative Agent its Percentage of any payment under a
Letter of Credit shall not relieve any other Lender of its obligation to make
available to the Administrative Agent its Percentage of such payment on the date
such payment is to be made, but no Lender shall be responsible for the failure
of any other Lender to make available to the Administrative Agent such other
Lender's Percentage of any such payment.
SECTION 4.7 Non-Conforming Demand For Payment. If, after examination of
a demand for payment under a Letter of Credit, the Administrative Agent shall
have determined that such demand does not conform to the terms and conditions of
such Letter of Credit, then the Administrative Agent shall, as soon as
reasonably practicable, give notice to the related Beneficiary and to the Parent
to the effect that demand was not made in accordance with the terms and
conditions of such Letter of Credit, stating the reasons therefor and that the
relevant document is being held at the disposal of the Beneficiary or is being
returned to the
<PAGE>
Beneficiary, as the Administrative Agent may elect. The Beneficiary may attempt
to correct any such non-conforming demand for payment under such Letter of
Credit if, and to the extent that, the Beneficiary is entitled (without regard
to the provisions of this sentence) and able to do so.
SECTION 4.8 Return of Funds Related to Non-Conforming Demand. If the
Administrative Agent does not disburse funds to the Beneficiary for any reason
after having received such funds from any Lender pursuant to Section 4.6, the
Administrative Agent shall return such funds to such Lender on the next
following Business Day together with interest on such funds from the date on
which the Administrative Agent received such funds to the day on which the
Administrative Agent so returns such funds at the Federal Funds Rate, or in the
case of payments denominated in Canadian Dollars, the Overnight Rate, for each
such day, based upon a year of 360 days or, in the case of Canadian Dollar
Loans, a year of 365-66 days.
SECTION 4.9 Return of Letter of Credit. With respect to each Letter of
Credit, the Administrative Agent shall have the right; provided the
Administrative Agent is not then in default under such Letter of Credit by
reason of its having wrongfully failed to honor a demand for payment previously
made by the Beneficiary under such Letter of Credit, to require the Beneficiary
to surrender such Letter of Credit to the Administrative Agent on the stated
expiration date. The Parent agrees, if necessary, to use its best efforts to
cause the Beneficiary to surrender such Letter of Credit.
SECTION 4.10 Reimbursement Agreement of the Parent. The Parent and, with
respect to any Letter of Credit denominated in Canadian Dollars, the Parent and
the Co-Borrowers hereby, jointly and severally, unconditionally and irrevocably
agrees to reimburse the Administrative Agent, immediately upon demand, for each
payment made by the Administrative Agent in accordance herewith under a Letter
of Credit honoring a demand for payment made by the Beneficiary thereunder, with
interest on the amount so paid by the Administrative Agent from the date paid by
the Administrative Agent to the date the Administrative Agent is reimbursed
therefor, at a rate per annum equal to the Base Rate, with respect to Letters of
Credit with payments denominated in Dollars and the Prime Rate, with respect to
Letters of Credit with payments denominated in Canadian Dollars, from time to
time in effect (but not less than the Base Rate or Prime Rate, as applicable, in
effect on the date of such payment by the Administrative Agent), plus the
Applicable Base/Prime Rate
<PAGE>
Margin. Interest shall be computed for the actual number of days elapsed on the
basis of a year consisting of 360 days or, in the case of Letters of Credit with
payments denominated in Canadian Dollars, 365-66 days. Upon receipt of each
payment under this Section 4.10, the Administrative Agent shall promptly pay to
each Lender which previously made the entire payment required under Section 4.6,
in the kind of funds received, an amount equal to such Lender's Percentage of
such payment.
SECTION 4.11 Obligation to Reimburse for or Participate in Letter of
Credit Payments. The Parent's and the Co-Borrower's obligation to reimburse the
Administrative Agent for payments made by the Administrative Agent under any
Letter of Credit honoring a demand for payment by the Beneficiary thereunder,
and each Lender's obligation to participate in and make available to the
Administrative Agent its Percentage of such payments in accordance with this
Agreement, shall be irrevocable, absolute and unconditional under any and all
circumstances including, without limitation, any of the following circumstances:
(a) any lack of legality, validity, regularity or enforceability of
this Agreement, any Letter of Credit or any other Related Document;
(b) the existence of any claim, setoff, defense or other right which
the Parent, either Co-Borrower or any Guarantor may have or have had at any
time against any Beneficiary, the Administrative Agent, the Foreign
Currency Agent, any Lender, any transferee of any Letter of Credit (or any
Person for whom any such transferee may be acting) or any other Person,
whether in connection with this Agreement, any Letter of Credit, any other
Related Document, the transactions contemplated herein or therein or any
unrelated transactions (including any underlying transaction between the
Parent, the Co-Borrowers and the Beneficiary of any Letter of Credit);
(c) any draft, certificate or any other document presented under any
Letter of Credit proving to be forged, fraudulent, invalid or insufficient
in any respect or any statement therein being untrue or inaccurate in any
respect;
(d) the surrender or impairment of any security for the performance
or observance of any of the terms of any of the Related Documents;
<PAGE>
(e) payment by the Administrative Agent under any Letter of Credit
against presentation of a draft or certificate or other document that does
not comply with the terms of such Letter of Credit; or
(f) the occurrence of any Default or Event of Default;
provided, however, that neither the Parent nor any such Co-Borrower shall be
obligated to reimburse the Administrative Agent for, and no Lender shall be
obligated to participate in, any wrongful payment made by the Administrative
Agent under any Letter of Credit as a result of acts or omissions constituting
gross negligence or willful misconduct on the part of the Administrative Agent
or any of its officers, employees or agents as finally judicially determined by
a court of competent jurisdiction.
SECTION 4.12 Mandatory Payment to Administrative Agent of LC Obligations.
The Parent and, with respect to LC Obligations relating to Letters of Credit
denominated in Canadian Dollars, the Parent and the Co-Borrowers agree, jointly
and severally, that, on any termination of the LC Commitments pursuant to
Section 6.2 or Section 14.2, it will pay to the Administrative Agent in Dollars
and in same day funds an amount equal to the Dollar Equivalent principal amount
of all LC Obligations under any LC Application, whether or not the related
Letter of Credit has been drawn (which amount shall be retained by the
Administrative Agent in a separate collateral account as security for the LC
Obligations and the other Liabilities) plus the then aggregate accrued amount of
unpaid fees arising under Sections 5.7(b) and 5.7(c).
SECTION 4.13 Existing Letters of Credit. The Parent, the Lenders and the
Administrative Agent agree that, on the Restatement Effective Date, each
Existing Letters of Credit shall be deemed to have been issued for the account
of the Parent (or jointly for the account of the Parent and any applicable
Subsidiary) hereunder and to be subject to the terms and provisions hereof.
SECTION 4.14 Limited Participation and Funding of Letters of Credit.
Notwithstanding the foregoing, only those Lenders set forth on Schedule 2.1
which have commitments to make Canadian Dollar Loans shall be required to
participate in or fund any Letter of Credit denominated in Canadian Dollars.
Furthermore, no Lender with a commitment only to make Canadian Dollar Loans
<PAGE>
shall be required to participate in or fund any Letter of Credit denominated in
Dollars.
SECTION 5. INTEREST AND FEES, ETC.
SECTION 5.1 Interest Rates. With respect to each Loan, the Parent and,
with respect to any Canadian Dollar Loan, the Co-Borrowers hereby, jointly and
severally, promise to pay interest on the unpaid principal amount thereof for
the period commencing on the date of such Loan until such Loan is paid in full,
as follows:
(a) At all times while such Loan is a Base Rate Loan or a Canadian
Dollar Loan, at a rate per annum equal to the Base Rate or the Prime Rate,
respectively, from time to time in effect, plus the Applicable Base/Prime
Rate Margin (as hereinafter defined); and
(b) At all times while such Loan is a LIBOR Rate Loan, for each
Interest Period, at a rate per annum equal to the LIBOR Rate (Reserve
Adjusted) applicable to such Interest Period, plus the Applicable LIBOR
Rate Margin, (as hereinafter defined).
For purposes hereof, the Applicable Base/Prime Rate Margin and the
Applicable LIBOR Rate Margin shall be determined based on the Leverage Ratio as
follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------
Applicable
Base/Prime Applicable LIBOR
Leverage Ratio Rate Margin Rate Margin
- -------------------------------------------------------------------
<S> <C> <C>
greater than 3.01:1.00 .75% 2.00%
- -------------------------------------------------------------------
greater than 2.51:1.00 but .50% 1.75%
not more than 3.01:1.00
- -------------------------------------------------------------------
greater than 2.01:1.00 but .25% 1.50%
not more than 2.51:1.00
- -------------------------------------------------------------------
greater than 1.51:1.00 - 0% 1.25%
but not more than
2.01:1.00
- -------------------------------------------------------------------
equal to or greater than 0% 1.00%
1.01:1.00 but not more than
1.51:1.00
- -------------------------------------------------------------------
less than 1.01x 0% 0.75%
- -------------------------------------------------------------------
</TABLE>
<PAGE>
Any adjustment in the Applicable Base/Prime Rate Margin or the Applicable
LIBOR Rate Margin as a result of a change in the Leverage Ratio shall be
effective upon receipt by the Administrative Agent of a Compliance Certificate
pursuant to Section 10.1.4 setting forth the calculation of the Leverage Ratio
and the financial statements required to be delivered in connection therewith;
provided that, notwithstanding the foregoing, the Applicable Base/Prime Rate
Margin and the Applicable LIBOR Rate Margin for the period commencing on the
Closing Date through September 30, 1998 shall be .50% per annum and 1.75% per
annum, respectively; and provided, further, that in no event will the Applicable
Base/Prime Rate Margin or the Applicable LIBOR Rate Margin be reduced at any
time when a Default has occurred and is continuing. Any adjustment in the
Applicable Base/Prime Rate Margin or the Applicable LIBOR Rate Margin shall be
effective retroactively to the first day of the Fiscal Quarter for which the
Compliance Certificate should have been delivered to the Lenders pursuant to
Section 10.1.4.
SECTION 5.2 Default Interest Rate. Notwithstanding the provisions of
Section 5.1, in the event that any Default or Event of Default shall occur
hereunder, the Parent and, with respect to any Canadian Dollar Loan, the Co-
Borrowers hereby, jointly and severally, promise to pay interest on the unpaid
principal amount of the Loans for the period commencing on the date of such
Default or Event of Default until such Default or Event of Default is cured or
waived by the Lenders in accordance with this Agreement at a rate per annum
equal to the applicable rate(s) otherwise in effect with respect to such Loans,
plus 2.00% per annum.
SECTION 5.3 Interest Payment Dates. Accrued interest on each Loan shall
be payable on each Interest Payment Date and at maturity, commencing with the
first of such dates to occur after the date hereof. After maturity, accrued
interest on all Loans shall be payable on demand.
SECTION 5.4 Interest Periods. Each "Interest Period" for a LIBOR Rate
Loan shall commence on the date such LIBOR Rate Loan was made, continued or
converted from a Loan of a different Type, or on the expiration of the
immediately preceding Interest Period for such LIBOR Rate Loan, and shall end on
the date which is 1, 2, 3 or 6 months thereafter, as the Parent may specify
pursuant to Section 3.2 or Section 3.5 hereof.
SECTION 5.5 Setting and Notice of Rates. The applicable LIBOR Rate
(Reserve Adjusted) for each Interest Period shall be determined by the
Administrative Agent, and notice thereof shall be
<PAGE>
given by the Administrative Agent promptly to the Parent and each Lender. Each
determination of the applicable LIBOR Rate (Reserve Adjusted) by the
Administrative Agent shall be conclusive and binding upon the parties hereto, in
the absence of manifest error. If LaSalle does not furnish a timely quotation,
the provisions of Section 7.3 shall apply. If the Administrative Agent is unable
to determine such a rate, the provisions of Section 7.2 shall apply. The
Administrative Agent shall, upon written request of the Parent or any Lender,
deliver to the Parent or such Lender a statement showing the computations used
by the Administrative Agent in determining any applicable LIBOR Rate (Reserve
Adjusted) hereunder.
SECTION 5.6 Computation of Interest. Interest on all Base Rate Loans,
Libor Rate Loans and LC Obligations payable in Dollars shall be computed for the
actual number of days elapsed on the basis of a 360-day year. For purposes of
the Interest Act (Canada), interest on all Canadian Dollar Loans and LC
Obligations with payment denominated in Canadian Dollars shall be computed for
the actual number of days elapsed on the basis of a year of 365-66 days.
SECTION 5.7 Fees. The Parent agrees to pay the following fees (all such
fees being non-refundable):
(a) The Parent agrees to pay to the Administrative Agent, for the
account of each Lender, for the period (including any portion thereof when
any of its Commitments are suspended by reason of the Parent's inability to
satisfy any condition of Section 13) commencing on the Restatement
Effective Date and continuing to the Revolving Loan Termination Date, a
commitment fee (the "Commitment Fee") at the rate set forth in Section
5.7(h) on such Lender's Percentage of the sum of the average daily unused
portion of such Lender's Commitment. Such Commitment Fees shall be payable
by the Parent in arrears on each Quarterly Payment Date, commencing with
the first such Quarterly Payment Date following the Restatement Effective
Date, and on the Revolving Loan Termination Date. For purposes of
determining utilization of each Lender's Commitment, the amount of any
outstanding Canadian Dollar Loan on any date shall be determined based on
the Dollar Equivalent amount with respect to such Canadian Dollar Loan.
(b) The Parent agrees to pay to each Lender an upfront fee equal to
0.15% of such Lender's Revolving Loan Commitment as set forth in Schedule
2.1.
<PAGE>
(c) The Parent agrees to pay to the Administrative Agent, for the
account of each Lender, a Commitment Fee for each Letter of Credit (the "LC
Commitment Fee"), from the date of issuance thereof to the earlier to occur
of the expiration or termination thereof or the date of payment by the
Administrative Agent thereunder, at a rate per annum equal to the amount
set forth in Section 5.7(h) of the aggregate outstanding undrawn amount of
each such Letter of Credit, such fee to be payable in arrears on each
Quarterly Payment Date (or at such other times as the Administrative Agent
shall reasonably request, for any period prior to such date or time for
which such Commitment Fee shall not have been theretofore paid).
(d) The Parent agrees to pay to the issuing Lender of each Letter of
Credit on the date of issuance for each such Letter of Credit a fronting
fee of 0.15% of the aggregate Dollar Equivalent amount of each such Letter
of Credit.
(e) The Parent agrees to pay, such published fees and other amounts
("LC Administrative Fees") as the Administrative Agent shall customarily
require in connection with the issuance, negotiation, processing and/or
administration of Letters of Credit in similar situations, such fees to be
in addition to the fees payable under the Fee Letter, with respect to the
issuance and/or negotiation of each Letter of Credit.
(f) With respect to the Existing Letters of Credit, (i) the Parent
shall only be responsible for fees pursuant to clause (c) above with
respect to such Letters of Credit commencing on the Restatement Effective
Date and (ii) the Parent shall be responsible for fees and expenses
pursuant to clause (d) and (e) above only to the extent not previously paid
in respect of such Letters of Credit.
(g) The Parent agrees to pay to the Administrative Agent, for its own
account, the fees set forth in that certain fee letter, dated as of October
26, 1998 (the "LaSalle Fee Letter") from the Administrative Agent addressed
to and accepted by the Parent, in addition to the other fees otherwise
expressly described herein.
(h) For purposes hereof, the Commitment Fee and the LC Commitment Fee
shall be determined based on the Leverage Ratio as follows:
<PAGE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------
Leverage Ratio Applicable Applicable LC
Commitment Fee Commitment Fee
- -----------------------------------------------------------------
<S> <C> <C>
greater than 3.01:1.00 .375% 2.00%
- -----------------------------------------------------------------
greater than 2.51:1.00 .25% 1.75%
but not more than
3.01:1.00
- -----------------------------------------------------------------
greater than 2.01:1.00 .25% 1.50%
but not more than
2.51:1.00
- -----------------------------------------------------------------
greater than 1.51:1.00 - .25% 1.25%
2.01:1.00
- -----------------------------------------------------------------
greater than or equal to .25% 1.00%
1.01:1.00 but not more
than 1.51:1.00
- -----------------------------------------------------------------
less than 1.01:1.00 .25% 0.75%
- -----------------------------------------------------------------
</TABLE>
Any adjustment in the Commitment Fee or the LC Commitment Fee as a result
of a change in the Leverage Ratio shall be effective upon receipt by the
Administrative Agent of a Compliance Certificate pursuant to Section 10.1.4
setting forth the calculation of the Leverage Ratio and the financial statements
required to be delivered therewith; provided that, notwithstanding the
foregoing, the Commitment Fee and the LC Commitment Fee for the period
commencing on the Closing Date through September 30, 1998 shall be .25% per
annum and 1.50% per annum, respectively; and provided, further, that in no event
will the Applicable Commitment Fee or the Applicable LC Commitment Fee be
reduced at any time when a Default has occurred and is continuing. Any
adjustment in the Applicable Commitment Fee or the Applicable LC Commitment Fee
shall be effective retroactively to the first day of the Fiscal Quarter for
which such Compliance Certificate should have been delivered to the
Administrative Agent pursuant to Section 10.1.4.
All such fees shall be computed for the actual number of days elapsed on
the basis of a 360-day year without regard to any Default or Event of Default.
SECTION 6. REDUCTION OR TERMINATION OF THE COMMITMENTS;
PAYMENTS AND PREPAYMENTS
SECTION 6.1 Voluntary Reduction or Termination of the Revolving Loan
Commitments. The Parent may from time to time prior
<PAGE>
to the Revolving Loan Termination Date on at least three (3) Business Days'
prior written notice received by the Administrative Agent (which shall promptly
advise each Lender thereof) permanently reduce the amount of the Revolving Loan
Commitments (such reduction to be pro rata among the Lenders according to their
respective Percentages) to an amount not less than the aggregate unpaid
principal amount of the Revolving Loans then outstanding. Any such reduction
shall be in an aggregate Dollar Equivalent amount of $5,000,000 or a Dollar
Equivalent integral multiple of $1,000,000 in excess thereof. The Parent may at
any time on like notice from the Parent prior to the Revolving Loan Termination
Date terminate the Revolving Loan Commitments upon payment in full of the
outstanding principal amount of the Revolving Loans and other obligations of the
Parent and the Co-Borrowers hereunder pertaining to the Revolving Loans.
SECTION 6.2 Voluntary Reduction of the LC Commitments. The Parent may,
from time to time on at least three (3) Business Days' prior written notice to
the Administrative Agent, permanently reduce the amount of the LC Commitments to
an amount not less than the maximum amount of the Letters of Credit then
outstanding or drawn and not reimbursed. The Parent may at any time on like
notice terminate the LC Commitments upon payment to the Administrative Agent in
accordance with Section 4.12 of all LC Obligations (whether absolute or
contingent) in connection with the Letters of Credit.
SECTION 6.3 Voluntary Prepayments. The Parent and the Co-Borrowers may
from time to time prepay the Loans in whole or in part, without premium or
penalty; provided that (a) the Parent shall give the Administrative Agent (which
shall promptly advise each Lender) not less than three (3) Business Days' prior
notice thereof, specifying the Loans to be prepaid, and the date and amount of
prepayment, (b) unless the fees and costs are paid pursuant to Section 7.5,
LIBOR Rate Loans shall be prepaid only on the last day of the Interest Period
relating thereto, (c) each partial prepayment shall be in a principal Dollar
Equivalent amount of $1,000,000, or a Dollar Equivalent integral multiple
$500,000 in excess thereof, and (d) any prepayment of the principal amount of
the Loans, or any portion thereof, shall include accrued interest to the date of
prepayment.
