<PAGE>
As filed with the Securities and Exchange Commission on February 1, 1999
Registration No. 333-59505
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------
AMENDMENT NO. 4
To
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------
CORINTHIAN COLLEGES, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<CAPTION>
<S> <C> <C>
Delaware 8249 33-0717312
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification Number)
</TABLE>
6 Hutton Centre Drive, Suite 400
Santa Ana, California 92707-5765
(714) 427-3000
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
---------------
David G. Moore
Corinthian Colleges, Inc.
6 Hutton Centre Drive, Suite 400
Santa Ana, California 92707-5765
(714) 427-3000
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
Copies To:
<TABLE>
<S> <C>
David A. Krinsky Jonathan Layne
O'Melveny & Myers LLP Gibson, Dunn & Crutcher LLP
610 Newport Center Drive, Suite 1700 333 South Grand Avenue, 46th Floor
Newport Beach, California 92660 Los Angeles, California 90071
(949) 760-9600 (213) 229-7000
</TABLE>
---------------
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, please 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. [_] ______
---------------
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this
Registration Statement shall thereafter become effective in accordance with
Section 8(a) of the Securities Act of 1933 or until the Registration Statement
shall become effective on such date as the Commission, acting pursuant to said
Section 8(a), may determine.
================================================================================
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+Information contained herein is subject to completion or amendment. A +
+registration statement relating to these securities has been filed with the +
+Securities and Exchange Commission. These securities may not be sold nor may +
+offers to buy be accepted prior to the time the registration statement +
+becomes effective. This prospectus shall not constitute an offer to sell or +
+the solicitation of an offer to buy nor shall there be any sale of these +
+securities in any State in which such offer, solicitation or sale would be +
+unlawful prior to registration or qualification under the securities laws of +
+any such State. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED FEBRUARY 1, 1999
PROSPECTUS
2,700,000 Shares
[LOGO OF CORINTHIAN COLLEGES, INC. APPEARS HERE]
Common Stock
--------
All of the 2,700,000 shares of Common Stock offered hereby (the "Offering")
are being sold by Corinthian Colleges, Inc. ("CCi" or the "Company"). Prior to
the Offering, there has not been a public market for the Common Stock of the
Company. It is currently estimated that the initial public offering price of
the Common Stock will be between $16.00 and $18.00 per share. See
"Underwriting" for a discussion of factors to be considered in determining the
initial public offering price. Application has been made to have the Common
Stock approved for quotation on the Nasdaq Stock Market's National Market under
the symbol "COCO."
A portion of the proceeds will be used to repay $5.0 million of subordinated
debt and redeem preferred stock in the approximate amount of $2.2 million and
pay cumulative dividends on convertible preferred stock in the approximate
amount of $0.3 million to Primus Capital Fund III Limited Partnership
("Primus") and Banc One Capital Partners LLC ("Banc One"), both of whom are
significant holders of Company Common Stock.
--------
See "Risk Factors" commencing on page 8 for a discussion of material risks
that should be considered by prospective purchasers of the Common Stock offered
hereby.
--------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
===========================================================================
Underwriting
Price to Discounts and Proceeds to
Public Commissions(1) Company(2)
- ---------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share $ $ $
- ---------------------------------------------------------------------------
Total(3) $ $ $
===========================================================================
</TABLE>
(1) For information regarding indemnification of the Underwriters, see
"Underwriting."
(2) Before deducting expenses estimated at $2,000,000, all of which is
payable by the Company.
(3) Certain stockholders of the Company have granted the Underwriters a 30-
day option to purchase up to an aggregate of 405,000 additional shares of
Common Stock, solely to cover over-allotments, if any. See
"Underwriting." If such options are exercised in full, the total Price to
Public, Underwriting Discounts and Commissions, Proceeds to Company and
Proceeds to Selling Securityholders will be $ , $ ,
$ and $ , respectively.
--------
The shares of Common Stock are being offered by the several Underwriters
named herein, subject to prior sale, when, as and if accepted by them and
subject to certain conditions. It is expected that the certificates for the
shares of Common Stock offered hereby will be available for delivery on or
about , 1999, at the office of Salomon Smith Barney Inc., 333 West
34th Street, New York, New York 10001.
--------
Salomon Smith Barney
Credit Suisse First Boston
Piper Jaffray Inc.
, 1999
<PAGE>
EDGAR DESCRIPTION OF PROSPECTUS COLORWORK
Two Corinthian Colleges students at graduation
The Company intends to furnish its stockholders annual reports containing
audited financial statements and, upon request, will make available copies of
quarterly reports for the first three quarters of each fiscal year containing
unaudited financial information.
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE SECURITIES
OFFERED HEREBY, INCLUDING BY OVER-ALLOTMENT, ENTERING INTO STABILIZING BIDS,
EFFECTING SYNDICATE COVERING TRANSACTIONS AND IMPOSING PENALTY BIDS. FOR A
DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
<PAGE>
EDGAR DESCRIPTION OF
PROSPECTUS COLORWORK GATE]1
DIPLOMA COLLEGES
With a principal focus on health-care and
electronics, the Company's Corinthian
Schools, Inc. (CSi) division operates 17
colleges in 8 states. CSi students prepare for
entry level careers in the medical, dental,
business and technology fields.
According to the U.S, Department of Labor,
these fields are likely to experience rapid
growth over the next several years. Graduates
receive a diploma upon successful comple-
tion of their program of study.
Photograph of front of Bryman College building.
Photograph of medical assisting student
checking the blood pressure of a patient.
Photograph of dental assisting student
performing dental checkup.
Photograph of student performing an eye exam
on patient.
Photograph of student studying X-rays.
Photograph of students looking through
microscopes.
Photograph of electronics technician student.
CORE CURRICULUM
More than 6,100 students are currently train-
ing at CSi campuses for rewarding careers as
medical assistants, dental assistants, medical
office managers, electronic technicians and
business operation specialists.
Most programs can be completed in less
than one year allowing students to transition
from the classroom to the workplace with the
knowledge and skills today's employers expect.
<PAGE>
EDGAR DESCRIPTION OF
PROSPECTUS COLORWORK GATE]2
DEGREE GRANTING COLLEGES
Degree programs in accounting, business,
computers and healthcare are offered at
the Company's Rhodes Colleges, Inc.
(RCi) division, operating 18 colleges
nationwide. The current robust U.S.
economy has fueled the demand for skilled
professionals who possess the requisite
knowledge to function effectively in the
rapidly changing business environment.
Graduates earn associate, baccalaureate
or master's degrees upon successful
completion of their program of study.
Photograph of front of FMU-Orlando College.
Photograph of students in a computer class.
Photograph of two students in a film
production studio.
Photograph of woman in presentation
pointing at information on easel.
Photograph of two men looking at book
in library.
CORE CURRICULUM
More than 9,700 students are
currently pursuing degree
programs in accounting, business
administration, computer
information systems, travel and
tourism, medical assisting and
paralegal.
Many of these students are
working adults and attend
classes in the evening in order
to advance in their current
careers.
Photograph of front of Parks College
building.
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by, and should be read in
conjunction with, the more detailed information, including "Risk Factors" and
Consolidated Financial Statements, including the notes thereto, appearing
elsewhere in this Prospectus. Unless otherwise indicated, all information in
this Prospectus (i) reflects the consummation of the Transactions, including a
44.094522 for 1 stock split of the Common Stock (as defined in "The
Transactions") and (ii) assumes that the Underwriters' over-allotment options
are not exercised. Throughout this Prospectus, except where the context
otherwise requires, the term "Company" refers collectively to Corinthian
Colleges, Inc. and its subsidiaries, including all of their schools and
campuses; the terms "school," "college" or "campus" refer to a single location.
The Company's fiscal year ends on June 30.
The Company
Based on revenues, the Company is one of the largest private, for-profit
post-secondary education companies in the United States, with more than 15,900
students as of November 30, 1998. The Company operates 35 colleges in 16
states, including nine in California and eight in Florida, and services the
large and growing segment of the population seeking to acquire career-oriented
education to become qualified and marketable in today's increasingly demanding
workplace environment. The Company's schools generally enjoy long operating
histories and strong franchise value in their local markets. The median
operating history for the Company's colleges is 36 years, including nine
colleges with operating histories over 80 years. For the year ended June 30,
1998, the Company had net revenues of $106.5 million.
The Company offers a variety of master's, bachelor's and associate's degrees
and diploma programs through two operating divisions. The Company's Corinthian
Schools division ("CSi") operates diploma-granting schools in the allied
healthcare and electronics technology fields and seeks to provide its students
a solid base of training for a variety of entry-level positions. The Company's
Rhodes Colleges division ("RCi") operates degree-granting schools principally
in the business area and provides its students with professional education to
succeed in today's increasingly competitive workplace. Both divisions receive
strategic direction and operational support from senior management and
headquarters staff.
The Company's management team is led by David Moore, Paul St. Pierre, Frank
McCord, Lloyd Holland and Dennis Devereux, who have 21, 20, 4, 11 and 10 years
of experience, respectively, in post-secondary education. See "Management."
Since its founding in 1995, the Company has grown rapidly and improved
enrollments and profitability. In order to capitalize on management's extensive
industry experience, the Company has implemented a regional management
structure supported by the Company's proprietary management information system
(the Schools Automation System, or "SAS"). SAS provides regional managers with
real time access to key information from any location and links all the
colleges and regional offices to corporate headquarters, providing senior
management with daily access to marketing reports, lead tracking, academic
records, grades, transcripts and placement information. At their respective
acquisition dates, the Company's colleges, in total, had 12,226 students. Due
to the Company's effective management of leads and other marketing resources,
as of November 30, 1998 the Company's colleges had 15,912 students,
representing a combined enrollment growth of 30% since their respective
acquisitions by the Company.
The Post-Secondary Education Industry
The market for post-secondary education is large and growing, exceeding $220
billion and 14 million students in the 1996-97 school year. The Company
believes that the demand for career-oriented post-secondary education will
increase during the next several years as a result of certain demographic,
economic and social trends, including: (i) an increased demand for skilled
labor, with an expected 36 million jobs requiring skilled labor projected to be
created between 1991 and 2000; (ii) a projected 17% growth in the annual number
of high school graduates from 1995 to 2005 (from 2.5 million to 3.0 million);
(iii) an expanded number of adults
3
<PAGE>
(persons aged 25 and older) enrolling in post-secondary education, with a
projected increase to 6.4 million by 2007; (iv) the significant and measurable
income premium attributable to post-secondary education; and (v) budgetary
constraints at traditional colleges and universities.
Operating Strategy
The Company has improved the enrollment and profitability of its schools
through the application of its operating strategy developed through
management's extensive industry experience. The Company believes that its
ability to continue to effectively and professionally manage its schools
provides it with an important competitive advantage. Key elements of the
Company's strategy include:
Focus on Attractive Markets. The Company selects its schools and designs its
educational programs to exploit favorable demographic and economic trends. The
Company offers programs in the rapidly growing fields of healthcare, business
and technology and seeks to locate its colleges to achieve operating
efficiencies and strong competitive positions in attractive and growing local
markets.
Centralization of Key Functions. In order to capitalize on the experience of
its senior management, the Company has established a regional management
organization to divide responsibilities among school administrators, regional
administrators and senior management. Local school administrators are
responsible for day-to-day management, while the corporate team centrally
provides certain key services which the Company believes enable it to achieve
significant operating efficiencies.
Emphasizing Student Outcomes. The Company believes that strong student
outcomes are a critical driver of its long term success. The Company devotes
substantial resources to maintaining and improving its retention and placement
rates, including implementing a variety of student services such as tutoring,
counselling and extensive placement assistance. As a result of the Company's
efforts, 83% of the Company's graduates who were available for placement in
fiscal 1997 were placed in jobs within six months of their graduation date.
Creating a Supportive and Friendly Environment. The Company views its
students as customers and seeks to provide a supportive and convenient learning
environment. The Company operates its colleges year-round, offers flexible
scheduling, and encourages personal interaction between faculty and students.
Growth Strategy
The Company intends to strengthen its position as a leading provider of
private, for-profit career-oriented post-secondary education in the United
States. To accomplish this objective, the Company will pursue the following
growth strategies:
Enhance Growth at Existing Campuses. The Company intends to enhance growth at
existing campuses by (i) continuing to develop and expand its curriculum based
on market research and the recommendations of its faculty, employees and
industry advisory board members, (ii) employing an integrated marketing program
utilizing an extensive direct response advertising campaign delivered through
television, radio, newspaper, direct mail and the Internet, and (iii)
continuing to systematically relocate selected colleges that are capacity
constrained to larger, enhanced facilities upon lease expiration.
Establish Additional Locations. The Company anticipates creating "Additional
Locations" of its existing institutions to enter new geographic markets and to
create additional capacity in existing markets. The Company seeks markets with
a high enrollment potential and significant placement opportunities that will
enable it to effectively leverage its existing curriculum, management and
marketing infrastructure.
Expand Service Areas and Delivery Models. The Company seeks to expand its
presence in the government and corporate training market and to pursue distance
learning opportunities.
4
<PAGE>
Selectively Acquire Accredited Proprietary Colleges. The Company is
selectively seeking to acquire additional institutions that can benefit from
its operational expertise. The Company will generally seek to acquire schools
that possess: (i) complementary or attractive new curricula, (ii) locations in
or near metropolitan areas, and (iii) strong franchise value (name recognition
or marketability).
Company History
The Company was founded in February 1995 by David Moore, Paul St. Pierre,
Frank McCord, Dennis Devereux and Lloyd Holland, the five senior managers of
what was then National Education Centers, Inc., ("NECI"), a subsidiary of
National Education Corporation ("NEC"), to capitalize on opportunities in
career- oriented post-secondary education. Between June and December 1995, the
Company acquired 16 of NECI's colleges, each of which was a diploma granting
school with a focus in healthcare (the "NEC Acquisition"). In July and
September 1996, the Company completed two single campus acquisitions of
additional diploma granting schools. 17 of these 18 colleges (one has since
been closed) today comprise the Company's CSi division.
In October of 1996, the Company completed its second multi-campus acquisition
through the purchase of 18 campuses from Phillips Colleges, Inc. (the "Phillips
Acquisition"). Each of these colleges is a degree granting school with a
primary focus on degrees in business. These colleges currently comprise the
Company's RCi division.
The Company's principal executive offices are located at 6 Hutton Centre
Drive, Suite 400, Santa Ana, California 92707 and its telephone number is (714)
427-3000.
Recent Developments
The Company's unaudited consolidated financial results for the six months
ended December 31, 1998 compared to its unaudited consolidated financial
results for the same period in 1997 are summarized below: (in thousands except
per share and student population data):
<TABLE>
<CAPTION>
Six Months Ended
December 31,
-----------------
1997 1998
-------- --------
<S> <C> <C>
Statement of Operations Data:
Net revenues............................................ $ 50,786 $ 63,270
Income from operations.................................. 2,145 4,967
Net income.............................................. 284 1,813
Net income per common share (diluted)................... $ 0.03 $ 0.21
Other Data:
EBITDA.................................................. $ 3,627 $ 6,649
Student population at end of period..................... 13,591 15,073
</TABLE>
The Offering
<TABLE>
<C> <S>
Common Stock offered by the Company..... 2,700,000 shares
Common stock to be outstanding after the
Offering............................... 10,345,627 shares
Use of proceeds......................... Repayment of certain indebtedness of
approximately $30.3 million;
redemption of outstanding preferred
stock of approximately $2.5 million;
and cash of approximately $7.8
million for general corporate
purposes. See "Use of Proceeds."
Proposed Nasdaq National Market symbol.. "COCO"
Risk factors............................ See "Risk Factors" for a discussion
of material risks which should be
considered in evaluating an
investment in the Common Stock
offered by this Prospectus.
</TABLE>
5
<PAGE>
Summary Consolidated Financial and Other Data
The following table sets forth certain consolidated financial and other
operating data for the Company. This information should be read in conjunction
with "Management's Discussion and Analysis of Financial Condition and Results
of Operations," the Company's Consolidated Financial Statements and notes
thereto and other financial information included elsewhere in this Prospectus.
See "Selected Historical Consolidated Financial and Other Data" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
<TABLE>
<CAPTION>
Three Months Ended
Years Ended June 30, September 30,
------------------------------- --------------------
1996 1997 1998 1997 1998
--------- --------- --------- --------- ---------
(Dollars in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Net revenues(1)....... $ 31,498 $ 77,201 $ 106,486 $ 24,346 $ 30,296
Operating expenses:
Educational services. 18,594 50,568 65,927 15,412 17,978
General and
administrative...... 3,298 8,101 10,777 2,561 3,289
Marketing and
advertising......... 7,562 19,000 24,268 6,303 7,636
--------- --------- --------- --------- ---------
Total operating
expenses............ 29,454 77,669 100,972 24,276 28,903
--------- --------- --------- --------- ---------
Income (loss) from
operations........... 2,044 (468) 5,514 70 1,393
Interest expense, net. 274 2,524 3,305 808 903
--------- --------- --------- --------- ---------
Income (loss) before
income taxes......... 1,770 (2,992) 2,209 (738) 490
Provision (benefit)
for income taxes..... 722 (1,107) 988 (311) 195
--------- --------- --------- --------- ---------
Net income (loss)..... $ 1,048 $ (1,885) $ 1,221 $ (427) $ 295
========= ========= ========= ========= =========
Income (loss)
attributable to
common stockholders:
Net income (loss).... $ 1,048 $ (1,885) $ 1,221 $ (427) $ 295
Accrued dividends on
preferred stock..... (111) (118) (365) (31) (132)
--------- --------- --------- --------- ---------
Income (loss)
attributable to
common
stockholders...... $ 937 $ (2,003) $ 856 $ (458) $ 163
========= ========= ========= ========= =========
Net income (loss) per
common share:
Basic ............... $ 0.21 $ (0.41) $ 0.16 $ (0.09) $ 0.03
========= ========= ========= ========= =========
Diluted.............. $ 0.15 $ (0.41) $ 0.12 $ (0.09) $ 0.02
========= ========= ========= ========= =========
Weighted average
number of common
shares outstanding:
Basic................ 4,409,452 4,895,682 5,236,224 4,960,634 5,236,224
========= ========= ========= ========= =========
Diluted.............. 6,338,588 4,895,682 7,125,235 4,960,634 7,326,887
========= ========= ========= ========= =========
Other Data:
EBITDA(2)............. $ 2,726 $ 1,602 $ 8,573 $ 801 $ 2,214
Cash flow provided by
(used in):
Operating activities. 997 995 (3,373) (442) (640)
Investing activities. (4,295) (30,973) (1,677) (434) (716)
Financing activities. 3,903 30,975 4,630 (429) (832)
Capital expenditures,
net(3)............... 1,046 5,936 1,927 434 716
Number of colleges at
end of period........ 16 36 35 36 35
Student population at
end of period........ 4,938 12,820 13,992 13,414 15,034
Starts during the
period(4)............ 5,834 13,673 18,261 5,026 5,795
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
September 30, 1998
----------------------
Pro Forma
Actual As Adjusted(6)
------- --------------
<S> <C> <C>
Balance Sheet Data:
Cash, cash equivalents and restricted cash(5).......... $ 973 $ 8,798
Working capital........................................ 318 10,643
Total assets........................................... 60,410 67,435
Long-term debt, net of current maturities.............. 31,499 5,999
Redeemable Preferred Stock............................. 2,200 --
Convertible Preferred Stock............................ 5,274 --
Total stockholders' equity............................. 1,140 44,888
</TABLE>
- --------
(1) Represents student tuition and fees and book store sales, net of refunds.
Year ended June 30, 1996 includes a non-recurring management fee of
approximately $2.1 million earned by the Company for managing certain
colleges owned by NECI during the first six months of that year.
(2) EBITDA equals earnings before interest expense, taxes, depreciation and
amortization (including amortization of deferred financing costs). EBITDA
is presented because the Company believes it allows for a more complete
analysis of the Company's results of operations. EBITDA should not be
considered as an alternative to, nor is there any implication that it is
more meaningful than, any measure of performance or liquidity as
promulgated under GAAP.
(3) Year ended June 30, 1997 includes approximately $3.4 million for real
estate acquired in connection with the Phillips Acquisition.
(4) Represents the new students starting school during the periods presented.
(5) Includes $760,000 of restricted cash at September 30, 1998.
(6) Pro forma as adjusted gives effect to the Transactions, the Offering and
the application of the net proceeds thereof, prepayment premium of
approximately $1,393,000 and the write-off of deferred financing costs of
approximately $480,000, net of income tax benefit of approximately
$1,249,000.
7
<PAGE>
RISK FACTORS
Investment in the shares of Common Stock offered hereby involves a high
degree of risk. In addition to the other information contained in this
Prospectus, prospective investors should consider carefully the following risk
factors in evaluating the Company and its business before purchasing any
Common Stock offered hereby. This Prospectus contains certain forward-looking
statements that are based on the beliefs of, as well as assumptions made by
and current information available to, the Company's management. Words such as
"believe," "anticipate," "intend," "estimate," "expect" and other similar
expressions are intended to identify such forward-looking statements, but are
not the exclusive means of identifying such statements. The cautionary
statements made in this Prospectus should be read as being applicable to
related forward-looking statements whenever they appear on this Prospectus.
The Company's results could differ materially from those discussed here should
one or more of these risks or uncertainties materialize, or should the
underlying assumptions prove to be incorrect. Factors that could cause or
contribute to such differences include those discussed below as well as those
discussed elsewhere herein.
Substantial Dependence on Student Financial Aid; Potential Adverse Effects of
Governmental Regulation
Students attending the Company's schools finance their education through a
combination of family contributions, individual resources (including earnings
from full or part-time employment) and government-sponsored financial aid. The
Company estimates that approximately 77% of its students, as of June 30, 1998,
received some federal Title IV financial aid (as defined herein). For fiscal
1998, approximately 72% of the Company's revenue (on a cash basis) was derived
from federal Title IV Programs (as defined herein).
In connection with the receipt by its students of government-sponsored
financial aid, the Company is subject to extensive regulation by governmental
agencies and licensing and accrediting bodies. In particular, the Higher
Education Act of 1965, as amended (the "HEA"), and the regulations issued
thereunder by the United States Department of Education (the "DOE"), subject
the Company to significant regulatory scrutiny in the form of numerous
standards that schools must satisfy in order to participate in the various
federal student financial aid programs under Title IV of the HEA (the "Title
IV Programs"). Under the HEA, regulatory authority is divided among each of
the following three components: (i) the federal government, which acts through
the DOE; (ii) the accrediting agencies recognized by the DOE; and (iii) state
higher education regulatory bodies. Among other things, the HEA and its
implementing regulations require the Company's institutions to: (i) maintain a
rate of default by its students on federally guaranteed or funded student
loans that is below a specified rate, (ii) limit the proportion of its revenue
derived from the Title IV Programs, (iii) establish certain financial
responsibility and administrative capability standards, (iv) prohibit the
payment of certain incentives to personnel engaged in student recruiting and
admissions activities and (v) achieve stringent completion and placement
outcomes for short-term programs.
Certain of the foregoing standards must be complied with on an institutional
basis. For purposes of those standards, the regulations define an institution
as a main campus and its additional locations, if any. Under this definition,
each of the Company's campuses is a separate institution with the following
exceptions: Bryman College in New Orleans, Louisiana is an additional location
of Bryman College (South) in San Jose, California; the Florida Metropolitan
University ("FMU") Campuses in Melbourne, Florida and Orlando, Florida (South)
are additional locations of FMU, Orlando (North); FMU in Brandon, Florida is
an additional location of FMU in Tampa, Florida; FMU in Lakeland, Florida is
an additional location of FMU in Pinellas, Florida; Parks College (South) in
Denver, Colorado is an additional location of Parks College (North) in Denver;
and Western Business College in Vancouver, Washington is an additional
location of Western Business College in Portland, Oregon (the Western Business
College, Vancouver campus, albeit an additional location, is not accounted for
separately from the main campus in Portland; unique to the Vancouver campus,
all students must complete part of their course of study at the main campus in
Portland).
The regulations, standards and policies of the regulatory agencies
frequently change, and changes in, or new interpretations of, applicable laws,
regulations or standards could have a material adverse effect on the
8
<PAGE>
Company's accreditation, authorization to operate in various states,
permissible activities, receipt of funds under Title IV Programs and/or costs
of doing business. The Company's failure to maintain or renew any required
regulatory approvals, accreditations or authorizations would have a material
adverse effect on the Company's business, results of operations and financial
condition. See "Financial Aid and Regulations--Federal Oversight of the Title
IV Programs."
Certain significant regulatory factors that could adversely affect the
Company are discussed below:
Student Loan Defaults. Under the HEA, an institution may lose its
eligibility to participate in some or all Title IV Programs if its current or
former students default on the repayment of their federally guaranteed student
loans (known as "Cohort Default Rates" or "CDR") at a rate exceeding certain
levels. Under the Federal Family Education Loan (the "FFEL," formerly the
Guaranteed Student Loan) program, any institution that has Cohort Default
Rates of 25% or greater for three consecutive fiscal years will no longer be
eligible to participate in the FFEL program or the William D. Ford Federal
Direct Loan Program (the "FDL") for the remainder of the federal fiscal year
in which the determination of ineligibility is made and for the two subsequent
federal fiscal years. In addition, if an institution's default rate for loans
under the FFEL program is 25% or greater in any fiscal year or exceeds 15% for
the Federal Perkins Loan ("Perkins") program for any federal award year, the
DOE may determine that the institution lacks administrative capability and
place the institution on provisional certification status for up to three
years. On October 1, 1998, amendments to the HEA became effective which
reauthorized the Title IV programs (the "1998 Amendments"). Among the changes
made by the 1998 Amendments is a provision that an institution which becomes
ineligible to participate in the loan programs because of default rates equal
to or in excess of applicable thresholds will also become ineligible to
participate in all Title IV programs, including the Pell Grant Program. See
"Financial Aid and Regulations--Federal Oversight of the Title IV Programs--
Cohort Default Rates" and "--Regulatory Consequences of a Change in Ownership
Resulting in a Change of Control."
At the time the Company purchased the CSi schools from NEC in 1995, 11
schools (one of which was closed by the Company after acquisition) had Cohort
Default Rates exceeding 25% for three consecutive years. Subsequent to the
publication of the fiscal 1994 CDR's, three of the eleven schools received
1994 rates below 25% as a result of the Company's appeals and default
management efforts. Those schools never lost eligibility for FFEL funding. As
a result of the Cohort Default Rate at the remaining schools, the DOE
terminated FFEL funding for six of those schools in 1997 (a seventh college,
Skadron College in San Bernardino, California, had lost eligibility to
participate in FFEL in June 1994). Pursuant to extended negotiations with the
DOE regarding reinstatement of eligibility for these campuses, the Company
received notice in June 1998 that the DOE proposed to reinstate three of the
seven colleges provided that the Company agree not to pursue remedies for
reinstatement for the remaining four campuses. The Company has agreed to the
terms of the proposal and the DOE has reinstated eligibility to participate in
the FFEL program for the three campuses. Of the remaining four campuses, NIT
in Wyoming, Michigan will be eligible for reinstatement in 1999, Bryman
College in New Orleans, Louisiana and Bryman College in San Jose (South),
California will be eligible for reinstatement in 2000. Pursuant to a
successful mitigating circumstances appeal of its 1996 rate, Skadron College
in San Bernardino, California will also be eligible for reinstatement in 2000.
As soon as the six schools were terminated from the FFEL program in 1997, the
Company expanded its internal loan program to fund internally (through
installment tuition contracts) part of the tuition of students at those
schools. During the 1997-98 award year (the most recent year in which default
rates have been pre-published), only two of the Company's institutions (and
one of the four remaining suspended schools, San Bernardino) had a Cohort
Default Rate in excess of 25%. Including the fiscal 1996 rate, only two of the
Company's colleges (Gardena and San Bernardino) have a Cohort Default Rate in
excess of 25% for each of the last two reporting years. Although the Company
has instituted a default management strategy, there can be no guarantee that
the Company or its institutions will be able to maintain their Cohort Default
Rates at, or below, their current level, or that the Cohort Default Rates will
never exceed 25%. Should a material number of the Company's schools lose FFEL
funds due to their Cohort Default Rate, it would have a material adverse
effect on the Company's business, results of operations and financial
condition. See "Financial Aid and Regulations--Federal Oversight of Title IV
Schools Program."
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Significant School Revenues From Title IV Programs. Under what is commonly
referred to as the "85/15 Rule," an institution would be disqualified from
participation in Title IV Programs if more than 85% of its revenues in any
year was derived from Title IV Programs. The 1998 Amendments increased the
proportion of revenues that an institution may derive from the Title IV
programs to 90%. For fiscal 1998, six of the Company's current institutions
derived more than 80% of their revenue from Title IV Programs, but no school's
revenue from Title IV Programs was more than 85% of its total revenue. Since
the DOE adopted the 85/15 Rule in 1994, none of the Company's individual
institutions have exceeded the 85% threshold. Should any material number of
the Company's institutions be deemed ineligible to participate in Title IV
Programs because their revenues from such programs exceed the applicable
thresholds, it would have a material adverse effect on the Company's business,
results of operations and financial condition. See "Financial Aid and
Regulations--Federal Oversight of Title IV Program."
Failure to Demonstrate Administrative Capability. DOE regulations specify
extensive criteria an institution must satisfy to establish that it has the
requisite "administrative capability" to participate in Title IV Programs.
These criteria require, among other things, that the institution comply with
all applicable Title IV Program regulations, have capable and sufficient
personnel to administer the Title IV Programs, have acceptable methods of
defining and measuring the satisfactory academic progress of its students,
provide financial aid counselling to its students, and timely submit all
reports and financial statements required by the regulations. The failure by
an institution to satisfy any of these criteria may lead the DOE to determine
that the institution lacks administrative capability and, therefore, (i)
require the repayment of Title IV Program funds, (ii) transfer the institution
from the "advance" system of payment of Title IV Program funds to the
"reimbursement" system of payment or cash monitoring; (iii) place the
institution on provisional certification status; or (iv) commence a proceeding
to impose a fine or to limit, suspend or terminate the participation of the
institution in Title IV Programs. Should any material number of the Company's
institutions be limited in their access to, or lose, Title IV Program funds
due to their failure to demonstrate administrative capability, it would have a
material adverse effect on the Company's business and its financial condition.
See "Financial Aid and Regulations--Federal Oversight of Title IV Program."
Potential Loss of Student Financial Aid Due to Failure to Meet Financial
Responsibility Standards. The HEA and its implementing regulations establish
specific standards of financial responsibility that must be satisfied in order
to participate in the Title IV Programs. Under standards applicable prior to
July 1, 1998, an institution was required to: (i) satisfy an acid test ratio
(defined as the ratio of cash, cash equivalents and current accounts
receivable to current liabilities) of at least 1:1 at the end of each fiscal
year, (ii) have a positive tangible net worth at the end of each fiscal year,
and (iii) not have a cumulative net operating loss during its two most recent
fiscal years that results in a decline of more than 10% of the institution's
tangible net worth at the beginning of that two-year period. In order to make
this determination, the DOE required an institution to annually submit audited
financial statements. An institution that is determined by the DOE not to meet
any one of the standards of financial responsibility is nonetheless entitled
to participate in the Title IV Programs if it can demonstrate that it is
financially responsible on an alternative basis (including by posting a surety
or an irrevocable letter of credit). See "Financial Aid and Regulations--
Federal Oversight of the Title IV Programs--Financial Responsibility
Standards."
In November 1997, the DOE published new regulations regarding financial
responsibility that took 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 previous regulations, whichever are more
favorable to the Company. Under the new regulations, the DOE will calculate
three financial ratios for an institution (an equity ratio, a primary reserve
ratio, and a net income ratio), 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 (which is 1.5) but above a designated
threshold level (the "Intermediate Zone," which is 1.0 to 1.4), 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 (below 1.0) or is in the Intermediate Zone for more
than three consecutive years, the institution will be required to post a
letter of credit in favor of the DOE.
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These new financial responsibility regulations provide a "transition year
alternative" which is available for fiscal years beginning between July 1,
1997 and June 30, 1998 (which includes the Company's 1998 fiscal year). Under
that alternative, an institution may choose to have its financial
responsibility measured under the previous standards rather than the new
standards if the previous standards are more favorable. The Company believes
that the DOE will also consider the new standards or the previous standards,
whichever are more favorable to the Company, for its fiscal 1997 financial
statements since those statements were filed in December 1997, subsequent to
publication of the new regulations in November 1997. Under the new
regulations, only one of the Company's schools (FMU--Ft. Lauderdale) would not
be considered to be financially responsible based on the new required
calculations. However, this college would nevertheless be considered
financially responsible by virtue of being on the reimbursement program and
being covered by the existing letter of credit for RCi. Two of the Company's
schools (Blair College in Aurora, Colorado and NIT in Wyoming, Michigan) are
in the Intermediate Zone and thus meet financial responsibility tests under
additional monitoring and reporting procedures for up to three years. The
Company's two operating divisions both meet the financial responsibility
criteria under the new regulations, but the Company, on a consolidated basis,
does not meet the standards for 1997.
Based on the Company's 1998 audited financial statements, the Company's
calculations show that all of its schools exceed the requirements for
financial responsibility on an individual basis, with composite scores from
1.8 to 3.0. Also, the Company's two operating divisions both meet the
requirements, with composite scores over 2.0. However, as in 1997, the
Company, on a consolidated basis, does not meet the new standards, with a
composite score of (0.2), because of the debt incurred and the intangibles
acquired at the parent Company level in connection with the Phillips
Acquisition. The Company expects to meet the new standards on a consolidated
basis after giving effect to the Offering, and the Company currently meets
such standards on an alternative basis by having previously posted a letter of
credit with the DOE.
In reviewing the Company's two major acquisitions, the DOE measured
financial responsibility differently for each acquisition. In the NEC
Acquisition in 1995, the DOE reviewed the financial statements of the acquired
institutions only, while in the Phillips Acquisition in 1996, the DOE reviewed
the financial statements of both the acquired institutions and the Company. At
the time of the NEC Acquisition, and subsequently, at the time of the
acquisitions of Repose, Inc. (the "Repose Acquisition") and Concorde Career
Colleges, Inc. (the "Concorde Acquisition"), all of the CSi colleges met the
financial responsibility requirements set forth by the DOE. At the time of the
Phillips Acquisition, the DOE elected to review the financial statements of
both the institutions and the Company and, as a result of the intangibles
associated with the purchase of the colleges, determined that the Company did
not meet the tangible net worth requirement. As a result of negotiations with
the DOE prior to the Phillips Acquisition, the DOE and the Company agreed to
the posting of an irrevocable letter of credit in favor of the DOE in the
amount of $1.0 million. In addition, the 18 colleges would remain on the
reimbursement program (they had been placed on reimbursement under prior
ownership). The need for and sufficiency of the letter of credit are scheduled
to be reviewed annually in connection with the Company's submission to the DOE
of its annual audited financial statements. Subsequent to the submission of
the Company's 1997 annual audited financial statements, the letter of credit
was increased to $1.5 million.
Although the above letter of credit is the only outstanding alternative
financial responsibility requirement currently in effect, based on the
Company's 1997 audited financial statements, eight of the Company's colleges
failed to meet one or more of the financial responsibility tests. Three of the
colleges failed to meet the acid test ratio (Blair College in Colorado
Springs, Colorado; FMU in Melbourne, Florida; and FMU in Fort Lauderdale,
Florida) and five of the colleges failed to meet the profitability test
(Bryman College in Seatac, Washington; NIT in Wyoming, Michigan; Bryman
College (North) in San Jose, California; Parks College in Aurora, Colorado;
and Springfield College in Springfield, Missouri). In addition, the Company,
on a consolidated basis, failed to meet the financial responsibility tests.
However, at the CSi operating company level, and at the RCi operating company
level, all financial responsibility tests were met. Since RCi is already on
reimbursement, and since the Company has posted a letter of credit as required
by the regulations, by definition the Company believes that it currently meets
financial responsibility standards as set forth by the DOE. There is no
assurance, however, that the DOE will not impose additional requirements for
letters of credit based upon its review of the Company's
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financial statements. Such actions, or other similar actions, could have a
material adverse effect on the Company's business, results of operations and
financial condition, and on its ability to generate sufficient liquidity to
continue to fund growth in its operations and purchase other institutions.
(See "Management's Discussion and Analysis of Financial Condition and Results
of Operations--Liquidity and Capital Resources").
In accordance with applicable law, the DOE will be required to rescind the
letter of credit and any related requirements if the Company and its colleges
demonstrate that they satisfy the standards of financial responsibility, using
accounting treatments acceptable to the DOE. Further, the Company believes
that in the conduct of its next review of the financial responsibility of the
Company and its colleges, the DOE will consider the financial information
reflecting the results of this Offering, as well as the 1998 fiscal year
audited financial statements of each entity. The Company expects to receive
net proceeds from the Offering of approximately $40.7 million (at an assumed
Offering price of $17.00 per share). (See "Use of Proceeds".) Management
believes that the Company's post-Offering financial position will enable the
Company to satisfy the DOE's standards of financial responsibility on a
Company-wide basis. However, there can be no assurance that all of the
Company's colleges will meet each financial responsibility test in the future
or that the DOE would not require the Company to post a letter of credit or
take other similar action with respect to an individual college which did not
meet those tests.
Under a separate standard of financial responsibility, if an institution has
made late refunds to students in its prior two years, the institution is
required to post a letter of credit in favor of the DOE in an amount equal to
25% of the total Title IV Program refunds paid by the institution in its prior
fiscal year. As of July 1, 1997, this standard has been modified to exempt an
institution if it has not been found to make late refunds to 5% or more of its
students in either of the two most recent fiscal years and has not been cited
for a reportable condition or material weakness in its internal controls
related to late refunds in either of its two most recent fiscal years. Based
on this standard, the Company currently has six outstanding letters of credit
on behalf of CSi institutions in the aggregate amount of approximately
$150,000. Seven additional RCi colleges have been cited for late refunds in
their annual audits. The Company believes that the existing $1.5 million
letter of credit issued in favor of the DOE on behalf of the RCi colleges
satisfies this standard of financial responsibility. The DOE, however, may
require additional letters of credit for these institutions in accordance with
the regulation. (See "Business--Title IV Regulation".)
Regulatory Consequences of a Change in Ownership Resulting in a Change of
Control. Upon a "change of ownership" of an institution resulting in a "change
in control," as defined in the HEA and applicable regulations, that
institution becomes ineligible to participate in Title IV Programs. In such
event, an institution may receive and disburse only previously committed Title
IV Program funds to its students until it has applied for and received
recertification from the DOE to participate under such institution's new
ownership. Approval of an application for recertification must be based upon a
determination by the DOE that the institution under its new ownership is in
compliance with the requirements for institutional eligibility. The time
required to act on such an application can vary substantially and may take
several months. As a result of the change in ownership at the time of the NEC
Acquisition and the Phillips Acquisition, all of the Company's schools are
currently under provisional certification status pursuant to standard DOE
procedure when an institution undergoes a change of control. Provisional
certification does not limit an institution's access to Title IV Program
funds, but does subject the institution to closer review by the DOE and may
subject the institution to summary adverse action if it violates other Title
IV Program requirements.
The 1998 Amendments allow for the provisional certification of an
institution that has undergone a change of ownership that results in a change
of control so that Title IV Program funds may not be interrupted. To qualify
for such provisional certification, the institution must submit a "materially
complete" application for recertification within 10 business days of the
transaction. Such provisional certification would continue until the
application is acted upon by the DOE. This provision of the 1998 Amendments is
not self-executing and will be subject to the promulgation of regulations by
the DOE which are not likely to take effect until July 1, 2000.
Under the HEA and its implementing regulations, a change of ownership
resulting in a change in control would occur upon the transfer of a
controlling interest in the voting stock of an institution or such
institution's
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parent corporation. If a corporation, such as the Company, is neither publicly
traded nor closely held, the regulations provide that a change in ownership
resulting in a change of control occurs when a person's legal or beneficial
ownership either rises above or falls below 25% of the voting stock of the
corporation and the person loses or gains the ability to direct the management
and policies of the institutions. With respect to a publicly traded
corporation, which the Company will be following consummation of the Offering,
a change of ownership resulting in a change in control occurs when there is an
event that would obligate that corporation to file a Current Report on Form 8-
K with the Securities and Exchange Commission (the "SEC") disclosing a change
of control. A change of ownership and control also could require an
institution to reaffirm its state authorization and accreditation. The
requirements of states and accrediting agencies with jurisdiction over the
Company's schools vary widely in this regard. Based upon its review of the HEA
and applicable federal regulations, the Company does not believe the Offering
will constitute a change of ownership resulting in a change in control under
federal law.
Once the Company is deemed to be publicly traded, the potential adverse
implications of a change of ownership resulting in a change in control could
influence future decisions by the Company and its stockholders regarding the
sale, purchase, transfer, issuance or redemption of the Company's capital
stock. However, the Company believes that any such future transaction having
an adverse effect on state authorization, accreditation or participation in
Title IV Programs of any of the Company's schools is not likely to occur
without the prior knowledge of the Company's Board of Directors (the "Board of
Directors"). See "--Certain Anti-Takeover Provisions," "--Control by Certain
Stockholders," "Description of Capital Stock" and "Business--Accreditation."
Loss of State Authorization and Accreditation. The Company is dependent on
the authorization of the applicable agency of each state where the Company is
offering educational programs to allow it to operate and to grant degrees or
diplomas. State authorization and accreditation by an accrediting agency
recognized by the DOE is also required in order for an institution to become
and remain eligible to participate in Title IV Programs. Accrediting agencies
primarily examine the academic quality of the instructional programs offered
at the institution, including retention and placement rates, and also review
the administrative and financial operations of the institution to insure that
it has the academic and financial resources to achieve its educational
mission. The loss of accreditation would, among other things, render that
institution ineligible to participate in Title IV Programs and would have a
material adverse effect on the Company's business, results of operation and
financial condition if one or more material institutions lost accreditation.
Similarly, the loss of state authorization by the Company or an existing
campus would, among other things, render the Company ineligible to participate
in Title IV Programs for students in that state or at that location and would
have a material adverse effect on the Company's business, results of
operations and financial condition.
Possible Investigations or Claims by Regulatory Agencies or Third
Parties. Because the Company operates in a highly regulated industry, it, like
other industry participants, may be subject from time to time to
investigations, claims of non-compliance, or lawsuits by governmental agencies
or third parties which allege statutory violations, regulatory infractions or
common law causes of action. In October 1998, the Inspector General's Office
(IG) of the DOE visited the Company's headquarters to examine the Company's
compliance with the 85/15 rule and to review in general the Company's
administration of Title IV funds. This examination is part of a broader review
conducted by the IG of proprietary institutions' compliance with these
requirements. The Company provided all information and documentation requested
by the IG. To date, the Company has not received a response from the IG
regarding its review. However, the Company believes that its institutions are
in compliance with the 85/15 rule and all other federal regulations. The
Company believes that it has taken effective steps to monitor compliance with
governmental regulations and other legal requirements. However, there can be
no assurance that regulatory agencies or third parties will not undertake
investigations or make claims against the Company, or that such claims, if
made, will not have a material adverse effect on the Company's business,
results of operations or financial condition.
Risk That Legislative Action Will Reduce Financial Aid Funding or Increase
Regulatory Burden
The Title IV Programs are subject to significant political and budgetary
pressures. The process of reauthorizing the student financial assistance
programs of the HEA by the U.S. Congress, which takes place approximately
every five years, was most recently completed in 1998.
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The 1998 Amendments continued many of the current requirements for student
and institutional participation in the Title IV Programs. The 1998 amendments
also changed or modified some requirements. These changes and modifications
include increasing the revenues that an institution may derive from Title IV
funds from 85% to 90% and revising the requirements pertaining to the manner
in which institutions must calculate refunds to students. The 1998 Amendments
also contain a provision that prohibits institutions that are ineligible for
participation in Title IV loan programs due to student default rates in excess
of applicable thresholds from participating in the Pell Grant program. Other
changes expand participating institutions' ability to appeal loss of
eligibility owing to such default rates. The 1998 amendments further permit an
institution to avoid the interruption of eligibility for the Title IV Programs
upon a change of ownership which results in a change of control by submitting
a materially complete application for recertification of eligibility within
ten business days of such a change of ownership. The Company does not believe
that the 1998 Amendments will adversely or materially affect its business
operations. Regulations to implement the 1998 amendments are subject to
negotiated rulemaking and will likely not become effective until July 1, 2000.
Although Congress has not declined to reauthorize the Title IV Programs, there
can be no assurance that government funding for the Title IV Programs will
continue to be available or maintained at current levels. A reduction in
government funding levels could lead to lower enrollments at the Company's
schools and require the Company to seek alternative sources of financial aid
for students enrolled in its schools. Given the significant percentage of the
Company's revenue that is derived from the Title IV Programs, the loss of or
reduction in Title IV Program funds available to students at the Company's
schools would have a material adverse effect on the Company's business,
results of operations and financial condition.
In addition, there can be no assurance that the current requirements for
student and institutional participation in the Title IV Programs will not
change or that one or more of the present Title IV Programs will not be
replaced with other programs with materially different student or
institutional eligibility requirements. If the Company cannot comply with the
provisions of the HEA, as revised during the reauthorization process, or with
new regulations promulgated to implement the 1998 Amendments, or if the cost
of such compliance is excessive, the Company's business, results of operations
and financial condition would be materially adversely affected. There can be
no assurance that in the future there will not be enacted other different
legislation amending the HEA or otherwise impacting institutions, guaranty
agencies or lenders. The DOE may also impose additional regulations based on
its interpretation of HEA.
Risks Relating to Internal Loan Program
The Company has routinely afforded relatively short-term installment payment
plans to many of its students to supplement their financial aid. The terms of
this program require the student to make monthly payments throughout their in-
school period, plus a period generally not exceeding six months after
graduation. In late 1997, the Company expanded the internal loan program to
assist students in those colleges which lost access to FFEL loans during that
year. The loans to these students are intended to replace the loss of the FFEL
loans, and thus are generally for greater amounts (averaging $3,200) and
longer periods of time (ranging typically from 6-84 months) than the shorter
term installment payment plans mentioned earlier. In an effort to minimize the
financial impact on new students, the Company elected to match, as closely as
possible, the standards of eligibility for the FFEL loan program. For example,
in order to qualify for an FFEL loan, a student must meet all admissions
requirements and be admitted into one of the college's programs. In addition,
the prospective student must meet with a financial aid officer at the college
and complete all the appropriate applications required by the Title IV
regulations. At the four colleges that are currently ineligible to participate
in the FFEL program, prospective students who meet all eligibility
requirements are offered an internal loan. As with the FFEL loan program, no
independent credit evaluations are performed. However, students participating
in the Company's internal loan program are required to make monthly payments
while in school and may be dropped from school for failing to remain current
in their payments.
As of September 30, 1998, the combined internal loan programs were assisting
more than 6,100 students (approximately 58% were active students and
approximately 42% were graduates or dropped students). The earned balances
were approximately $8.2 million, of which $1.9 million, or 24%, was reserved
for bad debts. While these internal loans are unsecured, the Company believes
it has adequate reserves against these loan
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balances, given that the loans are earned over the student's in-school period,
during which time a payment pattern is established. The Company believes that
the payment pattern established by the student while in school is a reasonable
predictor of future collectibility. The loss rates on the shorter-term loans
are similar to the Company's loss rates on accounts receivable in general, and
they are reserved at approximately 20%. The Company has relatively limited
repayment history on the longer-term loans, but preliminary information from
third party servicers of these loans indicates that the risk of loss is
greater on these longer-term loans and the Company has adjusted its reserve
levels accordingly (currently approximately 25%). While the Company believes
it has adequate reserves against these loan balances, there can be no
assurance that losses will not exceed reserves. Losses in excess of reserves
could have a material adverse effect on the Company's business, results of
operations and financial condition. See "Business--Loan Program."
Reliance on and Risks of Acquisition Strategy, Including Lack of Available
Financing
The Company expects to continue to rely on acquisitions as a component of
its strategy for growth. The Company regularly engages in evaluations of
possible acquisition candidates, including evaluations relating to
acquisitions that may be material in size and/or scope. However, the Company
currently has no agreements or commitments with respect to any acquisitions.
There can be no assurance that the Company will continue to be able to
identify educational institutions that provide suitable acquisition
opportunities or to acquire any such institutions on favorable terms.
Furthermore, there can be no assurance that any acquired institutions can be
successfully integrated into the Company's operations or be operated
profitably. Acquisitions involve a number of special risks and challenges,
including the diversion of management's attention, assimilation of the
operations and personnel of acquired companies, adverse short-term effects on
reported operating results, possible loss of key employees and difficulty of
presenting a unified corporate image. Continued growth through acquisition may
also subject the Company to unanticipated business or regulatory uncertainties
or liabilities. No assurance can be given that the Company will be able to
obtain adequate funding to complete any potential acquisition or that such an
acquisition will succeed in enhancing the Company's business and will not
ultimately have a material adverse effect on the Company's business, results
of operations and financial condition. See "Business--Growth Strategy."
The Company's acquisition of a school would constitute a change in
ownership, resulting in a change of control with respect to such school for
purposes of eligibility to participate in the Title IV Programs. Generally,
the Company intends to acquire schools subject to the condition that they be
recertified promptly for such eligibility by the DOE. The 1998 Amendments
allow for the provisional certification of an institution that has undergone a
change of ownership that results in a change of control so that Title IV
Program Funds are not interrupted. To qualify for such provisional
certification, the institution must submit a "materially complete" application
for recertification within ten business days of the transaction. Such
provisional certification would continue until the application is acted upon
by the DOE. The failure of the Company to manage its acquisition program
effectively could have a material adverse effect on the Company's business,
results of operations and financial condition. See "--Potential Adverse
Regulatory Consequences of a Change of Ownership or Control," "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Financial Aid and Regulations--Federal Oversight of the Title IV Programs--
Restrictions on Acquiring or Opening Additional Schools and Adding Educational
Programs."
The Company anticipates that it may need additional debt or equity
financing, in addition to the proceeds of this Offering, in order to finance
any future acquisitions. The amount and timing of financing which the Company
may need will vary principally depending on the timing and size of
acquisitions and the sellers' or other lenders' willingness to provide
financing. To the extent that the Company requires additional financing in the
future and is unable to obtain such additional financing, it may not be able
to fully implement its growth strategy. The Company has received a bank loan
commitment for a $10.0 million line of credit (the "Proposed Bank Line of
Credit") from Union Bank of California. However, the commitment is subject to
the completion of this Offering and the negotiation and execution of
definitive agreements thereafter. There can be no assurance that such
agreements will be entered into. If the Proposed Bank Line of Credit is not
available, there can be no assurance that any necessary additional financing,
whether debt or equity, will be obtainable on terms favorable to, or
affordable to, the Company. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
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Risks Associated with Expansion Plans
Although to date the Company has added new schools only through
acquisitions, in the future the Company expects to develop, open and operate
new schools, most likely as additional locations of existing schools.
Establishing additional locations would pose unique challenges and require the
Company to make investments in management, capital expenditures, marketing
expenses and other resources. Because the Company has not yet established any
new additional locations, there can be no certainty as to the Company's
ability to be successful in any such endeavor. Additionally, while the Company
expects that its career-oriented school business will continue to provide the
substantial majority of its revenue in the near term, the Company plans to
expand its contract training business, currently only offered to a limited
extent by one of the Company's schools, and may also decide to provide other
education-related services, such as distance learning. There can be no
assurance as to the Company's ability to succeed in markets beyond its current
career-oriented school business. Any failure of the Company to effectively
manage the operations of newly established schools or service areas could have
a material adverse effect on the Company's business, results of operations and
financial condition. See "Business--Growth Strategy" and "Financial Aid and
Regulations--Federal Oversight of the Title IV Programs--Restrictions on
Acquiring or Opening Additional Schools and Adding Educational Programs."
Limited History of Operations; History of Losses
While the Company's colleges generally have been in operation for many years
and the Company's management has extensive industry experience, the Company
itself did not commence operations until 1995. Since that time, the Company
has periodically acquired and integrated several colleges, and, accordingly,
the Company in its present structure has a relatively limited history of
operations on which to base an evaluation of its business and prospects.
Included in this operating history are periods of net and operating losses.
For instance, in the period ended June 30, 1997, the Company experienced an
operating loss of $468,000 and a net loss of $1.9 million. The limited
operating history of the Company makes any prediction of future operating
results, including factors such as student retention, difficult, and there can
be no assurance that the Company will maintain profitability.
Year 2000 Compliance
Introduction. In the next year and a half, most large companies will face a
potentially serious information systems problem 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 or
information. The Company began the process of identifying the necessary
changes to its computer programs and hardware as well as assessing the
progress of its significant vendors in their remediation efforts in 1997. The
discussion below details the Company's efforts to ensure Year 2000 compliance.
State of Readiness. The Company has identified and evaluated the readiness
of its internal and third party information technology and non-information
technology systems which, if not Year 2000 compliant, could have a direct
major impact to the Company. This evaluation identified the following areas of
concern: (i) the Company's accounting and financial reporting system, (ii) the
Company's proprietary student database system (School's Automation System or
"SAS"), (iii) the systems of third party vendors which process student
financial aid applications and loans for the Company, and (iv) the DOE's
systems for processing and disbursing student financial aid.
The Company's accounting and financial reporting system has already been
upgraded with the provider's latest release which is certified to be Year 2000
compliant. The Company's SAS system is not compliant and the updates to this
system are not yet complete. To date, a detailed assessment of the system has
been completed wherein each date occurrence has been identified and
documented, and a detailed plan has been developed to complete the necessary
remedial work. The remediation project has begun and the Company expects that
the corrections to this system will be completed and tested by mid-year 1999.
16
<PAGE>
The Company has also assessed the state of readiness of its major servers
and shared hardware devices. It has determined that its hardware systems are
either already Year 2000 compliant or can be made so through upgrades of
operating system software. Where necessary, these upgrades will be completed
by mid-year 1999.
Based on its assessment and its vendors' representations, the Company
believes that the systems of its significant third party vendors which provide
student financial aid and loan processing are already Year 2000 compliant.
The Company is highly dependent on student funding provided through Title IV
programs. Processing of student applications for this funding and actual
disbursement of a significant portion of these funds are accomplished through
the DOE's computer systems. According to the DOE, their systems should be
brought into certifiable compliance in early 1999. However, the Company is not
able to reliably assess the DOE's progress to date, and any problems in the
DOE's systems could result in interruption of funding for the Company's
students. The 1998 Amendments to reauthorize the student financial assistance
programs, which became effective on October 1, 1998, require the DOE to take
steps to ensure that the processing, delivery and administration of grant,
loan and work assistance provided under the Title IV Programs are not
interrupted because of the Year 2000 problem. This legislation also authorizes
the DOE to postpone certain HEA requirements to avoid overburdening
institutions and disrupting the delivery of student financial assistance as a
consequence of this problem. There can be no assurance, however, that
assistance will not be interrupted or that requirements would be postponed so
that there would be no material adverse effect on the Company's schools.
Year 2000 Costs. In fiscal 1998, the Company expensed approximately $150,000
on the assessment and evaluation phase of its Year 2000 initiatives and
estimates that it will expense approximately $750,000 in fiscal 1999 to
complete the remediation efforts. These efforts have been, and are expected to
continue to be, funded through cash from operations. The Year 2000 compliance
project has not resulted in the deferral of any significant information
systems initiatives by the Company.
Risks from Year 2000 Issues. The Company believes the greatest Year 2000
compliance risk, in terms of magnitude of risk, is that the DOE may fail to
complete its remediation efforts in a timely manner and Title IV funding for
its students could be interrupted for a period of time. Other than public
comments provided by the DOE, the Company is unable to predict the likelihood
of this risk occurring. Any significant interruption of this funding could
have a material adverse effect on the Company's results of operations,
liquidity or financial condition. As mentioned earlier, the Company is
dependent upon DOE assertions as to their progress to date and timetable for
completion of their remediation efforts.
Contingency Plans. At this time, the Company fully expects to be Year 2000
compliant and is satisfied that its significant vendors are already compliant.
As such, the Company has not developed any specific contingency plan in the
event it fails to complete its Year 2000 projects. The Company also has not
developed a contingency plan to handle the scenario in which the DOE does not
complete its internal systems remediation projects as planned. The Company
will continue to monitor DOE communications on its progress, and, if such a
scenario appears likely to occur, will develop a contingency plan. Any such
contingency plan to deal with an interruption in student funding will need to
address such factors as the length of the interruption and alternative sources
of funding (both internal and external) to bridge the interruption.
Dependence on a Limited Number of Key Personnel
The Company's success to date has depended in large part on the skills and
efforts of David G. Moore (President and Chief Executive Officer), Paul R. St.
Pierre (Executive Vice President of Marketing), Frank J. McCord (Executive
Vice President and Chief Financial Officer), Dennis L. Devereux (Executive
Vice President of Human Resources), Lloyd W. Holland (Executive Vice President
of Business Analysis and Financial Aid) and the Company's other key personnel.
Additionally, the Company's success depends, in large part, upon its ability
to attract and retain highly qualified faculty, school presidents and
administrators and corporate management. Due to the nature of the Company's
business, it may be difficult to locate and hire qualified
17
<PAGE>
personnel, and to retain such personnel once hired. None of the Company's
employees is subject to an employment or noncompetition agreement. The Company
maintains key man life insurance on Mr. Moore and Mr. St. Pierre. The loss of
the services of any of the foregoing individuals or any of the Company's other
key personnel, or the failure of the Company to attract and retain other
qualified and experienced personnel on acceptable terms, could have a material
adverse effect on the Company's business, results of operations and financial
condition. See "Management--Directors, Executive Officers and Key Employees."
Anti-Takeover Provisions
The Company's Certificate of Incorporation (the "Certificate of
Incorporation") and its Bylaws (the "Bylaws") contain certain provisions that
could delay, defer or prevent a takeover attempt that may be in the best
interest of stockholders. Certain of such provisions impose various procedural
and other requirements that could make it more difficult for stockholders to
effect certain corporate actions. Such provisions include (i) a requirement
that stockholder action be taken only at stockholder meetings, (ii) notice
requirements 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. Each of these provisions may have the effect of
discouraging a takeover attempt by either (i) making the processes of gaining
control of the Board of Directors more difficult, or (ii) preventing the
acquisition of outstanding Company Common Stock through a hostile tender
offer. Also, Delaware corporate law provides that an "interested stockholder,"
defined as a person who owns 15% or more of the outstanding voting stock of
the corporation, may not enter into any merger, asset sale or other
transaction resulting in financial benefit to the interested stockholder
within three years of becoming an interested stockholder, unless such
transaction is approved by the Board of Directors of the corporation. This
provision may have the effect of providing a legal barrier to hostile or
unwanted takeovers. See "Description of Capital Stock."
Upon consummation of the Offering, the Company's Board of Directors will
have the authority to issue up to 500,000 shares of undesignated preferred
stock and to determine the price, rights, preferences, privileges and
restrictions, including voting rights, of those shares without any further
vote or action by the Company's stockholders. The rights of the holders of
Common Stock will be subject to, and may be adversely affected by, the rights
of the holders of any preferred stock that may be issued in the future. The
issuance of preferred stock, while providing desirable flexibility in
connection with possible financings, acquisitions and other corporate
purposes, could have the effect of making it more difficult for a third party
to acquire a majority of the outstanding voting stock of the Company. The
Company has no present plans to issue such shares of preferred stock. See
"Description of Capital Stock."
Control by Certain Stockholders
Upon completion of the Offering, the existing stockholders of the Company
will beneficially own an aggregate of approximately 73.9% of the outstanding
shares of common stock (approximately 70.0% assuming the exercise of the
Underwriters' over-allotment options in full). The existing stockholders
include members of senior management of the Company (David G. Moore, Paul R.
St. Pierre, Frank J. McCord, Dennis L. Devereux and Lloyd W. Holland) and two
of the current directors of the Company. Loyal Wilson is also a director of
the Company and is a Managing Director of Primus Venture Partners, Inc., the
sole general partner of Primus Venture Partners III Limited Partnership, the
sole general partner of Primus Capital Fund III Limited Partnership, a
significant stockholder of the Company. Accordingly, such persons, if they
were to act in concert, would have majority control of the Company, with the
ability to approve certain fundamental corporate transactions (including
mergers, consolidations and sales of assets) and to elect all members of the
Board of Directors. See "Beneficial Ownership of Securities and Selling
Stockholders" and "Management--Board of Directors."
In connection with the Offering, the Company plans to use a portion of the
proceeds from the Offering to repay indebtedness in an aggregate principal
amount of $1.0 million owed to Primus Capital Fund III Limited
18
<PAGE>
Partnership ("Primus"). Primus has also indicated that it plans to exercise
its rights under a contingent stock warrant issued by the Company, which will
allow it to purchase 14,441 shares of Common Stock at an exercise price of
$.0002 per share.
Highly Competitive Market
The post-secondary education market is highly competitive. The Company's
schools compete for students and faculty with traditional public and private
two-year and four-year colleges and universities and other proprietary
schools, many of which have greater financial resources than the Company.
Certain public and private colleges and universities, as well as other private
career-oriented schools, may offer programs similar to those of the Company's
schools, as well as programs not currently offered by the Company. Although
tuition at private nonprofit institutions is, on average, higher than tuition
at the Company's schools, most public institutions are able to charge lower
tuition than the Company's schools, due in part to government subsidies,
government and foundation grants, tax-deductible contributions and other
financial sources not available to proprietary schools. See "Business--
Competition."
Geographic Concentration
While the Company's 35 colleges are dispersed among 16 states, 17 of those
colleges are located in the states of Florida and California (eight in Florida
and nine in California). As a result of this geographic concentration, any
material change in general economic conditions in California or Florida could
have a material adverse effect on the Company's business, results of
operations or financial conditions. In addition, the legislatures in the
states of Florida and California could change the law in those states or adopt
regulations regarding private, for-profit post-secondary education
institutions which could place significant additional burdens on the Company.
If the Company were unable to meet those burdens, it could have a material
adverse effect on the Company's business, results of the operations or
financial condition.
Absence of Public Market
There is currently no trading market for the Common Stock and there can be
no assurance that an active trading market for the Common Stock will develop.
Although an application has been made for the Common Stock for quotation on
Nasdaq, there can be no assurance that an active public trading market for the
Common Stock will develop after the Offering or that, if developed, it will be
sustained. The public offering price of the Common Stock offered hereby was
determined by negotiations between the Company and the Underwriters and may
not be indicative of the price at which the Common Stock will trade after the
Offering. See "Underwriting." Consequently, there can be no assurance that the
market price for the Common Stock will not fall below the public offering
price. After consummation of the Offering, the market price of the Common
Stock will be subject to fluctuations in response to a variety of factors,
including quarterly variations in the Company's operating results,
announcements of acquisitions by the Company or its competitors, new
regulations or interpretations of regulations applicable to the Company's
schools, changes in accounting treatments or principles and changes in
earnings estimates by securities analysts, as well as general political,
economic and market conditions. The market price for the Common Stock may also
be affected by the Company's ability to meet or exceed analysts' earnings
expectations, and any failure to meet such expectations, even if minor, could
have a material adverse effect on the market price of the Common Stock. In
addition, the stock market has, from time to time, experienced significant
price and volume fluctuations which could adversely affect the market price of
the Common Stock without regard to the financial performance of the Company.