SECTION 6.4 Making of Payments. Except as otherwise provided, all
payments (including those made pursuant to Section 5.7 or Section 6.3) in
respect of the Loans or the Letters of Credit (other than Canadian Dollar Loans
or Letters of Credit denominated in Canadian Dollars) shall be made by the
Parent to the
<PAGE>
Administrative Agent in immediately available funds in Dollars for the account
of the Lenders pro rata according to their respective Percentages of the unpaid
principal amount of the Loans or LC Obligations held by them, and with respect
to principal of, interest on, and any other amounts relating to, any Canadian
Dollar Loan or Letter of Credit with payment denominated in Canadian Dollars,
shall be made by the Parent and the Co-Borrowers, jointly and severally, in
Canadian Dollars, and, with respect to all other amounts payable hereunder,
shall be made in Dollars. All payments of fees pursuant to Section 5.7 (other
than any such fee payable for the Administrative Agent's sole account) shall be
made by the Parent to the Administrative Agent for the account of the Lenders,
pro rata according to their respective Percentages. All such payments shall be
made to the Administrative Agent at its office in Chicago, not later than 12:30
P.M., Chicago time, on the date due, and funds received after that hour shall be
deemed to have been received by the Administrative Agent on the next following
Business Day. The Administrative Agent shall promptly remit to each Lender its
pro rata share (based on its Percentage) of all such payments received in
collected funds by the Administrative Agent for the account of such Lender. All
payments under Sections 7.1, 7.2 and 7.5 shall be made by the Parent directly to
the Lender or Lenders entitled thereto. All payments under Sections 5.7(d) and
15.5 shall be made directly to, and for the sole account of, the Administrative
Agent.
SECTION 6.5 Due Date Extension. If any payment provided for hereunder
falls due on a Saturday, Sunday or other day which is not a Business Day, then
such due date shall be extended to the next following Business Day, and
additional interest shall accrue and be payable for the period of such
extension.
SECTION 6.6 Sharing of Payments. (a) If any Lender shall obtain any
payment or other recovery (whether voluntary, involuntary, by application of
offset or otherwise) on account of any Loan or LC Obligation (other than
pursuant to the terms of Section 7) in excess of its pro rata share (based on
its Percentage) of payments and other recoveries obtained by all Lenders of
Loans or LC Obligations on account of principal of and interest and fees with
respect to Loans or reimbursement or fees with respect to LC Obligations then
held by them, such Lender shall purchase from the other Lenders such
participation in the Loans and LC Obligations held by them as shall be necessary
to cause such purchasing Lender to share the excess payment or other recovery
ratably with each of them; provided, however, that if all or any portion of the
excess payment or other recovery is thereafter recovered from such purchasing
Lender, the purchase shall be
<PAGE>
rescinded and each Lender which has sold a participation to the purchasing
Lender shall repay to the purchasing Lender the purchase price to the ratable
extent of such recovery together with an amount equal to such selling Lender's
ratable share (according to the proportion of (i) the amount of such selling
Lender's required repayment to the purchasing Lender to (ii the total amount so
recovered from the purchasing Lender) of any interest or other amount paid or
payable by the purchasing Lender in respect of the total amount so recovered.
(b) The Parent and each Co-Borrower agrees that any Lender so purchasing a
participation from another Lender pursuant to Section 6.6(a) may, to the fullest
extent permitted by law, exercise all its rights of payment (including pursuant
to Section 6.7) with respect to such participation as fully as if such Lender
were the direct creditor of the Parent or such Co-Borrower, as applicable, in
the amount of such participation. If under any applicable bankruptcy,
insolvency or other similar law, any Lender receives a secured claim in lieu of
a setoff to which this Section applies, such Lender shall, to the extent
practicable, exercise its rights in respect to such secured claim in a manner
consistent with the rights of the Lenders entitled under this Section to share
in the benefits of any recovery of such secured claim.
SECTION 6.7 Setoff. Each Lender shall, upon the occurrence of any Event
of Default described in Section 14.1 or, with the consent of the Required
Lenders, upon the occurrence of any other Event of Default, have the right to
appropriate and apply to the payment of the Liabilities owing to it (whether or
not then due), and (as security for such Liabilities) the Parent and each Co-
Borrower hereby grants to each Lender a continuing security interest in, any and
all balances, credits, deposits, accounts or moneys of the Parent and such Co-
Borrower then or thereafter maintained with such Lender. Any such appropriation
and application shall be subject to the provisions of Section 6.6. Each Lender
agrees promptly to notify the Parent, such Co-Borrower and the Administrative
Agent after any such setoff and application made by such Lender; provided,
however, that the failure to give such notice shall not affect the validity of
such setoff and application. The rights of each Lender under this Section are
in addition to other rights and remedies (including other rights of setoff under
applicable law or otherwise) which such Lender may have.
SECTION 6.8 Net Payments. All payments by the Parent or any Co-Borrower
of principal of, and interest on, the Loans and all other amounts payable
hereunder shall be made free and clear of and
<PAGE>
without deduction for any present or future income, stamp or other Taxes, fees,
duties, withholdings or other charges of any nature whatsoever imposed by any
taxing authority, other than Income Taxes (such non-excluded items being called
"Charges"). In the event that any withholding or deduction from any payment to
be made by the Parent or such Co-Borrower hereunder is required in respect of
any Charges pursuant to any applicable law, rule or regulation, then the Parent
or such Co-Borrower will:
(a) pay directly to the relevant authority the full amount required
to be so withheld or deducted;
(b) promptly forward to the Administrative Agent an official receipt
or other documentation reasonably satisfactory to the Administrative Agent
evidencing such payment to such authority; and
(c) pay to the Administrative Agent, for the account of the Lenders,
such additional amount or amounts as is necessary to ensure that the net
amount actually received by each Lender will equal the full amount such
Lender would have received had no such withholding or deduction been
required.
Upon the request of the Parent or the Administrative Agent, each Lender that is
organized under the laws of a jurisdiction other than the U.S. shall, prior to
the due date of any payments under the Loans or LC Obligations, execute and
deliver to the Parent and the Administrative Agent, on or about the first
scheduled payment date in each calendar year, a United States Internal Revenue
Service Form 4224 or Form 1001, as may be applicable (or any successor form),
appropriately completed. Without prejudice to the survival of any other
agreement of the Parent hereunder or any other document, the agreements of the
Parent contained in this Section shall survive satisfaction of the Liabilities
and termination of this Agreement until the termination of all statutes of
limitations applicable thereto.
SECTION 7. CHANGES IN CIRCUMSTANCES
SECTION 7.1 Increased Costs. If (a) Regulation D of the Board of
Governors of the Federal Reserve System, or (b) after the date hereof, the
adoption of any applicable law, rule or regulation, or any change therein, or
any change in the interpretation or administration thereof by any governmental
authority, central bank or comparable agency charged with the
<PAGE>
interpretation or administration thereof, or compliance by any Lender (or any
Lending Office of such Lender) with any request or directive (whether or not
having the force of law) or any such authority, central bank or comparable
agency,
(i) shall subject any Lender (or any Lending Office of such Lender)
to any tax (other than Income Taxes), duty or other charge with respect to
its Loans or its LC Obligations or its obligation to make Loans, or issue
or participate in the issuance of Letters of Credit or shall change the
basis of taxation of payments to any Lender of the principal of or interest
on its Loans, LC Obligations or any other amounts due under this Agreement
in respect of its Loans or its obligation to make Loans or its LC
Obligations (except for changes in the rate of Income Tax); or
(ii) shall impose, modify or deem applicable any reserve (including,
without limitation, any reserve imposed by the Board of Governors of the
Federal Reserve System, but excluding any reserve included in the
determination of interest rates pursuant to Section 5), special deposit or
similar requirement against assets of, deposits with or for the account of,
or credit extended by, any Lender (or any Lending Office of such Lender);
or
(iii) shall impose on any Lender (or its Lending Office) any other
condition affecting its Loans or its LC Obligations;
and the result of any of the foregoing is to increase the net cost to (or in the
case of Regulation D referred to above, to impose a cost on) such Lender (or any
Lending Office of such Lender) of making or maintaining any Loan, or any Letter
of Credit or participation therein or to reduce the amount of any sum received
or receivable by such Lender (or the Lending Office or such Lender) under this
Agreement or under its Loans with respect thereto, then within thirty (30) days
after demand by such Lender (which demand shall be accompanied by a statement
setting forth in reasonable detail the basis of such demand); provided that such
Lender makes the same demand on other of its similarly-situated borrowers, if
any, the Parent shall pay directly to such Lender such additional amount or
amounts as will compensate such Lender for such increased cost or such
reduction.
SECTION 7.2 Change in Rate of Return. If, after the date hereof, any
change in, or the introduction, adoption,
<PAGE>
effectiveness, interpretation, reinterpretation or phase-in of, any law or
regulation, directive, guideline, decision or request (whether or not having the
force of law) of any court, central bank, regulator or other governmental
authority affects or would affect the amount of capital required or expected to
be maintained by any Lender or any person controlling such Lender, and such
Lender reasonably determines that the rate of return on its or such controlling
person's capital as a consequence of its Commitments, the Loans or the Letters
of Credit made by such Lender (or any participating interest therein held by
such Lender) is reduced to a level below that which such Lender or such
controlling person could have achieved but for the occurrence of any such
circumstance, then, in any such case the Parent shall, within thirty (30) days
after demand (accompanied by the statement described below) by such Lender;
provided that such Lender makes the same demand on other of its similarly-
situated borrowers, if any, the Parent shall pay directly to such Lender
additional amounts sufficient to compensate such Lender or such controlling
person for such reduction in rate of return. A written statement of such Lender
as to any such additional amount or amounts (including calculations thereof) in
reasonable detail shall, in the absence of manifest error, be conclusive and
binding on the Parent. In determining such amount, such Lender may use any
method of averaging and attribution that it shall reasonably deem applicable.
Each Lender promptly shall notify the Parent of any event of which it has
knowledge, occurring after the date hereof, which will entitle such Lender to
compensation pursuant to this Section 7.2.
SECTION 7.3 Basis for Determining Interest Rate Inadequate or Unfair. If
with respect to any Interest Period:
(a) the Administrative Agent is advised by LaSalle that deposits in
Dollars (in the applicable amounts) are not being offered to LaSalle in the
relevant market for such Interest Period, or the Administrative Agent
otherwise determines (which determination shall be binding and conclusive
on all parties) that by reason of circumstances affecting the interbank
eurodollar market adequate and reasonable means do not exist for
ascertaining the applicable LIBOR Rate; or
(b) any Lender advises the Administrative Agent that, for reasons
described in Section 7.1, 7.2 or 7.4, the LIBOR Rate (Reserve Adjusted), as
determined by the Administrative Agent, will not adequately and fairly
reflect the cost to such Lender of maintaining or funding such Loans for
such Interest Period, or that the making
<PAGE>
or funding of LIBOR Rate Loans has become impracticable as a result of an
event occurring after the date of this Agreement which in the opinion of
such Lender materially and adversely changes such Loans,
then, so long as such circumstances shall continue: (i) the Administrative
Agent shall promptly notify the other parties thereof, (ii no Lender shall be
under any obligation to make or convert into LIBOR Rate Loans so affected, and
(ii on the last day of the then current Interest Period for Loans of the Type so
affected, such Loans shall, unless then repaid in full, automatically convert
to Base Rate Loans. If conditions subsequently change so that the foregoing
conditions no longer exist, the Administrative Agent in the case of clause (a)
or such Lender in the case of clause (b) will promptly notify the Parent and the
Lenders thereof, and upon the receipt of such notice, the obligations of all
Lenders to make or continue LIBOR Rate Loans shall be reinstated.
SECTION 7.4 Changes in Law Rendering Certain Loans Unlawful. In the event
that any change in (including the adoption of any new) applicable laws or
regulations, or any change in the interpretation of applicable laws or
regulations by any governmental or other regulatory body charged with the
administration thereof, should make it unlawful for a Lender or the Lending
Office of such Lender ("Affected Lender") to make, maintain or fund LIBOR Rate
Loans, then (a) the Affected Lender shall promptly notify each of the other
parties hereto, (b) the obligation of all Lenders to make, continue or convert
into LIBOR Rate Loans shall, upon the effectiveness of such event, be suspended
for the duration of such unlawfulness, and (c) on the last day of the current
Interest Period for LIBOR Rate Loans (or, in any event, if the Affected Lender
so requests, on such earlier date as may be required by the relevant law,
regulation or interpretation), LIBOR Rate Loans shall, unless then repaid in
full, automatically convert to Base Rate Loans denominated in Dollars. If
conditions subsequently change so that the foregoing conditions no longer exist,
such Lender will promptly notify the Parent and the other Lenders thereof, and
upon the receipt of such notice, the obligations of all Lenders to make, convert
or continue LIBOR Rate Loans shall be reinstated.
SECTION 7.5 Funding Losses. The Parent hereby agrees that upon demand by
any Lender (which demand shall be accompanied by a statement setting forth in
reasonable detail the basis for the calculations of the amount being claimed)
the Parent will indemnify such Lender against any net loss or expense which such
Lender may
<PAGE>
sustain or incur (including, without limitation, any net loss or expense
incurred by reason of the liquidation or reemployment of deposits or other funds
acquired by such Lender to fund or maintain LIBOR Rate Loans), as reasonably
determined by such Lender, as a result of (a) any payment or prepayment or
conversion of any LIBOR Rate Loan of such Lender on a date other than the last
day of an Interest Period for such Loan, or (b) any failure of the Parent to
borrow, continue or convert any Loans on a date specified therefor in a
Borrowing Request or Continuation/Conversion Notice pursuant to this Agreement.
For this purpose, all notices to the Administrative Agent pursuant to this
Agreement shall be deemed to be irrevocable.
SECTION 7.6 Right of Lenders to Fund Through Other Offices. Each Lender
may, if it so elects, fulfill its Commitment as to any Loan by causing its
Lending Office to make such Loan; provided that in such event for the purposes
of this Agreement, such Loan shall be deemed to have been made by such Lender
and the obligation of the Parent to repay such Loan shall nevertheless be to
such Lender and shall be deemed held by it, to the extent of such Loan, for the
account of such branch or affiliate.
SECTION 7.7 Discretion of Lenders as to Manner of Funding.
Notwithstanding any provision of this Agreement to the contrary, each Lender
shall be entitled to fund and maintain its funding of all or any part of its
Loans in any manner it sees fit, it being understood, however, that for the
purposes of this Agreement all determinations hereunder shall be made as if such
Lender had actually funded and maintained each LIBOR Rate Loan during each
Interest Period for such Loan through the purchase of deposits having a maturity
corresponding to such Interest Period and bearing an interest rate equal to the
LIBOR Rate for such Interest Period.
SECTION 7.8 Conclusiveness of Statements; Survival of Provisions.
Determinations and statements of any Lender pursuant to Sections 7.1 through
Section 7.5 shall be conclusive absent manifest error. The provisions of
Sections 7.1 through Section 7.5 shall survive termination of this Agreement
until the expiration of all statutes of limitation applicable thereto.
SECTION 7.9 Alternative Lending Office. If pursuant to the provisions
of this Section 7, Parent is required to pay any additional fees, taxes,
interest or other expense, or if any Lender shall be prohibited from making or
maintaining LIBOR Loans, then the Administrative Agent and each such Lender
shall take any reasonable actions available to it (including designation of a
different Lending Office), consistent with legal and regulatory
<PAGE>
restrictions, that will avoid the need to take the steps described in this
Section 7, which will not, in the reasonable judgment of the Administrative
Agent or such Lender, be disadvantageous to the Administrative Agent or such
Lender.
SECTION 8. COLLATERAL AND OTHER SECURITY
SECTION 8.1 Security Documents. Concurrently with or prior to the
initial Borrowing or issuance of the initial Letter of Credit under the Original
Credit Agreement and from time to thereafter:
(a) Security Agreement. The Parent and each of its Subsidiaries
executed and delivered to the Administrative Agent the Security Agreement
(as defined in the Original Credit Agreement) covering, among other things,
inventory, equipment, accounts, and general intangibles of the Parent and
its Subsidiaries.
(b) Borrower Trademark Security Agreement. The Parent executed and
delivered to the Administrative Agent the Borrower Trademark Security
Agreement (as defined in the Original Credit Agreement) covering, among
other things, all of the copyrights the Parent.
(c) Borrower Pledge Agreement. The Parent executed and delivered to
the Administrative Agent a Borrower Pledge Agreement (as defined in the
Original Credit Agreement), covering, among other things, all of the issued
and outstanding capital stock of each Subsidiary of the Parent, including,
without limitation, all the issued and outstanding capital stock of each of
the Co-Borrowers and the Guarantors. Concurrently with the Restatement
Effective Date and as a condition precedent thereto the Parent will affirm
its obligations thereunder pursuant to the Affirmation of Borrower Pledge
Agreement, substantially, in the form of Exhibit E.
(d) Gibbs Pledge Agreement. Gibbs executed and delivered to the
Administrative Agent the Gibbs Pledge Agreement (as defined in the Original
Credit Agreement), covering, among other things, all of the issued and
outstanding capital stock of each Subsidiary of Gibbs. Concurrently with
the Restatement Effective Date and as a condition precedent thereto Gibbs
will affirm its obligations thereunder pursuant to the Affirmation of Gibbs
Pledge Agreement, substantially, in the form of Exhibit F.
<PAGE>
(e) IAMD (Canada) Pledge Agreement. IAMD (Canada) executed and
delivered to the Administrative Agent the IAMD (Canada) Pledge Agreement,
covering, among other things, all of the issued and outstanding capital
stock of each Subsidiary of IAMD (Canada). Concurrently with the
Restatement Effective Date and as a condition precedent thereto IAMD
(Canada) will affirm its obligations thereunder pursuant to the Affirmation
of IAMD (Canada) Pledge Agreement, substantially, in the form of Exhibit M.
(f) IAMD, Limited Pledge Agreement. IAMD, Limited executed and
delivered to the Administrative Agent the IAMD, Limited Pledge Agreement,
covering, among other things, all of the issued and outstanding capital
stock of each Subsidiary of IAMD, Limited. Concurrently with the
Restatement Effective Date and as a condition precedent thereto IAMD,
Limited will affirm its obligations thereunder pursuant to the Affirmation
of IAMD, Limited Pledge Agreement, substantially, in the form of Exhibit N.
(g) Subsidiary Guaranty. Each Subsidiary of the Parent executed and
delivered to the Administrative Agent the Subsidiary Guaranty (as defined
in the Original Credit Agreement) guarantying, among other things, the
indefeasible payment in full of the Liabilities and each such Subsidiaries'
obligations under the Subsidiary Guaranty. Concurrently with the
Restatement Effective Date and as a condition precedent thereto each
Subsidiary of the Parent (other than the Co-Borrowers) will affirm its
obligations thereunder pursuant to the Affirmation of Subsidiary Guaranty,
substantially in the form of Exhibit G.
SECTION 8.2 Termination. Concurrently with the Restatement Effective
Date, each of the Security Agreement, Borrower Trademark Security Agreement and
the Fee Mortgages (as defined in the Original Credit Agreement) shall be
cancelled, and the Administrative Agent shall take all actions necessary to
evidence such termination, including, without limitation, the filing of
termination statements in appropriate governmental offices. All reasonable,
documented expenses incurred by the Administrative Agent in connection with
actions taken by the Administrative Agent pursuant to this Section 8.2 shall be
reimbursed by the Parent promptly upon presentation of invoices with respect
thereto.
SECTION 8.3 Further Assurances. The Parent agrees that upon the request
of the Administrative Agent (a) it shall forthwith deliver, or cause to be
delivered to the Administrative Agent, in
<PAGE>
due form for transfer, all chattel paper, instruments, securities and documents
of title, if any, at any time representing all or any of the Collateral, and (b)
it shall forthwith execute and deliver or cause to be executed and delivered to
the Administrative Agent, in due form for filing or recording (and pay the cost
of filing or recording the same in all public offices reasonably deemed
necessary by the Administrative Agent), such further assignment agreements,
security agreements, pledge agreements, instruments, consents, waivers,
financing statements, stock or bond powers, searches, releases, and other
documents, and do such other acts and things, all as the Administrative Agent
may from time to time reasonably request to establish and maintain to the
satisfaction of the Administrative Agent a valid first priority perfected Lien
on all Collateral (free of all other Liens, except Permitted Liens) to secure
payment of the Liabilities.
SECTION 9. REPRESENTATIONS AND WARRANTIES
To induce the Lenders to enter into this Agreement and to make Loans and to
issue or participate in Letters of Credit hereunder, the Parent represents and
warrants to the Administrative Agent, the Foreign Currency Agent and to each of
the Lenders that:
SECTION 9.1 Organization, etc. The Parent is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Delaware; each of its Subsidiaries is a corporation duly organized, validly
existing and in good standing under the laws of its state of incorporation; and
the Parent and each such Subsidiary is duly qualified to transact business and
in good standing as a foreign corporation authorized to do business in each
jurisdiction where the nature of its business makes such qualification necessary
and where failure to so qualify reasonably would be expected to have a Material
Adverse Effect. The shares of capital stock of the Parent and each of its
Subsidiaries are owned by the Persons set forth in Schedule 9.1 in the amounts
set forth therein.
SECTION 9.2 Authorization. The Parent and each of its Subsidiaries (to
the extent it is a named party thereto) (a) has the corporate power to execute,
deliver and perform this Agreement and the Related Documents, and (b) has taken
all necessary corporate action to authorize the execution, delivery and
performance by it of this Agreement and the Related Documents.
SECTION 9.3 No Conflict. The execution, delivery and performance by the
Parent and each of its Subsidiaries (to the
<PAGE>
extent it is a named party thereto), of this Agreement and the Related Documents
does not and will not (a) contravene or violate any provision of any law,
statute, rule or regulation applicable to such Person, (b) contravene or
conflict with, result in any breach of, or constitute a default under, any
agreement or instrument binding on it which could reasonably be expected to have
a Material Adverse Effect, (c) result in the creation or imposition of or the
obligation to create or impose any Lien (except for Permitted Liens) upon any of
the property or assets of the Parent or any such Subsidiary, or (d) contravene
or violate any provision of the certificate or articles of incorporation or by-
laws of the Parent or any such Subsidiary.
SECTION 9.4 Governmental Consents. No order, consent, approval, license,
authorization or validation of, or filing, recording or registration with
(except as have been obtained or made prior to the Closing Date and except for
filings or recordings of the UCC statements and any other documents contemplated
to be filed or recorded by this Agreement or any Related Document with respect
to the Collateral) or exemption by, any governmental or public body or
authority, or any subdivision thereof, is required in connection with the
execution, delivery and performance by the Parent or any Subsidiary of the
Parent (to the extent it is a named party thereto) of this Agreement or the
Related Documents, except those which have been made or obtained or will be made
or obtained as and when required thereby.
SECTION 9.5 Validity. The Parent and each of its Subsidiaries has duly
executed and delivered this Agreement (to the extent it is a named party hereto)
and will have duly executed as and when required hereby the Related Documents
(to the extent it is named as a party thereto), and each of such documents
constitutes, or when so delivered will constitute the legal, valid and binding
obligation of the Parent and each such Subsidiary party thereto, enforceable in
accordance with its terms, except as such enforceability may be limited by
bankruptcy, insolvency or other laws relating to creditors rights generally.
SECTION 9.6 Financial Statements. The Parent's audited consolidated
financial statements as at December 31, 1997 and its unaudited consolidated
financial statements as at March 31, 1998, and June 30, 1998, copies of which
have been furnished to the Administrative Agent, have been prepared in
conformity with GAAP (except in the case of such unaudited statements, for the
absence of notes and subject to normal year-end adjustments) applied on a basis
consistent with that of the preceding Fiscal Year, except as disclosed therein,
and accurately present in all material respects
<PAGE>
the financial condition of the Parent and its Subsidiaries as at such dates and
the results of operations for the periods then ended. The Parent's pro forma
financial statements for the periods ended December 31, 1996 through December
31, 2002, which were delivered to the Administrative Agent on March 14, 1997,
are the most recent pro forma financial statements prepared by the Parent and
the projections and pro forma financial information contained therein are based
upon good faith estimates and assumptions believed by such Persons to be
reasonable at the time made, it being recognized by the Lenders that such
projections as to future events are not to be viewed as facts or guarantees and
that actual results during the period or periods covered by any such projections
may differ from the actual results.
SECTION 9.7 Material Adverse Change. No Material Adverse Change has
occurred since December 31, 1997.
SECTION 9.8 Litigation and Contingent Obligations. No Material
Litigation is pending or, to the Parent's knowledge after due inquiry,
threatened except as set forth (including good faith estimates of the Dollar
amounts involved with respect thereto) in Schedule 9.8. Neither the Parent nor
any of its Subsidiaries has any material Contingent Obligations other than as
provided for or disclosed on Schedule 9.8 or in the financial statements
referred to in Section 9.6.
SECTION 9.9 Liens. None of the assets of the Parent or any its
Subsidiaries is subject to any Lien, except for Permitted Liens.
SECTION 9.10 Subsidiaries. The Parent has no Subsidiaries, except as set
forth on Schedule 9.10.
SECTION 9.11 Pension and Welfare Plans.
(a) During the twelve-consecutive-month period prior to the
Restatement Effective Date and prior to the date of any Borrowing
hereunder, no steps have been taken to terminate or completely or partially
withdraw from any Pension Plan or Welfare Plan, and no contribution failure
has occurred with respect to any Pension Plan sufficient to give rise to a
Lien on any assets of the Parent or its Subsidiaries under section 302(f)
of ERISA;
(b) no condition exists or event or transactions have occurred with
respect to any Pension Plan which could reasonably be expected to result in
the incurrence
<PAGE>
by the Parent or any other member of the Controlled Group of any material
liability, fine, Tax or penalty which could reasonably be expected to have
a Material Adverse Effect;
(c) except as disclosed in Schedule 9.11 or the financial statement
referred to in Section 9.6, neither the Parent nor any member of the
Controlled Group has any vested or contingent liability with respect to any
post-retirement benefit under a Welfare Plan, other than liability for
continuation coverage described in Part 6 of Title I of ERISA;
(d) with respect to each Pension Plan maintained or contributed to by
the Parent which is intended to qualify under Section 401(a) of the Code, a
favorable determination letter has been received from the Internal Revenue
Service stating that such Pension Plan so qualifies and nothing has
occurred since the date of issuance of such determination letter which
would cause any such Pension Plan to cease to qualify under Section 401(a)
of the Code;
(e) each fiduciary (as defined in section 3(21) of ERISA) with respect
to any Pension Plan or Welfare Plan and any Person who handles funds of any
Pension Plan or Welfare Plan is bonded to the extent required under section
412 of ERISA; and
(f) no Pension Plan maintained by or contributed to by the Parent or
any other member of the Controlled Group and subject to section 302 of
ERISA or section 412 of the Code has incurred an accumulated funding
deficiency as defined in section 302(a)(2) of ERISA and Section 412(a) of
the Code, whether or not waived.
SECTION 9.12 Investment Company Act. Neither the Parent nor any
Subsidiary of the Parent is an "investment company" or a company "controlled" by
an "investment company," within the meaning of the Investment Company Act of
1940, as amended.
SECTION 9.13 Public Utility Holding Company Act. Neither the Parent nor
any Subsidiary of the Parent is a "holding company," or a "subsidiary company"
of a "holding company," or an "affiliate" of a "holding company" or of a
"subsidiary company" of a "holding company," within the meaning of the Public
Utility Holding Company Act of 1935, as amended.
<PAGE>
SECTION 9.14 Margin Regulation. Neither the Parent nor any Subsidiary of
the Parent is engaged principally, or as one of its important activities, in the
business of extending credit for the purpose of purchasing or carrying margin
stock (within the meaning of Regulation G or Regulation U of the Board of
Governors of the Federal Reserve System).
SECTION 9.15 Collateral. As security for the Liabilities, the
Administrative Agent has or upon the filing or recording of the UCC financing
statements in the offices set forth in Schedule 9.15 and the other documents
contemplated to be filed or recorded under the Related Documents and possession
by the Administrative Agent of all Collateral which consists of instruments or
securities as defined in the UCC will have a valid, first-priority perfected
Lien on the Collateral, subject only to Permitted Liens. There are no Liens or
UCC financing statements on file in favor of any Person with respect to the
Parent or any of its Subsidiaries (except for Permitted Liens).
SECTION 9.16 Taxes. Except for extensions which are on file with
appropriate governmental authorities which are in full force and effect as of
the date hereof and set forth on Schedule 9.16, the Parent and each of its
Subsidiaries has filed all tax returns and reports required by law to have been
filed by them and have paid or provided adequate reserves for all Taxes thereby
shown to be owing, except any such Taxes which are being diligently contested in
good faith by appropriate proceedings and for which adequate reserves have been
established and are being maintained in accordance with GAAP. There is no
ongoing audit or, to the Parent's knowledge, other governmental investigation of
the tax liability of the Parent or any of its Subsidiaries and there is no
unresolved claim by a taxing authority concerning the Parent's or of its
Subsidiary's tax liability, for any period for which returns have been filed or
were due. The liability stated for Taxes as of December 31, 1997 in the
financial statements described in Section 9.6 is sufficient in all material
respects for all Taxes as of such date.
SECTION 9.17 Accuracy of Information. All factual information heretofore
or contemporaneously furnished by or on behalf of the Parent or any its
Subsidiaries in writing to the Administrative Agent or any Lender for purposes
of or in connection with this Agreement or any transaction contemplated hereby
is, and all other such factual information hereafter furnished by or on behalf
of the Parent or any of its Subsidiaries to the Administrative Agent or any
Lender will be, true and accurate in every material respect on the date as of
which such information is
<PAGE>
dated or certified and as of the Effective Date, and such information is not, or
shall not be, as the case may be, incomplete by omitting to state any material
fact necessary to make such information not misleading.
SECTION 9.18 Environmental Warranties. Except as set forth in Schedule
9.18:
(a) all facilities and property (including underlying groundwater)
owned or leased by the Parent or any of its Subsidiaries have been, and
continue to be, owned or leased by the Parent and its Subsidiaries in
material compliance with all Environmental Laws;
(b) there have been no past, and there are no pending or, to the best
knowledge of the Parent, threatened (i) claims, complaints, notices or
requests for information received by the Parent or any of its Subsidiaries
with respect to any alleged violation of any Environmental Law, or (ii
complaints, notices or inquiries as to the Parent or any of its
Subsidiaries regarding potential liability under any Environmental Law;
(c) there have been no releases of Hazardous Materials at, on or
under any property now or previously owned or leased by the Parent or any
of its Subsidiaries that, individually or in the aggregate, have had, or
could reasonably be expected to have, a Material Adverse Effect;
(d) the Parent and each of its Subsidiaries has been issued and is in
material compliance with all permits, certificates, approvals, licenses and
other authorizations relating to environmental matters necessary for its
business;
(e) no property now or previously owned or leased by the Parent or
any of its Subsidiaries is listed or, to the best knowledge of Parent,
proposed for listing (with respect to owned property only) on the National
Priorities List pursuant to CERCLA, on the CERCLIS or on any similar state
list of sites requiring investigation or clean-up;
(f) there are no underground storage tanks, active or abandoned,
including petroleum storage tanks, on or
<PAGE>
under any property now or previously owned or leased by the Parent or any
of its Subsidiaries that, individually, or in the aggregate, have had, or
could reasonably be expected to have a Material Adverse Effect;
(g) neither the Parent nor any of its Subsidiaries has directly
transported or directly arranged for the transportation of any Hazardous
Material to any location which is listed or, to the best knowledge of the
Parent, proposed for listing on the National Priorities List pursuant to
CERCLA, on the CERCLIS or on any similar state list or which is the subject
of federal, state or local enforcement actions or other investigations or
claims which could reasonably be expected to have a Material Adverse
Effect;
(h) there are no polychlorinated biphenyls or friable asbestos
present at any property now or previously owned or leased by the Parent or
any of its Subsidiaries that, individually or in the aggregate, has had, or
could reasonably be expected to have, a Material Adverse Effect; and
(i) to the best of Parent's knowledge, no conditions exist at, on or
under any property now or previously owned or leased by the Parent or any
of its Subsidiaries which, with the passage of time, or the giving of
notice or both, could reasonably be expected to give rise to material
liability under any Environmental Law.
SECTION 9.19 Proceeds. The proceeds of the Revolving Loans will be used
for general working capital purposes.
SECTION 9.20 Insurance. Schedule 9.20 hereto sets forth a true and
correct summary of all insurance carried by the Parent and its Subsidiaries (or
on their behalf). The Parent and its Subsidiaries are, to the Parent's best
knowledge, adequately insured for their benefit under policies issued by
insurers of recognized responsibility. No notice of any pending or threatened
cancellation or material premium increase has been received by the Parent or any
of its Subsidiaries with respect to any of such insurance policies. The Parent
and its Subsidiaries are in substantial compliance with all conditions contained
in such insurance policies.
<PAGE>
SECTION 9.21 Securities Laws. Neither the Parent nor any Affiliate of the
Parent, nor anyone acting on behalf of any such Person, has directly or
indirectly offered any interest in the Loans or any other Liabilities for sale
to, or solicited any offer to acquire any such interest from, or has sold any
such interest to, any Person that would subject the issuance or sale of the
Loans or any other Liabilities to registration under the Securities Act of 1933,
as amended.
SECTION 9.22 Governmental Authorizations. The Parent and each of its
Subsidiaries has all licenses, franchises, permits and other governmental
authorizations necessary for all businesses presently carried on by them
(including ownership and leasing the real and personal property owned and leased
by them), except where failure to obtain such licenses, franchises, permits and
other governmental authorizations could not reasonably be expected to have a
Material Adverse Effect.
SECTION 9.23 Representations in Other Agreements True and Correct. Each
of the representations and warranties contained in each Related Document (each
as originally executed notwithstanding any amendment, modification or
termination thereof except to the extent consented to by the Required Lenders)
are true and correct, except to the extent any of such representations and
warranties relate to a specific date, in which case, such representations and
warranties are true and correct as of such specific date.
SECTION 9.24 Business Locations; Trade Names. Schedule 9.24 lists the
principal place of business of each of the Parent and its Subsidiaries together
with each corporate, fictitious or trade name under or by which the Parent or
any of its Subsidiaries conducts or has conducted its business.
SECTION 9.25 Solvency. The Parent and each of its Subsidiaries is, and
after consummation of the transactions contemplated by this Agreement and after
giving effect to all Indebtedness incurred and Liens created by the Parent and
its Subsidiaries in connection herewith and therewith will be, Solvent.
SECTION 9.26 Title IV Compliance.
With respect to each Educational Institution which is subject to Title IV:
(a) Each Educational Institution is (or, in the case of any
Educational Institution acquired on or after the Closing Date, immediately
prior to the acquisition such Educational
<PAGE>
Institution was, and in the ordinary course of review by the DOE, will be)
an "eligible proprietary institution of higher education," as defined in 34
C.F.R. Section 600.5.
(b) Each Educational Institution has (or, in the case of any
Educational Institution acquired on or after the Closing Date, immediately
prior to the acquisition such Educational Institution was, and in the
ordinary course of review by the DOE, will be) received an eligibility
notification, as that term is defined in 34 C.F.R. Section 600.21.
(c) The Parent has not changed, nor does the Parent anticipate any
change, in any of the information required by 34 C.F.R. Section 600.30 to
be reported by each Educational Institution to the Secretary, except as
provided in Schedule 9.26(c).
(d) Each Educational Institution has (or, in the case of any
Educational Institution acquired on or after the Closing Date, immediately
prior to the acquisition such Educational Institution was, and in the
ordinary course of review by the DOE, will be) met the standards for
participation in Title IV Programs as set forth in 34 C.F.R., Party 668,
Subpart B, and has a current program participation agreement with the
Secretary.
(e) Each Educational Institution has at all times during which it has
been owned by the Parent or a Subsidiary of the Parent, and to the Parent's
best knowledge or any such Subsidiary's best knowledge at all times prior
thereto, acted with the competency and integrity necessary to qualify as a
fiduciary in the administration of Title IV Programs, as provided by 34
C.F.R. Section 668.82.
(f) To the best of the Parent's and each of its Subsidiaries'
knowledge, and except as disclosed on Schedule 9.26(f), the Parent's and
each such Subsidiary's operations with respect to each Educational
Institution have, in all material respects, been conducted in all material
respects in accordance with the Policy Guidelines and all relevant
standards imposed by Accrediting Bodies, agencies administering state or
federal government student aid programs in which any such Subsidiary
participates, and all other applicable laws and regulations. The Parent
and each of its Subsidiaries have submitted all reports, audits and other
information, whether periodic in nature or pursuant to specific requests,
for each Educational Institution
<PAGE>
("Compliance Reports") to all agencies or other entities with which such
filings are required relating to its compliance with (i) applicable
accreditation standards governing its activities or (ii) laws or
regulations governing programs pursuant to which any Subsidiary or its
students receive funding, and (iii) all articulation agreements, if any,
with degree-granting colleges and universities in effect as of the date of
this Agreement. To the best of the Parent's and each such Subsidiary's
knowledge after due inquiry, all such forms and records with respect to
each Educational Institution have been prepared, completed, maintained and
filed in all material respects in accordance with all applicable federal
and state laws and regulations, and are true and correct in all material
respects. To the best knowledge of the Parent and each Subsidiary of the
Parent, all financial aid grants and loans, disbursements and record
keeping relating thereto have been completed in substantial compliance with
all federal and state requirements, and there are no material deficiencies
in respect thereto. To the best of the Parent's and each of its
Subsidiaries' knowledge and except as previously disclosed in prior audits
by DOE, no student at any Educational Institution has been funded prior to
the date for which such student was eligible for funding, and such
student's records conform in all material respects in form and substance to
all relevant regulatory requirements.
(g) Schedule 9.26(g) sets forth the cohort default rate for each
Educational Institution, as calculated and published by the DOE, for each
Educational Institution for the federal fiscal year ended December 31,
1996. Except as set forth in the appeals described on Schedule 9.26(f), to
the best of the Parent's and each of its Subsidiaries' knowledge, such
schedule is materially accurate in all respects. To the best of the
Parent's and each of its Subsidiaries' knowledge, they have received no
notice as to the calculation or publication of the cohort default rates for
either Educational Institution for the federal fiscal year ended December
31, 1997.
As used in this Section, all terms, unless otherwise defined herein, shall
have the meanings as set forth in the citations referred to above or as
otherwise defined in 34 C.F.R., Part 600 or Part 668, as the context requires.