In the past, following periods of volatility in the market price of a
company's securities, securities class action litigation has often been
instituted against such a company. Any such litigation initiated against the
Company could result in substantial costs and a diversion of management's
attention and resources, which could have a material adverse effect on the
Company's business, results of operations and financial condition.
Shares Eligible for Future Sale
The sale of a substantial number of shares of Common Stock, or the
perception that such sales could occur, could adversely affect prevailing
market prices for the Common Stock. Upon consummation of the Offering, the
19
<PAGE>
Company will have a total of 10,345,627 shares of Common Stock and Nonvoting
Common Stock outstanding, of which the 2,700,000 shares offered hereby will be
eligible for immediate sale in the public market without restriction unless
such shares are held by "affiliates" of the Company within the meaning of Rule
144 under the Securities Act of 1933, as amended (the "Securities Act"). The
remaining 7,645,627 shares of Common Stock and Nonvoting Common Stock
outstanding upon completion of the Offering will be "restricted securities"
within the meaning of Rule 144 under the Securities Act (the "Restricted
Shares"), all of which Restricted Shares will be subject to lock-up agreements
(the "Lock-Up Agreements") under which the holders of such shares agree that
they will not, directly or indirectly, sell or otherwise dispose of any shares
of Common Stock, or securities or other rights convertible into or
exchangeable or exercisable for any shares of Common Stock, for 180 days after
the date of the Offering without the prior written consent of Salomon Smith
Barney Inc. (should the over-allotment option not be exercised, Prudential
will retain shares of Common Stock; in that event, Prudential's lock-up
agreement will provide that, after 90 days, Prudential may effect a private
sale of Common Stock to an institutional investor as long as such
institutional investor executes a similar lock-up agreement for the remainder
of the 180 day period). An additional 145,039 shares of Common Stock are
issuable at various dates upon exercise of options held by certain employees,
officers and directors of the Company pursuant to stock option agreements.
Upon expiration of the Lock-Up Agreements, all of the currently outstanding
Restricted Shares will be eligible for sale under Rule 144, subject to volume
and other limitations (other than the holding period requirement) of such
rule. Subject to the Lock-Up Agreements, the holders of all of such Restricted
Shares of common stock also have been accorded registration rights under the
Securities Act. No prediction can be made as to the effect, if any, that
future sales of shares, or the availability of shares for future sales, will
have on the market price of the common stock prevailing from time to time or
on the Company's ability to raise capital through an offering of its equity
securities. See "Description of Capital Stock" and "Underwriting."
Seasonality
The Company's revenues normally fluctuate as a result of seasonal variations
in its business, principally in its total student population. Student
population varies as a result of new student enrollments and student
attrition. Historically, the Company's colleges have had lower student
populations in the first fiscal quarter than in the remainder of the year. The
Company's expenses, however, do not vary as significantly as student
population and revenue. The Company expects quarterly fluctuations in
operating results to continue as a result of seasonal enrollment patterns.
Such patterns may change, however, as a result of acquisitions, new school
openings, new program introductions and increased high school enrollments and
there can be no assurances that such changes may not have a material adverse
effect on the Company. The operating results for any quarter are not
necessarily indicative of the results for any future period.
Substantial and Immediate Dilution
The initial public offering price is substantially higher than the net
tangible book value per share of common stock. Investors purchasing shares of
Common Stock in the Offering will be subject to immediate dilution of $14.56
per share in net tangible book value (assuming an initial offering price of
$17.00 per share). See "Dilution."
Absence of Dividends
The Company does not anticipate declaring or paying any cash dividends on
the common stock following the Offering. Future dividend policy will depend on
the Company's earnings, capital requirements, financial condition and other
factors considered relevant by the Board of Directors. See "Dividend Policy"
and "Management's Discussion and Analysis of Financial Condition and Results
of Operation--Liquidity and Capital Resources."
Forward-Looking Statements
This Prospectus contains forward-looking statements that can be identified
by the use of forward-looking terminology such as "may," "will," "should,"
"expect," "anticipate," "estimate" or "continue" or the negative thereof or
other variations thereon or comparable terminology. The matters set forth
under "Risk Factors" constitute cautionary statements identifying important
factors with respect to such forward-looking statements, including certain
risks and uncertainties, that could cause actual results to differ materially
from those in such forward-looking statements.
20
<PAGE>
THE TRANSACTIONS
Prior to the consummation of the Offering, the Company will undertake a
series of transactions, described below, that will result in the Company
having 6,469,067 shares of Common Stock, 1,176,560 shares of Nonvoting Common
Stock and 18,125 shares of Redeemable Preferred Stock outstanding prior to the
Offering; the Redeemable Preferred will be redeemed with the proceeds of the
Offering. The Company's outstanding capital stock currently consists of (i)
Common Stock, $0.0001 par value (the "Common Stock"), (ii) Nonvoting Common
Stock, $0.0001 par value (the "Nonvoting Common Stock") (the Common Stock and
Nonvoting Common Stock are collectively referred to as the "Existing Common
Stock"); and (iii) one class of Preferred Stock consisting of three series:
Class A Series 1 Preferred Stock, $1.00 par value (the "Redeemable
Preferred"); Class A Series 2 Preferred Stock, $1.00 par value (the "Series 2
Convertible Preferred"); and Class A Series 3 Preferred Stock, $1.00 par value
(the "Series 3 Convertible Preferred") (the Redeemable Preferred, Series 2
Convertible Preferred and Series 3 Convertible Preferred are collectively
referred to as the "Existing Preferred Stock" and the Series 2 Preferred and
Series 3 Preferred are collectively referred to as the "Convertible
Preferred").
Prior to the consummation of the Offering, the Second Restated Certificate
of Incorporation of the Company (the "Existing Certificate") will be amended
(the "Certificate Amendment") to provide for, among other things, (i) an
increase in the authorized capital stock of the Company to 43,000,000 shares,
(ii) a 44.094522 for 1 split of all shares of Existing Common Stock, and (iii)
change in par value for Common Stock and Nonvoting Common Stock to $0.0001 per
share. The Company will then cause the conversion of all Existing Series 2
Convertible Preferred into 388,334 shares of Nonvoting Common Stock and all
Existing Series 3 Convertible Preferred into 388,334 shares of Common Stock
(the "Preferred Stock Conversion"). The Company has been informed by the
holders of 826,773 shares of Nonvoting Common Stock that, pursuant to
contractual obligations of the Company to such holders, they will exercise
their rights to exchange all such shares of Nonvoting Common Stock for an
equal number of shares of Common Stock in connection with the Offering (the
"Nonvoting Exchange"). The Company has been informed by the holders of all
currently outstanding exercisable warrants to purchase Common Stock and
Nonvoting Common Stock (excluding certain warrants which will terminate prior
to becoming exercisable) (collectively, the "Warrants") that they will
exercise such warrants (the "Warrant Exercise" and, together with the
Certificate Amendment, the Preferred Stock Conversion and the Nonvoting
Exchange, the "Transactions") for an aggregate of 330,366 shares of Common
Stock and 200,005 shares of Nonvoting Common Stock. The consummation of the
Offering and the Transactions are conditioned upon one another. See "Certain
Relationships and Transactions" and "Description of Capital Stock."
21
<PAGE>
USE OF PROCEEDS
The net proceeds to be received by the Company from the sale of the Common
Stock offered hereby (after deducting the estimated underwriting discounts and
expenses payable by the Company) are estimated to be $40.7 million, assuming
an initial public offering price of $17.00 per share. The Company intends to
apply the net proceeds from the Offering in the following manner: (i)
repayment of senior indebtedness of approximately $22.3 million, including
prepayment premiums of approximately $2.3 million; (ii) repayment of
subordinated indebtedness of $5.0 million; (iii) repayment of outstanding
revolving credit facility borrowings of approximately $3.0 million; (iv)
redemption of the Company's redeemable preferred stock in the approximate
amount of $2.2 million, including payment of cumulative dividends thereon; (v)
payment of cumulative dividends on the Company's convertible preferred stock
in the approximate amount of $0.3 million; and (vi) the remaining approximate
$7.8 million for working capital and general corporate purposes. Until the
time that such proceeds are utilized, the net proceeds will be invested in
high quality, short-term investment instruments such as short-term corporate
investment grade or United States Government interest-bearing securities.
The outstanding senior indebtedness was incurred by the Company in
connection with the Phillips Acquisition, bears interest at a rate of 11.02%
per annum and matures on October 17, 2004. The subordinated indebtedness was
incurred by the Company in connection with both the NEC Acquisition and the
Phillips Acquisition, bears interest at a rate of 12.0% per annum and matures
on October 17, 2005. The outstanding borrowings under the revolving credit
facility were incurred by the Company for working capital needs, bear interest
at LIBOR plus 3.5% (9.25% at September 30, 1998) and mature on October 17,
2000. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Liquidity and Capital Resources".
DIVIDEND POLICY
The Company has never declared or paid any cash dividends on its common
stock. The Company currently intends to retain any earnings for use in its
business and does not anticipate paying any cash dividends in the foreseeable
future.
22
<PAGE>
DILUTION
As of September 30, 1998, the Company had a net tangible book value of
$(15,487,071), or $(2.03) per share of common stock. Net tangible book value
per share is determined by dividing the net tangible book value of the Company
(total tangible assets less total liabilities, excluding the liquidation value
of Preferred Stock) by the number of shares of common stock outstanding as of
September 30, 1998. After giving effect to the sale by the Company of the
shares of Common Stock offered hereby, assuming an initial public offering
price per share of $17.00 and after deducting the estimated underwriting
discounts and expenses payable by the Company, the Company's net tangible book
value as of September 30, 1998 would have been $25,199,929, or $2.44 per share
of common stock. This represents an immediate increase in net tangible book
value of $4.47 per share to existing stockholders and an immediate dilution of
$14.56 per share to new investors purchasing shares in the Offering. The
following table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............... $17.00
Pro forma net tangible book value per share before the
Offering................................................... $(2.03)
Increase per share attributable to new investors............ 4.47
------
Pro forma net tangible book value per share after the
Offering..................................................... 2.44
------
Dilution per share to new investors(1)........................ $14.56
======
</TABLE>
The following table sets forth on a pro forma basis, as adjusted, as of
September 30, 1998, the relative investments of all existing stockholders and
new investors purchasing shares of Common Stock from the Company in the
Offering. The calculations are based on an assumed initial public offering
price of $17.00 per share.
<TABLE>
<CAPTION>
Shares Purchased Total Consideration
--------------------- ------------------- Average Price
Number Percent Amount Percent Per Share
---------- ------- ----------- ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders... 7,645,627(1) 73.9% $ 6,375,480 12.2% $ 0.83
New investors........... 2,700,000 26.1% 45,900,000 87.8% $17.00
---------- ----- ----------- -----
Total................. 10,345,627 100.0% $52,275,480 100.0%
========== ===== =========== =====
</TABLE>
- --------
(1) Includes: (i) certain warrants to purchase 530,371 shares of common stock
which are expected to be exercised prior to the Offering, and (ii) 776,668
shares of common stock issuable upon the conversion of Convertible
Preferred Stock. Excludes an aggregate of 145,039 shares of Common Stock
issuable upon the exercise of unvested Common Stock options. See "The
Transactions."
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<PAGE>
CAPITALIZATION
The following table sets forth the Company's cash, cash equivalents and
restricted cash, current portion of long-term debt and capitalization (long-
term debt, preferred stock and stockholders' equity) (i) as of September 30,
1998, (ii) pro forma to reflect the Transactions and (iii) pro forma as
adjusted to reflect the Transactions and the completion of the Offering,
assuming an initial public offering price of $17.00 per share, after deducting
estimated underwriting discounts and commissions and offering expenses payable
by the Company, the write-off of deferred financing costs, and the application
of the net proceeds therefrom to repay certain indebtedness, prepayment
penalties and redeemable preferred stock as described under "Use of Proceeds."
The information set forth below should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Consolidated Financial Statements and the related notes
thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
September 30, 1998
--------------------------------
Pro forma
Actual Pro forma as adjusted
------- --------- -----------
(in thousands)
<S> <C> <C> <C>
Cash, cash equivalents and restricted cash.... $ 973 $ 973 $ 8,798
======= ======= =======
Current portion of long-term debt............. $ 3,837 $ 3,837 $ 1,337
======= ======= =======
Long-term debt, net of current maturities..... $31,499 $31,499 $ 5,999
------- ------- -------
Preferred Stock, $1.00 par value, 500,000
shares authorized:
Redeemable Preferred Stock, 18,125 shares
outstanding, at redemption value, including
$387,064 of accumulated dividends, actual
and pro forma; none outstanding, pro forma
as adjusted................................ 2,200 2,200 --
------- ------- -------
Convertible Preferred Stock, 50,000 shares
issued and outstanding, including
25,000 shares of Series 2 Convertible
Preferred and 25,000 shares of Series 3
Convertible Preferred, actual; none
outstanding, pro forma and pro forma as
adjusted................................... 5,274 340(1) --
------- ------- -------
Stockholders' equity:
Common Stock and Nonvoting Common Stock,
$0.0001 par value, 40,000,000 shares of
Common Stock and 2,500,000 shares of
Nonvoting Common Stock authorized;
6,338,588 shares issued and outstanding,
including 4,923,594 shares of Common Stock
and 1,414,994 shares of Nonvoting Common
Stock, actual; 7,645,627 shares issued and
outstanding, including 6,469,067 shares of
Common Stock and 1,176,560 shares of
Nonvoting Common Stock, pro forma; and
10,345,627 shares issued and outstanding,
including 9,169,067 shares of Common Stock
and 1,176,560 shares of Nonvoting Common
Stock, pro forma as adjusted............... -- 1 1
Additional paid-in capital.................. 1,375 6,308 46,995
Notes receivable for stock.................. (187) (187) (187)
Accumulated deficit......................... (48) (48) (1,921)
------- ------- -------
Total stockholders' equity ............... 1,140 6,074 44,888
------- ------- -------
Total capitalization...................... $40,113 $40,113 $50,887
======= ======= =======
</TABLE>
- --------
(1) Represents accrued but unpaid dividends which will be paid from the
proceeds of the Offering.
24
<PAGE>
SELECTED HISTORICAL CONSOLIDATED FINANCIAL AND OTHER DATA
The following selected historical consolidated financial and other data are
qualified by reference to, and should be read in conjunction with, the
Company's consolidated financial statements and the related notes thereto
appearing elsewhere in this Prospectus and "Management's Discussion and
Analysis of Financial Condition and Results of Operations." The selected
statement of operations data and the balance sheet data set forth below for
the three years ended June 30, 1996, 1997 and 1998 and as of June 30, 1996,
1997 and 1998 are derived from the audited consolidated financial statements
of the Company included elsewhere in this Prospectus. The selected statement
of operations data and the balance sheet data presented below for the three
months ended September 30, 1997 and 1998 and as of September 30, 1998 are
unaudited, but, in the opinion of Management, reflect all adjustments
(consisting only of normal recurring adjustments) necessary for a fair
presentation of the results of operations for such periods. These historical
results are not necessarily indicative of the results that may be expected in
the future.
<TABLE>
<CAPTION>
Three Months Ended
Years Ended June 30, September 30,
------------------------------- --------------------
1996 1997 1998 1997 1998
--------- --------- --------- --------- ---------
(Dollars in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Net revenues(1)....... $ 31,498 $ 77,201 $ 106,486 $ 24,346 $ 30,296
Operating expenses:
Educational
services........... 18,594 50,568 65,927 15,412 17,978
General and
administrative..... 3,298 8,101 10,777 2,561 3,289
Marketing and
advertising........ 7,562 19,000 24,268 6,303 7,636
--------- --------- --------- --------- ---------
Total operating
expenses........... 29,454 77,669 100,972 24,276 28,903
--------- --------- --------- --------- ---------
Income (loss) from
operations........... 2,044 (468) 5,514 70 1,393
Interest expense, net. 274 2,524 3,305 808 903
--------- --------- --------- --------- ---------
Income (loss) before
income taxes......... 1,770 (2,992) 2,209 (738) 490
Provision (benefit)
for income taxes..... 722 (1,107) 988 (311) 195
--------- --------- --------- --------- ---------
Net income (loss)..... $ 1,048 $ (1,885) $ 1,221 $ (427) $ 295
========= ========= ========= ========= =========
Income (loss)
attributable to
common stockholders:
Net income (loss)... $ 1,048 $ (1,885) $ 1,221 $ (427) $ 295
Accrued dividends on
preferred stock.... (111) (118) (365) (31) (132)
--------- --------- --------- --------- ---------
Income (loss)
attributable to
common
stockholders..... $ 937 $ (2,003) $ 856 $ (458) $ 163
========= ========= ========= ========= =========
Net income (loss) per
common share:
Basic .............. $ 0.21 $ (0.41) $ 0.16 $ (0.09) $ 0.03
========= ========= ========= ========= =========
Diluted............. $ 0.15 $ (0.41) $ 0.12 $ (0.09) $ 0.02
========= ========= ========= ========= =========
Weighted average
number of common
shares outstanding:
Basic............... 4,409,452 4,895,682 5,236,224 4,960,634 5,236,224
========= ========= ========= ========= =========
Diluted............. 6,338,588 4,895,682 7,125,235 4,960,634 7,326,887
========= ========= ========= ========= =========
Other Data:
EBITDA(2)............. $ 2,726 $ 1,602 $ 8,573 $ 801 $ 2,214
Cash flow provided by
(used in):
Operating
activities......... 997 995 (3,373) (442) (640)
Investing
activities......... (4,295) (30,973) (1,677) (434) (716)
Financing
activities......... 3,903 30,975 4,630 (429) (832)
Capital expenditures,
net(3)............... 1,046 5,936 1,927 434 716
Number of colleges at
end of period........ 16 36 35 36 35
Student population at
end of period........ 4,938 12,820 13,992 13,414 15,034
Starts during the
period(4)............ 5,834 13,673 18,261 5,026 5,795
</TABLE>
25
<PAGE>
<TABLE>
<CAPTION>
As of June 30, As of September 30,
----------------------- -------------------
1996 1997 1998 1998
------- ------- ------- -------------------
<S> <C> <C> <C> <C>
Balance Sheet Data:
Cash, cash equivalents and
restricted cash(5).............. $ 2,024 $ 3,831 $ 3,162 $ 973
Working capital.................. 2,306 1,844 606 318
Total assets..................... 13,487 53,809 59,905 60,410
Long-term debt, net of current
maturities...................... 2,537 36,168 31,535 31,499
Redeemable preferred stock....... 1,924 2,042 2,167 2,200
Convertible preferred stock...... -- -- 5,174 5,274
Total stockholders' equity....... 2,124 121 977 1,140
</TABLE>
- --------
(1) Represents student tuition and fees and book store sales, net of refunds.
Year ended June 30, 1996 includes a non-recurring management fee of
approximately $2.1 million earned by the Company for managing certain
colleges owned by NECI during the first six months of that year.
(2) EBITDA equals earnings before interest expense, taxes, depreciation and
amortization (including amortization of deferred financing costs). EBITDA
is presented because the Company believes it allows for a more complete
analysis of the Company's results of operations. EBITDA should not be
considered as an alternative to, nor is there any implication that it is
more meaningful than, any measure of performance or liquidity as
promulgated under GAAP.
(3) Year ended June 30, 1997 includes approximately $3.4 million for real
estate acquired in connection with the Phillips Acquisition.
(4) Represents the new students starting school during the periods presented.
(5) Includes approximately $200,000, $1.0 million, $760,000 and $760,000 of
restricted cash at June 30, 1996, 1997, 1998 and September 30, 1998,
respectively.
26
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with the
Selected Historical Consolidated Financial and Other Data and the Company's
Consolidated Financial Statements and Notes thereto appearing elsewhere in
this Prospectus.
Background and Overview
Based on revenues, the Company is one of the largest private, for-profit
post-secondary education companies in the United States, with more than 15,900
students as of November 30, 1998. The Company operates 35 colleges in 16
states, including nine in California and eight in Florida. For the fiscal year
ended June 30, 1998, the Company had net revenues of $106.5 million.
The Company's revenue consists principally of student tuition, enrollment
fees and bookstore sales, and is presented as net revenue after deducting
refunds. Net revenue increased 38% to $106.5 million in 1998 from $77.2
million in 1997 mainly as a result of the inclusion of operating results from
the 18 schools acquired in the Phillips Acquisition for the full year in 1998
compared to approximately eight and one half months for 1997. Net revenue
increased 24% to $30.3 million in the three months ended September 30, 1998
from $24.3 million for the same quarter in the previous year. This increase
resulted primarily from a 12% increase in student population and tuition rate
increases averaging approximately 7.5% during the period.
Tuition revenue, which represented 95.3% of fiscal 1998 total net revenue,
fluctuates with the aggregate enrolled student population and the average
program or credit hour charge. The student population varies depending on,
among other factors, the number of (i) continuing students at the beginning of
a fiscal period, (ii) new student enrollments during the fiscal period, (iii)
students who have previously withdrawn but who reenter during the fiscal
period, and (iv) graduations and withdrawals during the fiscal period. New
student starts occur on a monthly basis in the CSi colleges. In the RCi
colleges, the majority of new student starts occur in the first month of each
calendar quarter with an additional "mini-start" in the second month of each
quarter in most colleges. The tuition charges vary by college depending on the
local market, the program level (i.e., diploma, or associate's, bachelor's or
master degree) and the specific curriculum.
The majority of students at the Company's colleges rely on funds received
under various government sponsored student financial programs, especially
Title IV Programs, to pay a substantial portion of their tuition and other
education-related expenses. In fiscal 1998, approximately 72% of the Company's
net revenue (on a cash basis) was indirectly derived from Title IV Programs.
The Company categorizes its expenses as educational services, general and
administrative, and marketing and advertising. Educational services expense is
primarily comprised of those costs incurred to deliver and administer the
education programs at the colleges, including faculty and college
administration compensation; education materials and supplies; college
facility rent and other occupancy costs; bad debt expense; depreciation and
amortization of college property, equipment and goodwill; and default
management and financial aid processing costs.
General and administrative expense consists principally of those costs
incurred at the corporate and regional level in support of college operations,
except for marketing and advertising related costs. Included in general and
administrative costs are Company executive management, corporate staff and
regional operations management compensation; rent and other occupancy costs
for corporate headquarters; depreciation and amortization of corporate
property, equipment and intangibles; and other expenses incurred at corporate
headquarters.
Marketing and advertising expense includes compensation for college
admissions staff, regional admissions directors, corporate marketing and
advertising executive management, and staff and all advertising and production
costs.
27
<PAGE>
Acquisitions
Since its inception, the Company has completed the following acquisitions,
each of which was accounted for as an asset purchase using purchase
accounting:
On June 30, 1995, the Company acquired five colleges from National Education
Centers, Inc. ("NECI"). As part of the same transaction, the Company
subsequently acquired from NECI a second group of five colleges on September
30, 1995 and an additional six colleges on December 31, 1995. The adjusted
purchase price for all 16 colleges was approximately $4.7 million.
On July 1, 1996, the Company acquired one college from Repose, Inc. (the
"Repose Acquisition") for a purchase price of $0.3 million.
On August 31, 1996, the Company acquired one college from Concorde Career
Colleges, Inc. (the "Concorde Acquisition") for a purchase price of $0.4
million.
On October 17, 1996, the Company acquired 18 colleges from Phillips
Colleges, Inc. ("Phillips") for an adjusted purchase price of approximately
$23.6 million.
Results of Operations
The following table summarizes the Company's operating results as a
percentage of net revenue for the periods indicated.
<TABLE>
<CAPTION>
Quarter Ended
Year Ended June 30, September 30,
----------------------- ---------------
1996 1997 1998 1997 1998
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Net revenue..................... 100.0% 100.0 % 100.0% 100.0 % 100.0%
Operating expenses:
Educational services.......... 59.0 65.5 61.9 63.3 59.3
General and administrative.... 10.5 10.5 10.1 10.5 10.9
Marketing and advertising..... 24.0 24.6 22.8 25.9 25.2
------ ------ ------ ------ ------
Total operating expenses.... 93.5 100.6 94.8 99.7 95.4
------ ------ ------ ------ ------
Income (loss) from operations... 6.5 (0.6) 5.2 0.3 4.6
Interest expense, net........... 0.9 3.2 3.1 3.3 3.0
------ ------ ------ ------ ------
Income (loss) before income
taxes.......................... 5.6 (3.8) 2.1 (3.0) 1.6
Provision (benefit) for income
taxes.......................... 2.3 (1.4) 0.9 (1.3) 0.6
------ ------ ------ ------ ------
Net income (loss)............... 3.3% (2.4)% 1.2% (1.8)% 1.0%
====== ====== ====== ====== ======
</TABLE>
Three Months Ended September 30, 1998 Compared to Three Months Ended September
30, 1997
Net Revenue. Net revenue increased $6.0 million, or 24.4%, from $24.3
million in the first quarter of fiscal 1998 to $30.3 million in the first
quarter of fiscal 1999. The increase was due primarily to a 12.1% increase in
the student population from 13,414 at September 30, 1997 to 15,034 at
September 30, 1998, and tuition rate increases averaging approximately 7.5%
which were implemented during the period.
Educational Services. Educational services expense increased $2.6 million,
or 16.7%, from $15.4 million in the first quarter of fiscal 1998 to $18.0
million in the first quarter of fiscal 1999. The increase was primarily due to
the increase in the student population and wage increases for employees.
Additionally, eight schools were moved to expanded facilities during the
period resulting in higher facility-related expenses. As a percentage of net
revenue, educational services expense decreased from 63.3% to 59.3%.
28
<PAGE>
General and Administrative. General and administrative expense increased
$0.7 million, or 28.4%, from $2.6 million in the first quarter of fiscal 1998
to $3.3 million in the first quarter of fiscal 1999, primarily as a result of
(i) additional headquarters staff to support operations and curriculum
development, (ii) wage increases for employees, (iii) increased performance
bonus accrual, and (iv) increased travel and training. As a percentage of net
revenue, general and administrative expense increased from 10.5% to 10.9%.
Marketing and Advertising. Marketing and advertising expense increased $1.3
million, or 21.2%, from $6.3 million in the first quarter of fiscal 1998 to
$7.6 million in the first quarter of fiscal 1999. The increase was due
primarily to increased advertising expenditures (quantity and cost inflation)
and increased admissions staff costs resulting from wage increases and
additional high school admissions representatives. As a percentage of net
revenue, marketing and advertising expense decreased from 25.9% to 25.2%.
Interest Expense, Net. Interest expense increased $0.1 million, or 11.6%,
from $0.8 million in the first quarter of fiscal 1998 to $0.9 million in the
first quarter of fiscal 1999 due primarily to an interest rate increase
resulting from a restructuring of senior debt in November 1997 partially
offset by increased interest income from student notes receivable.
Provision (Benefit) for Income Taxes. The income tax benefit of $0.3 million
in the first quarter of fiscal 1998 increased $0.5 million to a provision of
$0.2 million in the first quarter of fiscal 1999 due to the loss before income
taxes in the fiscal 1998 quarter versus net income before taxes in the fiscal
1999 quarter.
Net Income (Loss). A net loss of $0.4 million in the first quarter of fiscal
1998 increased $0.7 million to net income of $0.3 million in the first quarter
of fiscal 1999. The increase was primarily due to the increase in operating
income slightly offset by the increase in net interest expense.
Year Ended June 30, 1998 Compared to Year Ended June 30, 1997
Net Revenue. Net revenue increased $29.3 million, or 38%, from $77.2 million
in fiscal 1997 to $106.5 million in fiscal 1998. The increase was due
primarily to the inclusion of operating results related to the Phillips
Acquisition for the entire year in fiscal 1998 compared to approximately eight
and one half months for fiscal 1997. The schools acquired in the Phillips
Acquisition contributed revenues of $61.2 million in fiscal 1998 compared to
$34.6 million in the prior year. Also contributing to the increase was a 9%
increase in the student population from 12,820 at June 30, 1997 to 13,992 at
June 30, 1998, and the implementation of tuition increases averaging 3% to 7%
in most colleges during fiscal 1998.
Educational Services. Educational services expense increased $15.4 million,
or 30%, from $50.6 million in fiscal 1997 to $65.9 million in fiscal 1998. The
increase was primarily due to the inclusion of the operating results related
to the Phillips Acquisition for the entire year in fiscal 1998, versus only
eight and one half months for fiscal 1997. The schools acquired in the
Phillips Acquisition contributed educational services costs of $37.5 million
in fiscal 1998 compared to $22.4 million in the prior year. A portion of the
increase also resulted from the increase in the average student population and
wage increases for employees. As a percentage of net revenue, educational
services expense decreased from 65.5% to 61.9%.
General and Administrative. General and administrative expense increased
$2.7 million, or 33%, from $8.1 million in fiscal 1997 to $10.8 million in
fiscal 1998, due principally to the increased headquarters and regional
operations staff and infrastructure necessary to support the colleges acquired
in the Phillips Acquisition. As a percentage of net revenue, general and
administrative expense decreased from 10.5% to 10.1%.
Marketing and Advertising. Marketing and advertising expense increased $5.3
million, or 28%, from $19.0 million in fiscal 1997 to $24.3 million in fiscal
1998. The increase was due primarily to the inclusion of the operating results
related to the Phillips Acquisition for the entire year in fiscal 1998, versus
eight and one half months for fiscal 1997. The schools acquired in the
Phillips Acquisition contributed marketing and advertising costs of $10.9
million in fiscal 1998 compared to $6.6 million in the prior year. Also
contributing to the increase was additional spending on the production of
updated television commercials and printed advertising materials. As a
percentage of net revenues, marketing and advertising expense decreased from
24.6% to 22.8%.
29
<PAGE>
Interest Expense, net. Interest expense increased $0.8 million, or 31%, from
$2.5 million in fiscal 1997 to $3.3 million in fiscal 1998, primarily due to
interest expense on increased borrowings used to finance the Phillips
Acquisition in October 1996.
Provision (Benefit) for Income Taxes. The provision for income taxes
increased $2.1 million from a benefit of $1.1 million in fiscal 1997 to a
provision of $1.0 million in fiscal 1998.
Net Income (Loss). Net income increased $3.1 million from a loss of $1.9
million in fiscal 1997 to income of $1.2 million in fiscal 1998.
Year Ended June 30, 1997 Compared to Year Ended June 30, 1996
Net Revenue. Net revenue increased $45.7 million, or 145%, from $31.5
million in fiscal 1996 to $77.2 million in fiscal 1997, primarily due to $35.9
million generated from acquisitions made in fiscal 1997 and $11.8 million
generated from having all acquisitions made in fiscal 1996 for the entire
year. Student population increased more than 7.0%, from 11,977 students at the
beginning of fiscal year 1997 (or on the acquisition date of a particular
college, if later) to 12,820 students at the end of the fiscal year and
tuition increases were implemented averaging over 4.5% at most of the CSi
division colleges. The revenue increase was partially offset by a non-
recurring management fee of $2.1 million in 1996 for managing several of
NECI's schools during the first half of that year. Revenue was also negatively
impacted during 1997 due to the DOE's change in admissions testing
requirements for non-high school graduates in late December 1996 (See
"Financial Aid and Regulations--Ability to Benefit Regulations"). In the 12
month period immediately following this change, the Company's 12 colleges
which accept non-high school graduates started 1,105 such students, compared
to 1,795 started in the 12 month period immediately preceding the change.