Section 9.27 No Burdensome Restrictions. Neither the Parent nor any of
its Subsidiaries is a party to or bound by any agreement, or subject to any
restriction in its charter, by-laws or any other organizational document, or any
federal, state or local
<PAGE>
law, rule or regulation, which could reasonably be expected to have a Material
Adverse Effect.
Section 9.28 Copyrights, Patents, Trademarks and Licenses, etc. The
Parent and each of its Subsidiaries owns or is licensed or otherwise has the
right to use all of the patents, trademarks, service marks, trade names,
copyrights, contractual franchises, authorizations and other rights that are
reasonably necessary for the operation of their respective businesses, to
Parent's best knowledge without conflict with or violation of the rights of any
other Person. To the best knowledge of the Parent and its Subsidiaries, no
slogan or other advertising device, product, process, method, substance, part or
other material now employed, or now contemplated to be employed, by the Parent
or any of its Subsidiaries infringes upon any rights held by any other Person.
Except as specifically disclosed in Schedule 9.28, no Litigation regarding any
of the foregoing is pending or to the Parent's and its Subsidiaries' best
knowledge, threatened, and no patent, invention, device, application, principle
or any statute, law, rule, regulation, standard or code is pending or, to the
knowledge of the Parent or such Subsidiary, proposed, which, in either case,
could reasonably be expected to have a Material Adverse Effect.
SECTION 9.29 Title to Assets; Leases. The Parent or its Subsidiaries, as
the case may be, has good, sufficient and legal title to, or leasehold interest
in, all the property and assets reflected as owned in the financial statements
provided under Section 9.6, except such property and assets as have been
disposed of in the ordinary course of business since the relevant dates thereof.
The Parent or its Subsidiaries, as the case may be, enjoys peaceful and
undisturbed possession of all material property subject to leases and all such
leases are valid and in full force and effect. All leases in effect on the
Restatement Effective Date are set forth in Schedule 9.29.
SECTION 9.30 Labor Disputes. There are no strikes or other labor disputes
or grievances pending or, to the best knowledge of the Parent, threatened
against the Parent or its Subsidiaries that could reasonably be expected to have
a Material Adverse Effect.
SECTION 9.31 Year 2000. The Parent and its Subsidiaries have reviewed the
areas within their business and operations which could reasonably be expected to
adversely affected by, and have developed or are developing a program to address
on a timely basis, the "Year 2000 Problem" (that is, the risk that computer
applications used by the Parent and its Subsidiaries may be unable to recognize
and perform properly date-sensitive functions involving certain dates
<PAGE>
prior to and any date on or after December 31, 1999) and have made related
appropriate inquiry of material suppliers and vendors. Based on such review and
program, the Parent believes that the "Year 2000 Problem" will not have a
Material Adverse Effect on the Parent. From time to time, at the request of the
Administrative Agent, the Parent and its Subsidiaries shall provide to the
Administrative Agent such updated information or documentation as is requested
regarding the status of their efforts to address the "Year 2000 Problem."
SECTION 10. AFFIRMATIVE COVENANTS
The Parent and each Co-Borrower agrees that, on and after the Restatement
Effective Date and for so long thereafter as any Lender has any Commitment
hereunder or any of the Liabilities remain unpaid or outstanding, the Parent
will:
SECTION 10.1 Reports, Certificates and Other Information. Unless otherwise
provided herein, furnish or cause to be furnished to the Administrative Agent,
the Foreign Currency Agent and each Lender:
10.1.1 Audit Report. As soon as available, but in any event within
ninety (90) days after the end of each Fiscal Year of the Parent: (a)
copies of the consolidated and consolidating balance sheet of the Parent
and its Subsidiaries as at the end of such Fiscal Year and the related
statements of earnings, stockholders' equity and cash flow of the Parent
and its Subsidiaries for such Fiscal Year, in each case setting forth the
figures for the previous year, prepared in reasonable detail and in
accordance with GAAP applied consistently throughout the periods reflected
therein, certified, without Qualification by Arthur Anderson, L.L.P. (or
such other independent certified public accountants of recognized standing
reasonably acceptable to the Required Lenders); (b) a certificate from such
accountants containing a computation of, and showing compliance with, each
of the financial ratios and restrictions contained in Section 12, and to
the effect that, in making the examination necessary for the signing of the
annual audit report of the Parent and its Subsidiaries by such accountants,
they have not become aware of any non-compliance by the Parent or any of
its Subsidiaries, or any Default or Event of Default, under this Agreement
or the Related Documents; and (c) a letter
<PAGE>
addressed to the Parent from such accountants stating that such accountants
have been informed that a primary intent of the Parent was for the
professional services such accountants provided to the Parent and its
Subsidiaries in preparing the financial statements and the certificate
referred to above to benefit or influence the Administrative Agent and the
Lenders, and identifying the Administrative Agent and the Lenders as
parties that the Parent has indicated intend to rely on such professional
services provided to the Borrower and its Subsidiaries by such accountants;
10.1.2 Quarterly Reports. As soon as available, but in any event
within forty-five (45) days after the end of each Fiscal Quarter of the
Parent, copies of the unaudited consolidated and consolidating balance
sheet of the Parent and its Subsidiaries as at the end of such Fiscal
Quarter and the related unaudited statements of earnings, stockholders'
equity and cash flow for such Fiscal Quarter and the portion of the Fiscal
Year through such Fiscal Quarter, in each case setting forth in comparative
form the figures for the corresponding periods of the previous Fiscal Year,
prepared in reasonable detail and in accordance with GAAP applied
consistently throughout the periods reflected therein and certified by the
chief financial officer of the Parent as presenting fairly in all material
respects the financial condition and results of operations of the Parent
and its Subsidiaries (subject to normal year-end audit adjustments and
absence of footnotes);
10.1.3 [Intentionally Omitted]
10.1.4 Compliance Certificate. Contemporaneously with the furnishing
of a copy of each set of the statements and reports provided for in
Sections 10.1.1 and 10.1.2, a duly completed certificate, substantially in
the form of Exhibit I (the "Compliance Certificate"), signed by the chief
financial officer of the Parent, containing, among other things, (a) a
computation of, and showing compliance with, each of the applicable
financial ratios and restrictions contained in Section 12, (b) setting
forth the most recent cohort default rate for each Educational Institution,
as calculated and published by the DOE, (c) setting forth the Leverage
Ratio, (d) such other financial ratios required by the DOE including
without limitation revenue breakdowns, acid test
<PAGE>
(annually only), profitability 85/15, primary reserve, equity and net
income ratios with respect to each Educational Institution, and (e) to the
effect that as of such date no Default or Event of Default has occurred and
is continuing;
10.1.5 Auditors' Materials. Promptly upon receipt thereof, copies of
all detailed financial and management reports regarding the Parent or any
of its Subsidiaries submitted to the Parent or any such Subsidiary by
independent public accountants in connection with each annual or interim
audit report made by such accountants of the books of the Parent or any of
its Subsidiaries;
10.1.6 Business Plan. As soon as available, but in any event: (a)
within 30 days after the beginning of each Fiscal Year of the Parent, a
copy of the plan and forecast (including a projected closing consolidated
and consolidating balance sheet, income statement and funds flow
statements) of the Parent and its Subsidiaries for such Fiscal Year; and
(b) within 30 days after the end of the second Fiscal Quarter of the Parent
in each Fiscal Year, an update of each plan and forecast delivered with
respect to the Fiscal Year in which such Fiscal Quarter occurs, reflecting
changes in such plan resulting from actual and then anticipated results and
forecasts;
10.1.7 Reports to SEC and to Stockholders. Promptly upon the filing
or making thereof, copies of each filing and report made by the Parent or
any of its Subsidiaries with or to any securities exchange or the
Securities and Exchange Commission and of each communication from the
Parent or to stockholders generally;
10.1.8 Notice of Default, Litigation and License Matters. Promptly
upon learning of the occurrence of any of the following, written notice
thereof, describing the same and the steps being taken by the Parent with
respect thereto: (a) the occurrence of a Default or Event of Default, (b)
the institution of any Material Litigation or the occurrence of any
Material Litigation Development, (c) the commencement of any dispute which
could reasonably be expected to lead to the material modification,
transfer, revocation, suspension or termination of any Related Document,
(d) any Material Adverse Change, or (e) the termination or suspension of
<PAGE>
an Educational Institution's participation in Title IV Program, as set
forth in 34 C.F.R. Section 668.26;
10.1.9 Insurance Reports. (a) within ninety (90) days after the end
of each Fiscal Year of the Parent, a certificate signed by a Responsible
Officer that summarizes any changes in the insurance policies described in
Schedule 9.20 (such certificate to be in form and substance satisfactory to
the Administrative Agent), (b) written notification thirty (30) days prior
to any cancellation or material change of any such insurance by the Parent
or any of its Subsidiaries and within five (5) days after receipt of any
notice (whether formal or informal) of cancellation or change by any of its
insurers;
10.1.10 ERISA Liability. Promptly upon learning of the occurrence of
the following, written notice thereof describing the same and the steps
being taken by the Parent with respect thereto: (a) the failure of any
member of the Controlled Group to make a required contribution to any
Pension Plan if such failure is sufficient to give rise to a Lien on the
assets of the Parent or any of its Subsidiaries under section 302(f)(1) or
accumulated funding deficiency under section 302 of ERISA, (b) the
institution of any steps by any member of the Controlled Group to withdraw
from, or the institution of any steps by the Parent to terminate, any
Pension Plan, (c) the taking of any action with respect to a Pension Plan
which could reasonably be expected to result in the requirement that the
Parent or any of its Subsidiaries furnish a bond or other security to the
Pension Benefit Guaranty Corporation or such Pension Plan, or (d) the
occurrence of any event with respect to any Pension Plan which could
reasonably be expected to result in the incurrence by the Parent or any of
its Subsidiaries of any liability, fine, Tax or penalty or any increase in
the vested or contingent liability of the Parent or any of its Subsidiaries
with respect to any post-retirement Welfare Plan benefit if such penalty or
increased liability would exceed $250,000;
10.1.11 Pension Plan Withdrawals. With respect to each Pension Plan
which is a "multi-employer plan," as defined in section 4001 of ERISA as to
which any member of the Controlled Group may incur any liability, (a) no
less frequently than annually, a written estimate (which
<PAGE>
shall be based on information received from each such plan, it being
expressly understood that the Parent shall take all reasonable steps to
obtain such information) of the withdrawal liability that would be incurred
by the Controlled Group in the event that all members of the Controlled
Group were to completely withdraw from such plan, and (b) written notice
thereof, as soon as it has reason to believe (on the basis of the most
recent information available to it) that the sum of (i) the withdrawal
liability that would be incurred by the Controlled Group if all members of
the Controlled Group completely withdrew from all multi-employer plans as
to which any member of the Controlled Group has an obligation to
contribute, and (ii) the aggregate amount of the outstanding withdrawal
liability (without unaccrued interest) incurred by the Controlled Group to
multi-employer plans exceeds $250,000;
10.1.12 Other Information Concerning the Parent and its Subsidiaries.
Promptly upon learning thereof, written notice of (a) the occurrence with
respect to the Parent or any Subsidiary of the Parent of any of the events
the occurrence of which in relation to the Parent would constitute an Event
of Default under Sections 14.1.3 or 14.1.4; (b) the execution of any
agreement by the Parent or any of its Subsidiaries to merge with or
consolidate into or with, or purchase or otherwise acquire all or
substantially all of the assets or stock of any class of, or any
partnership or joint venture interest in, any other Person, or for the
sale, transfer, lease or conveyance by the Parent or any of its
Subsidiaries of all or any substantial part of its assets or sale or
assignment without recourse of any of its receivables; and (c) any action
which could reasonably be expected to result in a Change in Control
provided that nothing contained herein shall be deemed to permit any breach
or violation of any other provision of this Agreement or any Related
Document;
10.1.13 Environmental Liabilities. Promptly upon learning thereof,
written notice (together with copies, if available) of all written claims,
complaints, notices or inquiries relating to the Parent's or any of its
Subsidiaries' (a) properties or facilities, or (b) alleged non-compliance
with Environmental Laws, together with a description of the steps being
taken by the Parent or such Subsidiary with respect thereto in
<PAGE>
each case, which individually or in the aggregate could reasonably be
expected to cause liability to the Parent or any of its Subsidiaries in
excess of $1,000,000;
10.1.14 List of Officers and Directors. As soon as available, but in
any event (a) within 10 Business Days after each anniversary date of the
initial Loan, a complete list of the officers and directors of the Parent
and each of its Subsidiaries to the extent changed from the prior Fiscal
Year, and (b) within 15 Business Days of any change in such list, written
notice of such change; and
10.1.15 [Intentionally Omitted]
10.1.16 Other Information. From time to time such other information
and certifications concerning the Parent and any Subsidiary of the Parent
as the Administrative Agent or the Lender may reasonably request.
SECTION 10.2 Corporate Existence; Foreign Qualification. Except as
permitted by Section 11.3, do, and cause to be done at all times, all things
necessary to (a) maintain and preserve the corporate existence of the Parent and
each Subsidiary of the Parent, (b) be, and ensure that the Parent and each
Subsidiary of the Parent is, duly qualified to do business and in good standing
as foreign corporations in each jurisdiction where the nature of their business
makes such qualification necessary and where failure to so qualify could
reasonably be expected to have a Material Adverse Effect, and (c) comply, and
cause its Subsidiaries to comply, with all contractual obligations and
requirements of law binding upon such entity, except to the extent that the
failure to comply therewith could not individually or in the aggregate have a
Material Adverse Effect.
SECTION 10.3 Books, Records and Inspections. (a) Maintain, and cause each
of its Subsidiaries to maintain, complete and accurate books and records; (b)
permit, and cause each of its Subsidiaries to permit, access at reasonable times
by the Administrative Agent to its books and records; (c) permit, and cause each
of its Subsidiaries to permit, the Administrative Agent to inspect at reasonable
times its properties and operations; and (d) permit, and cause each of its
Subsidiaries to permit, the Administrative Agent to discuss its business,
operations and financial condition with its officers and internal and external
accountants; provided that, prior to a Default all such inspections
<PAGE>
shall be conducted by not more than four persons during normal business hours
after delivery of prior written notice to Parent. All information obtained
during such inspection shall be subject to the provisions of Section 16.3.
SECTION 10.4 Insurance. Maintain, and cause each of its Subsidiaries to
maintain, with responsible insurance companies insurance with respect to its
properties and business (including business interruption insurance) against such
casualties and contingencies and of such types and in such amounts as is
customary in the case of similar businesses.
SECTION 10.5 Taxes and Liabilities. Pay, and cause each of its
Subsidiaries to pay, when due all Taxes and other material liabilities, except
as contested in good faith and by appropriate proceedings with respect to which
reserves have been established, and are being maintained, in accordance with
GAAP if, and so long as, forfeiture of any part of the Collateral will not
result from the failure to pay any such Taxes or other material liabilities
during the period of any such contest.
SECTION 10.6 Pension Plans and Welfare Plans. Maintain, and cause each of
its Subsidiaries to maintain, each Pension Plan and Welfare Plan as to which it
may have any liability, in compliance in all material respects with all
applicable requirements of law (including any rules and regulations promulgated
thereunder).
SECTION 10.7 Compliance with Laws. Comply, and cause each of its
Subsidiaries to comply, with all federal, state and local laws, rules and
regulations related to its businesses (including, without limitation, all such
laws, rules and regulations relating to Hazardous Materials or the disposal
thereof) if the failure so to comply could reasonably be expected to have a
Material Adverse Effect.
SECTION 10.8 Title IV Compliance. The Parent and each of its Subsidiaries
will:
(a) other than actions for continued DOE and Accrediting Body
approvals obtained in connection with an Acquisition, take no action which
would cause any Educational Institution to fail to qualify as an "eligible
institution," as defined in 34 C.F.R. Section 600.2, including, without
limitation, under 34 C.F.R. Section 600.40;
<PAGE>
(b) take no action which would cause any Educational Institution to
fail to qualify as a Proprietary Institution of Higher Education in
accordance with 34 C.F.R. Section 600.5;
(c) not permit more than eighty five percent (85%) of each
Educational Institution's revenues during the most recent twelve-month
period to be derived from Title IV Program funds based on the formula set
forth in 34 C.F.R. Section 600.5(d) and with respect to any Educational
Institution acquired after the Closing Date, the Parent shall have a period
of 12 months to bring such Educational Institution in compliance with the
first clause of this Section 10.8(c);
(d) submit to the Administrative Agent, for each Educational
Institution, within one hundred twenty (120) days following the end of each
Fiscal Year of such Educational Institution, the certified public
accountant's report required by 34 C.F.R. Section 600.5(e), except that the
report shall certify that the percentage of revenue derived from Title IV
Program funds is not more than the amount of its revenue allowable under
Section 10.8(c);
(e) other than actions for continued DOE and Accrediting Body
approvals obtained in connection with an acquisition, maintain each
Educational Institution as an accredited institution, as defined in 34
C.F.R. Section 600.2;
(f) except as provided in 34 C.F.R. Section 600.7(b)(3), take no
action which would cause or permit, for the latest complete award year (i)
more than forty percent (40%) of each Educational Institution's courses to
be "correspondence courses" as calculated based on 34 C.F.R. Section
600.7(b) and defined in 34 C.F.R. Section 600.2; (ii) forty percent (40%)
or more of each Educational Institution's regular enrolled students to be
enrolled in correspondence courses; (iii) twenty percent (20%) or more of
each Educational Institution's regular enrolled students to be
incarcerated; (iv) forty percent (40%) or more of each Educational
Institution's regular enrolled students to have neither a high school
diploma nor the recognized equivalent of a high school diploma in cases
where the Educational Institution provides a four-year or two-year
educational program for which it awards a bachelor's degree or associate's
degree, respectively;
(g) take no action to commence, consent to, or acquiescence in any
case, proceeding, or other action relating
<PAGE>
to bankruptcy, insolvency, reorganization or similar relief of any
Subsidiary;
(h) notify the Secretary and the Administrative Agent within ninety
(90) days prior to the expiration of any Educational Institution's program
participation agreement and submit a materially completed application for a
renewal of certification to the Secretary at least ninety (90) days prior
to the expiration of such Educational Institution's current period of
participation or, in the event of the Secretary's selection of an
Educational Institution for recertification, submit a materially completed
application for renewal to the Secretary on or before the date specified in
the notice of selection for recertification;
(i) comply with the application procedures set forth in 34 C.F.R.
Section 600.20 and Section 668.12;
(j) notify the Secretary and the Administrative Agent in writing no
later than seven (7) days after a change occurs in any of the information
provided in any Educational Institution's eligibility application, as set
forth in 34 C.F.R. Section 600.30;
(k) unless such action is contingent upon approval of or a ruling from
the Secretary under 34 C.F.R. Section 600.31, take no action that would
cause any Educational Institution to undergo a change of ownership that
would result in a change of control, as set forth in 34 C.F.R. Section
600.31;
(l) cause each Educational Institution to meet the standards for
participation in Title IV Programs in 34 C.F.R., Part 668, Subpart B, and
to have a current program participation agreement with the Secretary or in
the case of an Acquired Person, immediately following its approval by the
DOE, take such action as is necessary to comply with the foregoing;
(m) cause not less than eighty percent (80%) of the tuition revenue
derived from the programs provided at each Educational Institution to be
derived from programs which qualify as eligible programs pursuant to 34
C.F.R. Section 668.8;
(n) cause each Educational Institution to comply with all of the
factors of financial responsibility set forth in 34 C.F.R. Section 668.15,
except that (i) all payments of
<PAGE>
existing debt obligations shall be made within ninety (90) days; and (ii)
no Educational Institution shall have operating losses for the two (2)
latest fiscal years that result in a decrease in such Educational
Institution's Tangible Net Worth in excess of eight percent (8%) of such
Educational Institution's Tangible Net Worth at the beginning of the first
year of the two-year period (operating losses and tangible net worth being
defined as set forth in 34 C.F.R. Section 668.15(B)(7);
(o) monitor and prevent the Federal Stafford loan and Federal SLS
published cohort default rate for each Educational Institution from
exceeding twenty-five percent (25%) for any two consecutive 12-month
periods or thirty percent (30%) for any twelve month period; and
(p) cause each Educational Institution to comply with the standard of
conduct required by each fiduciary in the administration of Title IV
Programs, as set forth in 34 C.F.R. Section 668.82.