Education Services. Education services expense increased $32.0 million, or
172%, from $18.6 million in fiscal 1996 to $50.6 million in fiscal 1997. Of
this increase, $24.4 million was attributable to acquisitions made in fiscal
1997 and $7.0 million was due to having all acquisitions made in fiscal year
1996 for the entire year. The remainder of the increase was due primarily to
wage increases and additional headquarters curriculum development costs. As a
percentage of net revenue, educational services expense increased from 59.0%
to 65.5%.
General and Administrative. General and administrative expense increased
$4.8 million, or 146%, from $3.3 million in fiscal year 1996 to $8.1 million
in 1997, primarily as a result of (i) increased headquarters and regional
management staffing and infrastructure necessary to support the increased
number of colleges of $4.1 million, and (ii) increased amortization expense
due to intangibles (curriculum and trade names) resulting from the Phillips
Acquisitions of $0.7 million. The headquarters staff and related expenses
benefited during the first six months of fiscal year 1996 from a favorable
services agreement negotiated by the Company with NEC as part of the NEC
Acquisition. Under this agreement, NEC provided accounting, payroll, office
services, human resources services, office space, MIS services, etc. at a
nominal charge for several months. As a percentage of net revenue, general and
administrative expense remained constant at 10.5%.
Marketing and Advertising. Marketing and advertising expense increased $11.4
million, or 151%, from $7.6 million in fiscal year 1996 to $19.0 million in
fiscal year 1997. The acquisitions made in fiscal 1997 accounted for $7.2
million of this increase; having all the acquisitions made in fiscal 1996 for
the entire year accounted for $3.1 million; and advertising cost and wage
inflation, new advertising development, and the additional regional management
staff supporting acquisitions accounted for $1.1 million. As a percentage of
net revenue, marketing and advertising expense increased from 24.0% to 24.6%.
Interest Expense, net. Interest expense increased $2.2 million, or 822% from
$0.3 million in fiscal 1996 to $2.5 million in fiscal 1997 due primarily to
interest expense on increased borrowings to finance the acquisitions made in
fiscal 1997.
Provision (Benefit) for Income Taxes. The income tax provision of $0.7
million in fiscal year 1996 decreased $1.8 million to a benefit of $1.1
million in fiscal year 1997 due to the loss before income taxes in fiscal year
1997.
30
<PAGE>
Net Income (Loss). Net income of $1.0 million in fiscal year 1996 decreased
$2.9 million, or 280% to a net loss of $1.9 million in fiscal year 1997. The
decrease was due to the decrease in operating income and the increase in
interest expense year to year.
Seasonality
The following table sets forth unaudited quarterly financial data for each
of the four fiscal quarters in the year ended June 30, 1998 (the only year in
which the Company owned all the schools for the entire year) as well as the
first quarter for the fiscal year ended June 30, 1999. The Company believes
that this information includes all adjustments (consisting solely of normal
recurring adjustments) necessary for a fair presentation of such quarterly
information when read in conjunction with the consolidated financial
statements included elsewhere herein.
<TABLE>
<CAPTION>
Fiscal Year Ended
Fiscal Year Ended June 30, 1998 June 30, 1999
---------------------------------- -----------------
1st Qtr 2nd Qtr 3rd Qtr 4th Qtr 1st Qtr
------- ------- ------- ------- -----------------
<S> <C> <C> <C> <C> <C>
Net revenue:
Amount................ $24,346 $26,440 $27,841 $27,859 $30,296
Percentage of fiscal
year total........... 22.9% 24.8% 26.1% 26.2% --
Income from operations
before interest and
income taxes:
Amount................ $ 70 $ 2,075 $ 1,833 $ 1,536 $ 1,393
Percentage of fiscal
year total........... 1.3% 37.6% 33.2% 27.9% --
</TABLE>
The Company's revenues normally fluctuate as a result of seasonal variations
in its business, principally in its total student population. Student
population varies as a result of new student enrollments and student
attrition. Historically, the Company's colleges have had lower student
populations in the first fiscal quarter than in the remainder of the year. The
Company's expenses, however, do not vary as significantly as student
population and revenue. The Company expects quarterly fluctuations in
operating results to continue as a result of seasonal enrollment patterns.
Such patterns may change, however, as a result of acquisitions, new school
openings, new program introductions and increased high school enrollments. The
operating results for any quarter are not necessarily indicative of the
results for any future period.
Liquidity and Capital Resources
During fiscal years 1996 and 1997, the Company financed its operating
activities and routine capital expenditures (not including acquisitions and
real estate) principally from cash provided by operating activities. In fiscal
year 1998, the Company received an equity investment of approximately $5.0
million in the form of convertible preferred stock. The convertible preferred
stock was issued in anticipation of the increased working capital requirements
to fund the Company's internal loan program and other operating needs. Cash
provided by (used in) operating activities for fiscal 1996, 1997 and 1998 was
$1.0 million, $1.0 million and ($3.4 million), respectively. Cash used in
operating activities for the three months ended September 30, 1997 and 1998
was $0.4 million and $0.6 million, respectively.
Working capital as of September 30, 1998 was $0.3 million compared to $0.6
million as of June 30, 1998. The decrease was due primarily to additional long
term debt becoming short term during the period, partially offset by favorable
operating results.
The Company had $1.8 million of working capital as of June 30, 1997,
compared to $2.3 million as of June 30, 1996. The decrease in working capital
in 1997 was due primarily to an increase in routine capital expenditures from
period to period. Working capital as of June 30, 1998 was $0.6 million,
compared to $1.8 million as of June 30, 1997. The decrease in 1998 was due
primarily to a significant portion of long term debt becoming short term
during the period and the increase in internally funded longer term student
loans as a result of the loss of Title IV loans in seven of the CSi schools.
This decrease was significantly offset by the
31
<PAGE>
increase in cash resulting from the sale of Convertible Preferred Stock in
November 1997. The Company closed one of those seven schools in December 1997.
The use of working capital to fund these longer term loans amounted to
approximately $5.0 million from inception in May 1997 until June 30, 1998.
With the reinstatement of three of the seven schools (representing over 50% of
the combined total student population in all seven schools) to the Title IV
Loan Program, the Company expects the working capital needed to fund these
internal loans to decrease significantly in the immediate future. The Company
also expects reinstatement of Title IV loans to one of the remaining
ineligible schools in 1999 and to the three others in 2000 (one of which has
been ineligible since 1994). With the reinstatement of these four schools, the
working capital needs should decrease in the longer term. See "Risk Factors--
Substantial Dependence on Student Financial Aid; Potential Adverse Effects of
Governmental Regulation--Student Loan Defaults." Included in working capital
at June 30, 1997 is $1.0 million of restricted cash, which secures a letter of
credit to the DOE. See "Financial Aid and Regulations--Federal Oversight of
the Title IV Programs--Financial Responsibility Standards." Included in
working capital at June 30 and September 30, 1998 is $760,000 of restricted
cash, of which $750,000 secures a letter of credit to the DOE.
Routine capital expenditures increased from $1.0 million in 1996 to $2.5
million in 1997 and decreased from $2.5 million in 1997 to $1.9 million in
1998. The 1996 to 1997 increase was primarily due to accelerated investments
in upgrading computers and other equipment in the classrooms and upgrading the
Company's administrative computers and networking capability to accommodate
the Phillips Acquisition. The decrease from 1997 to 1998 was the result of a
return to a more normal rate of capital improvement versus the accelerated
spending pace needed to upgrade the colleges acquired in October 1996. In
addition to the routine capital expenditures during 1997, the Company also
purchased the real estate associated with five of the colleges acquired in the
Phillips Acquisition for a purchase price of $3.4 million. The Company leases
the rest of its operating facilities along with various equipment under
noncancellable operating leases expiring at various dates through 2017. The
Company's future minimum payments under these noncancellable leases total
approximately $39.5 million. The routine capital expenditures increased from
$0.4 million in the three months ended September 30, 1997 to $0.7 million in
the same period in 1998. The increase is due mainly to timing of expenditures.
The Company's capital assets, other than the real estate mentioned above,
consist primarily of classroom and laboratory equipment (such as computers,
medical and dental devices, and film and video equipment), classroom and
office furniture, and leasehold improvements. Capital expenditures are
expected to increase as the Company continues to upgrade and expand current
equipment and facilities along with the anticipated growth in student
population and campuses. The Company expects to be able to fund these routine
capital expenditures with cash generated from operations. At the current time
the Company has no material commitments for capital expenditures.
In addition to the capital expenditures mentioned above, the Company's
investment activity over the past three fiscal years has primarily consisted
of acquisitions of colleges. Purchases of colleges, including goodwill and
other intangibles, in 1996 and 1997 totaled approximately $3.0 million and
$24.2 million, respectively. The Company's growth strategy includes continuing
to pursue selective acquisitions in the future. To the extent that potential
acquisitions are large enough to require financing beyond cash from operations
and the Company's proposed bank line of credit, the Company could incur
additional debt, resulting in increased interest expense.
The Company currently has a revolving credit facility with The Prudential
Insurance Company of America ("Prudential") under which it can borrow up to
$5.0 million. The revolving credit facility matures on October 17, 2000;
however, under terms of the credit facility, availability under this facility
will be reduced to $3.0 million on August 31, 1999. At September 30, 1998, the
Company had outstanding borrowings of $4.2 million under this revolving credit
facility. Borrowings under the revolving credit facility bear interest at
LIBOR plus 3.5% (9.25% at September 30, 1998). The Company also has a $22.5
million term note with Prudential which matures on October 17, 2004, with
interest at 11.02% payable quarterly in January, April, July, and October. A
required principal payment of $2.5 million was made on this note on October
19, 1998, and the note requires an additional principal payment of $5.0
million on October 17, 1999. After these two principal
32
<PAGE>
payments, the remaining $15.0 million due on the note is amortized quarterly
over the next five years. The Company has an aggregate of $5.0 million in
subordinated term notes with Primus Capital Fund III Limited Partnership
("Primus") and Banc One Capital Partners II, LLC ("Banc One") which mature on
October 17, 2005. These subordinated notes bear interest at 12%, payable
quarterly, and the unpaid principal is due and payable in quarterly
installments of $281,250 beginning October 17, 2001 until the maturity date,
at which time any remaining outstanding balance is due and payable. A mortgage
note secured by the real estate of five colleges in the amount of
approximately $3.7 million matures in April 2007. The mortgage note bears
interest at 10.95% and is being amortized monthly. These note agreements
contain various financial and non-financial covenants. At June 30, 1997, the
Company was not in compliance with certain covenant requirements of these
notes. However, on November 7, 1997, the Company entered into agreements
amending the terms of these note agreements. Among other things, the amended
agreements waived all covenant violations through September 30, 1997, extended
the principal payment dates, adjusted certain interest rates and reset the
financial ratios to be consistent with the Company's current operating plan.
As of June 30, 1998 the Company was in compliance with all the covenant
requirements of these note agreements except for a 1998 minimum annual cash
flow requirement from operating activities which has been waived by the
lenders. As of September 30, 1998 the Company was in compliance with all the
covenant requirements of these note agreements.
The Company plans to use approximately $30.3 million of the net proceeds
from this Offering to repay all the outstanding indebtedness under the
revolving credit facility and notes mentioned above, except for the real
estate mortgages which will remain outstanding after the Offering. As a
result, the Company expects its interest expense in the period following the
Offering, assuming no material acquisitions during this period, will be
significantly lower and have a lesser impact on the Company's net income, as
compared to the period prior to the Offering. The early extinguishment of
indebtedness includes a prepayment premium of approximately $2.3 million and
will cause the Company to write off approximately $0.8 million of associated
deferred loan fees. In connection with this debt extinguishment and associated
write-off, the Company expects to record a one-time extraordinary loss, net of
tax benefit, of approximately $1.9 million in the period immediately following
the Offering.
In order to ensure adequate working capital and availability of funds for
capital expenditures and growth plans, the Company has negotiated the Proposed
Bank Line of Credit with Union Bank of California which will go into effect
concurrent with this Offering. This $10.0 million line of credit will be for a
period of one year, bears interest at LIBOR plus 200 basis points and includes
a non-usage fee of 1/8% per year on the unused portion. At maturity, any
acquisition advances will convert to a three year fully amortizing term loan.
Under this line of credit the Company will be required to maintain certain
financial and other covenants. Borrowings under this line of credit will be
secured by substantially all personal property of the Company. The Company
intends to renegotiate the line of credit on an annual basis after determining
expected needs for each upcoming year. However, there can be no assurance that
such line of credit can be renegotiated on terms acceptable to the Company.
The Company believes that the cash flow from operations, supplemented by
borrowings under the line of credit, will provide adequate funds for ongoing
operations, planned capital expenditures, and planned expansion to new
locations for at least the next 18 months.
Cash flow from operations on a long-term basis is highly dependent on the
receipt of funds from Title IV Programs. Title IV regulations require that
institutions meet certain "financial responsibility" tests to be eligible to
participate in Title IV Programs (See "Risk Factors"). If an institution fails
to meet one or more of these tests, it can still be considered financially
responsible by posting a letter of credit or going into the "reimbursement"
program and posting a smaller letter of credit. As a result of acquiring the
former Phillips colleges through debt financing and the large amount of
intangibles associated with the purchase, the Company did not meet the
tangible net worth financial responsibility test and was required to continue
the 18 colleges acquired on the reimbursement program (which they were already
on) and to post a letter of credit (now totaling $1.5 million). By doing so,
the Company was deemed financially responsible under the regulations. As a
result of, and subsequent to, this Offering, the Company expects to meet the
financial responsibility requirements and plans to immediately petition the
DOE for release from the reimbursement program and the letter of credit
requirement.
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Year 2000 Compliance
Introduction. In the next year and a half, most large companies will face a
potentially serious information systems problem 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 or
information. The Company began the process of identifying the necessary
changes to its computer programs and hardware as well as assessing the
progress of its significant vendors in their remediation efforts in 1997. The
discussion below details the Company's efforts to ensure Year 2000 compliance.
State of Readiness. The Company has identified and evaluated the readiness
of its internal and third party information technology and non-information
technology systems which, if not Year 2000 compliant, could have a direct
major impact to the Company. This evaluation identified the following areas of
concern: (i) the Company's accounting and financial reporting system, (ii) the
Company's proprietary student database system (Schools Automation System or
"SAS"), (iii) the systems of third party vendors which process student
financial aid applications and loans for the Company, and (iv) the DOE's
systems for processing and disbursing student financial aid.
The Company's accounting and financial reporting system has already been
upgraded with the provider's latest release which is certified to be Year 2000
compliant. The Company's SAS system is not compliant and the updates to this
system are not yet complete. To date, a detailed assessment of the system has
been completed wherein each date occurrence has been identified and
documented, and a detailed plan has been developed to complete the necessary
remedial work. The remediation project has just begun, and the Company expects
the corrections to this system will be completed and tested by mid-year 1999.
The Company has also assessed the state of readiness of its major servers
and shared hardware devices. It has determined that its hardware systems are
either already Year 2000 compliant or can be made so through upgrades of
operating system software. Where necessary, these upgrades will be completed
by mid-year 1999.
Based on its assessment and the vendors' representations, the Company
believes that the systems of its significant third party vendors which provide
student financial aid and loan processing are already Year 2000 compliant.
The Company is highly dependent on student funding provided through Title IV
programs. Processing of student applications for this funding and actual
disbursement of a significant portion of these funds are accomplished through
the DOE's computer systems. According to the DOE, their systems should be
brought into certifiable compliance in early 1999. However, the Company is not
able to reliably assess their progress to date, and any problems in the DOE's
systems could result in interruption of funding for the Company's students.
The 1998 Amendments to reauthorize the student financial assistance programs,
which became effective on October 1, 1998, require the DOE to take steps to
ensure that the processing, delivery and administration of grant, loan and
work assistance provided under the Title IV Programs are not interrupted
because of the Year 2000 problem. This legislation also authorizes the DOE to
postpone certain HEA requirements to avoid overburdening institutions and
disrupting the delivery of student financial assistance as a consequence of
this problem. There can be no assurance, however, that assistance will not be
interrupted or that requirements would be postponed so that there would be no
material adverse effect on the Company's schools.
Year 2000 Costs. In fiscal 1998, the Company expensed approximately $150,000
on the assessment and evaluation phase of its Year 2000 initiatives and
estimates that it will expense approximately $750,000 in fiscal 1999 to
complete the remediation efforts. These efforts have been, and are expected to
continue to be, funded through cash from operations. The Year 2000 compliance
project has not resulted in the deferral of any significant information
systems initiatives by the Company.
Risks from Year 2000 Issues. The Company believes the greatest Year 2000
compliance risk, in terms of magnitude of risk, is that the DOE may fail to
complete its remediation efforts in a timely manner and Title IV
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funding for its students could be interrupted for a period of time. Other than
public comments provided by the DOE, the Company is unable to predict the
likelihood of this risk occurring. Any significant interruption of this
funding could have a material adverse effect on the Company's results of
operations, liquidity or financial condition. As mentioned earlier, the
Company is dependent upon DOE assertions as to their progress to date and
timetable for completion of their remediation efforts.
Contingency Plans. At this time, the Company fully expects to be Year 2000
compliant and is satisfied that its significant vendors are already compliant.
As such, the Company has not developed any specific contingency plan in the
event it fails to complete its Year 2000 projects. The Company also has not
developed a contingency plan to handle the scenario in which the DOE does not
complete its internal systems remediation projects as planned. The Company
will continue to monitor DOE communications on its progress, and, if such a
scenario appears likely to occur, will develop a contingency plan. Any such
contingency plan to deal with an interruption in student funding will need to
address such factors as the length of the interruption and alternative sources
of funding (both internal and external) to bridge the interruption.
Inflation
The Company does not believe its operations have been materially affected by
inflation.
New Accounting Standards
Recent pronouncements of the Financial Accounting Standards Board ("FASB")
include Statement of Financial Accounting Standards ("SFAS") No. 133
"Accounting for Derivatives Instruments and for Hedging Activities" SFAS No.
132, "Employers' Disclosures about Pension and Other Post Retirement
Benefits", SFAS No. 131, "Disclosure about Segments of an Enterprise and
Related Information", SFAS No. 130, "Reporting Comprehensive Income", SFAS No.
129, "Disclosure of Information about Capital Structure" ("SFAS No. 129"), and
SFAS No. 128, "Earnings Per Share" ("SFAS No. 128"). SFAS Nos. 129 and 128
specify guidelines as to the method of computation of, as well as presentation
and disclosure requirements for, earnings per share. The Company adopted SFAS
No. 128 for all periods presented in this Registration Statement. The other
Statements discussed above are effective for fiscal years beginning after
December 15, 1997 and earlier application is not permitted. The adoption of
the Statements is not expected to have a material effect on the Company's
consolidated financial position or results of operations. The impact of these
pronouncements on the disclosures in the financial statements has not been
determined.
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BUSINESS
Overview
Based on revenues, the Company is one of the largest private, for-profit
post-secondary education companies in the United States, with more than 15,900
students as of November 30, 1998. The Company operates 35 colleges in 16
states, including nine in California and eight in Florida, and services the
large and growing segment of the population seeking to acquire career-oriented
education to become more qualified and marketable in today's increasingly
demanding workplace environment. The Company's schools generally enjoy long
operating histories and strong franchise value in their local markets. The
median operating history for the Company's colleges is 36 years, including
nine colleges with operating histories over 80 years. For the fiscal year
ended June 30, 1998, the Company had net revenues of $106.5 million.
The Company offers a variety of master's, bachelor's and associate's degree
and diploma programs through two operating divisions. The Company's CSi
division operates diploma-granting schools in the allied healthcare and
electronics technology fields and seeks to provide its students a solid base
of training for a variety of entry-level positions. The Company's RCi division
operates degree-granting schools principally in the business area and provides
its students with professional education to succeed in today's increasingly
competitive workplace. Both divisions receive strategic direction and
operational support from senior management and headquarters staff.
The Company's management team is led by David Moore, Paul St. Pierre, Frank
McCord, Lloyd Holland and Dennis Devereux, who together have more than 60
years of experience in post-secondary education. Since its founding in 1995,
the Company has grown rapidly and has improved enrollments and profitability.
See "Selected Historical Consolidated Financial and Other Data." In order to
capitalize on management's extensive industry experience, the Company has
implemented a regional management structure supported by the Company's
proprietary management information system (the Schools Automation System, or
"SAS"). SAS provides regional managers with real time access to key
information from any location and links all the colleges and regional offices
to corporate headquarters, providing senior management with daily access to
marketing reports, lead tracking, academic records, grades, transcripts and
placement information. At their respective acquisition dates, the Company's
colleges, in total, had 12,226 students. Due to the Company's effective
management of leads and other marketing resources, as of November 30, 1998 the
Company's colleges had 15,912 students, representing a combined enrollment
growth of 30% since their respective acquisitions by the Company.
Industry Background
The market for post-secondary education is large and growing, exceeding $220
billion and 14 million students in the 1996-97 school year. The private, for-
profit post-secondary education industry is highly fragmented. Of the
approximately 6,000 post-secondary institutions that are eligible to
participate in Federal Financial Aid programs, approximately one-third are
private, for-profit institutions. The Company believes that the growing demand
for skilled labor, positive demographic trends, the economic value of post-
secondary education to students and budgetary constraints at public colleges
will combine to broaden the market for the Company's services over the next
decade.
Growing Demand for Skilled Labor. According to the U.S. Department of Labor,
demand for skilled labor in the United States continues to grow. The
percentage of jobs requiring skilled labor grew from 20% in 1954 to 45% in
1991, and is projected to grow to approximately 65% by the year 2000. The
total number of jobs requiring skilled labor in the year 2000 is projected to
equal approximately 92.3 million, an increase of approximately 36 million jobs
from 1991. Growth in certain sectors of the economy is expected to be
particularly high. The Department of Labor projects that job growth in the
healthcare and technology fields will significantly outpace the growth of the
overall labor market over the next several years. The demand for entry level
Medical Assistants, for instance, is expected to grow more than 70% from 1996
to 2006. The Company believes the economy is also generating increased demand
for business professionals. According to the Bureau of Labor Statistics,
employment in service-producing industries will increase faster than the
average, with growth near 30% between 1996 and 2006. Business, health and
education services will account for 70% of the growth within the service
industry.
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Positive Demographic Trends. Favorable demographic shifts are expected to
occur over the next decade as children of "baby boomers" reach adulthood and
seek post-secondary education. For the first time in more than 25 years, the
number of new high school graduates is increasing. The DOE projects a 17%
increase in annual high school graduates by the year 2005 (from 2.5 million in
1995 to 3.0 million in 2005) and high school graduates are pursuing post-
secondary education at higher rates. In 1996, 65% of new high school graduates
pursued post-secondary education, compared with 53% in 1986. The number of
young adults that do not graduate high school is also growing and these non-
high school graduates can also benefit from career oriented education,
including training for entry level skilled positions in healthcare and other
growing industries. According to the DOE's National Center for Educational
Statistics ("NCES"), the number of adult enrollments (persons aged 25 and
older) is also expected to grow, reaching 6.4 million by 2007.
Economic Value of Post-Secondary Education. Post-secondary education leads
to significant and measurable improvements in a person's financial prospects
and the Company believes that the public is increasingly aware of this
relationship. 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.
Budgetary Constraints at Public Colleges. Limited recent growth in federal,
state and local budgets for post-secondary education has caused budgetary
constraints among traditional colleges and made additional facility expansion
difficult. At the same time, the number of private, for-profit post-secondary
institutions has remained relatively constant over the last three years. The
Company believes that these factors, combined with significant barriers to
entry for new proprietary education companies, create significant
opportunities for well-capitalized, proprietary institutions.
Operating Strategy
The Company has improved enrollment and profitability through the
application of its operating strategy which management developed through its
extensive industry experience. The Company believes that its ability to
continue to effectively and professionally manage its schools provides it with
an important competitive advantage. Key elements of the Company's operating
strategy include:
Focus on Attractive Markets. The Company selects its schools and designs its
educational programs to exploit favorable demographic and economic trends. The
Company's CSi division provides diploma programs in healthcare and technology
related fields, allowing the Company to capitalize on the growth in entry-
level positions in these industries which is expected to significantly outpace
the growth of the overall labor market over the next several years. The RCi
division's degree programs, with their business focus and the modern equipment
and resources of their facilities, also seek to provide students with specific
knowledge and skills necessary to advance in business and industry. The
Company's geographic strategy is to build a strong competitive position in
attractive and growing local markets where the Company can take advantage of
operating efficiencies and benefit from demographic shifts. For example, the
Company is well positioned, with nine schools in California and eight schools
in Florida, to benefit from the population growth in these states which is
expected to significantly exceed the national average over the next several
years.
Centralization of Key Functions. In order to capitalize on the experience of
its senior management, the Company has established a regional management
organization to divide responsibilities among school administrators, regional
administrators and senior management. Local school administrators retain
control of, and accountability for, the day-to-day academic, operational and
financial performance of their individual schools and receive appropriate
financial incentives. The corporate management team controls key operational
functions such as financial aid management, marketing, curriculum development,
staff training, human resources and centralized purchasing, which the Company
believes enable it to achieve significant operating efficiencies. For example,
the Company controls the advertising function at the corporate level by
utilizing its SAS system to
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analyze the effectiveness of its marketing efforts and make timely and
efficient decisions regarding the allocation of marketing resources at
individual colleges.
Emphasizing Student Outcomes. The Company believes that strong student
outcomes are a critical driver of its long-term success and devotes
substantial resources to maintaining and improving its retention and placement
rates. Modest increases in student retention can have a significant impact on
the Company's profitability and high graduation and placement rates enhance a
school's reputation and marketability, increase referrals and improve cohort
default rates. The Company has studied attrition patterns and implemented a
variety of programs including tutoring, counseling, ride-sharing and referral
programs, all of which are designed to improve student retention. The Company
utilizes a curriculum development team and advisory boards comprised of local
business professionals to help maintain its current, market driven curricula
that provide the foundation of its placement effort. The Company additionally
maintains dedicated, full-time placement personnel at each school that
undertake extensive placement efforts, including recruiting prospective
employers, helping students prepare resumes, conducting practice interviews,
establishing internship programs and tracking students' placement success on a
monthly basis. As a result of the Company's efforts in this area, 83% of its
graduates in 1997 who were searching for employment were placed in a job for
which they had trained within six months after graduation.
Creating a Supportive Learning Environment. The Company views its students
as customers and seeks to provide a supportive and convenient learning
environment where student satisfaction is achieved. The Company offers a
flexible schedule of classes, providing its students with the opportunity to
attend classes throughout the day, as well as nights and weekends. Schools
operate year-round, permitting students to complete their course of study more
quickly. The Company limits class sizes and focuses the efforts of its faculty
on teaching students rather than research. Personal interaction between
students and faculty is encouraged and the Company offers several support
programs, such as on-campus counseling and tutoring, which are designed to
help students successfully complete their course of study. The Company also
maintains a toll-free student hotline to address and help resolve student
concerns. The Company believes these efforts help attract new students,
enhance students' probability of success and maintain competitive retention
rates.
Growth Strategy
The Company intends to strengthen its position as a leading provider of
career-oriented private, for-profit post-secondary education in the United
States. To accomplish this objective, the Company will pursue the following
growth strategies:
Enhance Growth at Existing Campuses. The Company intends to enhance growth
at existing campuses through the following measures:
Curriculum Expansion and Development. The Company intends to continue
developing and expanding its curricula based on market research and the
recommendations of its faculty, employees, industry advisory board members
and a dedicated curriculum development team. The Company believes
considerable opportunities exist for curriculum expansion in both operating
divisions and expects to continue developing and adding new curricula and
selectively replicating existing programs at new locations, including
introducing its longer-term programs more broadly. In fiscal 1998, the
Company replicated existing programs at five new locations and initiated
new programs at three locations. For example, the RCi division launched a
master's of science in criminal justice and an executive MBA program in
1997 and is developing additional new programs such as healthcare
administration.
Integrated and Centralized Marketing Program. The Company believes that
it can increase student enrollment at its existing and newly opened or
acquired schools by employing an integrated marketing program utilizing an
extensive direct response advertising campaign delivered through
television, radio, newspaper, direct mail and the internet. In addition,
the Company has recently begun a significant sales and marketing effort
directed at high school guidance counselors and has also begun to directly
target potential government and corporate clients. A professional marketing
staff at the Company's headquarters coordinates
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marketing efforts through an in-bound call center and the sophisticated
real-time leads tracking capability of its SAS system.
Facilities Enhancement and Expansion. Due to increased enrollments, the
Company has faced temporary physical plant limitations at a number of its
colleges, particularly the CSi campuses. In order to expand capacity, as
well as to improve the location and appearance of its facilities, the
Company has relocated, and will continue to systematically relocate,
selected colleges within their respective markets to larger, enhanced
facilities upon lease expiration. Fourteen colleges have been relocated
since 1995. Since the Company acquired its various colleges, it has
increased the total square footage of leased space by approximately 40,000
square feet over that existing at the time the various schools were
acquired.
Establish Additional Locations. The Company anticipates creating "Additional
Locations" of its existing institutions to enter new geographic markets and to
create additional capacity in existing markets. Opening additional locations
will enable the Company to effectively leverage its infrastructure and
curriculum library. Establishing additional locations rather than opening new
colleges also allows the Company to become eligible for Title IV funding and
accreditation more expeditiously. The Company has considerable experience in
operating Additional Locations of its existing colleges and is currently
considering opening additional locations in Houston, Texas and Chesapeake,
Virginia, subject to contingencies such as identifying suitable facilities,
negotiating acceptable lease terms, and retaining qualified personnel to
manage and staff those locations. The Company has also established demographic
and market criteria to evaluate other cities as potential sites for additional
locations.
Expand Service Areas and Delivery Models. The Company seeks to enhance its
growth by more aggressively pursuing contract training and distance learning
opportunities.
Contract Training. The Company seeks to expand its presence in the
government and corporate training markets. The Company's CSi division
employs a full-time contracts administrator and actively pursues training
opportunities through the Job Training Partnership Act (the "JTPA") and
other state and federal programs. To date, nine of the Company's schools
have obtained contracts under these programs. The Company believes that
corporate training is an attractive market and that its curriculum and
national market presence address the needs of a variety of employers.
Distance Learning. The Company anticipates that distance learning will
become an increasingly important component of the higher education market.
The Company is actively pursuing relationships with technology providers
which will allow the Company's colleges to capitalize on distance learning
opportunities.
Selectively Acquire Accredited Proprietary Colleges. Since its formation the
Company has completed and integrated several acquisitions, including two
multicampus acquisitions, and is selectively seeking to acquire additional
institutions that can benefit from its operational expertise. The Company will
seek to acquire schools that generally possess: (i) complimentary or
attractive new curricula, (ii) locations in or near metropolitan areas, and
(iii) strong franchise value (name recognition or marketability).
Programs of Study
The Company's diploma programs are intended to provide students with the
requisite knowledge and job skills for entry-level positions in their chosen
career field. The Company's degree programs are primarily designed to help
career-oriented adults advance in business and industry. The Company's
curriculum development team has responsibility for maintaining high quality,
market driven curricula. Each college also utilizes advisory boards to help
evaluate and improve the curriculum for each program offered. These advisory
boards meet at least twice a year and are comprised of local industry and
business professionals. Board members provide valuable input regarding changes
in the discipline, new technologies and any other factors that require
curriculum adjustments. The Company believes its advisory boards give it the
ability to adapt quickly to market changes and provide a distinct competitive
advantage for the Company. For this reason, the Company is committed to
maintaining its strong and proactive advisory boards.
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Among the CSi colleges, the curriculum principally includes medical
assisting, dental assisting, medical office management, ophthalmic technician,
business operation, medical administrative assistant, respiratory therapy
technician, and electronics and computer technology. Medical assisting is the
most popular program of study, often accounting for 60% or more of the student
body at any given CSi campus. The four National Institute of Technology
("NIT") colleges within the CSi division also offer electronics technology. At
these colleges, the student population is generally split between electronics
and medical assisting. The RCi curriculum includes accounting, business
administration, computer information technology, hospitality management,
marketing, criminal justice, medical assisting, paralegal, commercial art,
court reporting, film and video and travel and tourism. Most programs lead to
an associate's degree, while at the Florida Metropolitan University campuses
most programs also lead to a bachelor's degree. Master's degrees are also
offered at FMU in business administration and criminal justice.
Diploma programs generally have a duration of 8-15 months, however, the
electronics and computer technology programs last 13-19 months. Associate's
degree programs have a duration of 18-24 months, bachelor's degree programs
last 36-48 months and master's degree programs have a duration of 24 months
(except for the executive MBA, which is 12 months). As of November 30, 1998,
6,916 students were enrolled in associate's programs, 1,717 were enrolled in
bachelor's programs, 488 were enrolled in master's programs and 6,791 were
enrolled in diploma programs.
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The following chart reflects the general courses of study at the Company's
colleges, along with the number of locations that offer those courses and the
student population for each, as of November 30, 1998.
STUDENT POPULATION BY AREAS OF STUDY
<TABLE>
<CAPTION>
Number of Student
Locations Population
--------- ----------
<S> <C> <C>
Diploma Programs
Business Operations....................................... 4 493
Electronics & Computer Technology......................... 4 470
Dental Assisting.......................................... 8 695
Medical Assisting......................................... 17 4,106
Medical Office Management................................. 9 704
Ophthalmic Technician..................................... 3 65
Respiratory Therapy Technology............................ 1 53
General................................................... 18 205
------
TOTAL................................................... 6,791
Associate's Degree Programs
Business Administration (includes criminal justice and
paralegal)............................................... 16 3,279
Court Reporting........................................... 3 154
Commercial Art............................................ 2 174
Computer Information Systems.............................. 13 1,101
Film & Video.............................................. 2 165
Hotel/Restaurant Management............................... 4 37
Medical Assisting......................................... 11 1,100
Secretarial/Legal Assistant............................... 7 294
Travel & Tourism.......................................... 6 207
Electronics............................................... 1 188
General................................................... 17 217
------
TOTAL................................................... 6,916
Bachelor's Degree Programs
Business Administration (includes criminal justice and
paralegal)............................................... 8 1,338
Computer Information Science/Programming.................. 7 362
Hospitality Management.................................... 1 17
------
TOTAL................................................... 1,717
Master's Degree Programs
Business Administration (MBA)............................. 8 471
Criminal Justice.......................................... 1 17
------
TOTAL................................................... 488
COMPANY TOTAL........................................... 15,912
======
</TABLE>
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Marketing and Recruitment
The Company employs a variety of methods to attract qualified applicants who
will benefit from the Company's programs and achieve success in their chosen
career fields. The Company believes that one of the principal attractions for
prospective students is the excellent reputation which the Company's schools
enjoy in their respective communities, where nine have been operating for more
than 100 years and all but two have been operating for more than 15 years. The
Company believes that the franchise value of these schools enhances their
marketability within their respective communities. This franchise value, along
with the quality of the programs offered, has enabled the Company to generate
significant new student enrollments from referrals. For the year ended June
30, 1998, the Company generated approximately 31% of its new student
enrollments from referrals.
The Company also employs a variety of direct response advertising techniques
to generate leads on candidates for its schools. The Company's advertising
department generates approximately 200,000 leads per year through television,
direct mail, newspaper, and yellow pages. The effectiveness of this
advertising campaign is dependent on timely and accurate lead tracking. To
that end, the Company operates a Call Center at its headquarters, staffed by a
team of operators who receive incoming lead calls generated by all television
and newspaper media sources. These trained operators enter data on each
prospect into the SAS computer system during the call and immediately transmit
the lead to the appropriate college. The college admissions department
receives the lead instantaneously and the local admissions representative
phones the prospect to begin the admissions process.
This leads tracking capability allows the Company to identify leads
generated by specific commercials and spot time. The Company's three
advertising agencies are networked into the Company's SAS data base and are
provided with real time information on the effectiveness of individual
commercials as well as the effectiveness of the media "buy." The agencies
consult with the Company's advertising department to adjust schedules for ads
depending on the Company's needs and the effectiveness of particular ads.
Since nearly 78% of the Company's advertising budget is spent on television
and newspaper ads, the availability of timely and accurate lead information is
critical to management of the leads generation process. For the year ended
June 30, 1998, 49% of the Company's new student enrollments were generated
through television, newspaper and yellow pages advertising, 31% were generated
through referrals, 10% were generated through direct mail, and 10% were
generated through a variety of other methods. Television and referrals
combined generate nearly two thirds of all the Company's new student
enrollments. The Company has recently initiated a significant marketing effort
directed at the high school market.
Admissions
The Company employs approximately 170 admissions representatives who work
directly with prospective students to facilitate the enrollment process. These
representatives interview and advise students interested in specific careers
to determine the likelihood of their success and are a key component of the
Company's effort to generate interest in its educational services. In
satisfaction surveys conducted quarterly, students have consistently given
high marks to the Company's admissions personnel for helpfulness, courtesy and
accuracy of information. Because the Company's success is highly dependent on
the efficiency and effectiveness of its admissions process, the Company spends
considerable time and energy training its representatives to improve their
product knowledge and customer service. The Company also employs various
supervisory and monitoring efforts (including a survey of students to solicit
their views of the "truthfulness" of the admissions process) to help ensure
compliance by its staff with government regulations and Company policy.
The Company seeks to identify students that have appropriate qualifications
to succeed in its schools. All candidates for admission to colleges in the
Company's RCi division must have a high school diploma or a GED and must pass
a standardized admissions test. Students with these credentials can also
attend colleges in the Company's CSi division. In addition, thirteen colleges
in the CSi division accept non-high school graduates that can demonstrate an
ability to benefit ("ATB") from the program by passing certain tests required
by the DOE.
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The Company believes that ATB students can successfully complete many of its
diploma programs and the Company's colleges have demonstrated success in
graduating and placing these students over the years. As of November 30, 1998,
ATB students accounted for approximately 5.0% of total enrollments in the
Company's schools. See "Financial Aid and Regulation--Federal Oversight of the
Title IV Programs--Ability to Benefit Regulations."
Placement
One of the primary reasons students decide to attend a particular college is
its placement success, which is critical to a college's reputation and its
ability to continue successfully recruiting new students. The Company
maintains a dedicated placement department at each college and, in the
aggregate, employs approximately 60 professionals in this capacity. Placement
staff work with students from the time they begin their courses of study to
prepare them for the job search they will conduct at the end of their
programs. The Company views its placement departments as essentially in-house
employment agencies, assisting students with resumes, conducting practice
interview sessions, and recruiting prospective employers for the colleges'
graduates.
The efforts devoted by the Company's colleges to place their students have
achieved excellent results, with most colleges achieving and maintaining high
placement rates for their graduates. Based on information received from
graduating students and employers for fiscal year 1997, 83% of the Company's
graduates who were "available for placement" were placed within six months
after their graduation date. In accordance with industry practice, the term
"available for placement" includes all graduates except those who are
continuing their education, are in active military service or are deceased or
disabled, and foreign students who are ineligible to work in the United States
after graduation.
Tuition
Typical tuition for the Company's diploma programs range from $4,700 to
$13,000, depending upon the nature and length of the program. Tuition for
degree programs is charged on a credit hour basis and varies by college,
ranging from $158 to $189 per undergraduate credit hour, depending upon the
program of study and the number of courses taken per quarter. Tuition for
graduate programs is $263 per credit hour (except for the executive MBA
program, which is $457 per credit hour.). On average, an undergraduate degree
candidate can expect tuition of approximately $6,000 per academic year, while
a master's degree candidate can expect tuition of approximately $6,300 per
academic year. In addition to tuition, students at the Company's schools must
also typically purchase textbooks and other supplies as part of their
educational programs. The Company anticipates increasing tuition based on the
market conditions prevailing at its individual colleges. Over the last three
years the Company has initiated tuition increases typically ranging from 3% to
7% per year on an individual college basis. The Company's tuition ranges are
competitive with similar institutions, but like many proprietary institutions,
are somewhat higher than public institutions such as community colleges and
state universities. See "Business--Competition."
Under DOE regulations, if a student fails to complete the initial period of
enrollment (i.e., quarter, trimester, semester, academic year, or program, as
applicable), the institution must pay the largest refund under the federal pro
rata refund policy (calculated through 60% of the period of enrollment), state
refund policy (in California, a pro rata refund may be required for the
duration of the program), or the accrediting agency refund policy. If the
student terminates after the initial period, the institution must pay the
refund for such subsequent period under the state refund policy or, if no such
policy applies, the larger of the amount required by additional federal refund
policy requirements or the institution's own policy.
Faculty
Faculty at all of the Company's colleges are expected to be industry
professionals and hold appropriate credentials in their respective
disciplines. The Company chooses faculty carefully and provides support for
these professionals to pursue professional development activities. The Company
believes the skill and dedication of its
43
<PAGE>
faculty have the single greatest impact on the placement and success of its
students following their graduation. As of September 30, 1998, the Company
employed 1,310 faculty, 270 of whom were full time employees. Faculty
represent 62% of all employees in the Company.
Campus Administration
The Company sets policy for all of the schools and implements these policies
through the coordination of a Vice President of Operations and two Regional
Operations Directors in each division. The college presidents, in consultation
with their respective management teams, have the responsibility for the day-
to-day operation of the schools. Each college employs the following management
personnel which report to the College President: (i) an academic dean or
education director, (ii) an admissions director, (iii) a placement director
and (iv) a finance or business director. Corporate personnel at headquarters
manage several key functions, including financial aid, MIS, finance, marketing
and advertising, purchasing, human resources, payroll, curriculum development,
leads management, staff training and development, and internal compliance
audit. Among the principal oversight functions performed by the Company, in
cooperation with regional and college managers, is the annual budget process.
The budget process establishes goals for each college and sets performance
incentives for achieving targeted results. The Company's senior management
have daily access to operational data through its SAS system and conduct
weekly conference calls with the school presidents to review results of
operations and set or reorder priorities for the coming week.
Management and Employees
The Company's management is led by David Moore, Paul St. Pierre, Frank
McCord, Lloyd Holland and Dennis Devereux, each of whom has significant
experience in the private, for-profit post-secondary education industry, and
who together have over 60 years experience in the industry. See "Management."
The Company believes the extensive experience of its executives is a
significant factor in the rapid growth of the Company.
Beyond the senior management level, the Company structure includes a Vice
President of Operations, a Vice President of Education, four regional
operations directors and four regional admissions directors. Currently, the
Company has approximately 2,120 employees, of whom approximately 85 are
employed at the Company's headquarters. Neither the Company nor any of its
colleges has any collective bargaining agreements with its employees. All
regular full-time employees who are scheduled to work at least 30 hours per
week (20 hours for instructors) are eligible to participate in the Company's
benefit programs so long as they have satisfied the eligibility waiting
period. The Company's benefits include comprehensive healthcare (which is a
co-pay program), life insurance, disability insurance and a 401(k) program.
The Company considers its relations with its employees to be good.
Loan Program
In 1997, the Company expanded its internal loan program to assist eligible
students in those seven colleges that lost eligibility to participate in the
FFEL program due to Cohort Default Rates in excess of 25% for three
consecutive years prior to their acquisition by the Company. The Company
extends loans to these students based on the same qualifying criteria as the
FFEL Program. For example, in order to qualify for an FFEL loan, a student
must meet all admissions requirements and be admitted into one of the
college's programs. In addition, the prospective student must meet with a
financial aid officer at the college and complete all the appropriate
applications required by the Title IV regulations. At the four colleges that
are currently ineligible to participate in the FFEL program, prospective
students who meet all eligibility requirements are offered an internal loan.
As with the FFEL loan program, no independent credit evaluations are
performed. The loans generally have maturities ranging from 6 to 84 months
after graduation and bear interest at a fixed rate that is competitive with
rates under Title IV Programs. Monthly loan payments begin the first month
after the loan date and generally vary between $60 and $150, including loan
principal as well as interest. Student borrowers are required to make payments
while still enrolled, thereby reducing the debt they otherwise would assume
upon completion of their studies. The aggregate amount of earned loans
outstanding to students at these schools as of September 30, 1998, was
approximately $2.7 million, with an average individual earned loan balance of
approximately $2,500. Loans under the Company's internal financing program are
unsecured.
44
<PAGE>
Technology
The Company is committed to providing its students with access to the
technology necessary for developing the skills required to succeed in their
chosen career. In order to ensure that programs of study remain current and
effective, classrooms and laboratories must be properly equipped with modern
equipment appropriate to the course of study. To that end, the Company has
established a purchasing department which manages the capital expenditure
requests of all of its colleges and establishes national contracts for cost
effective acquisition of equipment. Computers, medical laboratory equipment,
dental laboratory equipment, optical laboratory equipment, software and all
related instructional materials are coordinated with, and purchased by, the
Company's Purchasing Manager. This national purchasing power has enabled the
Company to furnish its computer labs with modern computers at reasonable
prices. Purchasing decisions are prioritized among and within colleges through
the annual budget preparation process. Based on recent experience, the Company
plans annual routine capital expenditures of approximately 2% of revenue.
Competition
The post-secondary education market, consisting of approximately 6,000
accredited institutions, is highly fragmented and competitive, with no
institution having a significant market share. Many of the programs offered by
the Company's colleges are also offered by public and private non-profit
institutions, as well as by many of the approximately 2,000 private, for-
profit colleges and schools. Typically, the tuition charged by public
institutions is less than tuition charged by the Company for comparable
programs because public institutions receive state tax subsidies, donations,
and government grants that are not available to the Company's colleges.
However, tuition at private non-profit institutions is typically higher than
that at the Company's colleges. In either case, the Company believes its
colleges compete effectively with other education alternatives for several
reasons: (i) the Company's colleges provide instruction that immediately
prepares students to enter careers; (ii) many of the Company's programs are
not offered at public institutions and are the only way students can train for
particular careers, (iii) the Company's educational programs are designed to
promote on-schedule completion, allowing students to move from the classroom
to the workplace within a finite period; (iv) more flexible schedules and
greater availability of required courses, resulting in shorter completion time
and higher completion rates and (v) placement services offered by the Company
are generally superior to those offered by private and public non-profit
colleges and universities.
The Company competes in most markets with other private, for-profit
institutions offering similar programs. The Company believes that the strong
franchise value of its colleges, the qualifications of its faculty, its
facilities, and its emphasis on student services allow the Company to compete
effectively. In addition, most of the Company's colleges have been operating
in their markets for more than 35 years, which has led to a substantial number
of graduates who are working in the market and validating the quality of the
colleges' programs. For example, the Bryman Colleges have been a commanding
presence in the healthcare education field in California for over 35 years.
Many physicians and dentists in California have hired Bryman graduates and
continue to view Bryman as a source of qualified Medical and Dental
Assistants.
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<PAGE>
Facilities
The Company's 35 colleges are located in metropolitan and suburban areas in
16 states. Facilities among the colleges vary considerably in both size and
type. The Company's headquarters and 30 of its schools are located in leased
facilities; five of the Company's schools are located in facilities owned by
the Company. As lease expirations approach in its various facilities, the
Company assesses the existing space in terms of current needs, prospects for
future growth, condition of the facility, desirability of the location and
financial terms. Based on the above criteria, the Company decides whether or
not to relocate its schools. Since acquiring the colleges, the Company has
relocated fourteen colleges. Square footage of the Company's colleges varies
significantly based upon the type of programs offered and the market being
served. The following table reflects square footage by location as of
November 30, 1998:
<TABLE>
<CAPTION>
Approx
Square
College Footage
------- -------
<S> <C>
RCi Division
Blair College, Colorado Springs, CO*............................. 22,300
Duff's, Pittsburgh, PA........................................... 40,000
FMU, Brandon, FL ................................................ 35,250
FMU, Ft. Lauderdale, FL ......................................... 34,500
FMU, Lakeland, FL................................................ 23,717
FMU, Melbourne, FL*.............................................. 16,500
FMU, Orlando, FL North .......................................... 39,424
FMU, Orlando, FL South........................................... 31,680
FMU, Pinellas, FL................................................ 30,344
FMU, Tampa, FL*.................................................. 30,000
Las Vegas College, Las Vegas, NV................................. 16,664
Mountain West College, Salt Lake City, UT........................ 19,620
Parks College, Thornton, CO North*............................... 24,000
Parks College, Aurora, CO South*................................. 30,000
RBI, Rochester, NY............................................... 29,300
Springfield College, Springfield, MO............................. 23,012
Western Business College, Vancouver, WA.......................... 10,243
Western Business College, Portland OR............................ 26,800
Corporate Offices
Santa Ana, CA................................................... 21,957
Gulfport, MS.................................................... 1,580
</TABLE>
<TABLE>
<CAPTION>
Approx
Square
College Footage
------- -------
<S> <C>
CSi Division
Bryman, Brookline, MA............................................ 6,700
Bryman, El Monte, CA............................................. 21,503
Bryman, Gardena, CA.............................................. 14,356
Bryman, Los Angeles, CA.......................................... 13,824
Bryman, New Orleans, LA.......................................... 14,443
Bryman, Orange, CA............................................... 11,081
Bryman, San Francisco, CA........................................ 18,500
Bryman, San Jose, CA North....................................... 14,624
Bryman, San Jose, CA South....................................... 3,054
Bryman, Reseda, CA............................................... 14,200
Bryman, Sea Tac, WA.............................................. 12,239
Kee Business College, Newport News, VA........................... 16,126
NIT, Cross Lanes, WV............................................. 18,000
NIT, San Antonio, TX............................................. 29,500
NIT, Southfield, MI.............................................. 22,260
NIT, Wyoming, MI................................................. 24,000
Skadron College, San Bernardino, CA.............................. 21,600
</TABLE>
- --------
* Indicates owned property.
Company History
The Company was founded in February of 1995 by David Moore, Paul St. Pierre,
Frank McCord, Dennis Devereux and Lloyd Holland, the five senior managers of
what was then NECI, a subsidiary of NEC, to capitalize on opportunities in
career oriented post-secondary education. Between June and December of 1995,
the Company acquired 16 of NECI's colleges, each of which was a diploma
granting school with a focus in healthcare. In July and September of 1996, the
Company completed two single campus acquisitions of additional diploma
granting schools. These 18 colleges (one of which has since been closed) today
comprise the Company's CSi division.
In October of 1996, the Company completed its second multi-campus
acquisition through the purchase of 18 campuses from Phillips Colleges, Inc.
Each of these colleges are degree granting schools with a primary focus on
degrees in business. These colleges comprise the Company's RCi division. Since
this most recent acquisition, the Company has focused on improving the
operations and profitability of its schools.
Legal Proceedings
From time to time, the Company has been involved in legal proceedings
arising in the ordinary course of business. None of the matters in which the
Company is currently involved is expected to have a material adverse effect on
the Company's business or financial condition.
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<PAGE>
FINANCIAL AID AND REGULATIONS
Accreditation
Accreditation is a voluntary non-governmental process by which institutions
submit themselves to qualitative review by an organization of peer
institutions. There are three types of accrediting agencies: (i) national
accrediting agencies, which accredit institutions on the basis of the overall
nature of the institutions without regard to geographical location; (ii)
regional accrediting agencies, which accredit institutions within their
geographic areas; and (iii) programmatic accrediting agencies, which accredit
specific educational programs offered by institutions. Accrediting agencies
primarily examine the academic quality of the instructional programs offered
at the institution, including retention and placement rates, and also review
the administrative and financial operations of the institution to insure that
it has the academic and financial resources to achieve its educational
mission. A grant of accreditation is generally viewed as certification that an
institution and its programs meet generally accepted academic standards.
Pursuant to provisions of the HEA, the DOE relies on accrediting agencies to
determine whether an institution and its educational programs are of
sufficient quality to permit it to participate in Title IV Programs. The HEA
specifies certain standards that all recognized accrediting agencies must
adopt in connection with their review of post-secondary institutions and
requires accrediting agencies to submit to a periodic review by the DOE as a
condition of their continued recognition. All of the Company's 35 colleges are
accredited by an accrediting agency recognized by the DOE. Twenty of the
Company's schools are accredited by the Accrediting Council for Independent
Colleges and Schools ("ACICS") and the remaining fifteen are accredited by the
Accrediting Commission of Career Schools and Colleges of Technology
("ACCSCT").
The following table specifies the accrediting agency and the expiration of
accreditation for each college:
<TABLE>
<CAPTION>
Accrediting
College Location Agency Expiration
------- -------- ----------- ----------
<S> <C> <C> <C>
RCi Division
Blair College................... Colorado Springs, CO ACICS 12/31/2002
Duff's Business Institute....... Pittsburgh, PA ACICS 12/31/2000
FMU--Ft. Lauderdale College..... Fort Lauderdale, FL ACICS 12/31/1999
FMU--Orlando College, North..... Orlando, FL ACICS 12/31/2001
FMU--Orlando College, South..... Orlando, FL ACICS 12/31/2001
FMU--Orlando, Melbourne......... Melbourne, FL ACICS 12/31/2001
FMU--Tampa College.............. Tampa, FL ACICS 12/31/2001
FMU--Tampa College, Brandon..... Tampa, FL ACICS 12/31/2001
FMU--Tampa College, Lakeland.... Lakeland, FL ACICS 12/31/1999
FMU--Tampa College, Pinellas.... Clearwater, FL ACICS 12/31/1999
Las Vegas College............... Las Vegas, NV ACICS 12/31/2000
Mountain West College........... Salt Lake City, UT ACICS 12/31/2000
Parks College North............. Thorton, CO ACICS 12/31/2000
Parks College South............. Aurora, CO ACICS 12/31/2000
Rochester Business Institute.... Rochester, NY ACICS 12/31/2000
Springfield College............. Springfield, MO ACICS 12/31/2000
Western Business College,
Portland....................... Portland, OR ACICS 12/31/2001
Western Business College,
Vancouver...................... Vancouver, WA ACICS 12/31/2001
CSi Division
Bryman College.................. Los Angeles, CA ACCSCT 12/31/2000
Bryman College.................. New Orleans, LA ACCSCT 12/31/2001
Bryman Institute................ Brookline, MA ACCSCT 12/31/2002
National Institute of
Technology..................... Cross Lanes, WV ACCSCT 12/31/2001
Bryman College.................. Orange, CA ACCSCT 12/31/2002
Bryman College.................. El Monte, CA ACCSCT 12/31/1999
</TABLE>
47
<PAGE>
<TABLE>
<CAPTION>
Accrediting
College Location Agency Expiration
------- -------- ----------- ----------
<S> <C> <C> <C>
Bryman College.......... San Francisco, CA ACCSCT 12/31/2001
Bryman College.......... SeaTac, WA ACCSCT 12/31/2002
Bryman College.......... Gardena, CA ACCSCT 12/31/2002
Bryman College.......... Reseda, CA ACCSCT 12/31/2001
Bryman College North.... San Jose, CA ACCSCT 12/31/2003
Bryman College South.... San Jose, CA ACCSCT 12/31/2001
Kee Business College.... Newport News, VA ACICS 12/31/2004
National Institute of
Technology............. San Antonio, TX ACCSCT 12/31/2001
National Institute of
Technology............. Southfield, MI ACCSCT 12/31/2003
National Institute of
Technology............. Wyoming, MI ACCSCT 12/31/2002
Skadron College......... San Bernardino, CA ACICS 12/31/2001
</TABLE>
The HEA requires accrediting agencies recognized by the DOE to review many
aspects of an institution's operations in order to ensure that the education
or training offered is of sufficient quality to achieve, for the duration of
the accreditation period, the stated objectives of the education or training
offered. Under the HEA, recognized accrediting agencies must conduct regular
inspections and reviews of the institutions they accredit, which may include
unannounced site visits to institutions that perform career oriented education
and training. In addition to periodic accreditation reviews, institutions
undergoing a change of ownership must be reviewed by the accrediting agency.
All of the Company's colleges have been visited and reviewed by their
respective accrediting agencies subsequent to the date of acquisition by the
Company. Accrediting agencies also monitor institutions' compliance during the
term of their accreditation. If an accrediting agency believes that an
institution may be out of compliance with accrediting standards, it may place
the institution on probation or a similar warning status or direct the
institution to show cause why its accreditation should not be revoked. An
accrediting agency may also place an institution on "reporting" status in
order to monitor one or more specific areas of the institution's performance.
An institution placed on reporting status is required to report periodically
to its accrediting agency on that institution's performance in specific areas.
Failure to demonstrate compliance with accrediting standards in any of these
instances could result in loss of accreditation. While on probation, show
cause or reporting status, an institution may be required to seek permission
of its accrediting agency to open and commence instruction at new locations.
One of the Company's colleges, located in Gardena, California, is on reporting
status and is required to file a report on timeliness of refunds on June
25, 1999. Two of the Company's other colleges, located in San Jose, California
and Wyoming, Michigan, are on reporting status with respect to completion and
placement outcomes. Each of these colleges has filed an outcomes report with
the applicable accrediting agency, and such agency is scheduled to review the
reports in February 1999.
Student Financial Assistance
Students attending the Company's schools finance their education through a
combination of family contributions, individual resources, government-
sponsored financial aid (including Title IV loan programs and those sponsored
by the Company) and tuition reimbursement from employers. The Company
estimates that over 77% of its students receive financial aid from Title IV
Programs. For the 1998 fiscal year, approximately 72% of the Company's tuition
and fee revenue (on a cash basis) was derived from Title IV Programs.
To provide students access to financial assistance available through the
Title IV Programs, an institution must be (i) authorized to offer its programs
of instruction by the relevant agencies of the state in which it and its
additional campuses, if any, are located, (ii) accredited by an accrediting
agency recognized by the DOE, and (iii) certified as eligible by the DOE. In
addition, the institution must comply with strict accounting and disbursement
standards regarding Title IV Program funds.
Under HEA and its implementing regulations, each of the Company's colleges
that participate in Title IV Programs must comply with certain standards on an
institutional basis. For purposes of these standards, the regulations define
an institution as a main campus and its additional locations (formerly called
"branch" campuses), if any. Under this definition, each of the Company's
colleges is a separate institution, except for the following: Bryman College
in New Orleans, Louisiana is an additional location of Bryman College (South)
in San Jose, California; the FMU Campuses in Melbourne, Florida and Orlando,
Florida (South) are additional
48
<PAGE>
locations of FMU, Orlando, Florida (North); FMU in Brandon, Florida is an
additional location of FMU, Tampa, Florida; FMU, Lakeland is an additional
location of FMU, Pinellas, Florida; Parks College (South) in Denver, Colorado
is an additional location of Parks College (North) in Denver; and Western
Business College in Vancouver, Washington is an additional location of Western
Business College in Portland, Oregon. (The Western Business College, Vancouver
campus, albeit an additional location, is not accounted for separately from
the main campus in Portland. Unique to the Vancouver campus, all students must
complete part of their course of study at the main campus in Portland).
All of the Company's colleges participate in Title IV Programs. Currently,
four of the CSi colleges are ineligible to participate in the federal student
loan program (FFEL) as a result of previous Cohort Default Rates relating to
fiscal years prior to the acquisition of the schools by the Company. In 1997,
the Company expanded its internal loan program to assist students in those
seven colleges which lost access to FFEL loans during that year (three of the
seven regained eligibility during fiscal 1998 and significantly reduced their
reliance on the internal loan program). The internal loans to these students
essentially replace the loss of the FFEL loans, and thus are generally for
greater amounts (average of approximately $3,200) and longer periods of time
(average of approximately 4 years) than the normal installment payment plans
routinely afforded to many of the Company's students to supplement their
financial aid. Therefore, the risk of loss is also greater. While the Company
believes it has adequate reserves against these loan balances, there can be no
assurance that losses will not exceed reserves. Losses in excess of reserves
could have a material adverse effect on the Company's business, results of
operations and financial condition. The terms of the internal loan program are
similar in most respects to the FFEL. However, unlike the FFEL, students
participating in the internal loan program are required to make monthly
payments while in school and are given no grace period. The interest rate and
repayment period are identical to the FFEL program.
The loss of eligibility to participate in FFEL has not had a material
adverse effect on new student enrollments at the four colleges which are still
ineligible to participate in FFEL. The Company has, however, increased its bad
debt reserves for the internal loans and has been negatively affected by the
reduced cash flow resulting from the loss of FFEL. With the reinstatement of
three of the seven schools (representing over 50% of the combined total
student population in all seven schools) to the Title IV Loan Program, the
Company expects the working capital needed to fund these internal loans to
decrease significantly in the future. See "--Federal Support for Post-
secondary Education--Cohort Default Rates," "Risk Factors--Potential Adverse
Effects of Regulation," and "Management's Discussion and Analysis--Liquidity
and Capital Resources".
Federal Support for Post-Secondary Education
While many of the states support their public colleges and universities
through direct state subsidies, the federal government provides a substantial
part of its support for post-secondary education by way of grants and loans to
students who can use this money at any institution certified as eligible by
the DOE. Since 1972, Congress has expanded the scope of the HEA by, among
other things, (i) providing that students at proprietary institutions, such as
the Company's institutions, are eligible for assistance under the Title IV
Programs, (ii) establishing a program for loans to parents of eligible
students, (iii) opening the Title IV Programs to part-time students, and (iv)
increasing maximum loan limits and in some cases eliminating the requirement
that students demonstrate financial need to obtain federally guaranteed loans.
Most recently, the FDL program was enacted, enabling students to obtain loans
directly from the federal government rather than from commercial lenders.
Congress reauthorizes the student financial assistance programs of the HEA
approximately every five years. The current reauthorization process was
recently completed in 1998. See "Risk Factors--Risk That Legislative Action
Will Reduce Financial Aid Funding or Increase Regulatory Burden."
Students at the Company's institutions receive grants, loans and work
opportunities to fund their education under several of the Title IV Programs,
of which the two largest are the FFEL program and the Federal Pell Grant
("Pell") program. The Company's institutions also participate in the Federal
Supplemental Educational Opportunity Grant ("FSEOG") program, and some of them
participate in the Perkins program and the Federal Work-Study ("FWS") program.
None of the Company's institutions is an active participant in the William D.
Ford Federal Direct Loan ("FDL") program.
49
<PAGE>
Most aid under the Title IV Programs is awarded on the basis of financial
need, generally defined under the HEA as the difference between the cost of
attending an educational 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.
Pell. Pell grants are the primary component of the Title IV Programs under
which the DOE makes grants to students who demonstrate financial need. Every
eligible student is entitled to receive a Pell grant; there is no
institutional allocation or limit. For the 1998-99 award year, Pell grants
range from $400 to $3,000 per year, and the authorization for such grants has
been increased in the 1998 Amendments. Amounts received by students enrolled
in the Company's institutions in the 1997-98 award year under the Pell program
equaled approximately 21% of the Company's net revenue.