As used in this Section, all terms shall have the meanings as set forth in
the citations referred to above or as otherwise defined in 34 C.F.R., Part 600
or Part 668, as the context requires.
SECTION 10.9 Maintenance of Permits. Except as permitted pursuant to
Section 11.3, maintain, and cause each of its Subsidiaries to maintain, all
permits, licenses and consents as may be required for the conduct of its
business by any state, federal or local government agency or instrumentality
(including, without limitation, any such license, consent or permit relating to
Hazardous Materials or the disposal thereof) if the failure to maintain such
licenses, permits and consents could reasonably be expected to have a Material
Adverse Effect.
SECTION 10.10 Environmental Compliance. Maintain, and cause each of its
Subsidiaries to maintain, (a) all necessary permits, approvals, certificates,
licenses and other authorizations relating to environmental matters in effect
and use and operate all of its facilities and properties in material compliance
with all Environmental Laws, and (b) appropriate procedures for the handling of
all Hazardous Materials in material compliance with all applicable Environmental
Laws, and comply in all material respects with such procedures at all times.
<PAGE>
SECTION 11. NEGATIVE COVENANTS
The Parent and each Co-Borrower agrees that, on and after the Restatement
Effective Date and for so long thereafter as any Lender has any Commitment
hereunder or any of the Liabilities remains unpaid or outstanding, the Parent
will:
SECTION 11.1 Limitation on Indebtedness. Not, and not permit any of its
Subsidiaries to, incur or at any time be liable with respect to any Indebtedness
except:
(a) Indebtedness outstanding under this Agreement in respect of the
Loans and other Liabilities;
(b) Subordinated Debt in an aggregate principal amount at any time
outstanding not to exceed $5,000,000 without duplication of Indebtedness
permitted by Section 11.1(c); provided that such Subordinated Debt (i) is
unsecured, (ii) principal payments thereon are not paid or scheduled for
payment prior to six months after the Revolving Loan Termination Date, and
(iii) does not contain any event of default, affirmative, negative or
financial covenant that is more onerous than those provided in this
Agreement;
(c) Indebtedness outstanding on the Effective Date described on
Schedule 11.1; provided that Indebtedness permitted by this clause (c) does
not include any extension, renewal or refunding of any such outstanding
Indebtedness;
(d) Indebtedness of Subsidiaries of the Parent owing to the Parent
and unsecured Indebtedness of the Parent owing to its Subsidiaries;
(e) Indebtedness secured by a Permitted Lien;
(f) Indebtedness with respect to Contingent Obligations outstanding
on the Effective Date and described on Schedule 11.1 and other Contingent
Obligations in an aggregate principal amount not exceeding $1,000,000 per
year (excluding any Contingent Obligation with respect to Indebtedness
permitted by Section 11.7 and not set forth on Schedule 11.1);
(g) Indebtedness in respect of deferred Taxes;
<PAGE>
(h) unsecured Indebtedness in respect of current accounts payable
arising in the ordinary course of business (including open accounts
extended by suppliers on normal trade terms in connection with purchases of
goods and services, but excluding Indebtedness incurred through the
borrowing of money or Contingent Obligations), except, without duplication,
to the extent permitted by clause (f) above;
(i) Indebtedness in respect of non-current accounts payable which the
Parent is contesting in good faith and by appropriate proceedings, and with
respect to which reserves have been established, and are being maintained,
in accordance with GAAP;
(j) Indebtedness in the nature of seller holdbacks issued by the
Parent with respect to any Educational Institution acquired after the
Closing Date for the period from such Acquisition until receipt of DOE
approval of such Acquisition;
(k) Indebtedness in respect of capital leases entered into by the
Parent or any Subsidiary to finance the acquisition of equipment; provided
that the aggregate amount of all such leases incurred pursuant to this
clause (k) do not exceed $5,000,000; and
(l) Indebtedness (in addition to Indebtedness set forth in clauses
(a)-(k) above) in an amount not to exceed $1,000,000.
SECTION 11.2 Liens. Not, and not permit any Subsidiary of the Parent to,
create, assume or suffer to exist any Lien on any asset now owned or hereafter
acquired by it, except for the following (collectively called "Permitted
Liens"):
(a) Liens in favor of the Administrative Agent, for the benefit of
the Lenders, pursuant to this Agreement and the Related Documents, until
released in accordance herewith;
(b) Liens for current Taxes not delinquent or for Taxes being
contested in good faith and by appropriate proceedings and with respect to
which adequate reserves are being maintained in accordance with GAAP;
<PAGE>
(c) Liens in connection with the acquisition of fixed or capital
assets after the date hereof to the extent permitted under Section 12.4 and
attaching only to the property being acquired, provided the Indebtedness
secured thereby does not exceed one hundred percent (100%) of the fair
market value of such property at the time of acquisition thereof nor
$500,000 in the aggregate at any one time outstanding;
(d) Liens shown on Schedule 11.2;
(e) Liens incurred in the ordinary course of business in connection
with worker's compensation, unemployment insurance or other forms of
governmental insurance or benefits or to secure performance of tenders,
statutory obligations, leases and contracts (other than for borrowed money)
entered into in the ordinary course of business or to some obligations on
surety or appeal bonds; and
(f) Liens of mechanics, carriers, materialmen and other like Liens
arising in the ordinary course of business in respect of obligations which
are not delinquent or which are being contested in good faith and by
appropriate proceedings and with respect to which adequate reserves are
being maintained in accordance with GAAP.
SECTION 11.3 Consolidation, Merger, etc. Not, and not permit any of its
Subsidiaries to, liquidate or dissolve, consolidate with, or merge into or with,
any other Person, or purchase or otherwise acquire all or substantially all of
the assets of any Person (or of any division thereof) except:
(a) any such Subsidiary may liquidate or dissolve voluntarily into,
and may merge with and into, the Parent or any other Subsidiary of the
Parent; and
(b) so long as no Default or Event of Default has occurred and is
continuing or would occur after giving effect thereto, any Permitted
Acquisition, if permitted by Section 12.4 if made as a Consolidated Capital
Expenditure.
SECTION 11.4 Asset Disposition, etc. Not, and not permit any of its
Subsidiaries to, sell, assign, lease, transfer, contribute,
<PAGE>
convey or otherwise dispose of, or grant options, warrants or other rights with
respect to, any of its assets to any Person, unless:
(a) such sale, assignment, transfer, lease, contribution, conveyance
or other disposition constitutes bona fide sales of inventory in the
ordinary course of its business or obsolete equipment or other property no
longer used or useful in the business; or
(b) such sale, assignment, transfer, lease, contribution, conveyance
or other disposition constitutes a Permitted Asset Sale; provided that all
such Permitted Asset Sales for such fiscal year shall not exceed
$2,500,000; or
(c) such sale, assignment, transfer, lease, contribution, conveyance
or other disposition constitutes a Sale Leaseback Transaction; provided
that all such Sale Leaseback Transactions for such fiscal year shall not
exceed $10,000,000;
; provided that (i) the consideration received is at least equal to the fair
market value of such assets, and (ii) no Default exists prior to or results from
the consummation of such sale of assets.
SECTION 11.5 Dividends, etc. Except with respect to (a) dividends paid to
the Parent to pay the Liabilities and (b) dividends paid while no Default or
Event of Default exists and, after giving effect to such dividend the Leverage
Ratio does not exceed 1.00:1.00 (i) declare, pay or make any dividend or
distribution (in cash, property or obligations) on any shares of any class of
capital stock (now or hereafter outstanding) of the Parent or on any warrants,
options or other rights with respect to any shares of any class of capital stock
(now or hereafter outstanding) of the Parent (other than dividends or
distributions payable in its common stock or warrants to purchase its common
stock or splitups or reclassifications of its stock into additional or other
shares of its common stock) or apply, or permit any of its Subsidiaries to
apply, any of its funds, property or assets to the purchase, redemption, sinking
fund or other retirement of any shares of any class of capital stock (now or
hereafter outstanding) of the Parent or any option, warrant or other right to
acquire shares of the Parent's capital stock (other than any such payment
pursuant to stock appreciation rights granted and exercised in accordance with
applicable rules and regulations of the Securities and Exchange Commission); and
(ii) make any deposit for any of the foregoing purposes.
<PAGE>
SECTION 11.6 Investments. Not, and not permit any of its Subsidiaries to,
make, incur, assume or suffer to exist any Investment in any other Person,
except:
(a) Investments existing on the Restatement Effective Date and
identified in Schedule 11.6;
(b) Cash Equivalent Investments;
(c) without duplication, Investments permitted as Indebtedness
pursuant to Section 11.1;
(d) in the ordinary course of business, Investments by the Parent in
any of its Subsidiaries, or by any such Subsidiary in any of its
Subsidiaries, by way of contributions to capital or loans or advances;
(e) other Investments in an aggregate amount at any one time not to
exceed $1,000,000; and
(f) Investments in connection with any Permitted Acquisition;
provided, however, that no Investment otherwise permitted by clause (d), (e) and
(f) shall be permitted to be made if, immediately before or after giving effect
thereto, any Default or Event of Default shall exist.
SECTION 11.7 Rental Obligations. Not, and not permit any of its
Subsidiaries to, enter into at any time any arrangement which involves the
leasing by the Parent or any of its Subsidiaries from any lessor of any real or
personal property (or any interest therein) including, without limitation,
operating leases, except arrangements which, together with all other such
arrangements then in effect, will not require the payment of an aggregate amount
of rentals by the Parent and its Subsidiaries in excess of fifteen percent (15%)
of consolidated revenues of the Parent and its Subsidiaries in any Fiscal Year.
SECTION 11.8 Subordinated Debt. Not, and not permit any of its
Subsidiaries to:
(a) make any payment (whether of principal, interest or otherwise) on
any Subordinated Debt prior to the Revolving Loan Termination Date, other
than regularly scheduled payments of interest thereon so long as no Default
or Event of Default exists; or
<PAGE>
(b) make any payment on any Subordinated Debt in contravention or
violation of the subordination provisions thereof; or
(c) prepay, redeem, purchase or defease any Subordinated Debt, or
make any deposit for any of the foregoing purposes; or
(d) enter into any amendment, supplement or modification of any
Subordinated Debt, which results in a violation of the foregoing provisions
of this Section or which adversely affects the interests or rights of any
of the Parent, any of its Subsidiaries, the Administrative Agent or the
Lenders.
SECTION 11.9 Take or Pay Contracts. Not, and not permit any of its
Subsidiaries to, enter into or be a party to any arrangement for the purchase of
materials, supplies, other property or services if such arrangement by its
express terms requires that payment be made by the Parent or any Subsidiary of
the Parent regardless of whether such materials, supplies, other property or
services are delivered or furnished to it.
SECTION 11.10 Regulation U. Not, and not permit any of its Subsidiaries
to, use or permit any proceeds of the Loans or LC Obligations to be used, either
directly or indirectly, for the purpose, whether immediate, incidental or
ultimate, of "purchasing or carrying margin stock" within the meaning of
Regulation U of the Board of Governors of the Federal Reserve System, as amended
from time to time.
SECTION 11.11 Subsidiaries. Notwithstanding any provision of this
Agreement to the contrary, not, and not permit any of its Subsidiaries to,
create or permit to exist any Subsidiary other than the Subsidiaries of the
Parent listed on Schedule 9.10 unless (a) such new Subsidiary, if domestic,
shall promptly execute and deliver to the Administrative Agent, for the benefit
of the Lenders, a supplement to the Subsidiary Guaranty, whereby such new
Subsidiary agrees to be bound under each such agreement as a "Guarantor" and a
"Subsidiary Grantor", respectively, and (b) (i) if any stock of such new
Subsidiary is owned by another Subsidiary of the Parent, such other Subsidiary
shall promptly execute and deliver to the Administrative Agent, for the benefit
of the Lenders, a pledge agreement, in the form of the Borrower Pledge
Agreement, whereby such other Subsidiary pledges, to secure payment of the
Liabilities and its obligations under the Subsidiary Guaranty, a first priority
security interest (subject only to
<PAGE>
Permitted Liens) in all, or if such Subsidiary is organized outside of the
United States, 66-2/3% of the outstanding capital stock of such new Subsidiary
owned by such other Subsidiary, and (ii) if any stock of such new Subsidiary is
owned by the Parent, Gibbs, IAMD, Limited or IAMD (Canada), the Parent, Gibbs,
IAMD, Limited, or IAMD (Canada), as the case may be, shall promptly pledge such
stock under the Borrower Pledge Agreement, the Gibbs Pledge Agreement, the IAMD,
Limited Pledge Agreement, or the IAMD (Canada) Pledge Agreement, as the case may
be; the documents contemplated by each of the foregoing clauses (a) and (b)
shall be in form and substance satisfactory to the Administrative Agent and
shall be accompanied by such other documents, agreements, filings, opinions or
certificates reasonably requested by the Administrative Agent, including,
without limitation, such other deliveries requested by the Administrative Agent
pursuant to Section 8.3.
SECTION 11.12 Other Agreements. Not, and not permit any of its
Subsidiaries to, enter into any agreement containing any provision which (a)
would be violated or breached by the performance of its obligations hereunder or
under any instrument or document delivered or to be delivered by it hereunder or
in connection herewith, (b) prohibits or restricts the creation or assumption of
any Lien upon its properties, revenues or assets (whether now owned or hereafter
acquired) as security for the Liabilities hereunder, (c) prohibits or restricts
the ability of any Subsidiary of the Parent to make dividends or advances or
payments to the Parent, or (d) prohibits or restricts the ability of the Parent
or any of its Subsidiaries to amend or otherwise modify this Agreement or any
other document executed in connection herewith, except in each case, to the
extent required to comply in Title IV or other applicable laws, regulations,
rules and guidelines of governmental authorities and Accrediting Bodies.
SECTION 11.13 Business Activities. Not, and not permit any of its
Subsidiaries to, (a) engage in any type of business except the businesses which
the Parent and its Subsidiaries are presently engaged in or businesses
reasonably related thereto, or (b) substantially alter the methods by which the
Parent or its Subsidiaries conduct such business.
SECTION 11.14 Change of Location or Name. Not, and not permit any of its
Subsidiaries to, change (a) the location of its principal place of business,
chief executive office, major executive office, chief place of business or its
records concerning its business and financial affairs, or (b) its name or the
name under or by which it conducts its business, in each case without first
giving the Administrative Agent at least thirty (30) days'
<PAGE>
advance written notice thereof and having taken any and all action reasonably
required or desirable to maintain and preserve the first perfected Lien on
Collateral in favor of the Administrative Agent free and clear of any other Lien
whatsoever (except for Permitted Liens); provided, however, that notwithstanding
the foregoing, neither the Parent nor any of its Subsidiaries shall change the
location of its principal place of business, chief executive office, major
executive office, chief place of business or its records concerning its business
and financial affairs to any place outside the contiguous continental United
States of America or, with respect to the Co-Borrowers, Canada.
SECTION 11.15 Transactions with Affiliates. Except for loans made by the
Parent to officers of the Parent in an aggregate principal amount not to exceed
$150,000, not, and not permit any of its Subsidiaries to, enter into, or cause,
suffer or permit to exist any arrangement or contract with any of its other
Affiliates unless such arrangement (a) is fair and equitable to the Parent or
such Subsidiary, (b) is of a sort which would be entered into by a prudent
Person in the position of the Parent or such Subsidiary with a Person which is
not one of its Affiliates, and (c) is on terms which are not less favorable to
the Parent or such Subsidiary than are obtainable from a Person which is not one
of its Affiliates.
SECTION 11.16 Limitation on Sales and Leasebacks. Not, and not permit its
Subsidiaries to, at any time, directly or indirectly, sell and thereafter lease
back any of their respective assets or properties other than as permitted in
connection with the incurrence of Indebtedness pursuant to Section 11.4(c).
SECTION 11.17 Modification of Certain Documents. The Parent will not
consent to any amendment, supplement or other modification of any of the terms
or provisions contained in, or applicable to, its charter, by-laws or other
organizational documents, or any other acquisition documents relating to any
Acquired Person after the consummation of such Permitted Acquisition without the
prior written consent of the Required Lenders if such amendment, supplement or
other modification could reasonably be expected to have an adverse effect on the
Parent, or any of its Subsidiaries, the Administrative Agent or the Lenders or
any rights of the Administrative Agent or Lenders under this Agreement or any of
the Related Documents.
<PAGE>
SECTION 12. FINANCIAL COVENANTS
The Parent agrees that, on and after the Effective Date and for so long
thereafter as any Lender has any Commitment hereunder or any of the Liabilities
remain unpaid or outstanding, it will:
SECTION 12.1 Minimum Interest Coverage Ratio. Not permit the Interest
Coverage Ratio, at the end of any Fiscal Quarter set forth below (for the four
Fiscal Quarters then ended) to be less than the applicable ratio set forth
opposite such Fiscal Quarter.
<TABLE>
<CAPTION>
Fiscal Quarter Minimum Interest
End Date Coverage Ratio
-------------- ----------------
<S> <C>
12/31/98 1.75:1.00
6/30/99 2.00:1.00
12/31/99 and thereafter 2.50:1.00
</TABLE>
SECTION 12.2 Maximum Leverage Ratio. Not permit the Leverage Ratio to
exceed, at the end of any Fiscal Quarter (for the four Fiscal Quarters then
ended) during any period, 3.50:1.00.
SECTION 12.3 Minimum Net Worth. Not permit Consolidated Net Worth, at the
end of any Fiscal Quarter during any Fiscal Year of the Parent, to be less than
[$78,000,000] plus (a) 50% of Consolidated Net Income, if positive, plus (b) 50%
of the Net Proceeds received by the Parent or its Subsidiaries in connection
with the private or public sale of equity securities after the Restatement
Effective Date.