FSEOG. FSEOG awards are designed to supplement Pell grants for the neediest
students. FSEOG grants generally range in amount from $100 to $4,000 per year;
however, the availability of FSEOG awards is limited by the amount of those
funds allocated to an institution under a formula that takes into account the
size of the institution, its costs and the income levels of its students. The
Company is required to make a 25% matching contribution for all FSEOG program
funds disbursed. Resources for this institutional contribution may include
institutional grants, scholarships and other eligible funds (i.e., funds from
foundations and other charitable organizations) and, in certain states,
portions of state scholarships and grants. During the 1997-98 award year, the
Company's required 25% institutional match was met by approximately $491,237
in funds from its institutions and approximately $49,339 in funds from state
scholarships and grants and from foundations and other charitable
organizations. Amounts received by students in the Company's institutions
under the federal share of the FSEOG programs in the 1997-98 award year
equaled approximately 1.0% of the Company's net revenue.
FFEL and FDL. The FFEL program consists of two types of loans, Stafford
loans, which are made available to students, and PLUS loans, which are made
available to parents of students classified as dependents. Under the FDL
program, students may obtain loans directly from the DOE rather than
commercial lenders. The conditions on FDL loans are generally the same as on
loans made under the FFEL program. None of the Company's institutions have
elected to participate in the FDL program. Under the Stafford loan program, a
student may borrow up to $2,625 for the first academic year, $3,500 for the
second academic year and, in some educational programs, $5,500 for each of the
third and fourth academic years. Students with financial need qualify for
interest subsidies while in school and during grace periods. Students who are
classified as independent can increase their borrowing limits and receive
additional unsubsidized Stafford loans. Such students can obtain an additional
$4,000 for each of the first and second academic years and, depending upon the
educational program, an additional $5,000 for each of the third and fourth
academic years. The obligation to begin repaying Stafford loans does not
commence until six months after a student ceases enrollment as at least a
half-time student. Amounts received by students in the Company's institutions
under the Stafford program in the 1997-98 award year equaled approximately
40.5% of the Company's net revenue. PLUS loans may be obtained by the parents
of a dependent student in an amount not to exceed the difference between the
total cost of that student's education (including allowable expenses) and
other aid to which that student is entitled. Amounts received by students in
the Company's institutions under the PLUS program in the 1997-98 award year
equaled approximately 1.3% of the Company's net revenue.
The Company's schools and their students use a wide variety of lenders and
guaranty agencies and have generally not experienced difficulties in
identifying lenders and guaranty agencies willing to make federal student
loans. Four of the Company's colleges are currently ineligible to participate
in FFEL and PLUS loan programs as a result of past Cohort Default Rates that
exceeded federal standards. One of these colleges will be eligible to reapply
for participation in October 1999, two colleges will be eligible to reapply in
October 2000, and the remaining college will be eligible to reapply in October
2001. Additionally, the HEA requires the establishment of lenders of last
resort in every state to ensure that students at any institution that cannot
identify such lenders will have access to the FFEL program loans. None of the
Company's colleges uses a lender of last resort.
50
<PAGE>
Perkins. Eligible undergraduate students may borrow up to $3,000 under the
Perkins program during each academic year, with an aggregate maximum of
$15,000, at a 5% interest rate and with repayment delayed until nine months
after the borrower ceases to be enrolled on at least a half-time basis.
Perkins loans are made available to those students who demonstrate the
greatest financial need. Perkins loans are made from a revolving account, 75%
of which was initially capitalized by the DOE. Subsequent federal capital
contributions, with an institutional match in the same proportion, may be
received if an institution meets certain requirements. Each institution
collects payments on Perkins loans from its former students and loans those
funds to currently enrolled students. Collection and disbursement of Perkins
loans is the responsibility of each participating institution. During the
1997-98 award year, the Company collected approximately $638,426 from its
former students in repayment of Perkins loans. In the 1997-98 award year, the
Company had no required matching contribution. The Perkins loans disbursed to
students in the Company's institutions in the 1997-98 award year equaled
approximately 1.0% of the Company's net revenue. In 1995, the Company's RCi
colleges voluntarily chose to discontinue participating in the Perkins
program. Bryman College in SeaTac, Washington also does not participate in the
Perkins program.
FWS. Under the FWS program, federal funds are made available to pay up to
75% of the cost of part-time employment of eligible students, based on their
financial need, to perform work for the institution or for off-campus public
or non-profit organizations. During the 1997-98 award year, the Company's
institutions and other organizations provided matching contributions totaling
approximately $156,147. At least 5% of an institution's FWS allocation must be
used to fund student employment in community service positions. FWS earnings
are not used for tuition and fees. However, in the 1997-98 award year, the
federal share of FWS earnings equalled .05% of the Company's net revenue.
Federal Oversight of the Title IV Programs
The substantial amount of federal funds disbursed through the Title IV
Programs coupled with the large numbers of students and institutions
participating in those programs have led to instances of fraud, waste and
abuse. As a result, the United States Congress has required the DOE to
increase its level of regulatory oversight of institutions to ensure that
public funds are properly used. Each institution which participates in the
Title IV Programs must annually submit to the DOE an audit by an independent
accounting firm of that institution's compliance with the Title IV Program
requirements, as well as audited financial statements. The DOE also conducts
compliance reviews, which include on-site evaluations, of several hundred
institutions each year, and directs student loan guaranty agencies to conduct
additional reviews relating to the FFEL programs. In addition, the Office of
the Inspector General of the DOE conducts audits and investigations of
institutions in certain circumstances. Under the HEA, accrediting agencies and
state licensing agencies also have responsibilities for overseeing
institutions' compliance with Title IV Program requirements. As a result, each
participating institution, including each of the Company's institutions, is
subject to frequent and detailed oversight and must comply with a complex
framework of laws and regulations or risk being required to repay funds or
becoming ineligible to participate in the Title IV Programs. In addition, the
DOE periodically revises its regulations (e.g., in November 1997, the DOE
published new regulations with respect to financial responsibility standards
which took effect on July 1, 1998) and changes its interpretation of existing
laws and regulations. See "--Financial Responsibility Standards."
Cohort Default Rates. A significant component of the Congressional
initiative aimed at reducing fraud, waste and abuse was the imposition of
limitations on participation in the Title IV Programs by institutions whose
former students defaulted on the repayment of federally guaranteed or funded
student loans at an "excessive" rate ("Cohort Default Rates"). Since the DOE
began to impose sanctions on institutions with Cohort Default Rates above
certain levels, the DOE has reported that more than 1,000 institutions have
lost their eligibility to participate in some or all of the Title IV Programs.
However, many institutions, including all of the Company's institutions, have
responded by implementing aggressive student loan default management programs
aimed at reducing the likelihood of students failing to repay their loans in a
timely manner. An institution's Cohort Default Rates under the FFEL and FDL
programs are calculated on an annual basis as the rate at which student
borrowers
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scheduled to begin repayment on their loans in one federal fiscal year default
on those loans by the end of the next federal fiscal year. An institution that
participates in both the FFEL and FDL programs, including any of the Company's
institutions, receives a single "weighted average" cohort default rate in
place of an FFEL or FDL cohort default rate. Any institution whose cohort
default rate equals or exceeds 25% for any one of the three most recent
federal fiscal years may be found by the DOE to lack administrative capability
and, on that basis, placed on provisional certification status for up to three
years. Provisional certification status does not limit an institution's access
to Title IV Program funds but does subject that institution to closer review
by the DOE and possible summary adverse action if that institution commits
violations of the Title IV Program requirements. Any institution whose Cohort
Default Rates equal or exceed 25% for three consecutive years will no longer
be eligible to participate in the FFEL or FDL programs for the remainder of
the federal fiscal year in which the DOE determines that such institution has
lost its eligibility and for the two subsequent federal fiscal years. In
addition, an institution whose cohort default rate for any federal fiscal year
exceeds 40% may have its eligibility to participate in all of the Title IV
Programs limited, suspended or terminated. The 1998 Amendments provide that
institutions which become ineligible to participate in the Title IV loan
programs because of Cohort Default Rates in excess of the applicable levels
will also become ineligible to participate in the Pell Grant Program. Since
the calculation of Cohort Default Rates involves the collection of data from
many non-governmental agencies (i.e., lenders, private guarantors or
servicers), as well as the DOE, the HEA provides a formal process for the
review and appeal of the accuracy of Cohort Default Rates before the DOE takes
any action against an institution based on such rates. The 1998 Amendments
expand institutions' ability to appeal loss of eligibility owing to such
default rates.
The Company proactively manages its students and has engaged two
professional default management firms to assist the Company in reducing the
Cohort Default Rates at its colleges. To date the two firms have favorably
impacted the Cohort Default Rates at the Company's colleges, lowering
historical default rates at certain colleges by ten percentage points or more.
The Company believes that professional default management services can
continue to materially improve the Cohort Default Rates at its colleges.
For federal fiscal year 1996, the published Cohort Default Rates for the
Company's CSi institutions ranged from a low of 4.9% to a high of 29.3%. For
the RCi colleges, the 1995 Cohort Default Rates ranged from a low of 13.2% to
a high of 22.7%. The average Cohort Default Rates for proprietary institutions
nationally were 23.9%, 21.1% and 19.9% in federal fiscal years 1993, 1994 and
1995, respectively. None of the RCi colleges has had a published cohort
default rate of 25% or greater for three consecutive years. Twelve of the RCi
colleges had fiscal 1993 Cohort Default Rates above 25%. However, none of the
RCi colleges had fiscal 1996 cohort default rates at or above 25%, and only
one of the RCi colleges, Las Vegas College, had a 1995 Cohort Default Rate
above 25%.
One of the Company's CSi institutions has default rates in excess of 25% for
the most recent three consecutive federal fiscal years published (1994, 1995,
1996). The published 1996 rate for this college, Skadron College in San
Bernardino, California, was 27.2%. This college, along with six additional
campuses, NIT in Wyoming, Michigan, Bryman Institute in Brookline,
Massachusetts, and the Bryman Colleges in El Monte, California, Los Angeles,
California, San Jose (South), California and New Orleans, Louisiana also had
default rates in excess of 25% for the 1992, 1993, and 1994 federal fiscal
years. As a result, six of these colleges became ineligible to participate in
the FFEL programs beginning in May 1997. The seventh, Skadron College in San
Bernardino, California, had lost its eligibility to participate in the FFEL
program in June of 1994.
Through the Company's aggressive default management efforts, two of these
seven colleges had fiscal 1995 published default rates below 25%: Bryman
College in Brookline, Massachusetts had a default rate of 23.4% and NIT in
Wyoming, Michigan had a default rate of 22.1%. Pursuant to extended
negotiations with the DOE regarding reinstatement of eligibility for these
seven campuses, the Company received notice in June 1998 that the DOE proposed
to reinstate three of the seven colleges, provided that the Company agree not
to pursue remedies for reinstatement of the remaining four campuses. The
Company has agreed to the terms of the proposal
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and the eligibility of the three campuses to participate in the FFEL Programs
has been reinstated. Of the remaining four, NIT in Wyoming, Michigan will be
eligible for reinstatement in 1999 and two of the other three (Bryman Colleges
in San Jose, California and New Orleans, Louisiana) will be eligible for
reinstatement in 2000, based on published rates for fiscal 1995 and 1996,
respectively. The Skadron College in San Bernardino, California will also be
eligible for reinstatement in 2000 as a result of a successful mitigating
circumstances appeal of its 1996 Cohort Default Rate.
The following table sets forth the Cohort Default Rates for the Company's
institutions for federal fiscal years 1993, 1994, 1995, and 1996:
<TABLE>
<CAPTION>
Cohort Default Rate
----------------------
Institution 1993 1994 1995 1996
----------- ---- ---- ---- ----
<S> <C> <C> <C> <C>
RCi Division
Blair College, Colorado Springs, CO..................... 15.0% 13.3% 15.5% 13.2%
Duff's Business Institute, Pittsburgh................... 30.8% 24.5% 17.1% 20.1%
FMU--Orlando (North, South, Melbourne)*................. 26.8% 18.8% 16.7% 20.0%
FMU--Pinellas (Lakeland)*............................... 27.8% 24.1% 21.5% 21.7%
FMU--Tampa (Brandon)*................................... 24.9% 19.9% 17.4% 20.4%
Ft. Lauderdale College.................................. 28.4% 23.9% 19.8% 19.5%
Las Vegas College....................................... 25.2% 23.7% 28.8% 18.9%
Mountain West College, Salt Lake City, UT............... 24.3% 18.0% 14.8% 16.5%
Parks College North and South, CO*...................... 30.1% 21.8% 19.3% 15.8%
Rochester Business Institute, Rochester, NY............. 21.3% 24.4% 24.6% 22.7%
Springfield College, Springfield, MO.................... 21.7% 14.8% 16.5% 18.8%
Western Bus. Col. (Portland, Vancouver)*................ 27.2% 23.0% 24.8% 21.7%
CSi Division
Bryman College, Brookline, MA........................... 37.9% 29.6% 23.4% 23.0%
Bryman College, El Monte, CA............................ 39.4% 31.5% 26.2% 14.7%
Bryman College, Gardena, CA............................. 30.6% 23.9% 25.8% 29.3%
Bryman College, Los Angeles, CA......................... 35.3% 33.6% 25.1% 18.8%
Bryman College, Orange CA............................... 24.9% 18.0% 19.5% 18.5%
Bryman College, San Francisco, CA....................... 21.6% 22.6% 21.0% 24.5%
Bryman College, San Jose No. ........................... 23.0% 22.5% 30.5% 22.3%
Bryman Col., San Jose South (New Orleans)*.............. 35.3% 31.1% 32.6% 20.2%
Bryman College, Sea Tac, WA............................. 15.0% 8.5% 7.5% 4.9%
Bryman College, Reseda, CA.............................. 28.3% 24.2% 21.4% 19.2%
Kee Business College, Newport News, VA.................. 20.6% 15.4% 2.6% 12.3%
NIT, Cross Lanes, WV.................................... 28.3% 11.7% 20.7% 19.1%
NIT, San Antonio, TX.................................... 31.4% 24.3% 24.5% 17.6%
NIT, Southfield, MI..................................... 32.2% 23.6% 18.9% 17.7%
NIT, Wyoming, MI........................................ 30.1% 25.9% 22.1% 14.7%
Skadron College, San Bernardino, CA**................... 30.3% 28.2% 25.1% 27.2%
</TABLE>
- --------
* Indicates additional location wherein cohort default rates are blended with
the main campus.
** The 1996 Cohort Default Rate for this college was successfully appealed
based on mitigating circumstances.
In addition, if an institution's cohort default rate for loans under the
Perkins Program exceeds 15% for any federal award year (i.e., July 1 through
June 30), that institution may be placed on provisional certification status
for up to three years. Fifteen of the Company's institutions have Perkins
Cohort Default Rates in excess of 15% for students who were scheduled to begin
repayment in the 1997 federal award year, the most recent year for which such
rates have been calculated. The Perkins Program Cohort Default Rates for these
institutions ranged from 36.7% to 81.6%. Default rates in excess of 15% could
result in provisional certification status.
Beyond the efforts of the professional default management firms, each of the
Company's colleges has adopted an internal student loan default management
plan. Those plans emphasize the importance of meeting
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loan repayment requirements and provide for extensive loan counseling, along
with methods to increase student persistence and completion rates and graduate
employment (placement) rates. Immediately upon a student's cessation of
enrollment, the professional default management firm initiates regular contact
with the student, and maintains regular contact throughout the grace period,
and continues this activity through the entire cohort period. The colleges
continue to work with the default management firm to maintain accurate and up-
to-date information on address changes, marital status changes, or changes in
circumstance that may allow the student to apply for additional deferments.
These activities are all in addition to the loan servicing and collection
activities of FFEL lenders and guarantee agencies.
Increased Regulatory Scrutiny. The HEA provides for a three-part initiative,
generally referred to as the Triad, intended to increase regulatory scrutiny
of post-secondary education institutions. One part of the Triad expands the
role of accrediting agencies in the oversight of institutions participating in
the Title IV Programs. As a result, the accrediting agencies which review and
accredit the Company's campuses have increased the breadth of such reviews and
have expanded their examinations in such areas as financial responsibility and
timeliness of student refunds. The Triad provisions also require each
accrediting agency recognized by the DOE to undergo comprehensive periodic
reviews by the DOE to ascertain whether such accrediting agency is adhering to
required standards.
A second part of the Triad tightened the standards to be applied by the DOE
in evaluating the financial responsibility and administrative capability of
institutions participating in the Title IV Programs. In addition, the Triad
mandated that the DOE periodically reviews the eligibility and certification
to participate in the Title IV Programs of every such eligible institution. By
law, all institutions were required to undergo such a recertification review
by the DOE by 1997 and are required to undergo such a recertification review
every six years thereafter. Under these standards, each of the Company's
institutions will be evaluated by the DOE more frequently than in the past. A
denial of recertification would preclude an institution from continuing to
participate in the Title IV Programs.
A third part of the Triad required each state to establish a State Post-
Secondary Review Entity ("SPRE") to review certain institutions within that
state to determine their eligibility to continue participating in the Title IV
Programs. However, no SPREs have ever actively functioned, and the United
States Congress has eliminated the authorization for the SPREs in the 1998
Amendments. Nevertheless, state requirements are important to an institution's
eligibility to participate in the Title IV Programs since an institution must
be licensed or otherwise authorized to operate in the state in which it offers
education or training services in order to be certified as eligible. See
"State Authorization."
Financial Responsibility Standards. All institutions participating in the
Title IV Programs must satisfy a series of specific standards of financial
responsibility. Institutions are evaluated for compliance with those
requirements in several circumstances, including as part of the DOE's
recertification process and also annually as each institution submits its
audited financial statements to the DOE. Under standards in effect prior to
July 1, 1998, each institution was required to demonstrate an acid test ratio
(defined as the ratio of cash, cash equivalents and current accounts
receivable to current liabilities) of at least 1:1 at the end of each fiscal
year. Another standard required that each institution have a positive tangible
net worth at the end of each fiscal year. A third standard prohibited any
institution from having a cumulative net operating loss during its two most
recent fiscal years that resulted in a decline of more than 10% of that
institution's tangible net worth as measured at the beginning of that two-year
period. The DOE may measure an institution's financial responsibility on the
basis of the financial statements of the institution itself or the financial
statements of the institution's parent company, and may also consider the
financial condition of any other entity related to the institution.
In November 1997, the DOE published new regulations regarding financial
responsibility that took 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 previous regulations, whichever are more
favorable to the Company. Under the new regulations, the DOE will
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<PAGE>
calculate three financial ratios for an institution, an equity ratio, a
primary reserve ratio, and a net income ratio, 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 (which is a score of 1.5) but
above a designated threshold level (the "Intermediate Zone," which is 1.0 to
1.4), 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 the minimum threshold level of 1.0 or is in the Intermediate
Zone for more than three consecutive years, the institution will be required
to post a letter of credit in favor of the DOE. The Company does not believe
that these new regulations will have a material effect on the Company's
compliance with the DOE's financial responsibility standards.
These new financial responsibility regulations provide a "transition year
alternative" which is available for fiscal years beginning between July 1,
1997 and June 30, 1998 (which includes the Company's 1998 fiscal year). Under
that alternative, an institution may choose to have its financial
responsibility measured under the previous standards rather than the new
standards if the previous standards are more favorable. The Company believes
that the DOE will also consider the new standards or the previous standards,
whichever are more favorable to the Company, for its fiscal 1997 financial
statements since those statements were filed in December 1997, subsequent to
publication of the new regulations in November 1997. Under the new
regulations, only one of the Company's schools (FMU--Ft. Lauderdale College)
would not be considered to be financially responsible based on the new
required calculations. However, this college would nevertheless be considered
financially responsible by virtue of being on the reimbursement program and
being covered by the existing letter of credit for RCi. Two of the Company's
schools (Blair College in Aurora, Colorado and NIT in Wyoming, Michigan) are
in the Intermediate Zone and thus meet financial responsibility tests under
additional monitoring and reporting procedures for up to three years. The
Company's two operating divisions both meet the financial responsibility
criteria under the new regulations, but the Company, on a consolidated basis,
does not meet the standards in 1997. For the 1998 audited financial
statements, the Company's calculations show that all of its schools exceed the
requirements for financial responsibility on an individual basis, with
composite scores from 1.8 to 3.0. Also, the Company's two operating divisions
both meet the requirements with composite scores over 2.0. However, as in
1997, the Company, on a consolidated basis, does not meet the new standards
because of the debt incurred and the intangibles acquired at the parent
Company level in connection with the Phillips Acquisition. The Company expects
to meet such new standards on a consolidated basis after giving effect to the
Offering and currently meets such standards in any event by having previously
post a letter of credit.
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 provisional certification and to transfer to the reimbursement
or cash monitoring system of payment for its Title IV Program funds. The DOE
has interpreted this surety condition to require the posting of an irrevocable
letter of credit in favor of the DOE. Alternatively, an institution may
demonstrate, with the support of a statement from a certified public
accountant and other information specified in the regulations, that it was
previously in compliance with the numeric standards and that its continued
operation is not jeopardized by its financial condition.
In reviewing the Company's two major acquisitions, the DOE has measured
financial responsibility differently for each acquisition. In the NEC
Acquisition in 1995, the DOE reviewed the financial statements of the
institutions only, while in the Phillips Acquisition in 1996, the DOE reviewed
the financial statements of both the institutions and the Company. At the time
of the NEC Acquisition, (and subsequently, at the time of the Repose
Acquisition and Concorde Acquisitions) all of the CSi colleges met the
financial responsibility requirements set forth by the DOE. At the time of the
Phillips Acquisition, the DOE elected to review the financial statements of
both the institutions and the Company and, as a result of the debt incurred to
purchase the
55
<PAGE>
colleges, determined that the Company did not meet the tangible net worth
requirement. As a result of negotiations with the DOE prior to the
acquisition, the DOE and the Company agreed to the posting of an irrevocable
letter of credit in favor of the DOE in the amount of $1.0 million. In
addition, the 18 colleges would remain on the reimbursement program (they had
been placed on reimbursement under prior ownership). Although the $1.0 million
letter of credit is less than the amount normally required under such
circumstances, the DOE agreed to these terms in order to facilitate the sale
of the colleges to CCi. The need for and sufficiency of the letter of credit
are scheduled to be reviewed annually subsequent to receipt of the Company's
annual audited financial statements. As a result of this review in 1998, the
letter of credit was increased to $1.5 million based on the increased usage of
Title IV funds by the Company's students.
Although the above letter of credit is the only outstanding financial
responsibility requirement currently in effect, based on the Company's 1997
audited financial statements, eight of the Company's colleges failed to meet
one or more of the financial responsibility tests. Three of the colleges
failed to meet the acid test ratio and five of the colleges failed to meet the
profitability test. In addition, the Company, on a consolidated basis, failed
to meet the financial responsibility tests. However, at the CSi operating
company level, and at the RCi operating company level, all financial
responsibility tests were met. Since the RCi colleges are already on
reimbursement, and since the Company has posted a letter of credit as required
by the regulations, by definition the Company believes that it currently meets
financial responsibility standards as set forth by the DOE. There is no
assurance, however, that the DOE may not impose additional requirements for
letters of credit based upon review of the Company's financial statements, and
such actions could have a material adverse effect on the Company's business,
results of operations and financial condition, and on its ability to generate
sufficient liquidity to continue to fund growth in its operations and purchase
other institutions. (See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources").
In accordance with applicable law, the DOE will be required to rescind the
letter of credit and any related requirements if the Company and its colleges
demonstrate that they satisfy the standards of financial responsibility, using
accounting treatments that are acceptable to the DOE. Further, the Company
believes that in the conduct of its next review of the financial
responsibility of the Company and its colleges, the DOE will consider
financial information reflecting the results of the offering, as well as the
1998 fiscal year audited financial statements of each entity. The Company
expects to receive net proceeds from the Offering of approximately $40.7
million (assuming an initial public offering price of $17.00 per share). (See
"Use of Proceeds"). Management believes that the Company's post-Offering
financial position will enable the Company to satisfy the DOE's standards of
financial responsibility on a Company basis. However, there can be no
assurance that all of the Company's colleges will meet each financial
responsibility test in the future or that the DOE would not require the
Company to post a letter of credit or take other similar action with respect
to an individual college which did not meet those tests.
Under a separate standard of financial responsibility, if an institution has
made late Title IV refunds to students in its prior two years, the institution
is required to post a letter of credit in favor of the DOE in an amount equal
to 25% of the total Title IV Program refunds paid by the institution in its
prior fiscal year. As of July 1, 1997, this standard has been modified to
exempt an institution if it has not been found to make late refunds to 5% or
more of its students in either of the two most recent fiscal years and has not
been cited for a reportable condition or material weakness in its internal
controls related to late refunds in either of its two most recent fiscal
years. Based on this standard, the Company currently has six outstanding
letters of credit on behalf of CSi institutions in the aggregate amount of
approximately $150,000. Seven additional RCi colleges have been cited for late
refunds in their annual audits. The Company believes that the existing $1.5
million letter of credit issued in favor of the DOE on behalf of the
RCi colleges satisfies this standard of financial responsibility. Although
there are no citations for material weaknesses in the Company's or its
colleges' internal controls, there can be no assurance that, upon review by
the DOE, that the Company will not be required to post additional letters of
credit in favor of the DOE on behalf of the affected colleges.
Restrictions on Acquiring or Opening Additional Schools and Adding
Educational Programs. An institution which undergoes a change of ownership
resulting in a change in control, including all the institutions the Company
has acquired or will acquire, must be reviewed and recertified for
participation in the Title IV Programs under its new ownership. Pending
recertification, the DOE suspends Title IV Program funding to that
institution's students except
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for certain Title IV Program funds that were committed under the prior owner.
If an institution is recertified following a change of ownership, it will be
on a provisional basis. During the time an institution is provisionally
certified, it may be subject to closer review by the DOE and to summary
adverse action for violations of Title IV Program requirements, but
provisional certification does not otherwise limit an institution's access to
Title IV Program funds. All of the Company's schools have been provisionally
certified.
The 1998 Amendments allow for the provisional certification of an
institution that has undergone a change of ownership that results in a change
of control so that Title IV Program funds may not be interrupted. To qualify
for such provisional certification, the institution must submit a "materially
complete" application for recertification within 10 business days of the
transaction. Such provisional certification would continue until the
application is acted upon by the DOE. This provision of the 1998 Amendments is
not self-executing and will be subject to the promulgation of regulations by
the DOE which are not likely to take effect until July 1, 2000.
In addition, the HEA generally requires that proprietary institutions be
fully operational for two years before applying to participate in the Title IV
Programs. However, under the HEA and applicable regulations, an institution
that is certified to participate in the Title IV Programs may establish an
additional location and apply to participate in the Title IV Programs at that
location without reference to the two-year requirement, if such additional
location satisfies all other applicable eligibility requirements. The
Company's expansion plans are based, in part, on its ability to acquire
schools that can be recertified and to open additional locations as part of
its existing institutions.
Generally, if an institution eligible to participate in the Title IV
Programs adds an educational program after it has been designated as an
eligible institution, the institution must apply to the DOE to have the
additional program designated as eligible. However, an institution is not
obligated to obtain DOE approval of an additional program that leads to an
associate's, bachelor's, professional or graduate degree or which prepares
students for gainful employment in the same or related recognized occupation
as an educational program that has previously been designated as an eligible
program at that institution and meets certain minimum length requirements.
Furthermore, short-term educational programs, which generally consist of those
programs that provide at least 300 but less than 600 clock hours of
instruction, are eligible only for FFEL funding and only if they have been
offered for a year and the institution can demonstrate, based on an
attestation by its independent auditor, that 70% of all students who enroll in
such programs complete them within a prescribed time and 70% of those students
who graduate from such programs obtain employment in the recognized occupation
for which they were trained within a prescribed time. Certain of the CSi
colleges offer such short term programs, but students enrolled in such
programs represent a small percentage of the total enrollment of the Company's
colleges. In the event that an institution erroneously determines that an
educational program is eligible for purposes of the Title IV Programs without
the DOE's express approval, the institution would likely be liable for
repayment of the Title IV Program funds provided to students in that
educational program. The Company does not believe that the DOE's regulations
will create significant obstacles to its plans to add new programs.
Certain of the state authorizing agencies and accrediting agencies with
jurisdiction over the Company's campuses also have requirements that may, in
certain instances, limit the ability of the Company to open a new campus,
acquire an existing campus or establish an additional location of an existing
institution or begin offering a new educational program. The Company does not
believe that those standards will have a material adverse effect on the
Company or its expansion plans.
Ability to Benefit Regulations. Under certain circumstances, an institution
may elect to admit non-high school graduates into certain of its programs of
study. In such instances, the institution must demonstrate that the student
has the "ability to benefit" from the program of study ("ATB"). Historically,
the basic evaluation method to determine that a student has the ability to
benefit from the program has been the student's achievement of a minimum score
on a test approved by the DOE. On December 25, 1996, the DOE tightened its
regulations regarding ATB testing, reducing the list of approved tests to
eight, and requiring institutions to institute cut off scores that were
determined solely by the test developers.
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Twelve of the Company's CSi colleges admit ATB students into their programs.
The twelve colleges had been successful in evaluating ATB students through the
use of the CPAT test, a nationally recognized test which is used by many
institutions. Prior to the December 25, 1996 regulation, the twelve colleges
applied a composite cutoff score of 125 to the three part test. The integrity
of this scoring was validated over the years by the completion and placement
success of ATB students admitted into the Company's colleges. The new
regulation required that the cut-off score for the CPAT test be increased to
129 and that a minimum score be achieved in each of the three sections of the
test, in lieu of using a composite score. The ATB testing regulations imposed
by the DOE have had a negative effect on pass rates and new enrollments by ATB
students. The pass rate dropped, subsequent to the implementation of the new
regulation, to 40%, down from 70% before December 25, 1996. The Company's
twelve colleges experienced declining enrollments among the ATB population
during the January 1997 to June 1997 period.
In addition to the testing requirements, the DOE regulations also prohibit
enrollment of ATB students from constituting 50% or more of the total
enrollment of the institution. None of the Company's colleges that accept ATB
students has an ATB enrollment population that exceeds 50% of the total
enrolled population.
The Company initiated an intensive tutorial and test preparation program at
the affected colleges beginning in February 1997. Over the next few months,
pass rates began to increase and ultimately reached a high of 65%. Currently,
the pass rate for the ATB test at the twelve affected CSi colleges ranges
between 55% and 65%. The Company believes that at these pass rates, the
colleges' enrollment of ATB students can continue to grow for the foreseeable
future.
The "85/15 Rule." Under a provision of the HEA commonly referred to as the
"85/15 Rule," a private, for-profit institution, such as each of the Company's
institutions, would cease being eligible to participate in the Title IV
Programs if, on a cash accounting basis, more than 85% of its revenue for the
prior fiscal year was derived from the Title IV Programs. The 1998 Amendments
increased the proportion of revenues that an institution may derive from the
Title IV programs to 90%. Any institution that violates the 85/15 Rule
immediately becomes ineligible to participate in the Title IV Programs and is
unable to apply to regain its eligibility until the following fiscal year. The
Company has calculated that, since this requirement took effect in 1995, none
of the Company's institutions has derived more than 84.5% of its revenue from
the Title IV Programs for any fiscal year, and that for 1998 the range for the
Company's institutions was from approximately 20.3% to approximately 81.6%.
The Company regularly monitors compliance with this requirement in order to
minimize the risk that any of its institutions would derive more than the
applicable thresholds of its revenue from the Title IV Programs for any fiscal
year. If an institution appears likely to approach the threshold, the Company
would evaluate the appropriateness of making changes in student funding and
financing to ensure compliance with the 85/15 Rule.
Restrictions on Payment of Bonuses, Commissions or Other Incentives. The HEA
prohibits an institution from providing any commission, bonus or other
incentive payment based directly or indirectly on success in securing
enrollments or financial aid to any person or entity engaged in any student
recruitment, admission or financial aid awarding activity for programs
eligible for Title IV Program funds. The Company believes that its current
compensation plans are in compliance with HEA standards.
State Authorization
Each of the Company's campuses is authorized to offer educational programs
and grant degrees or diplomas by the state in which such campus is located.
The level of regulatory oversight varies substantially from state to state. In
some states, the campuses are subject to licensure by the state education
agency and also by a separate higher education agency. State laws establish
standards for instruction, qualifications of faculty, location and nature of
facilities, financial policies and responsibility and other operational
matters. State laws and regulations may limit the ability of the Company to
obtain authorization to operate in certain states or to award degrees or
diplomas or offer new degree programs. Certain states prescribe standards of
financial responsibility that are different from those prescribed by the DOE.
The Company believes that each of its campuses is in substantial compliance
with state authorizing and licensure laws.
58
<PAGE>
MANAGEMENT
Directors, Executive Officers and Key Employees
The following table sets forth certain information with respect to the
Company's executive officers, directors and selected key employees:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<C> <C> <S>
David G. Moore.............. 60 President, Chief Executive Officer,
Director
Paul R. St. Pierre.......... 53 Executive Vice President, Marketing and
Admissions, Secretary, Director
Frank J. McCord............. 55 Executive Vice President and Chief
Financial Officer
Lloyd W. Holland............ 60 Executive Vice President, Business
Analysis and Financial Aid, Assistant
Treasurer
Dennis L. Devereux.......... 52 Executive Vice President, Human Resources,
Assistant Secretary
Loyal Wilson................ 50 Director
Jack D. Massimino........... 49 Director Nominee
Dr. Carol D'Amico........... 46 Director Nominee
Linda Arey Skladany......... 54 Director Nominee
Mary H. Barry............... 50 Vice President, Education
Beth A. Wilson.............. 46 Vice President, Operations
</TABLE>
David G. Moore has served as President and Chief Executive Officer and a
Director of the Company since its inception in July 1995. Immediately prior to
forming the Company, he was President of National Education Centers, Inc., a
subsidiary of National Education Corporation. From 1992 to 1994, Mr. Moore
served as President of DeVry Institute of Technology in Los Angeles, where he
developed DeVry's West Coast operation and its growth strategy for the 11
western states. From 1980 to 1992 he was employed by Mott Community College in
Flint, Michigan, where he was President from 1984 to 1992. Mr. Moore served as
Dean, Management from 1982 to 1984 and Dean, Management Information Systems
from 1980 to 1982. From 1960 to 1980 Mr. Moore served a distinguished career
in the U. S. Army, retiring at the rank of Colonel. Mr. Moore received a
Bachelor of Arts in Political Science from Seattle University and Master of
Business Administration from the University of Puget Sound. He has also
completed the Management of Higher Education Program at Harvard University,
post graduate studies in Higher Education Management at the University of
Michigan and graduate study and research in Computer Science at Kansas State
University.
Paul R. St. Pierre has served as Vice President, Marketing & Admissions and
a Director of the Company since its inception in July 1995. He was promoted to
Executive Vice President in April 1998. He was employed by National Education
Centers, Inc. from 1991 to 1995. His first assignment at NECI was as School
President for its San Bernardino, California campus. Subsequently, he held
corporate assignments as Director of Special Projects, Vice President of
Operations for the Learning Institutes Group (the largest colleges owned by
NEC) and as Vice President, Marketing & Admissions for NEC. From 1986 to 1991,
Mr. St. Pierre was employed by Allied Education Corporation, initially as
School Director, but the majority of the period as Regional Operations
Manager. He was employed as School Director at Watterson College in 1985. From
1982 to 1985, Mr. St. Pierre was Executive Vice President and Partner for
University Consulting Associates, principally responsible for the marketing
and sales of education services, on a contract basis, to institutions of
higher education. He was previously employed, from 1980 to 1982 as Division
Manager for the Institute for Professional Development, a division of Apollo
Group. Mr. St. Pierre received a Bachelor of Arts in Philosophy from Stonehill
College, a Master of Arts in Philosophy from Villanova University and is a
Ph.D. candidate in Philosophy at Marquette University.
59
<PAGE>
Frank J. McCord has served as Vice President & Chief Financial Officer for
the Company since its inception in July 1995. He was promoted to Executive
Vice President in April 1998. He was employed by National Education Centers,
Inc. as Vice President, Finance & Administration from 1994 to 1995. From 1980
to 1994, Mr. McCord was employed by Atlantic Richfield Company ("ARCO"). From
1989 to 1994, he was Business Manager/Controller and Director for ARCO Marine,
Inc. During the period 1980 to 1989 his assignments at ARCO ranged from Senior
Internal Auditor to Audit Manager. From 1976 to 1980, Mr. McCord served in the
U. S. Army as Management Analyst, Internal Review Officer and Budget Officer,
attaining the rank of Captain. He received a Bachelor's Degree in Business
Administration (Accounting) from North Texas State University. Mr. McCord is
also a Certified Public Accountant and Certified Internal Auditor.
Lloyd W. Holland has served as Vice President, Business Analysis & Financial
Aid for the Company since its inception in July 1995. He was promoted to
Executive Vice President in April 1998. He was employed by National Education
Centers, Inc. from 1987 to 1995 in financial positions including Regional
Controller, Group Controller, Vice President, Finance & Administration and
Director of Finance. Mr. Holland was employed by Bonney Forge Corporation from
1984 to 1987 as Division Controller, then Corporate Controller. From 1978 to
1979, he was Controller for SMC Corporation. Mr. Holland was employed by
Rockwell International Corporation at various Midwest plant locations during
the period 1969 to 1978, in positions ranging from Manager, General Accounting
to Division Controller. From 1963 to 1969, he was employed in various
accounting and cost accounting positions. Mr. Holland received a Bachelor of
Science in Accounting from Point Park College in Pittsburgh, Pennsylvania.
Dennis L. Devereux has served as Vice President, Human Resources for the
Company since its inception in July 1995. He was promoted to Executive Vice
President in April 1998. He was employed by National Education Centers, Inc.
as its Vice President, Human Resources from 1988 to 1995. From 1987 to 1988 he
was Director, Human Resources for Jacobs Engineering Group, Inc. He was
employed by American Diversified Companies, Inc. as its Director, Human
Resources from 1985 to 1987. From 1973 to 1984, Mr. Devereux was employed by
Bechtel Group, Inc. in a variety of human resources management positions,
including Personnel Manager for a subsidiary company and Personnel Supervisor
for a major construction site and within a large regional operation.
Previously, he was employed in a compensation assignment with Frito-Lay, Inc.
and as Personnel Manager and Personnel Assistant with Anaconda Wire & Cable
Company from 1969 to 1973. Mr. Devereux received a Bachelor of Science in
Business Administration (Industrial Relations) from California State
University, Long Beach.
Loyal Wilson has served as a Director of the Company since its inception in
July 1995. He has been a Managing General Partner of Primus Venture Partners
since 1983 and a Managing Director of Primus Venture Partners, Inc. since
1993. In those capacities, Mr. Wilson has overseen investments by various
venture funds controlled by those entities in numerous private companies. From
1975 to 1983, Mr. Wilson was employed by First Chicago Corporation. He is also
a Director of STERIS Corporation and was formerly a Director of DeVry, Inc. He
received a Bachelor of Arts in Economics from the University of North Carolina
and a Masters in Business Administration from Indiana University.
Jack D. Massimino will become a Director effective upon the consummation of
the Offering. Mr Massimino is retired and manages his personal investment
portfolio. He was President and Chief Executive Officer of Talbert Medical
Management Corporation, a publicly traded physician practice management
company from 1995 through late 1997. Prior to his association with Talbert,
Mr. Massimino was Executive Vice President and Chief Operation Officer of FHP
International Corporation, a multi-state, publicly traded HMO, with revenues
in excess of $4 billion. He also served in other executive positions since
joining FHP in 1988, including Senior Vice President and Vice President,
Corporate Development. Mr. Massimino has held other executive positions in the
healthcare field since the mid 1970's. He received a Bachelor of Arts in
Psychology from California Western University and earned a Master's Degree in
Management from the American Graduate School for International Management.
Mr. Massimino has served on several boards, including Talbert Medical
Management Corporation, FHP, Inc., Texas Health Plans, Great States Insurance
Company, Art Institute of Southern California, Thunderbird World Business
Advisory Council and the Orange County Business Committee for the Arts.
60
<PAGE>
Dr. Carol D'Amico will become a Director effective upon the consummation of
the Offering. Dr. D'Amico has been employed by the Hudson Institute,
Indianapolis, Indiana since 1990. She currently serves as Senior Fellow and
Co-Director of Hudson's Workforce Development Center, established to conduct
research on the future of the American workforce and American economic
competitiveness. She is also co-author of Workforce 2020: Work and Workers in
the 21st Century, published by Hudson Institute in 1997. Previously at Hudson
Institute, Dr. D'Amico served as Director, Educational Excellence Network and
prior to that as Research Fellow. From 1986 to 1990, she was a Policy and
Planning Specialist with the Indiana Department of Education. She also served
as Senior Program Analyst for the Indiana General Assembly from 1982 to 1986.
Dr. D'Amico received a Bachelor of Science in Biology from Ball State
University, and a Master of Science in Adult Education and an ED.D in
Educational Leadership and Policy Studies from Indiana University. She serves
on the Board of Trustees for Indiana Vocational Technical College (Ivy Tech)
and is a board member of the Indianapolis Private Industry Council.
Linda Arey Skladany, Esq. will become a Director effective upon the
consummation of the Offering. Ms. Skladany has been Vice President for
Congressional Relations at Parry, Romani & DeConcini, a Washington D.C.
lobbying firm since 1995. Ms. Skladany joined the Reagan administration in
1981 as Special Assistant, first to the Secretary of Education and then later
to the United States Attorney General, before joining the United States
Department of Transportation as Director of the Executive Secretariat under
Secretary Elizabeth Dole. In 1985, she joined President Reagan's White House
staff as Special Assistant to the President and Deputy Director of the White
House Office of Public Liaison. In 1988, President Reagan appointed Ms.
Skladany to the Advisory Committee for Trade Negotiation. She was later
appointed by Presidents Reagan and Bush, respectively, to the positions of
Commissioner and Acting Chair of the Occupational Safety and Health Review
Commission. From 1990 to 1995, Ms. Skladany was a legislative attorney and of
counsel with the law firm of Holland and Hart. From 1993 to 1995, she also
served as Executive Director of the Foundation for Environmental and Economic
Progress. In 1994, Governor George Allen of Virginia appointed her to a four-
year term on the Board of Visitors of the College of William and Mary. Ms.
Skladany earned a Bachelor of Arts in Education from the College of William
and Mary, a Master of Arts in Education from Wake Forest University and a
Juris Doctorate from the University of Richmond Law School. She was admitted
to the bar in Virginia and the District of Columbia.
Mary H. Barry has served as Vice President, Education for the Company since
April 1998. She was previously employed by University of Phoenix from 1992
through April 1998, where her assignments included Director of Academic
Affairs, Director of Administration and Director of the California Center for
Professional Education. From 1990 to 1991, Ms. Barry was Director of National
College. During the period 1980 to 1990, she was employed in the banking
industry as Senior Vice President of Marquette Banks, Director for Citibank,
South Dakota and Vice President of First National Bank, Chicago. Ms. Barry
served as a public affairs officer in the U.S. Marine Corps from 1971 to 1979,
achieving the rank of Major. Ms. Barry earned a Bachelor of Science in
Speech/Drama from Bowling Green State University, a Master of Management from
Northwestern University and a Juris Doctorate from Western State University.
Beth A. Wilson has been employed by the Company since its inception in July
1995. She is currently Vice President, Operations for Corinthian Colleges,
Inc. Previously, she was Regional Operations Director for the College Region
of Rhodes Colleges, Inc. from May 1997 to June 1998. From July 1995 to May
1997 she was Operations Director and Regional Operations Director for
Corinthian Schools, Inc. Ms. Wilson was employed by National Education
Centers, Inc. from 1991 to 1995, initially as Executive Director of its
Capital Hill campus, then as Area Operations Manager. From 1990 to 1991, she
was Vice President, Branch Operations for National College. She was employed
by United Education and Software from 1984 to 1990, initially as Executive
Director of a business school, then as Group Manager for four to fifteen
locations and finally as Vice President, Administration. She was Scholarship
Administrator for National University from 1982 to 1984 and Assistant Director
of American Business College from 1976 to 1981. Ms. Wilson earned an MBA from
National University and a Bachelor of Arts degree from California State
College, Sonoma.
Board of Directors
The Company's Board of Directors is divided into three classes with
staggered three-year terms. The terms of Mr. Wilson and Dr. D'Amico expire at
the annual meeting of the Company's Stockholders in fiscal year
61
<PAGE>
2000, the terms of Mr. St. Pierre and Ms. Skladany expire at the annual
meeting of the Company's Stockholders in fiscal year 2001, and the terms of
Mr. Moore and Mr. Massimino expire at the annual meeting of the Company's
Stockholders in fiscal year 2002. At each annual meeting of the Company's
Stockholders, the successors to the directors whose terms expire at such
annual meeting will be elected for a three-year term. The Company currently
has one vacant board seat which it intends to fill as soon as practicable
after the consummation of the Offering. The term of the vacant board seat
expires at the annual meeting of the Company's Stockholders in the year 2000.
Board Committees
Concurrent with the Offering, the Board of Directors will establish an Audit
Committee and a Compensation Committee. Both the Audit Committee and the
Compensation Committee will be composed entirely of directors who are not
officers or employees of the Company.
The Audit Committee will generally have responsibility for recommending
independent auditors to the Board of Directors for selection, reviewing the
plan and scope of the annual audit, reviewing the Company's audit and control
functions and reporting to the full Board of Directors regarding all of the
foregoing.
The Compensation Committee will generally have the responsibility for
recommending to the Board guidelines and standards relating to the
determination of executive compensation, reviewing the Company's executive
compensation policies and reporting to the Board of Directors regarding the
foregoing. The Compensation Committee will also have responsibility for
administering the Company's incentive compensation plans, determining the
number of options to be granted to the Company's executive officers pursuant
to such plans and reporting to the Board of Directors regarding the foregoing.
Compensation of Directors
Subsequent to the closing of the Offering, all directors who are not
employees of the Company will be paid an annual fee of $10,000 and will be
paid $1,000 for each Board meeting attended and $500 for each Board committee
meeting attended. Non-employee directors are also reimbursed for their
reasonable out-of-pocket expenses incurred in attending Board and committee
meetings. The Company has adopted the 1998 Performance Award Plan, providing
for annual option grants to each director who is not an employee of the
Company. Concurrent with and conditioned upon the Offering, the Company
intends to grant to each of the four non-employee directors an option to
purchase 6,000 shares of Common Stock of the Company at the per share initial
public offering price. These options will vest at the rate of 50% on each of
the first and second anniversaries of the grant date. Upon the election of any
new member to the Board of Directors, such member will be granted an option to
purchase 6,000 shares of Common Stock at the fair market value of the Common
Stock on the date of grant, and such option will vest at the rate of 50% on
each of the first and second anniversaries of the grant date. Immediately
following the date of each annual meeting of the stockholders of the Company,
beginning with the 1999 annual meeting of the stockholders of the Company, it
is the Company's current intent that each non-employee director who is then
serving on the Board will be granted an option to purchase 3,000 shares of the
Common Stock of the Company at the fair market value of the Common Stock on
the date of grant, and such option will vest immediately preceding the next
annual meeting of the Company. Such annual grants to directors will be made if
(i) a sufficient number of shares remain available under the 1998 Performance
Award Plan (See "--Benefit Plans"), and (ii) the director has served as such
for at least six months prior to such award date. See "Benefit Plans--
Performance Award Plan."
Compensation Committee Interlocks and Insider Participation
Upon consummation of the Offering, the Compensation Committee will consist
of at least two non-employee directors. During the year ended June 30, 1998,
the Company did not have a Compensation Committee. David Moore, the Chief
Executive Officer, and Loyal Wilson, a non-employee director, made all
decisions concerning executive compensation during the year ended June 30,
1998.
62
<PAGE>
Limitation of Liability and Indemnification Matters
The Company has adopted a provision in its Second Amended and Restated
Certificate of Incorporation (the "Certificate") that limits the liability of
its directors for monetary damages arising from a breach of their fiduciary
duties as directors. The Company's Bylaws provide that the Company must
indemnify its directors and officers to the fullest extent permitted by the
Delaware General Corporation Law. The Company also has officer and director
liability insurance with respect to certain liabilities. See "Description of
Capital Stock--Limitation of Liability of Directors and Indemnification of
Directors and Officers."
Executive Compensation
Summary Compensation Table
The following table sets forth certain information with respect to
compensation paid to the named executive officers during the fiscal year ended
June 30, 1998.
<TABLE>
<CAPTION>
Annual Compensation
-------------------------------------
All Other
Salary Other Annual Compensation
Name and Principal Position ($) Bonus ($) Compensation ($)(1) ($)(2)
- --------------------------- ------- --------- ------------------- ------------
<S> <C> <C> <C> <C>
David G. Moore............. 232,356 -- 14,256 3,189
President and Chief
Executive Officer
Paul St. Pierre............ 191,048 -- 20,142 3,748
Executive Vice President,
Marketing
Frank J. McCord............ 180,721 -- 21,158 --
Executive Vice President
and Chief Financial
Officer
Dennis L. Devereux......... 170,394 -- 21,995 3,169
Executive Vice President,
Human Resources
Lloyd W. Holland........... 170,394 -- 18,451 3,652
Executive Vice President,
Business Analysis and
Financial Aid
</TABLE>
- --------
(1) Includes $12,220 for auto allowance for each of the named executive
officers.
(2) Represents the Company's matching contribution to the employees' 401(k)
Plan. This benefit is provided to all eligible Company employees on a 100%
matching basis up to 2% of each employee's annual salary.
Option Grants in Fiscal 1998
The following table contains information concerning the grant of stock
options by the Company to the named executive officers during fiscal 1998.
<TABLE>
<CAPTION>
Potential
Realizable
Value at
Assumed Annual
Rates of Stock
Price
Appreciation
Percentage of Total for Option
Number of Options Granted to Exercise Term(1)
Shares Underlying Employees in Fiscal Price Expiration --------------
Name Options Granted Year ($/Sh) Date 5% ($) 10% ($)
- ---- ----------------- ------------------- -------- ---------- ------ -------
<S> <C> <C> <C> <C> <C> <C>
David G. Moore.......... 11,068(2) 9.1 12.47(3) 6/30/2008 86,799 219,965
Paul St. Pierre......... 11,068(2) 9.1 12.47(3) 6/30/2008 86,799 219,965
Frank J. McCord......... 11,068(2) 9.1 12.47(3) 6/30/2008 86,799 219,965
Lloyd W. Holland........ 11,068(2) 9.1 12.47(3) 6/30/2008 86,799 219,965
Dennis L. Devereux...... 11,068(2) 9.1 12.47(3) 6/30/2008 86,799 219,965
</TABLE>
- --------
(1) Potential realizable value is presented net of the option exercise price,
but before any federal or state income taxes associated with exercise, and
is calculated assuming that the fair market value on the date of the grant
63
<PAGE>
appreciates at the indicated annual rate (set by the SEC), compounded
annually, for the term of the option. The 5% and 10% rates of appreciation
are mandated by the rules of the SEC and do not represent the Company's
estimate or projection of future increases in the price of the Common
Stock.
(2) The Options were granted under the Company's 1998 Performance Award Plan
and are each incentive stock options that vest in four equal annual
installments on each of the first four anniversaries of the award date.
(3) The exercise price of these options equals the fair market value of the
option shares on the date of grant as determined by the Company's Board of
Directors based upon the evaluation of Houlihan Valuation Advisors, an
independent appraisal firm.
Fiscal Year-End Option Values
The following table contains information regarding the Named Executive
Officers' unexercised options as of June 30, 1998. None of the named executive
officers exercised any options during fiscal 1998.
<TABLE>
<CAPTION>
Number of Shares Value of Unexercised
Underlying Unexercised in-the-Money Options
Options as of as of June 30,
Name June 30, 1998(1) 1998(2)
- ---- ---------------------- --------------------
<S> <C> <C>
David G. Moore...................... 11,068 $50,138
Paul St. Pierre..................... 11,068 $50,138
Frank J. McCord..................... 11,068 $50,138
Lloyd W. Holland.................... 11,068 $50,138
Dennis L. Devereux.................. 11,068 $50,138
</TABLE>
- --------
(1) All of the options were granted as of June 30, 1998 and none of the
options are currently exercisable.
(2) The value per option is calculated by subtracting the exercise price of
the option from the assumed public offering price of the Common Stock of
$17.00.
Benefit Plans
Performance Award Plan
The Company's 1998 Performance Award Plan (the "Plan") provides for the
grant of Options and stock appreciation rights ("SARs"), Restricted Stock
Awards, Performance Share Awards and Stock Bonuses (collectively "Awards").
While only Options are contemplated at this time, the other forms of Awards
allow the Company flexibility to incentivize and reward employees of the
Company in the future. Employees, officers, directors, and consultants of the
Company and its Subsidiaries may be selected for Plan participation. Only
persons selected by the Board can receive Awards under the Plan. The Company
currently intends to amend the Plan following the Offering to provide for the
annual grants of an option to purchase 3,000 shares of Common Stock to each
non-employee director of the Company then in office. A maximum of 529,134
shares of Common Stock may be issued under the Plan (subject to adjustment
upon the occurrence of certain events which affect the Common Stock) or
approximately 6.92% of the outstanding shares prior to the Offering. The
aggregate number of shares subject to Options and SARs granted under the Plan
to any one person in a calendar year can not exceed 22,047 shares. The
aggregate number of shares subject to all Awards granted under the Plan to any
one person in a calendar year can not exceed 22,047 shares.
Each of the Awards under the Plan accelerate and become immediately vested
and exercisable (subject to the right of the Board of Directors to limit such
acceleration) upon a Change of Control of the Company. A Change of Control
would occur upon the approval by the stockholders of the Company of (i) the
dissolution or liquidation of the Company, (ii) an agreement to merge or
consolidate the Company into another entity where the stockholders of the
Company immediately prior to such merger or consolidation would have less than
50% of the outstanding voting securities of the surviving entity, or (iii) the
sale of all or substantially all of the assets of the Company to an entity
that is not a subsidiary or affiliate.
64
<PAGE>
401(k) Profit Sharing Plan
The Company provides a 401(k) retirement savings plan to employees who have
completed 1,000 hours of service in 12 months of employment. The plan allows
eligible employees to defer up to 16% of their compensation or the statutory
limit each year, whichever is less. The Company matches a portion of the
compensation deferred by the employee at a level which is established by the
Company at its discretion from time to time. The Company currently matches
100% of the first 2% of compensation deferred by the employee. In addition,
the plan also allows a discretionary Company contribution to participating
employee accounts from the Company's net profit. In the fiscal year ending
June 30, 1998, the Company contributed $292,572 in basic company match to
employee accounts in this program. No discretionary additional contribution
was made by the Company in the fiscal year ending June 30, 1998.
CERTAIN RELATIONSHIPS AND TRANSACTIONS
The Company has entered into the following arrangements with certain of its
executive officers, directors, and beneficial holders of more than five
percent of its voting stock.
Transactions Between the Company and Certain Executive Officers
On November 24, 1997, the Company entered into a separate Amended and
Restated Executive Stock Agreement with each of David Moore, Paul St. Pierre,
Frank McCord, Lloyd Holland and Dennis Devereux (collectively, the
"Executives") (the "Amended Stock Agreements"). Each Amended Stock Agreement
amended and restated an earlier Executive Stock Agreement between CSi and each
of the Executives dated as of June 30, 1995, (hereinafter collectively, the
"Original Executive Stock Agreements", and together with the Amended Stock
Agreements, the "Executive Stock Agreements").
Pursuant to the Executive Stock Agreements, on June 30, 1995 each Executive
purchased 440,945 shares of Common Stock and between 110,236 and 275,591
shares of Nonvoting Common Stock, each at a price of $0.2268 per share. Each
Executive paid for the Common Stock by delivering (i) between $80,025 and
$80,063 in cash, and (ii) shares of common stock in the Company's predecessor
which the Executive had previously purchased, and with respect to which each
Executive had made previous capital contributions of $20,000. Each Executive
borrowed money from the Company to purchase their respective shares of
Nonvoting Common Stock.
Each of the Executive Stock Agreements provide for a vesting schedule for
the Executives' Common Stock and Nonvoting Common Stock. The Common Stock and
Nonvoting Common Stock vests over time, and as of June 30, 1998, 87.5% of each
of the Executives' Common Stock was vested and none of the Executives'
Nonvoting Common Stock was vested. Pursuant to the Executive Stock Agreements,
all of the Executives' Common Stock will vest upon a "Qualified Public
Offering" (as defined therein). The Company anticipates that the Offering will
constitute a "Qualified Public Offering" and that the Executives' Common Stock
will completely vest upon completion of the Offering. Upon vesting, the
Company will lose certain repurchase rights with respect to the unvested
Common Stock of the Executives. The Executives' Nonvoting Common Stock vests
either (i) on June 30, 2005 if the Executive is still employed by the Company,
or (ii) upon the occurrence of a "Trigger Event" (as defined in the Executive
Stock Agreements) which includes an initial public offering of a specified
size. The Company anticipates that the Offering will be of sufficient size
that all of the Executives' Nonvoting Common Stock will vest concurrently with
the Offering. The Company also anticipates that, upon vesting, each of the
Executives will exercise their rights under the Executive Stock Agreements to
require the Company to exchange each share of the Executives' Nonvoting Common
Stock for an identical number of shares of Common Stock.
Each of the Executive Stock Agreements provides for a severance benefit for
each of the Executives in the event he is terminated by the Company, other
than for Cause, in an amount equal to the Executive's base salary (excluding
bonuses) during the preceding 12 months, payable on a monthly basis in equal
installments for each of the twelve succeeding months following the
Executive's termination. Cause is defined as (i) the commission
65
<PAGE>
of a felony or a crime of moral turpitude or any act involving dishonesty,
disloyalty or fraud, (ii) conduct that brings the Company into public disgrace
or disrepute, (iii) substantial or repeated failure to perform duties directed
by the Board of Directors, (iv) gross negligence or willful misconduct
relating to the Company, or (v) any material breach of the Executive Stock
Agreement.
The money borrowed by the Executives from the Company to purchase their
Nonvoting Common Stock is evidenced by Promissory Notes (collectively, the
"Executive Notes") entered into on June 30, 1995 between each of the
Executives and the Company. The Executive Notes are payable on demand and bear
interest at the lesser of (i) 7.07% per annum, or (ii) the highest rate
allowed by applicable law, payable when the principal becomes due and payable.
Each Executive Note is secured by a pledge to the Company of the respective
Executive's Nonvoting Common Shares. Mr. Moore's Executive Note is in the
aggregate principal amount of $62,437 and, as of June 30, 1998, the accrued
interest on such note was $14,201. Mr. St. Pierre's Executive Note is in the
aggregate principal amount of $49,950 and, as of June 30, 1998, the accrued
interest on such note was $11,361. Each of Messrs. McCord, Holland and
Devereux have Executive Notes in the principal amount of $24,975 and, as of
June 30, 1998, the accrued interest on each of such notes was $5,681.
Transactions Between the Company and Certain Directors and Security Holders
Loyal Wilson has served as a Director of the Company since its inception in
1995. Mr. Wilson is also a Managing Director of Primus Venture Partners, Inc.,
the sole general partner of Primus Venture Partners III Limited Partnership,
the sole general partner of Primus Capital Fund III Limited Partnership, which
holds more than 5% of the Common Stock of the Company. On October 17, 1996,
Primus and Banc One entered into a Subordinated Note and Warrant Purchase
Agreement with the Company (as subsequently amended on November 24, 1997, the
"Subordinated Note Agreement"). Pursuant to the Subordinated Note Agreement,
the Company incurred indebtedness to Primus and Banc One evidenced by
Subordinated Notes (the "Subordinated Notes") in an aggregate principal amount
of $1.0 million and $4.0 million, respectively. The Subordinated Notes have an
interest rate of 12% per annum, a maturity date of October 2005 and are
subordinate to the Company's obligations under a Note Purchase and Revolving
Credit Agreement (the "Note and Credit Agreement") between the Company and
Prudential, dated as of October 17, 1996, and as amended November 24, 1997.
The Company plans to use a portion of the proceeds from the Offering to repay
the Subordinated Notes and the Note and Credit Agreement. See "Use of
Proceeds" and "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Liquidity and Capital Resources."
Pursuant to the Subordinated Note Agreement, Primus received a warrant to
purchase 35,560 shares of Common Stock and Banc One received a Warrant to
purchase 142,241 shares of Nonvoting Common Stock, each for an aggregate
exercise price of $100 (the "Warrants"). Primus and Banc One also received
contingent stock warrants (the "Contingent Warrants") designed to prevent
possible dilution of the Warrants in connection with the vesting of the
Executive Nonvoting Common Stock. In connection with the Offering and the
concurrent vesting of the Executives' Nonvoting Common Stock, Primus's
Contingent Warrant will allow it to purchase 14,441 additional shares of
Common Stock and Banc One's Contingent Warrant will allow it to purchase
57,765 additional shares of Nonvoting Common Stock, all at an exercise price
of $.0002 per share. Primus and Banc One have informed the Company that, prior
to and contingent upon the Offering, they will exercise their Warrants and
Contingent Warrants.
On November 24, 1997, the Company, Primus and Banc One entered into an
amendment to the Subordinated Note Agreement which extended the maturity of
the Subordinated Notes from October 2004 to October 2005 (the "Subordinated
Note Amendment"). Pursuant to the Subordinated Note Amendment, Primus, Banc
One, and the Company also entered into a Purchase Agreement (the "Purchase
Agreement") dated November 7, 1997 whereby Primus purchased 25,000 shares of
Series 3 Preferred and Banc One purchased 25,000 shares of Series 2 Preferred
from the Company, all at a price of $100 per share. It is expected that all
Series 3 Preferred will be converted to Common Stock and all Series 2
Preferred Stock will be converted to Nonvoting Common Stock in connection with
the Offering. See "Description of Capital Stock--Preferred Stock--Conversion
of the Convertible Preferred" and "The Transactions."
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In connection with the Subordinated Note Amendment, Primus received an
additional Warrant to purchase 186,467 shares of Common Stock and Banc One
received an additional Warrant to purchase 88,632 shares of Nonvoting Common
Stock, each at an exercise price of $.0002 per share, ("New Warrants"). The
New Warrants have terms which cause them to terminate prior to becoming
exercisable if certain conditions are satisfied; the Company anticipates that
in connection with the Offering the New Warrants will terminate.
The Executives, Primus, Banc One, Prudential, and the Company are parties to
the Registration Rights Agreement which was amended on November 24, 1997. See
"Description of Capital Stock--Registration Rights."
The Company intends that any future transactions between the Company,
Primus, Banc One and the Executives will be on terms no less favorable to the
Company than can be obtained on an arm's length basis from unaffiliated third
parties and that any transactions with such persons or entities will be
approved by a majority of the Company's outside directors or will be
consistent with policies approved by such outside directors.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table (including the Notes thereto) sets forth certain
information regarding the beneficial ownership of the Common Stock as of
December 31, 1998 (after giving effect to the Transactions) and as adjusted to
reflect the sale of the shares of Common Stock being offered hereby by: (i)
each person (or group of affiliated persons) known by the Company to
beneficially own more than 5% of the outstanding shares of Common Stock, (ii)
each director of the Company, (iii) each of the Named Executive Officers and
(iv) all of the Company's directors and executive officers as a group. Unless
otherwise indicated below, the persons in the table have sole voting and
investment power with respect to all shares shown as beneficially owned by
them.