SECTION 13. CONDITIONS
The obligation of each of the Lenders to make its Loans and of the
Administrative Agent to issue Letters of Credit is subject to the performance by
the Parent of all of its obligations under this Agreement and to the
satisfaction of the following conditions precedent or concurrent:
SECTION 13.1 Initial Borrowing. In the case of the initial Borrowing, the
Administrative Agent shall have received all of the following, each, except to
the extent otherwise specified below, duly executed by a Responsible Officer of
the applicable party, dated the date of such Loan or Letter of Credit (or such
earlier date as shall be satisfactory to the Administrative Agent), in form and
substance reasonably satisfactory to the Administrative Agent,
<PAGE>
and each in sufficient number of signed counterparts to provide one for each
Lender:
13.1.1 For each Lender, an appropriately completed Revolving Note,
payable to the order of such Lender in the principal amount of such
Lender's Revolving Loan Commitment;
13.1.2 An appropriately completed Borrowing Request;
13.1.3 Affirmations satisfactory to the Administrative Agent with
respect to the Borrower Pledge Agreement, the Gibbs Pledge Agreement, the
IAMD, Limited Pledge Agreement, the IAMD (Canada) Pledge Agreement and the
Subsidiary Guaranty from each of the parties thereto;
13.1.4 A favorable opinion of Messrs. Katten, Muchin & Zavis, counsel
to the Parent and its Subsidiaries, substantially in the form of Exhibit J-
1 hereto, and a favorable opinion of Messrs. Fraser & Beatty and McMaster
Gervais, counsel to the Co-Borrowers, substantially in the form of Exhibits
J-2 and J-3, respectively, and, in each case, addressing such other legal
matters as the Administrative Agent or its counsel reasonably may require;
13.1.5 An officer's certificate of the Parent and its Subsidiaries,
substantially in the form of Exhibit H hereto and dated as of the date
hereof, signed by the president or a vice-president of the Parent and each
such Subsidiary, as the case may be, and attested to by its secretary,
together with certified copies of the Parent's, and each such Subsidiary's
certificate or articles of incorporation, by-laws, resolutions, incumbency,
solvency and any other documents pursuant to the terms thereof;
13.1.6 Evidence of the good standing of the Parent and each
Subsidiary of the Parent in the jurisdiction in which such Person is
incorporated and any jurisdiction in which Collateral is located;
13.1.7 Evidence that the Parent and the Subsidiaries of the Parent
have obtained the insurance policies required by this Agreement and the
Related
<PAGE>
Documents, or such policies have been obtained on the Parent's or such
Subsidiary's behalf;
13.1.8 Evidence that the Parent shall have paid to the Administrative
Agent the fees and expenses provided for herein and in the LaSalle Fee
Letter;
13.1.9 A letter from the Process Agent agreeing to receive service of
process on behalf of the Parent and each of its Subsidiaries pursuant to
Section 17.11 hereof, unless a registered agent exists in the State of
Illinois for such party;
13.1.10 Evidence of each filing, registration or recordation (and
payment of any necessary fee, Tax or expense relating thereto) with respect
to each document (including, without limitation, any UCC financing
statement) required by the Related Documents or under law or reasonably
requested by the Administrative Agent to be filed, registered or recorded
in order to create, in favor of the Administrative Agent, for the benefit
of the Lenders, a perfected first Lien on the Collateral (subject to
Permitted Liens);
13.1.11 A calculation of the Leverage Ratio as of the Restatement
Effective Date certified by the chief financial officer of the Parent; and
13.1.12 Such other information and documents as may reasonably be
required by the Administrative Agent and the Administrative Agent's
counsel.
SECTION 13.2 Conditions of each Letter of Credit. The obligation of the
Administrative Agent to issue each Letter of Credit is subject to the conditions
precedent that (a) the Administrative Agent shall have received the related LC
Application and, (b) the conditions set forth in Sections 13.1 and 13.3 have
been satisfied.
SECTION 13.3 All Loans and Letters of Credit. The obligation of each
Lender to make each Loan and of the Administrative Agent to issue each Letter of
Credit is subject to the following further conditions precedent that:
13.3.1 The Administrative Agent and each Lender shall have received a
Borrowing Request or an LC Application;
<PAGE>
13.3.2 No Default or Event of Default exists or will result from the
making of such Loan or issuance of such Letter of Credit;
13.3.3 The representations and warranties of the Parent contained in
Section 9 (except, with respect to Loans made or Letters of Credit issued
after the Effective Date, Sections 9.7 and 9.8) are true and correct with
the same effect as though made on the date of the making of such Loan or
issuance of such Letter of Credit (except to the extent they expressly
relate solely to an earlier date, in which case, as of such date);
13.3.4 No Material Litigation exists except as disclosed on Schedule
9.8, and since the Effective Date of this Agreement no Material Litigation
Development has occurred with respect to any Litigation so disclosed on
Schedule 9.8; and
13.3.5 No Material Adverse Change has occurred since the date of the
most recent financial statements delivered or required to be delivered
pursuant to Section 9.6.
SECTION 13.4 Loans for Permitted Acquisitions. In addition to the
satisfaction of the conditions precedent in Sections 13.1, 13.2, and 13.3 (as
applicable), the obligation of the Lenders to make Loans to consummate any
Permitted Acquisition is subject to the following further conditions precedent:
13.4.1 The Parent shall have delivered to the Administrative Agent in
form and detail reasonably satisfactory to the Administrative Agent and the
Required Lenders,
(a) at least thirty (30) days prior to any requested Borrowing,
a duly executed preliminary financing request, substantially in the
form of Exhibit L, outlining the aggregate principal amount of any
requested Borrowing which the Parent will request to facilitate or
consummate such Permitted Acquisition and containing pro forma
financial projections of the Parent and its Subsidiaries for the three
years immediately following such acquisition and after giving effect
thereto; and
<PAGE>
(b) certified copies of any acquisition agreements, letters of
intent, asset purchase agreements, stock purchase agreements or other
related documentation or instruments proposed to be executed and
delivered in connection therewith as the Administrative Agent shall
reasonably request and all other documents required to be delivered
pursuant to clause (i) of the definition of "Permitted Acquisition."
13.4.2 The Parent shall have delivered to the Administrative Agent
and the Lenders such other information and documents as may reasonably be
required or requested by the Administrative Agent, the Required Lenders and
the Administrative Agents's counsel.
SECTION 14. EVENTS OF DEFAULT AND THEIR EFFECT
SECTION 14.1 Events of Default. An "Event of Default" shall exist if any
one or more of the following events (herein collectively called "Events of
Default") shall occur and be continuing:
14.1.1 Non-Payment of Loans, etc. (a) Default in the payment or
prepayment when due of any principal on any Loan; or (b) default in the
payment or prepayment when due of any reimbursement obligation with respect
to any LC Obligation; or (c) default and continuance for three (3) days in
the payment when due of any other amount owing by the Parent or any other
Person pursuant to this Agreement.
14.1.2 Non-Payment of Other Indebtedness. Default in the payment
when due (subject to any applicable grace period), whether by acceleration
or otherwise, of any Indebtedness of the Parent or any Subsidiary of the
Parent (other than Indebtedness in respect of this Agreement) in an amount
in excess of $1,000,000 in the aggregate, or default in the performance or
observance of any obligation or condition with respect to any such
Indebtedness if the effect of such default is to accelerate the maturity of
any such Indebtedness or to permit the holder or holders thereof, or any
trustee or agent for such holders, to cause such Indebtedness to become due
and payable prior to its expressed maturity.
<PAGE>
14.1.3 Bankruptcy, Insolvency, etc. The Parent or any Subsidiary of
the Parent becomes insolvent or generally fails to pay, or admits in
writing its inability to pay, debts as they become due; or the Parent or
any such Subsidiary applies for, consents to, or acquiesces in the
appointment of, a trustee, receiver or other custodian for the Parent or
such Subsidiary or any property thereof, or makes a general assignment for
the benefit of creditors, or, in the absence of such application, consent
or acquiescence; a trustee, receiver or other custodian is appointed for
the Parent or any such Subsidiary or for a substantial part of the property
of any thereof and is not discharged within forty five (45) days; or any
bankruptcy, reorganization, debt arrangement, or other case or proceeding
under any bankruptcy or insolvency law, or any dissolution or liquidation
proceeding (except the voluntary dissolution, not under any bankruptcy or
insolvency law, of a Subsidiary), is commenced in respect of the Parent or
any such Subsidiary and if such case or proceeding is not commenced by the
Parent or such Subsidiary, it is consented to or acquiesced in by the
Parent or such Subsidiary or remains for forty five (45) days undismissed;
or the Parent or any such Subsidiary takes any corporate action to
authorize, or in furtherance of, any of the foregoing.
14.1.4 Defaults Under this Agreement. Failure by the Parent or the
Co-Borrowers to comply with or perform any of the covenants or agreements
of the Parent or the Co-Borrowers set forth in Sections 10.1, 10.2, 10.3,
10.5, 10.6, 10.7, 10.8, 10.10, 11 and 12.
14.1.5 Other Noncompliance with this Agreement. Failure by the Parent
or any Subsidiary of the Parent to comply with or perform any other
provision of this Agreement or the Related Documents applicable to it
(other than those listed in Sections 14.1.4 or those constituting an Event
of Default under any of the other provisions of this Section 14) and
continuance of such failure for fifteen (15) days after notice thereof to
the Parent from the Administrative Agent or any Lender.
14.1.6 Representations and Warranties. Any representation or
warranty made by the Parent, or any Subsidiary of the Parent herein or in
any of the Related Documents is false or misleading in any material respect
<PAGE>
as of the date hereof or as of the date hereafter certified, or any
schedule, certificate, financial statement, report, notice, or other
writing furnished by the Parent, or any such Subsidiary to the
Administrative Agent or any Lender is false or misleading in any material
respect on the date as of which the facts therein set forth are stated or
certified.
14.1.7 Pension Plans and Welfare Plans. With respect to any Pension
Plan as to which the Parent or any Subsidiary of the Parent may have any
liability, there shall exist a deficiency of more than $250,000 in the
Pension Plan assets available to satisfy the benefits guaranteeable under
ERISA with respect to such Pension Plan, and steps are undertaken to
terminate such plan or such Pension Plan is terminated or the Parent or
such Subsidiary withdraws from or institutes steps to withdraw from such
Pension Plan or any material Reportable Event with respect to such Pension
Plan shall occur. With respect to any Welfare Plans as to which the Parent
may have any liability, there shall occur any event which could result in
the incurrence by the Parent of any increase in excess of $1,000,000 in the
vested or contingent liability of the Parent or with respect to any post-
retirement Welfare Plan benefit.
14.1.8 Adverse Judgment. One or more final judgments or decrees
shall be entered against the Parent or any of its Subsidiaries involving,
in the aggregate, a liability (not covered by collectible insurance) of
$1,000,000 or more and all such judgments or decrees shall not have been
vacated, satisfied, discharged or stayed or bonded pending appeal within
thirty (30) days from the entry thereof.
14.1.9 Related Documents. Any of the Related Documents shall fail to
remain in full force and effect or any action shall be taken by the Parent
or any Subsidiary of the Parent to discontinue any of the Related Documents
or to assert the invalidity of any thereof.
14.1.10 Change in Control. The occurrence of a Change in Control.
14.1.11 Material Adverse Change. The occurrence of a Material
Adverse Change.
<PAGE>
SECTION 14.2 Effect of Event of Default. If any Event of Default
described in Section 14.1.3 shall occur and be continuing, the Commitments (if
they have not theretofore terminated) shall immediately terminate and all
Liabilities shall become immediately due and payable, all without notice,
demand, presentment or protest of any kind; and, in the case of any other Event
of Default, the Administrative Agent may (or shall, upon the written request of
the Required Lenders) declare the Commitments (if they have not theretofore
terminated) to be terminated and all Liabilities to be due and payable,
whereupon the Commitments (if they have not theretofore terminated) shall
immediately terminate and all Liabilities shall become immediately due and
payable, all without presentment, demand, protest or notice of any kind. The
Administrative Agent shall promptly advise the Parent and each Lender of any
such declaration, but failure to do so shall not impair the effect of such
declaration. Notwithstanding the foregoing or any provision of Section 17.1,
the declaration of an Event of Default of any event described in Section 14.1.3
may be waived only by the written concurrence of the Lenders holding 100% of the
aggregate unpaid principal amount of the Loans and LC Obligations, and the
declaration of an Event of Default of any other event described in this Section
14 may be waived as provided in Section 17.1.
SECTION 15. THE ADMINISTRATIVE AGENT AND FOREIGN CURRENCY AGENT
SECTION 15.1 Authorization and Action. Each Lender hereby appoints and
authorizes the Administrative Agent and the Foreign Currency Agent to take such
action as agent on its behalf and to exercise such powers to the extent provided
herein or in any document or instrument delivered hereunder or in connection
herewith, together with such other action as may be reasonably incidental
thereto. As to matters not expressly provided for by this Agreement (including,
without limitation, enforcement or collection of this Agreement or any Related
Document) neither the Administrative Agent nor the Foreign Currency Agent shall
be required to exercise any discretion, but shall be required to act or to
refrain from acting (and shall be fully protected in so acting or refraining
from acting) upon the instructions of the Required Lenders and such instructions
shall be binding upon all Lenders. Under no circumstances shall the
Administrative Agent or the Foreign Currency Agent be required to take any
action which exposes the Administrative Agent or the Foreign Currency Agent to
personal liability or which is contrary to this Agreement or to the Related
Documents or applicable law.
<PAGE>
SECTION 15.2 Liability of the Administrative Agent. Neither the
Administrative Agent, the Foreign Currency Agent, nor any of their respective
directors, officers, agents or employees shall be liable to any Lender or any of
such Lender's Affiliates for any action taken or omitted to be taken by it or
them under or in connection with this Agreement and the Related Documents,
except for its or their own gross negligence or willful misconduct as finally
judicially determined by a court of competent jurisdiction. Without limiting the
generality of the foregoing, the Administrative Agent and the Foreign Currency
Agent, as applicable, (a) may treat the payee of any Note as the holder thereof
until the Administrative Agent or the Foreign Currency Agent, as applicable,
receives an executed Assignment Agreement entered into between a Lender and an
Eligible Assignee pursuant to Section 16.1; (b) may consult with legal counsel
(including counsel for the Parent or any of its Subsidiaries), independent
public accountants and other experts or consultants selected by it; (c) shall
not be liable for any action taken or omitted to be taken in good faith by the
Administrative Agent or the Foreign Currency Agent, as applicable, in accordance
with the advice of counsel, accountants, consultants or experts; (d) makes no
warranty or representation to any Lender and shall not be responsible to any
Lender for any recitals, statements, warranties or representations, whether
written or oral, made in or in connection with this Agreement or the Related
Documents; (e) shall not have any duty to ascertain or to inquire as to the
performance or observance of any of the terms, obligations, covenants or
conditions of this Agreement on the part of the Parent or any of its
Subsidiaries or to inspect the property (including, without limitation, any
books and records) of the Parent or any Subsidiary of the Parent; (f) shall not
be responsible to any Lender for the due execution, legality, validity,
enforceability, genuineness, sufficiency or value of this Agreement, any Related
Document, any Collateral or other support or security, or any other document
furnished in connection with any of the foregoing; and (g) shall incur no
liability under or in respect of this Agreement or any Related Document by
action upon any written notice, statement, certificate, order, telephone
message, facsimile or other document which the Administrative Agent or the
Foreign Currency Agent, as applicable, believes in good faith to be genuine and
correct and to have been signed, sent or made by the proper Person.
SECTION 15.3 LaSalle and Affiliates. With respect to the Loans made by it
and Letters of Credit issued by it, LaSalle shall have the same rights and
powers under this Agreement and the other Related Documents as any other Lender
and may exercise the same as though it were not the Administrative Agent; and
the term "Lender"
<PAGE>
or "Lenders" shall, unless otherwise expressly indicated, include LaSalle in its
individual capacity. LaSalle and its Affiliates may accept deposits from, lend
money to, act as trustee under indentures of, and generally engage in any kind
of business with, the Parent and any of its Subsidiaries and any Person who may
do business with or own securities of the Parent or any such Subsidiary, all as
if LaSalle were not the Administrative Agent and without any duty to account
therefor to the Lenders.
SECTION 15.4 Lender Credit Decision. Each Lender acknowledges that it
has, independently and without reliance upon the Administrative Agent, the
Foreign Currency Agent or any other Lender and based on the financial statements
referred to in Section 9.6 and such other documents and information as it has
deemed appropriate, made its own credit analysis and decision to enter into this
Agreement. Each Lender also acknowledges that it will, independently and
without reliance upon the Administrative Agent, the Foreign Currency Agent or
any other Lender and based on such documents and information as it shall deem
appropriate at the time, continue to make its own credit decisions in taking or
not taking action under this Agreement.
SECTION 15.5 Indemnification. The Lenders agree to indemnify the
Administrative Agent and the Foreign Currency Agent (to the extent not
reimbursed by the Parent), ratably according to their Percentages, from and
against any and all liabilities, obligations, losses, damages, penalties,
actions, judgments, suits, costs, expenses or disbursements of any kind or
nature whatsoever which may be imposed on, incurred by, or assessed against the
Administrative Agent or the Foreign Currency Agent in any way relating to or
arising out of this Agreement or the Related Documents, or any action taken or
omitted by the Administrative Agent or the Foreign Currency Agent under this
Agreement or the Related Documents; provided that no Lender shall be liable for
any portion of such liabilities, obligations, losses, damages, penalties,
actions, judgments, suits, costs, expenses or disbursements resulting from the
Administrative Agent's or the Foreign Currency Agent's gross negligence or
willful misconduct as finally judicially determined by a court of competent
jurisdiction. Without limiting any of the foregoing, each Lender agrees to
reimburse the Administrative Agent promptly upon demand for its Percentage of
any out-of-pocket expenses (including reasonable counsel fees and expenses)
incurred by the Administrative Agent in connection with the preparation,
execution, delivery, administration, modification, amendment, waiver or
enforcement (whether through negotiations, legal proceedings or otherwise) of,
or legal advice in respect of rights or responsibilities under this
<PAGE>
Agreement or the Related Documents to the extent that the Administrative Agent
or the Foreign Currency Agent is not reimbursed for such expenses by the Parent.
All obligations provided for in this Section 15.5 shall survive termination of
this Agreement.
SECTION 15.6 Successor Administrative Agent or Foreign Currency Agent, as
the case may be. The Administrative Agent or Foreign Currency Agent, as the
case may be, may resign at any time by giving written notice thereof to the
Lenders and, while no Default or Event of Default exists, the consent of the
Parent (which consent shall not be unreasonably withheld or delayed) and may be
removed at any time with or without cause by the Required Lenders. Upon any
such resignation or removal, the Required Lenders shall have the right to
appoint a successor Administrative Agent or Foreign Currency Agent, as the case
may be. If no successor Administrative Agent or Foreign Currency Agent shall
have been so appointed by the Required Lenders, and shall have accepted such
appointment within thirty (30) days after the retiring Administrative Agent's or
Foreign Currency Agent, as the case may be, giving of notice of resignation or
the Required Lenders' removal of the retiring Administrative Agent or Foreign
Currency Agent, as the case may be, then the retiring Administrative Agent or
Foreign Currency Agent, as the case may be, may, on behalf of the Lenders,
appoint a successor Administrative Agent which shall be a commercial bank having
a combined capital and surplus of at least $250,000,000. Upon the acceptance of
any appointment as Administrative Agent or Foreign Currency Agent hereunder by a
successor Administrative Agent, such successor Administrative Agent shall
thereupon succeed to and become vested with all the rights, powers, privileges
and duties of the retiring Administrative Agent or Foreign Currency Agent, and
the retiring Administrative Agent shall be discharged from its duties and
obligations in its capacity as Administrative Agent or Foreign Currency Agent
under this Agreement. After any retiring Administrative Agent's or Foreign
Currency Agent's resignation or removal hereunder as Administrative Agent, the
provisions of this Section 15 shall inure to its benefit as to any actions taken
or omitted to be taken by it while it was Administrative Agent or Foreign
Currency Agent under this Agreement.
SECTION 15.7 Collateral Matters. (a) The Administrative Agent is
authorized on behalf of all the Lenders, without the necessity of any notice to
or further consent from the Lenders, from time to time to take any action with
respect to any Collateral or the Related Documents which may be necessary to
perfect and
<PAGE>
maintain perfected the security interest in and Liens upon the Collateral
granted pursuant to the Related Documents.
(b) The Lenders irrevocably authorize the Administrative Agent, at its
option and in its discretion, to release any Lien granted to or held by the
Administrative Agent upon any Collateral (i) upon termination of the Commitments
and payment in full of all Loans, LC Obligations and all other Liabilities known
to the Administrative Agent and payable under this Agreement or any Related
Document; (ii) constituting property sold or to be sold or disposed of as part
of or in connection with any disposition permitted hereunder; (iii) constituting
property in which the Parent or any of its Subsidiaries owned no interest at the
time such Lien was granted or at any time thereafter; (iv) constituting property
leased to the Parent or any of its Subsidiaries under a lease which has expired
or been terminated in a transaction permitted under this Agreement or is about
to expire and which has not been, and is not intended by the Parent or such
Subsidiary to be, renewed or extended; (v) consisting of an instrument
evidencing Indebtedness or other debt instrument, if the Indebtedness evidenced
thereby has been paid in full; (vi) pursuant to any transaction permitted by
Section 11.3; or (vii) if approved, authorized or ratified in writing by the
Required Lenders or all the Lenders, as the case may be, as provided in Section
17.1. Upon request by the Administrative Agent at any time, the Lenders will
confirm in writing the Administrative Agent's authority to release particular
types or items of Collateral pursuant to this Section 15.7.
SECTION 16. ASSIGNMENTS AND PARTICIPATIONS
SECTION 16.1 Assignments. (a) Each Lender shall have the right at any
time to assign (with the consent of the Parent while no Default or Event of
Default exists, which consent shall not be unreasonably withheld or delayed), to
any Eligible Assignee, all or any part of such Lender's rights and obligations
under this Agreement and each Related Document including its rights in respect
of Loans, Notes, Letters of Credit and LC Obligations and its obligations in
respect of Commitments to make Loans or participate in Letters of Credit. Any
such assignment shall be pursuant to an assignment agreement, substantially in
the form of Exhibit K (an "Assignment Agreement"), duly executed by such Lender
and the Eligible Assignee, and acknowledged by the Administrative Agent. No
assignment by the Administrative Agent shall relieve it from its obligations in
respect of the Letters of Credit, it being understood that any assignment by the
Administrative Agent as to
<PAGE>
Letters of Credit shall be deemed to automatically constitute an assignment by
the Administrative Agent and the purchase by the Eligible Assignee of a
participating interest in such Letters of Credit.
(b) Each assignment shall be pro rata with respect to all rights and
obligations of the assigning Lender including the Loans, Notes, LC Obligations
and Commitments of the assigning Lender. Each assignment, if to a Person other
than a Lender or its Affiliate, shall be in an amount equal to or in excess of
$5,000,000 (except for assignments of the entire unpaid balance of a Lender if
less than $5,000,000). In the case of any such assignment, the satisfaction or
waiver of the conditions specified in clause (c) below, this Agreement shall be
deemed to be amended to the extent, and only to the extent, necessary to reflect
the addition of such Eligible Assignee, and the Eligible Assignee shall for all
purposes be a Lender party hereto and shall have, to the extent of such
assignment, the same rights and obligations as a Lender hereunder, including the
right to approve or disapprove actions which, in accordance with the terms
hereof, require the approval of the Lenders or the Required Lenders, as the case
may be, and the obligations to make Loans and to participate in Letters of
Credit.
(c) An assignment shall become effective hereunder when all of the
following shall have occurred:
(i) the Assignment Agreement shall have been executed by the
assigning Lender and the Eligible Assignee,
(ii) the Assignment Agreement shall have been acknowledged by
the Administrative Agent and, while no Default or Event of Default
exists, consented to by Parent (which consent shall not be
unreasonably withheld or delayed),
(iii) unless waived by the Administrative Agent, either the
assigning Lender or the Eligible Assignee shall have paid a processing
fee of $3,500 to the Administrative Agent for its own account (other
than in connection with an assignment to an Affiliate of such Lender),
and
(iv) the assigning Lender and the Administrative Agent shall
have agreed upon a date upon which the Assignment shall become
effective. Upon the Assignment
<PAGE>
becoming effective, the Administrative Agent shall forward all
payments of interest, principal, fees and other amounts that would
have been made to the assigning Lender, in proportion to the
percentage of the assigning Lender's rights transferred, to the
Eligible Assignee.
(d) Upon the effectiveness of any assignment, the assigning Lender shall be
relieved from its obligations hereunder to the extent of the obligations so
assigned (except, (i) obligations of the Administrative Agent in respect of the
Letters of Credit issued by it, and (ii to the extent, if any, that the Parent,
any other Lender or the Administrative Agent has rights against such assigning
Lender as a result of any default by such Lender under this Agreement) and
appropriate arrangements shall be made so that, if required, replacement Notes
are issued to such assigning Lender and new Notes or, as appropriate,
replacement Notes are issued to the Eligible Assignee, in each case in principal
amounts reflecting their outstanding Loans as adjusted pursuant to such
Assignment Agreement. Promptly following the consummation of each assignment,
the Administrative Agent shall furnish to the Parent and each Lender, a revised
Schedule 2.1, revised to reflect such assignment.
SECTION 16.2 Participations. Each Lender may grant participations in all
or any part of its Loans, Notes, Letters of Credit and LC Obligations to any
commercial lender or other financial institution. A participant not shall have
any rights under this Agreement or any other document delivered in connection
herewith (the participant's rights against such Lender in respect of such
participation to be those set forth in the agreement executed by such Lender in
favor of the participant relating thereto, which agreement with respect to such
participation shall not restrict such Lender's ability to make any modification,
amendment or waiver to this Agreement without the consent of the participant
except that the consent of such participant may be required in connection with
matters requiring the consent of all of the Lenders under Section 17.1). All
amounts payable by the Parent under this Agreement shall be determined as if the
Lender had not sold such participation. In the event of any such sale by a
Lender of participating interests to a participant, such Lender's obligations
under this Agreement shall remain unchanged, such Lender shall remain solely
responsible for the performance thereof, such Lender shall remain the holder of
any obligation for all purposes under this Agreement, and the Parent and the
Administrative Agent shall continue to deal solely and directly with such Lender
in connection with such Lender's rights and obligations under this Agreement.
<PAGE>
SECTION 16.3 Disclosure of Information. The Parent authorizes each Lender
to disclose to any participant, assignee or Eligible Assignee (each, a
"Transferee") and any prospective Transferee any and all financial and other
information in such Lender's possession concerning the Parent and any of its
Subsidiaries which has been delivered to such Lender by or on behalf of the
Parent or any of its Subsidiaries in connection with such Lender's credit
evaluation of the Parent prior to entering into this Agreement or which has been
delivered to such Lender by or on behalf of the Parent or any of its
Subsidiaries pursuant to this Agreement; provided that each Lender agrees that
it shall hold all non-public, confidential and proprietary information obtained
pursuant to the requirements of this Agreement (the "Information") confidential
in accordance with safe and sound banking and business practices and may only
make disclosure reasonably required by a Transferee or a prospective Transferee
in connection with the contemplated transfer of any portion of the Loans.
Notwithstanding anything to the contrary herein, any Lender may disclose
Information: (a) that consists of information that has been filed with, and
made public and generally available by, any governmental agency, or which has
otherwise been publicly disclosed, (b) to regulatory authorities having
jurisdiction to examine its books and records, (c) pursuant to subpoena or other
legal process or as otherwise required by law, and (d) to its counsel and
auditors in connection with matters concerning the transactions contemplated by
this Agreement.
SECTION 16.4 Foreign Transferees. If, pursuant to this Section 16, any
interest in this Agreement or any Loan, Letter of Credit, Note or LC Obligation
is transferred to any Transferee which is organized under the laws of any
jurisdiction other than the United States or any state thereof, the transferor
Lender shall cause such Transferee (other than any participant), and may cause
any participant, concurrently with the effectiveness of such transfer, (a) to
represent to the transferor Lender (for the benefit of the transferor Lender,
the Administrative Agent, and the Parent) that under applicable law and treaties
no Taxes will be required to be withheld by the Administrative Agent, the Parent
or the transferor Lender with respect to any payments to be made to such
Transferee in respect of the Loans, Notes, Letters of Credit or LC Obligations,
(b) to furnish to the transferor Lender, the Administrative Agent and the Parent
either U.S. Internal Revenue Service Form 4224 or U.S. Internal Revenue Service
Form 1001 (wherein such transfer claims entitlement to complete exemption from
U.S. federal withholding tax on all interest payments hereunder), and (c) to
agree (for the benefit of the transferor Lender, the Administrative Agent and
the Parent) to provide the
<PAGE>
transferor Lender, the Administrative Agent and the Parent a new Form 4224 or
Form 1001 upon the obsolescence of any previously delivered form and comparable
statements in accordance with applicable U.S. laws and regulations and
amendments duly executed and completed by such Transferee, and to comply from
time to time with all applicable U.S. laws and regulations with regard to such
withholding tax exemption.
SECTION 17. MISCELLANEOUS
SECTION 17.1 Waivers and Amendments. The provisions of this Agreement and
of each Related Document may from time to time be amended, modified or waived,
if such amendment, modification or waiver is in writing and consented to by the
Parent and the Required Lenders; provided that no such amendment, modification
or waiver:
(a) which would modify any requirement hereunder that any particular
action be taken by all Lenders or by the Required Lenders, shall be
effective without the consent of each Lender;
(b) which would modify this Section 17.1, change the definition of
"Required Lenders," change any Percentage for any Lender (except pursuant
to an Assignment Agreement), reduce any fees (other than any fees payable
to the Administrative Agent for its sole account), extend the Revolving
Loan Termination Date, or subject any Lender to any additional obligations,
shall be effective without the consent of each Lender;
(c) which would permit the release of any Guarantor (except as
otherwise permitted by Section 11.3) or all or substantially all of the
Collateral other than a release in connection with a disposition permitted
hereunder or otherwise permitted under the terms of the Related Documents,
shall be effective without the consent of each Lender;
(d) which would extend the due date for, or reduce the amount of, any
payment or prepayment of principal of or interest on any Loan or any
reimbursement obligation, interest or fees with respect to any LC
Obligation, shall be effective without the consent of the holder of such
Loan or LC Obligation; or
<PAGE>
(e) which would affect adversely the interests, rights or obligations
of the Administrative Agent (in its capacity as the Administrative Agent),
shall be effective without consent of the Administrative Agent.
SECTION 17.2 Notices. All notices, requests and other communications to
any party hereunder shall be in writing (including bank wire, telex or similar
writing) and shall be given to such party at its address or facsimile number set
forth on the signature pages hereof or such other address or facsimile number as
such party may hereafter specify for the purpose by notice to the Administrative
Agent and the Parent. Each such notice, request or other communication shall be
effective (a) if given by facsimile, when such facsimile is transmitted to the
facsimile number specified in this Section and the appropriate answerback is
received, (b) if given by certified mail or overnight mail (via a reputable
courier), 72 hours after such communication is deposited in the mails with first
class postage prepaid, addressed as aforesaid or (c) if given by any other
means, when delivered at the address specified in this Section, provided that
notices to the Administrative Agent under Sections 3, 4 and 15 shall not be
effective until received by the Administrative Agent.
SECTION 17.3 Regulation U. Each Lender represents that it in good faith
is not relying, either directly or indirectly, upon any margin stock (as such
term is defined in Regulation U promulgated by the Board of Governors of the
Federal Reserve System) as collateral security for the extension or maintenance
by it of any credit provided for in this Agreement.
SECTION 17.4 Payment of Costs and Expenses. The Parent agrees to pay on
demand all reasonable expenses of the Administrative Agent (including the
reasonable fees and out-of-pocket expenses of counsel to the Administrative
Agent and of local counsel, if any, who may be retained by counsel to the
Administrative Agent) in connection with
(a) the negotiation, preparation, execution and delivery of this
Agreement and of each Related Document, including schedules and exhibits,
and any amendments, waivers, consents, supplements or other modifications
to this Agreement or any Related Document as may from time to time
hereafter be required, whether or not the transactions contemplated hereby
or thereby are consummated,
<PAGE>
(b) the filing, recording, refiling or rerecording of any of the
Related Documents (including the Borrower Pledge Agreement and the Gibbs
Pledge Agreement) and/or any Uniform Commercial Code financing statements
or Uniform Commercial Code, judgement, tax or other lien searches relating
thereto and all amendments, supplements and modifications to any thereof
and any and all other documents or instruments of further assurance
required to be filed or recorded or refiled or rerecorded by the terms
hereof or of the Related Documents, and
(c) the preparation and/or review of the form of any document or
instrument relevant to this Agreement or any Related Document.
The Parent further agrees to pay, and to save the Administrative Agent and the
Lenders harmless from all liability for, any stamp or other Taxes which may be
payable in connection with the execution or delivery of this Agreement, the
Borrowings hereunder, or the issuance of the Notes, Letters of Credit or any
other Related Documents. The Parent also agrees to reimburse the Administrative
Agent, the Foreign Currency Agent and each Lender upon demand for all reasonable
out-of-pocket expenses (including reasonable attorneys' fees and legal expenses)
incurred by the Administrative Agent, the Foreign Currency Agent or such Lender
in connection with the enforcement of any Liabilities and the consideration of
legal issues relevant to such enforcement. All obligations of the Parent
provided for in this Section 17.4 shall survive termination of this Agreement
until the expiration of all statutes of limitations applicable thereto. All
demands made under this Section 7.4 shall be accompanied by a statement setting
forth in reasonable detail any such amounts.
SECTION 17.5 Indemnity. The Parent agrees to indemnify the Administrative
Agent, the Foreign Currency Agent and each Lender and hold each Lender harmless
from and against any and all liabilities, losses, damages, costs and expenses of
any kind (including, without limitation, the reasonable fees and disbursements
of counsel for any Lender, the Administrative Agent or the Foreign Currency
Agent) in connection with any investigative, administrative or judicial
proceedings whether or not such Lender shall be designated a party thereto,
which may be incurred by such Lender (or by the Administrative Agent or Foreign
Currency Agent in connection with its actions as Administrative Agent or Foreign
Currency Agent hereunder), relating to or arising out of this Agreement or any
actual or proposed use of the proceeds of the Loans or LC Obligations hereunder;
provided that neither the
<PAGE>
Administrative Agent nor any Lender shall have the right to be indemnified
hereunder for its own gross negligence or willful misconduct as finally
judicially determined by a court of competent jurisdiction. All obligations of
the Parent provided for in this Section 17.5 shall survive termination of this
Agreement until the expiration of all statutes of limitations applicable
thereto.
SECTION 17.6 Subsidiary References. The provisions of this Agreement
relating to Subsidiaries shall apply only during such times as the Parent have
one or more Subsidiaries.
SECTION 17.7 Captions. Section captions used in this Agreement are for
convenience only, and shall not affect the construction of this Agreement.
SECTION 17.8 Governing Law. This Agreement, the Notes and each Loan and
Letter of Credit and each other Related Document shall be a contract made under
and governed by the laws of the State of Illinois, without regard to conflict of
laws principles. All obligations of the Parent and rights of the Administrative
Agent and the Lenders expressed herein or in the Related Documents shall be in
addition to and not in limitation of those provided by applicable law.
SECTION 17.9 Counterparts. This Agreement may be executed in any number
of counterparts and by the different parties on separate counterparts and each
such counterpart shall be deemed to be an original, but all such counterparts
shall together constitute but one and the same Agreement. When counterparts
executed by all the parties shall have been lodged with the Administrative Agent
(or, in the case of any Lender as to which an executed counterpart shall not
have been so lodged, the Administrative Agent shall have received telegraphic,
facsimile, telex or other written confirmation from such Lender of execution of
a counterpart hereof by such Lender), this Agreement shall become effective as
of the Restatement Effective Date hereof, and at such time the Administrative
Agent shall notify the Parent and each Lender.
SECTION 17.10 SUBMISSION TO JURISDICTION; WAIVER OF VENUE. THE PARENT AND
EACH OF THE CO-BORROWERS, ON BEHALF OF ITSELF AND EACH SUBSIDIARY OF THE PARENT
AND SUCH CO-BORROWER (A) HEREBY IRREVOCABLY SUBMITS TO THE JURISDICTION OF ANY
ILLINOIS STATE OR FEDERAL COURT SITTING IN CHICAGO, ILLINOIS OVER ANY ACTION OR
PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT OR ANY RELATED DOCUMENT,
AND THE PARENT AND EACH OF THE CO-BORROWERS HEREBY IRREVOCABLY AGREES THAT ALL
CLAIMS IN RESPECT OF SUCH ACTION OR PROCEEDING MAY BE HEARD AND DETERMINED IN
SUCH ILLINOIS STATE OR
<PAGE>
FEDERAL COURT, AND (B) AGREES NOT TO INSTITUTE ANY LEGAL ACTION OR PROCEEDING
AGAINST THE ADMINISTRATIVE AGENT, THE FOREIGN CURRENCY AGENT OR ANY LENDER OR
THE DIRECTORS, OFFICERS, EMPLOYEES, AGENTS OR PROPERTY OF ANY THEREOF, ARISING
OUT OF OR RELATING TO THIS AGREEMENT OR ANY RELATED DOCUMENT, IN ANY COURT OTHER
THAN AS HEREINABOVE SPECIFIED IN THIS SECTION 17.10. THE PARENT AND EACH OF THE
CO-BORROWERS, ON BEHALF OF ITSELF AND EACH SUBSIDIARY, HEREBY IRREVOCABLY
WAIVES, TO THE FULLEST EXTENT PERMITTED OF THE PARENT OR SUCH CO-BORROWER BY
LAW, ANY OBJECTION IT MAY NOW OR HEREAFTER HAVE TO THE LAYING OF VENUE IN ANY
ACTION OR PROCEEDING (WHETHER BROUGHT BY THE PARENT, EITHER CO-BORROWER, ANY
SUBSIDIARY, THE ADMINISTRATIVE AGENT, THE FOREIGN CURRENCY AGENT, ANY LENDER, OR
OTHERWISE) IN ANY COURT HEREINABOVE SPECIFIED IN THIS SECTION 17.10 AS WELL AS
ANY RIGHT IT MAY NOW OR HEREAFTER HAVE TO REMOVE ANY SUCH ACTION OR PROCEEDING,
ONCE COMMENCED, TO ANOTHER COURT ON THE GROUNDS OF FORUM NON CONVENIENS OR
OTHERWISE. THE PARENT AND EACH OF THE CO-BORROWERS ON BEHALF OF ITSELF AND EACH
SUBSIDIARY OF THE PARENT AND SUCH CO-BORROWER AGREES THAT A FINAL JUDGMENT IN
ANY SUCH ACTION OR PROCEEDING SHALL BE CONCLUSIVE AND MAY BE ENFORCED IN OTHER
JURISDICTIONS BY SUIT ON THE JUDGMENT OR IN ANY OTHER MANNER PROVIDED BY LAW.
SECTION 17.11 Service of Process. The Parent on behalf of itself and each
Subsidiary of the Parent hereby irrevocably appoints C.T. Corporation (the
"Process Agent"), with an office on the date hereof at 208 South LaSalle Street,
Chicago, Illinois 60604, United States, as its agent to receive on behalf of the
Parent and its Subsidiaries and its property service of copies of the summons
and complaint and any other process which may be served in any such action or
proceeding, in each case, in the event it has no other duly appointed registered
agent in Illinois, provided that a copy of such process is also mailed by
registered or certified mail, postage prepaid, to the Parent at its address
specified pursuant to Section 17.2. Such service may be made by mailing or
delivering a copy of such process to the Parent in care of the Process Agent at
the Process Agent's above address, and the Parent hereby irrevocably authorizes
and directs the Process Agent to accept such service on its behalf. The Parent
agrees to indemnify such Process Agent in connection with all matters relating
to its appointment as agent of the Parent for such purposes, to enter into any
agreement relating to such appointment which such Process Agent may customarily
require, and to pay such Process Agent's customary fees upon demand. As an
alternative method of service, the Parent for itself and its Subsidiaries also
irrevocably consents to the service of any and all process in any such action or
proceeding by the mailing of the Parent at its address specified pursuant to
Section 17.2. Nothing in this Section 17.11 shall affect the right
<PAGE>
of the Administrative Agent or any Lender to serve legal process in any other
manner permitted by law or affect the right of the Administrative Agent, the
Foreign Currency Agent or any Lender to bring any action or proceeding against
the Parent or its properties in the courts of any other jurisdictions.
SECTION 17.12 WAIVER OF JURY TRIAL. THE PARENT AND EACH OF THE CO-
BORROWERS (ON BEHALF OF ITSELF AND EACH OF ITS SUBSIDIARIES), THE ADMINISTRATIVE
AGENT, THE FOREIGN CURRENCY AGENT, AND EACH LENDER HEREBY KNOWINGLY, VOLUNTARILY
AND INTENTIONALLY WAIVE ANY RIGHT TO A TRIAL BY JURY IN ANY ACTION, PROCEEDING
OR COUNTERCLAIM CONCERNING ANY RIGHTS UNDER THIS AGREEMENT, ANY RELATED DOCUMENT
OR UNDER ANY OTHER DOCUMENT OR AGREEMENT DELIVERED OR WHICH MAY IN THE FUTURE BE
DELIVERED IN CONNECTION HEREWITH OR THEREWITH, OR ARISING FROM ANY BANKING
RELATIONSHIP EXISTING IN CONNECTION WITH THIS AGREEMENT, AND AGREE THAT ANY SUCH
ACTION, PROCEEDING OR COUNTERCLAIM SHALL BE TRIED BEFORE A COURT AND NOT BEFORE
A JURY; THIS PROVISION IS A MATERIAL INDUCEMENT FOR THE ADMINISTRATIVE AGENT,
THE FOREIGN CURRENCY AGENT AND THE LENDERS ENTERING INTO THIS AGREEMENT.
SECTION 17.13 Successors and Assigns. This Agreement shall be binding
upon and shall inure to the benefit of the parties hereto and their respective
successors and permitted assigns; provided, however, that: (a) the Parent may
not assign or transfer its rights or obligations hereunder without the prior
written consent of the Administrative Agent, the Foreign Currency Agent and all
Lenders; and (b) the rights of the Lenders to make assignments or grant
participations are subject to the provisions of Section 16.
SECTION 17.14 Judgment Currency.
(a) If, for the purpose of obtaining or enforcing judgment against
the Parent, the Co-Borrowers and/or their respective Subsidiaries in any court
in any jurisdiction, it becomes necessary to convert into a particular currency
(such currency being hereinafter in this Section 17.14 referred to as the
"Judgment Currency") an amount due in another currency (such other currency
being hereinafter in this Section 17.14 referred to as the "Indebtedness
Currency") under this agreement, the conversion shall be made at the Spot Rate
prevailing on the Business Day immediately preceding:
(i) the date of actual payment of the amount due, in the case of any
proceeding in the courts of the State of Illinois or in the
courts of any other
<PAGE>
jurisdiction that will give effect to such conversion being made
on such date; or
(ii) the date on which the judgment is given, in the case of any
proceeding in the courts of any other jurisdiction (the date as
of which such conversion is made pursuant to this Section 17.14
being hereinafter in this Section 17.14 referred to as the
"Judgment Conversion Date").
(b) If, in the case of any proceeding in the court of any jurisdiction
referred to in Section 17.14, there is a change in the Spot Rate prevailing
between the Judgment Conversion Date and the date of actual payment of the
amount due, the Parent and Co-Borrowers, jointly and severally, shall pay to the
Lenders such additional amount (if any, but in any event not a lesser amount) as
may be necessary to ensure that the amount paid in the Judgment Currency, when
converted at the Spot Rate prevailing on the date of payment, will produce the
amount of the Indebtedness Currency which could have been purchased with the
amount of Judgment Currency stipulated in the judgment or judicial order at the
Spot Rate prevailing on the Judgment Conversion Date.
(c) Any amount due from the Parent and Co-Borrowers under the
provisions of this Section 17.14 shall be due to the judgment creditor as a
separate debt and shall not be affected by judgment being obtained for any other
amounts due under or in respect of this agreement.
SECTION 17.15 Joint and Several Liability. Each of the Parent and the Co-
Borrowers unconditionally guarantees the payment in full and performance of the
Liabilities arising or related to any Canadian Dollar Loan. Each of the Parent
and the Co-Borrowers shall be liable for all amounts due to the Lenders under
this Agreement with respect to Canadian Dollar Loans, regardless of which such
Person actually receives such Canadian Dollar Loans or the amount of such
Canadian Dollar Loans received or the manner in which the Lenders account for
such Canadian Dollar Loans on their respective books and records. Each of the
Parent and the Co-Borrower's Liabilities with respect to Canadian Dollar Loans
made to it, and each of the Parent's and the Co-Borrower's Liabilities arising
as a result of the joint and several liability of the Parent and the Co-
Borrowers under this Agreement or any Related Document, shall be separate and
distinct obligations, but all such Liabilities shall be primary obligations of
the Parent and each Co-Borrower.
<PAGE>
Upon any Event of Default, the Administrative Agent may proceed
directly and at once, without notice, against any of the Parent or either the
Co-Borrowers to collect and recover the full amount, or any portion of the
Liabilities arising or related to any Canadian Dollar Loan, without first
proceeding against any other Person, or against any security or collateral for
such Liabilities. Each of the Parent and the Co-Borrowers consents and agrees
that the Administrative Agent and the Lenders shall be under no obligation to
marshal any assets in favor of the Parent or the Co-Borrowers or in payment of
any or all of such Liabilities.
<PAGE>
Delivered at Chicago, Illinois, as of the day and year first above written.
CAREER EDUCATION CORPORATION
By: /s/ William A. Klettke
------------------------------
Name: William A. Klettke
----------------------------
Title: Chief Financial Officer
---------------------------
Address: 2800 W. Higgins Road, #790
--------------------------
Hoffman Estates, IL 60195
-------------------------
Attention: William A. Klettke
-----------------------
Telephone: 847/781-3600
-----------------------
Facsimile: 847/781-3610
-----------------------
INTERNATIONAL ACADEMY OF MERCHANDISING & DESIGN
(CANADA) LTD.
By: /s/ William A. Klettke
------------------------------
Name: William A. Klettke
----------------------------
Title: Vice President and Treasurer
----------------------------
ACADEMIE INTERNATIONALE dU DESIGN INC.
By: /s/ William A. Klettke
------------------------------
Name: William A. Klettke
----------------------------
Title: Vice President and Treasurer
----------------------------
<PAGE>
LASALLE NATIONAL BANK, in its
individual corporate capacity and
as Administrative Agent
By: /s/ David F. Mohr
--------------------------------
Name: David F. Mohr
------------------------------
Title: Assistant Vice President
-----------------------------
Notice Information
Address: 135 S. LaSalle Street, #308
---------------------------
Chicago, IL 60603
---------------------------
Attention: Janice Koch
-------------------------
Telephone: 312/904-7138
-------------------------
Facsimile: 312/904-8544
-------------------------
Lending Office (Base Rate Loans)
Address: 135 S. LaSalle Street, #308
---------------------------
Chicago, IL 60603
---------------------------
Attention: Janice Koch
-------------------------
Telephone: 312/904-7138
-------------------------
Facsimile: 312/904-8544
-------------------------
Lending Office (LIBOR Rate Loans)
Address: 135 S. LaSalle Street, #308
---------------------------
Chicago, IL 60603
---------------------------
Attention: Janice Koch
-------------------------
Telephone: 312/904-7138
-------------------------
Facsimile: 312/904-8544
-------------------------
<PAGE>
THE BANK OF NOVA SCOTIA, in its
individual corporate capacity and
as Foreign Currency Agent
By: /s/ F.C.H. Ashby
--------------------------------
Name: F.C.H. Ashby
------------------------------
Title: Sr. Manager Loan Operations
-----------------------------
Notice Information
Address: 600 Peachtree St. NE, #2700
---------------------------
Atlanta, GA
---------------------------
Attention: Demetria January
-------------------------
Telephone: 404/877-1540
-------------------------
Facsimile: 404/888-8998
-------------------------
Lending Office (Base Rate Loans)
Address: 600 Peachtree St. NE, #2700
---------------------------
Atlanta, GA
---------------------------
Attention: Demetria January
-------------------------
Telephone: 404/877-1540
-------------------------
Facsimile: 404/888-8998
-------------------------
Lending Office (LIBOR Rate Loans)
Address: 600 Peachtree St. NE, #2700
---------------------------
Atlanta, GA
---------------------------
Attention: Demetria January
-------------------------
Telephone: 404/877-1540
-------------------------
Facsimile: 404/888-8998
-------------------------
<PAGE>
ABN AMRO BANK CANADA, in its
individual corporate capacity
By: /s/ David Moore
------------------------------
Name: David Moore
----------------------------
Title: Vice President
---------------------------
By: /s/ David Lam
------------------------------
Name: David Lam
----------------------------
Title: Manager, Credit
---------------------------
Notice Information
Address: 79 Wellington Street West
-------------------------
Toronto, Ontario
-------------------------
Canada M5K1G8
-------------------------
Attention: David Moore
-----------------------
Telephone: 416/365-2946
-----------------------
Facsimile: 416/367-7937
-----------------------
Lending Office (Base Rate Loans)
Address: 79 Wellington Street West
-------------------------
Toronto, Ontario
-------------------------
Canada M5K1G8
-------------------------
Attention: Loan Operations
-----------------------
Yasmin Mohideen
-----------------------
Telephone: 416/365-6765
-----------------------
Facsimile: 416/367-1485
-----------------------
Lending Office (LIBOR Rate Loans)
Address: N/A
-------------------------
-------------------------
Attention: _______________________
Telephone: _______________________
Facsimile: _______________________
<PAGE>
NATIONAL CITY BANK, in its
individual corporate capacity
By: /s/ Diego Tobon
------------------------------
Name: Diego Tobon
----------------------------
Title:____________________________
Notice Information
Address: _________________________
_________________________
Attention: _______________________
Telephone: _______________________
Facsimile: _______________________
Lending Office (Base Rate Loans)
Address: _________________________
_________________________
Attention: _______________________
Telephone: _______________________
Facsimile: _______________________
Lending Office (LIBOR Rate Loans)
Address: _________________________
_________________________
Attention: _______________________
Telephone: _______________________
Facsimile: _______________________
<PAGE>
COMERICA BANK, in its
individual corporate capacity
By: /s/ Gregory N. Block
------------------------------
Name: Gregory N. Block
----------------------------
Title: Vice President
---------------------------
Notice Information
Address: 500 Woodward Avenue, MC3269
---------------------------
Detroit, MI 48226
---------------------------
Attention: Gregory N. Block
-------------------------
Telephone: 313/222-7006
-------------------------
Facsimile: 313/222-9516
-------------------------
Lending Office (Base Rate Loans)
Address: 500 Woodward Avenue, MC3269
---------------------------
Detroit, MI 48226
---------------------------
Attention: Beverly Jones
-------------------------
Telephone: 313/222-3805
-------------------------
Facsimile: 313/222-9516
-------------------------
Lending Office (LIBOR Rate Loans)
Address: 500 Woodward Avenue, MC3269
---------------------------
Detroit, MI 48226
---------------------------
Attention: Beverly Jones
-------------------------
Telephone: 313/222-7006
-------------------------
Facsimile: 313/222-9516
-------------------------
<PAGE>
HARRIS TRUST AND SAVINGS BANK, in its individual
corporate capacity
By: /s/ M. James Barry, III
------------------------------
Name: M. James Barry, III
----------------------------
Title: Vice President
---------------------------
Notice Information
Address: 111 West Monroe Street
-------------------------
Chicago, IL 60603
-------------------------
Attention: M. James Barry, III
-----------------------
Telephone: 312/461-2781
-----------------------
Facsimile: 312/293-5283
-----------------------
Lending Office (Base Rate Loans)
Address: 111 West Monroe Street
-------------------------
Chicago, IL 60603
-------------------------
Attention: Chris Hale
-----------------------
Telephone: 312/461-5664
-----------------------
Facsimile: 312/293-5283
-----------------------
Lending Office (LIBOR Rate Loans)
Address: 111 West Monroe Street
-------------------------
Chicago, IL 60603
-------------------------
Attention: Chris Hale
-----------------------
Telephone: 312/461-5664
-----------------------
Facsimile: 312/293-5283
-----------------------
<PAGE>
UNION BANK OF CALIFORNIA, N.A., in its individual
corporate capacity
By: /s/ Stephen R. Sweeney
-----------------------------------
Name: Stephen R. Sweeney
---------------------------------
Title: Vice President
--------------------------------
Notice Information
Address: 445 S. Figuerda St., 15/th/ Fl.
-------------------------------
Los Angeles, CA 90071
-------------------------------
Attention: Commercial Finance Div.
-----------------------------
Telephone: 213/236-6065
-----------------------------
Facsimile: 213/236-6089
-----------------------------
Lending Office (Base Rate Loans)
Address: _______________________________
_______________________________
Attention: _____________________________
Telephone: _____________________________
Facsimile: _____________________________
Lending Office (LIBOR Rate Loans)
Address: _______________________________
_______________________________
Attention: _____________________________
Telephone: _____________________________
Facsimile: _____________________________
<PAGE>
THE BANK OF MONTREAL, in its individual corporate
capacity
By: /s/ Michael W. McAdam
------------------------------
Name: Michael W. McAdam
----------------------------
Title: Relationship Manager
---------------------------
Notice Information
Address: First Canadian Place
-------------------------
Mezzanine Level
-------------------------
P.O. Box 3100
-------------------------
King Street W
-------------------------
Toronto, Ontario
-------------------------
Canada M5X-1A3
-------------------------
Attention: Michael W. McAdam
-----------------------
Telephone: 416/867-5230
-----------------------
Facsimile: 416/867-2744
-----------------------
Lending Office (Prime Rate Loans)
Address: First Canadian Place
-------------------------
Mezzanine Level
-------------------------
P.O. Box 3100
-------------------------
King Street W
-------------------------
Toronto, Ontario
-------------------------
Canada M5X-1A3
-------------------------
Attention: Michael W. McAdam
-----------------------
Telephone: 416/867-5230
-----------------------
Facsimile: 416/867-2744
-----------------------
<PAGE>
EXHIBIT 21
CAREER EDUCATION CORPORATION
SUBSIDIARIES
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
Subsidiary Jurisdiction
---------- of Incorporation
----------------
- -------------------------------------------------------------------------------
<S> <C>
Al Collins Graphic Design School, Ltd., Delaware
d/b/a Al Collins Graphic Design School
- -------------------------------------------------------------------------------
Allentown Business School, Ltd., Delaware
d/b/a Allentown Business School
- -------------------------------------------------------------------------------
Brooks College, Ltd., Delaware
d/b/a Brooks College
- -------------------------------------------------------------------------------
Brown Institute, Ltd., Delaware
d/b/a Brown Institute
- -------------------------------------------------------------------------------
CEC Management, Inc. Illinois
- -------------------------------------------------------------------------------
Harrington Institute of Interior Design, Inc., Illinois
d/b/a Harrington Institute of Interior Design
- -------------------------------------------------------------------------------
IAMD Limited (holding company) Delaware
- -------------------------------------------------------------------------------
International Academy of Merchandising & Design, Ltd., Illinois
d/b/a IAMD-Chicago
- -------------------------------------------------------------------------------
International Academy of Merchandising & Design, Inc., Florida
d/b/a IAMD-Tampa
- -------------------------------------------------------------------------------
International Academy of Merchandising and Design (Canada) Ontario
Ltd.,
d/b/a International Academy of Design-Toronto
- -------------------------------------------------------------------------------
International Academy of Design, Inc., Quebec
a.k.a. Academie Internationale du Design Inc.,
d/b/a International Academy of Design-Montreal and
d/b/a Academie Internationale du Design-Montreal
- -------------------------------------------------------------------------------
The Katharine Gibbs Schools, Inc. (holding company) Delaware
- -------------------------------------------------------------------------------
The Katharine Gibbs School of Montclair, Inc., New Jersey
d/b/a Katharine Gibbs School-Montclair
- -------------------------------------------------------------------------------
The Katharine Gibbs School of Piscataway, Inc., New Jersey
d/b/a Katharine Gibbs School-Piscataway
- -------------------------------------------------------------------------------
The Katharine Gibbs Corporation - New York, New York
d/b/a Katharine Gibbs School-New York
- -------------------------------------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
Subsidiary Jurisdiction
---------- of Incorporation
----------------
- -------------------------------------------------------------------------------
<S> <C>
The Katharine Gibbs Corporation - Melville, New York
d/b/a Katharine Gibbs School-Melville
- -------------------------------------------------------------------------------
The Katharine Gibbs School of Norwalk, Inc., Connecticut
d/b/a Gibbs College
- -------------------------------------------------------------------------------
The Katharine Gibbs School of Providence, Inc., Rhode Island
d/b/a Katharine Gibbs School-Providence
- -------------------------------------------------------------------------------
The Katharine Gibbs School of Boston, Inc., a private Massachusetts
two-year college,
d/b/a Katharine Gibbs School-Boston
- -------------------------------------------------------------------------------
Market Direct, Inc. Illinois
- -------------------------------------------------------------------------------
School of Computer Technology, Inc., Delaware
d/b/a Computer Tech and d/b/a International Culinary Academy
- -------------------------------------------------------------------------------
Scottsdale Culinary Institute, Ltd., Delaware
d/b/a Scottsdale Culinary Institute
- -------------------------------------------------------------------------------
Southern California School of Culinary Arts, Ltd. Delaware
d/b/a Southern California School of Culinary Arts
- -------------------------------------------------------------------------------
Western Culinary Institute, Ltd., Delaware
d/b/a Western Culinary Institute
- -------------------------------------------------------------------------------
</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 February 13, 1998 (except with
respect to the matters discussed in the fourth, fifth, sixth, seventh, eighth,
ninth, tenth and eleventh paragraphs of Note 16, as to which the dates are March
13, 1998, May 13, 1998, July 31, 1998, September 8, 1998, October 5, 1998,
October 26, 1998, October 29, 1998 and January 4, 1999) 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 19, 1999
<PAGE>
Exhibit 23.2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use in this
registration statement of our report dated September 25, 1998 (except with
respect to the matter discussed in Note 7, as to which the date is December 17,
1998), on the financial statements of SCOTTSDALE CULINARY INSTITUTE, INC.
included herein and to all references to our Firm included in this registration
statement.
Arthur Andersen LLP
Chicago, Illinois
January 19, 1999
<PAGE>
EXHIBIT 23.3
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Registration Statement of Career Education
Corporation on Form S-1 of our report dated October 27, 1997 on the
consolidated financial statements of The Katharine Gibbs Schools, Inc. as of
December 31, 1995 and 1996 and for the years then ended, 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
January 19, 1999