<TABLE>
<CAPTION>
Shares of Common
Stock
Beneficially Percentage of
Owned Prior to Outstanding
the Offering(1) Shares Owned
---------------- --------------------
Before After
Name Number Offering Offering(2)
---- ---------------- -------- -----------
<S> <C> <C> <C>
Primus Capital Fund III Limited
Partnership.......................... 2,918,652 38.2 28.2
5900 Landerbrook Drive
Suite 200
Cleveland, OH 44124
Banc One entities(3).................. 1,415,112 18.5 13.7
300 Crescent Court
Suite 1600
Dallas, TX 75201
The Prudential Insurance Company of
America(4)........................... 280,365 3.7 2.7
4 Embarcadero Center
Suite 2700
San Francisco, CA 94111
David Moore(5)........................ 716,536 9.4 6.9
Paul St. Pierre(6).................... 661,418 8.7 6.4
Frank McCord(7)....................... 551,182 7.2 5.3
Lloyd Holland(8)...................... 551,181 7.2 5.3
Dennis Devereux(9).................... 551,181 7.2 5.3
Loyal Wilson(10)...................... 2,918,652 38.2 28.2
All directors and executive officers
as a group
(9 persons)(5)(6)(7)(8)(9)(10)(11)... 5,950,150 77.8 57.5
</TABLE>
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- --------
(1) Beneficial ownership is determined in accordance with the rules of the
Commission. The number of shares beneficially owned by a person and the
percentage ownership of that person includes shares of common stock
subject to options or warrants held by that person that are currently
exercisable or exercisable within 60 days of December 31, 1998 (including
options that will become exercisable upon consummation of the Offering).
Assuming consummation of the Transactions, there will be issued and
outstanding 7,645,627 shares of Common Stock immediately prior to the
Offering, which includes 1,176,560 shares of Nonvoting Common Stock which
is convertible into Common Stock upon a sale of such Nonvoting Common
Stock after the Offering.
(2) Assumes no exercise of the Underwriters' over-allotment option.
(3) Consists of shares held by BOCPII, Limited Liability Company ("BOCPII"),
and Banc One Capital Partners II, LLC ("BancOne"). BOCPII holds an
aggregate of 826,772 shares, including 588,221 shares of Nonvoting Common
Stock that will be convertible into Common Stock on a share for share
basis upon the sale of such stock at any time following the Offering.
Banc One holds 588,340 shares of Nonvoting Common Stock that will be
convertible into Common Stock on a share for share basis upon the sale of
such stock at any time following the Offering.
(4) Prudential has granted the Underwriters an option to purchase 280,365
shares of its Common Stock pursuant to the Underwriters' over-allotment
option. Assuming such option is exercised in full, Prudential will own no
Common Stock or Nonvoting Common Stock upon consummation of the Offering.
(5) Includes 275,591 shares of Nonvoting Common Stock that will be exchanged
for Common Stock on a share for share basis as part of the Transactions.
Mr. Moore, who is President, Chief Executive Officer and a Director of
the Company, has granted the Underwriters an option to purchase 24,927
shares of his Common Stock pursuant to the Underwriters' over-allotment
option. Assuming such option is exercised in full, Mr. Moore will own
691,609 shares, or approximately 6.7%, of the Common Stock (including
Nonvoting Common Stock) upon consummation of the Offering.
(6) Includes 220,473 shares of Nonvoting Common Stock that will be exchanged
for Common Stock on a share for share basis as part of the Transactions.
Mr. St. Pierre, who is Executive Vice President, Secretary and a Director
of the Company, has granted the Underwriters an option to purchase 24,927
shares of his Common Stock pursuant to the Underwriters' over-allotment
option. Assuming such option is exercised in full, Mr. St. Pierre will
own 636,491 shares, or approximately 6.2%, of the Common Stock (including
Nonvoting Common Stock) upon consummation of the Offering.
(7) Includes 110,237 shares of Nonvoting Common Stock that will be exchanged
for Common Stock on a share for share basis as part of the Transactions.
Mr. McCord, who is Executive Vice President, Chief Financial Officer of
the Company, has granted the Underwriters an option to purchase 24,927
shares of his Common Stock pursuant to the Underwriters' over-allotment
option. Assuming such option is exercised in full, Mr. McCord will own
526,255 shares, or approximately 5.1%, of the Common Stock (including
Nonvoting Common Stock) upon consummation of the Offering.
(8) Includes 110,236 shares of Nonvoting Common Stock that will be exchanged
for Common Stock on a share for share basis as part of the Transactions.
Mr. Holland, who is Executive Vice President and Assistant Treasurer of
the Company, has granted the Underwriters an option to purchase 24,927
shares of his Common Stock pursuant to the Underwriters' over-allotment
option. Assuming such option is exercised in full, Mr. Holland will own
526,254 shares, or approximately 5.1%, of the Common Stock (including
Nonvoting Common Stock) upon consummation of the Offering.
(9) Includes 110,236 shares of Nonvoting Common Stock that will be exchanged
for Common Stock on a share for share basis as part of the Transactions.
Mr. Devereux, who is Executive Vice President and Assistant Secretary of
the Company, has granted the Underwriters an option to purchase 24,927
shares of his Common Stock pursuant to the Underwriters' over-allotment
option. Assuming such option is exercised in full, Mr. Devereux will own
526,254 shares, or approximately 5.1%, of the Common Stock (including
Nonvoting Common Stock) upon consummation of the Offering.
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<PAGE>
(10) Mr. Wilson, a director of the Company, is a managing director of Primus
Venture Partners, Inc., the sole general partner of Primus Venture
Partners III Limited Partnership, the sole general partner of Primus
Capital Fund III Limited Partnership. Mr. Wilson shares voting and
investment power with respect to such shares with four other directors of
Primus Venture Partners, Inc. Mr. Wilson disclaims beneficial ownership of
the shares held by Primus Capital Fund III Limited Partnership, except to
the extent of his pecuniary interest therein.
(11) Included in this group are the nominees for Director, Mr. Jack Massimino,
Ms. Linda Arey Skladany and Dr. Carol D'Amico, each of whom owned no
shares of Common Stock and no options to purchase Common Stock as of
December 31, 1998.
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<PAGE>
DESCRIPTION OF CAPITAL STOCK
Upon consummation of the Offering, the authorized capital stock of the
Company will consist of 40,000,000 shares of Common Stock, $0.0001 par value
per share, 2,500,000 shares of Nonvoting Common Stock, $0.0001 par value per
share, and 500,000 shares of Preferred Stock, $1.00 par value per stock (the
"Preferred Stock"), of which shares of Preferred Stock, 18,125 shares are
Redeemable Preferred, 25,000 shares are Series 2 Convertible Preferred, and
25,000 shares are Series 3 Convertible Preferred (the Series 2 Preferred and
the Series 3 Preferred are collectively referred to herein as the "Convertible
Preferred"). See "The Transactions."
The following summary of certain provisions relating to the Common Stock,
the Nonvoting Common Stock and the Preferred Stock does not purport to be
complete and is subject to, and qualified in its entirety by, provisions of
applicable law and the provisions of the Company's Restated Certificate of
Incorporation (the "Certificate") and the Bylaws (the "Bylaws") that are
included as exhibits to the Registration Statement of which this Prospectus is
a part.
Common Stock
Upon consummation of the Transactions, there will be 6,469,067 shares of
Common Stock and 1,176,560 shares of Nonvoting Common Stock outstanding. As of
September 30, 1998 (giving effect to the stock split but not to any of the
other Transactions), 4,923,594 shares of Common Stock and 1,414,994 shares of
Nonvoting Common Stock were outstanding and were held by eight and six
stockholders of record, respectively. Each holder of Nonvoting Common Stock
is entitled to convert any or all of such holder's Nonvoting Common Stock into
an equal number of shares of Common Stock as will be distributed, disposed of
or sold in connection with a Conversion Event. A Conversion Event includes a
public offering such as the Offering wherein such Nonvoting Common Stock is
proposed to be sold, or any sale of such Nonvoting Common Stock pursuant to
Rule 144 of the Securities Act following a public offering. Upon consummation
of the Offering, the holders of all Nonvoting Common Stock will be entitled to
convert and sell such stock as Common Stock, subject to the volume and holding
requirements of Rule 144.
Voting. Holders of Common Stock are entitled to one vote per share on all
matters to be voted on by the stockholders of the Company. Holders of
Nonvoting Common Stock have no right to vote, except that holders of Nonvoting
Common Stock are entitled to one vote per share together with the Common Stock
as one class on (i) any merger or consolidation of the Company with or into
another entity or entity, (ii) any sale of all or substantially all of the
Company's assets, and (iii) any amendment to the Certificate. The Certificate
does not provide for cumulative voting in the election of directors.
Dividends. Dividends on the Common Stock and Nonvoting Common Stock of the
Company may be declared by the Board of Directors at any regular or special
meeting, pursuant to law, and may be paid in cash, in property, or in
securities of the Company. When dividends are paid, subject to the provisions
of the Preferred Stock, the holders of Common Stock and the holders of
Nonvoting Common Stock are entitled to receive such dividends pro rata at the
same rate per share; provided that dividends paid in stock will be paid in
Common Stock to the holders of Common Stock and in Nonvoting Common Stock to
the holders of Nonvoting Common stock and that dividends consisting of other
voting securities will be paid in equivalent nonvoting securities to holders
of Nonvoting Common Stock. The Company does not anticipate paying any cash
dividends in the foreseeable future. See "Risk Factors--Absence of Dividends"
and "Dividend Policy."
Liquidation. Subject to the rights of holders of the Preferred Stock, the
holders of the Common Stock shall be entitled to participate pro rata upon any
liquidation, dissolution, or winding up of the Corporation.
Amendment and Waiver. The Certificate limits the Company's authority to
amend or waive the rights, preferences and powers given to the holders of
Common Stock and Nonvoting Common Stock under the Certificate. Any such
amendment to or waiver of the Certificate must be approved by the holders of a
majority of the outstanding Common Stock voting as a separate class and the
holders of a majority of the then outstanding Nonvoting Common Stock voting as
a separate class.
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<PAGE>
The rights, preferences, and privileges of holders of Common Stock and
Nonvoting Common Stock are subject to, and may be adversely affected by, the
rights of the holders of shares of any series of preferred stock currently
outstanding and which the Company may designate and issue in the future. For
example, if the Company issues a series of preferred stock which grants a
liquidation preference to the holders of such preferred stock, the rights of
holders of Common Stock and Nonvoting Common Stock upon liquidation would be
adversely affected. See "--Preferred Stock."
Preferred Stock
As of September 30, 1998, 18,125, 25,000 and 25,000 shares of Redeemable
Preferred, Series 2 Convertible Preferred and Series 3 Convertible Preferred,
respectively, were outstanding, all of which was held by Primus and Banc One.
New Series of Preferred Stock. The Board of Directors of the Company is
authorized to issue up to 500,000 shares of preferred stock in one or more
series and to determine and alter all rights (including voting rights),
preferences, privileges and qualifications, limitations, and restrictions
granted to or imposed upon any wholly unissued series of stock. The Board of
Directors is also authorized to determine the number of shares constituting
any such series and to increase or decrease (but not below the number of
shares of such series then outstanding) the number of shares of any series.
The Board of Directors may authorize the issuance of preferred stock which
ranks senior to the Common Stock with respect to the payment of dividends and
the distribution of assets on liquidation. In addition, the Board of Directors
is authorized to fix the limitations and restrictions, if any, upon the
payment of dividends on Common Stock to be effective while any shares of
preferred stock are outstanding. The Board of Directors, without stockholder
approval, may issue preferred stock with voting and conversion rights which
could adversely affect the voting power of the holders of Common Stock. The
issuance of preferred stock may have the effect of delaying, deferring or
preventing a change in control of the Company. The Company has no present
intention to issue shares of preferred stock.
Redemption of Redeemable Preferred. The Company may at any time, and by vote
of the majority of the holder of Redeemable Preferred after the Offering is
required to, redeem all or any portion of the Redeemable Preferred then
outstanding. In connection with any such redemption, the Company shall pay a
price equal to the liquidation value of the shares (plus all accrued and
unpaid dividends thereon). The Company intends to use a portion of the
proceeds from the Offering to redeem all of the Redeemable Preferred at an
aggregate redemption price including accrued dividends of $2.2 million.
Conversion of the Convertible Preferred. At the time of, and subject to, the
Offering, the Company may, at its option and with 10 days' prior written
notice to the holders of the Convertible Preferred, require the conversion of
all shares of the Convertible Preferred into Common Stock and Nonvoting Common
Stock. Series 2 Convertible Preferred will be converted into Nonvoting Common
Stock; Series 3 Convertible Preferred will be converted into Common Stock
(collectively, the "Conversion Stock"). The Company plans to effectuate the
conversion of all of the Convertible Preferred in connection with the
Offering. At any time, holders of the Convertible Preferred may convert any or
all of their Convertible Preferred to Conversion Stock. The number of shares
of Conversion Stock received in a conversion of Convertible Preferred Stock is
computed by multiplying the number of shares to be converted by $100 and
dividing by the Conversion Price then in effect. The Conversion Price at the
time of the Offering is expected to be $283.87 ($6.44 on a post-split basis),
and based on the terms of the Convertible Preferred, the Company will earn
back some of the Convertible Preferred. In connection with the Offering, each
share of Series 3 Convertible Preferred will be converted into approximately
15.53 shares of Common Stock, and a total of 388,334 shares of Common Stock
will be issued in connection with the conversion. Each share of Series 2
Convertible Preferred will be converted into approximately 15.53 shares of
Nonvoting Common Stock, and a total of 388,334 shares of Nonvoting Common
Stock will be issued in connection with the conversion. See "Description of
Capital Stock--Common Stock." After all conversions of Preferred Stock into
Common Stock and Nonvoting Common Stock, and all conversions of Nonvoting
Common Stock into Common Stock, a total of 7,645,627 shares of Common Stock
and Nonvoting Common Stock will be outstanding prior to the Offering.
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<PAGE>
Dividends. Until redeemed, Redeemable Preferred accrues preferential
dividends at an annual rate of 6% of their liquidation value (plus all
accumulated and unpaid dividends thereon) until June 30, 2002, and a rate of
12% thereafter. Until redeemed, the Convertible Preferred accrue preferential
dividends at an annual rate of 8% of their liquidation value (plus all
accumulated and unpaid dividends thereon). Holders of the Convertible and
Redeemable Preferred also participate in dividends, other than dividends paid
solely in Common Stock and Nonvoting Common Stock, paid to holders of the
Common Stock and Nonvoting Common Stock.
Liquidation. Until redeemed, holders of the Preferred Stock have priority in
any liquidation, dissolution, or winding up of the Company. Holders of the
Redeemable Preferred are entitled to the liquidation value of their shares, in
cash. Holders of the Convertible Preferred are entitled to the greater of the
liquidation value of their shares and the amount they would receive on an "as
if" converted basis as holders of the Common Stock. If the Company's assets to
be distributed are insufficient to permit full payment to all Existing
Preferred Stockholders, then all such assets will be distributed ratably to
such holders based upon the liquidation value (plus all accrued and unpaid
dividends thereon) of their Existing Preferred Shares.
Voting. Except as required by law, holders of the Existing Preferred Stock
have no right to vote on any matters to be voted on by the stockholders of
Company; however, holders of the Existing Preferred Stock have the right to
vote as a separate class on any amendment to the Certificate or any equivalent
action by the Company which alters the terms of the Existing Preferred Stock.
Certain Provisions of the Certificate and Bylaws
Limitation of Directors' Liability and Indemnification. The Certificate
eliminates, to the fullest extent permitted by the Delaware General
Corporation Law (the "DGCL") or other applicable law, liability of a director
of the Company to the Company or its stockholders for money damages for breach
of fiduciary duty as a director. The Certificate requires, and the Bylaws
provide, that the Company will, to the fullest extent permitted by law,
indemnify its directors and officers against any liabilities, losses, or
related expenses which they may incur by reason of serving or having served as
directors or officers of the Company or at the request of the Company in an
entity in which Company has an interest.
Under the DGCL, liability of a director may not be limited (i) for any
breach of the director's duty of loyalty to the Company or its stockholders,
(ii) for acts or omissions not in good faith or that involve intentional
misconduct or a knowing violation of law, (iii) in respect of certain unlawful
dividend payments or stock redemptions or repurchases and (iv) for any
transaction from which the director derives an improper personal benefit. The
effect of the provisions of the Company's Certificate of Incorporation is to
eliminate the rights of the Company and its stockholders (through
stockholders' derivative suits on behalf of the Company) to recover monetary
damages against a director for breach of the fiduciary duty of care as a
director (including breaches resulting from negligent or grossly negligent
behavior), except as provided in the Company's Certificate of Incorporation
and in the situations described in clauses (i) through (iv) above. This
provision does not limit or eliminate the rights of the Company or any
stockholder to seek nonmonetary relief such as an injunction or rescission in
the event of a breach of a director's duty of care.
Anti-takeover Provisions. The Company's Certificate and Bylaws contain a
number of provisions related to corporate governance and to the rights of
stockholders. Certain of these provisions may be deemed to have a potential
"anti-takeover" effect in that such provisions may delay, defer, or prevent a
change of control of the Company. These provisions include (i) a requirement
that stockholder action be taken only at stockholder meetings, (ii) notice
requirements 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.
Delaware Antitakeover Law. The Company is subject to the provisions of
Section 203 of the DGCL. Section 203 provides, with certain exceptions, that a
Delaware corporation may not engage in certain business combinations with a
person or affiliate or associate of such person who is an "interested
stockholder" for a period of three years from the date such person became an
interested stockholder, unless: (1) the transaction
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resulting in the acquiring person's becoming an interested stockholder, or the
business combination, is approved by the board of directors of the corporation
before the person becomes an interested stockholder, (ii) the interested
stockholder acquires 85% or more of the outstanding voting stock of the
corporation in the same transaction that makes it an interested stockholder,
excluding (a) shares held by directors who are also officers, or (b) shares
held in certain employee stock plans in which employee participants do not
have the right to determine confidentially whether shares held subject to the
plan will be tendered in a tender or exchange offer, or (iii) on or after the
date the person becomes an interested stockholder, the business combination is
approved by the corporation's board of directors and by the holders of at
least two-thirds of the corporation's outstanding voting stock, at an annual
or special meeting (excluding shares held by an interested stockholder).
Except as otherwise specified in Section 203, an "interested stockholder" is
defined as: (a) any person that is the owner of 15% or more of the outstanding
voting stock of the corporation, (b) any person that is an affiliate or
associate of the corporation and was the owner of 15% or more of the
outstanding voting stock of the corporation at any time within the three-year
period immediately prior to the date on which it is sought to be determined
whether such person is the interested stockholder, or (c) the affiliates and
associates of any such person. By restricting the ability of the Company to
engage in business combinations with an interested person, the application of
Section 203 to the Company may provide a barrier to hostile or unwanted
takeovers.
A "business combination" includes a merger, asset sale or other transaction
resulting in a financial benefit to such interested stockholder. For purposes
of Section 203, an "interested" stockholder is a person who, together with
affiliates and associates, owns (or within three years prior, did own) 15% or
more of the corporation's voting stock.
Authorized but Unissued Shares. Upon completion of the Offering, there will
be approximately 30,831,000 shares of Common Stock, 1,323,000 shares of
Nonvoting Common Stock and 500,000 shares of Preferred Stock available for
further issuance. Delaware law does not require stockholder approval for the
issuance of authorized shares, or to determine the price, rights, preferences,
privileges and restrictions, including voting rights, of the Preferred Stock.
The additional shares may be used for a variety of corporate purposes. The
issuance of Common Stock, Nonvoting Common Stock or Preferred Stock may have
the effect of delaying, deferring, or preventing a change in control of the
Company by making it more difficult for a third party to acquire a majority of
the outstanding voting stock of the Company.
Registration Rights
The following shareholders are parties to an Amended and Restated
Registration Rights Agreement dated October 17, 1996 (as amended November 24,
1997, the "Registration Rights Agreement"): Primus and Banc One (collectively,
the "Investors"), David Moore, Paul St. Pierre, Frank McCord, Dennis Devereux,
and Lloyd Holland (collectively, the "Executives"), Prudential, and the
Company. Pursuant to the Registration Rights Agreement, the parties thereto
have certain rights with respect to the registration under the Securities Act
of shares of Common Stock owned by them (including Common Stock received upon
the conversion of Nonvoting Common Stock, upon the exercise of warrants, or
upon the conversion of Convertible Preferred Stock) (the "Registrable
Securities").
"Demand" Registration Rights. The Investors and Prudential are entitled to
certain "demand" registration rights as follows.
At any time the holders of a majority of the Investors' Registrable
Securities (the "Investor Registrable Securities") may demand registration on
Form S-1 (subject to the Lock-up Agreements) of all or any portion of their
Registrable Securities, and the holders of at least 10% of the Investor
Registrable Securities may demand registration on Form S-2, Form S-3, or any
similar short-form registration ("Short-Form Registration"), if available, of
all or any portion of their Registrable Securities. For the first two such
registrations on Form S-1, the holders of the Investor Registrable Securities
are entitled to have the Company pay all registration expenses, except
underwriting discounts and commissions ("Company-Paid Long-Form
Registrations"); such holders may also demand an unlimited number of
registrations on Form S-1 in which the holders pay their pro rata share of
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the registration expenses ("Holder-Paid Long-Form Registrations"), provided
that the aggregate offering value of the Registrable Securities in each case
must be at least $1,000,000. The holders of the Investor Registrable
Securities are entitled to request an unlimited number of Short-Form
Registrations in which the Company pays all registration expenses, except
underwriting discounts and commissions, provided that the aggregate offering
value of the Registrable Securities requested to be registered must be at
least $500,000. Demand registrations will be Short-Form Registrations whenever
the Company is permitted to use any applicable short-form.
At any time after October 17, 1998, Prudential will have demand registration
rights (subject to the Lock-up Agreements) with respect to its Registrable
Securities (the "Prudential Registrable Securities") under the same terms as
the Investors, except that (i) if after two Company-Paid Long-Form
Registrations one-third or more of the aggregate number of shares of
Prudential Registrable Securities initially issuable have not been sold
pursuant to such Registrations, the holders of the Prudential Registrable
Securities are entitled to request one additional Company-Paid Long-Form
Registration, provided that the aggregate offering value of the Registrable
Securities requested to be registered in each case is at least $1,000,000, and
(ii) holders of the Prudential Registrable Securities are not entitled to
demand additional Holder-Paid Long-Form Registrations. If upon consummation of
the Offering Prudential has sold all of its shares of Common Stock, the
Investors shall become entitled to all of Prudential's registration rights as
if each Investor held Prudential Registrable Securities.
"Piggyback" Registration Rights. The Investors, Prudential, and the
Executives are entitled to the following "piggyback" registration rights.
Whenever the Company proposes to register any of its securities under the
Securities Act (other than pursuant to a demand registration), the Company
must notify all holders of Registrable Securities of the registration, and
must include in the registration all Registrable Securities whose holders so
request. If a "piggyback" registration is underwritten, and the managing
underwriters advise the Company that the number of securities requested to be
included exceeds the number which can be sold at an acceptable price, priority
in the registration is as follows: (i) the securities the Company proposes to
sell, (ii) the Investor Registrable Securities and the Prudential Registrable
Securities requested to be included, and (iii) the Registrable Securities held
by the Executives (the "Executive Registrable Securities") requested to be
included. The Company will pay all registration expenses, except underwriting
discounts and commissions, in connection with any "piggyback" registration.
Each of the Investors, Prudential and the Executives has waived its respective
"piggyback" registration rights in connection with the Offering and has agreed
to participate in the Offering only as described herein pursuant to the
underwriters' overallotment options.
Transfer Agent and Registrar
The transfer agent and registrar for the Common Stock is U.S. Stock Transfer
Corporation.
74
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the Offering, the Company will have an aggregate of
10,345,627 outstanding shares of Common Stock and Nonvoting Common Stock. Of
the outstanding shares, the 2,700,000 shares issued in this Offering will be
freely tradeable without restriction or further registration under the
Securities Act unless purchased by "affiliates" of the Company as that term is
defined in Rule 144 under the Securities Act.
The remaining 7,645,627 shares of Common Stock and Nonvoting Common Stock
outstanding are "restricted securities" as that term is defined in Rule 144
promulgated under the Securities Act and are eligible for sale subject to
holding period, volume and other limitations imposed by that rule. As
described below, Rule 144 permits resales of restricted securities subject to
certain restrictions. In addition, stock options for an additional 145,039
shares of Common Stock have been granted, or will be granted in connection
with the Offering, to certain non-employee directors and employees of the
Company under the Stock Option Plan. An additional 384,095 shares of Common
Stock are reserved for future issuance under the Stock Option Plan. The
Company and certain stockholders have agreed, subject to certain conditions,
that they will not offer, sell or otherwise dispose of any of the shares of
Common Stock or securities convertible into Common Stock owned by them for 180
days from the date of this Prospectus and the commencement of the Offering,
respectively, without the prior written consent of Salomon Smith Barney Inc.
on behalf of the Underwriters (should the over-allotment option not be
exercised, Prudential will retain shares of Common Stock; in that event,
Prudential's lock-up agreement will provide that, after 90 days, Prudential
may effect a private sale of Common Stock to an institutional investor as long
as such institutional investor executes a similar lock-up agreement for the
remainder of the 180 day period).
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated) who has beneficially owned restricted securities
for at least one year, will be entitled to sell in any three-month period a
number of shares that does not exceed the greater of: (i) 1% of the number of
shares of Common Stock then outstanding (approximately 103,456 shares
immediately after the Offering) or (ii) the average weekly trading volume of
the Company's Common Stock on Nasdaq during the four calendar weeks
immediately preceding the date on which the notice of sale is filed with the
Securities and Exchange Commission. Sales pursuant to Rule 144 are subject to
certain requirements relating to manner of sale, notice and availability of
current public information about the Company. A person (or persons whose
shares are aggregated) who is not deemed to have been an affiliate of the
Company at any time during the 90 days immediately preceding the sale and who
has beneficially owned restricted securities for at least two years is
entitled to sell such shares pursuant to Rule 144(k) without regard to the
limitations and requirements described above.
The Company intends to file a registration statement under the Securities
Act to register shares of Common Stock reserved for issuance under its 1998
Performance Award Plan, thus permitting the resales of such shares by non-
affiliates in the public market without restriction under the Securities Act.
Such registration statement is expected to be filed shortly after the date of
this Prospectus. As of this date of this Prospectus, options to purchase an
aggregate of 121,039 shares of Common Stock were outstanding under the Stock
Option Plan, and an additional 24,000 shares are expected to be granted to
non-employee directors concurrent with, and conditioned upon, the Offering.
75
<PAGE>
UNDERWRITING
Upon the terms and subject to the conditions stated in the Underwriting
Agreement dated the date hereof, each Underwriter named below has severally
agreed to purchase, and the Company has agreed to sell to such Underwriter,
the number of shares of Common Stock set forth opposite the name of such
Underwriter.
<TABLE>
<CAPTION>
Number
of
Name Shares
---- ------
<S> <C>
Salomon Smith Barney Inc. .........................................
Credit Suisse First Boston Corporation.............................
Piper Jaffray Inc..................................................
-----
Total............................................................
=====
</TABLE>
The Underwriting Agreement provides that the obligations of the several
Underwriters to pay for and accept delivery of the shares are subject to
approval of certain legal matters by counsel and to certain other conditions.
The Underwriters are obligated to take and pay for all shares of Common Stock
offered hereby (other than those covered by the over-allotment option
described below) if any such shares are taken.
The Underwriters, for whom Salomon Smith Barney Inc., Credit Suisse First
Boston Corporation and Piper Jaffray Inc. are acting as the Representatives,
propose to offer part of the shares directly to the public at the public
offering price set forth on the cover page of this Prospectus and part of the
shares to certain dealers at a price which represents a concession not in
excess of $ per share under the public offering price. The Underwriters may
allow, and such dealers may reallow, a concession not in excess of $ per
share to certain other dealers. After the initial offering of the shares to
the public, the public offering price and such concessions may be changed by
the Representatives. The Representatives of the Underwriters have advised the
Company that the Underwriters do not intend to confirm any Shares to any
accounts over which they exercise discretionary authority.
Prudential, David Moore, Paul St. Pierre, Frank McCord, Lloyd Holland and
Dennis Devereux have granted to the Underwriters an option, exercisable for
30 days from the date of this Prospectus, to purchase up to an aggregate of
405,000 additional shares of Common Stock at the price to public set forth on
the cover page of this Prospectus minus the underwriting discounts and
commissions. The Underwriters may exercise such option solely for the purpose
of covering over-allotments, if any, in connection with the offering of the
shares offered hereby. To the extent such option is exercised, each
Underwriter will be obligated, subject to certain conditions, to purchase
approximately the same percentage of such additional shares as the number of
shares set forth opposite each Underwriter's name in the preceding table bears
to the total number of shares listed in such table.
At the Company's request, the Underwriters have reserved up to 5% of the
shares of Common Stock (the "Directed Shares") for sale at the initial public
offering price to persons who are directors, officers or employees of, or
otherwise associated with, the Company and its affiliates and who have advised
the Company of their desire to purchase shares of Common Stock. The number of
shares of Common Stock available for sale to the general public will be
reduced to the extent of sales of Directed Shares to any of the persons for
whom they have been reserved. Any shares not so purchased will be offered by
the Underwriters on the same basis as all other shares of Common Stock offered
hereby. The Company has agreed to indemnify the Underwriters against certain
liabilities and expenses, including liabilities under the Securities Act, in
connection with the sale of the Directed Shares.
In connection with this offering and in compliance with applicable law, the
Underwriters may over-allot (i.e., sell more shares of Common Stock than the
total amount shown on the list of Underwriters and participations which appear
above) and may effect transactions which stabilize, maintain or otherwise
affect the market price of the shares of Common Stock at levels above those
which might otherwise prevail in the open market. Such transactions may
include placing bids for the shares of Common Stock or effecting purchases of
76
<PAGE>
the shares of Common Stock for the purpose of pegging, fixing or maintaining
the price of the shares of Common Stock or for the purpose of reducing a
syndicate short position created in connection with this Offering. A syndicate
short position may be covered by exercise of the option described above in
lieu of or in addition to open market purchases. In addition, the contractual
arrangements among the Underwriters include a provision whereby, if the
Underwriters purchase shares of Common Stock in the open market for the
account of the underwriting syndicate and the securities purchased can be
traced to a particular Underwriter or member of the selling group, the
underwriting syndicate may require the Underwriter or selling group member in
question to purchase the shares of Common Stock in question at the cost price
to the syndicate or may recover from (or decline to pay to) the Underwriter or
selling group member in question the selling concession applicable to the
securities in question. The Underwriters are not required to engage in any of
these activities and such activities, if commenced, may be discontinued at any
time.
The Company, its officers and directors, Primus, Banc One and Prudential
have agreed that, for a period of 180 days from the date of this Prospectus,
they will not, without the prior written consent of Salomon Smith Barney Inc.,
offer, sell, contract to sell, or otherwise dispose of, any shares of Common
Stock of the Company or any securities convertible into, or exercisable or
exchangeable for, Common Stock of the Company (should the over-allotment
option not be exercised, Prudential will retain shares of Common Stock; in
that event, Prudential's lock-up agreement will provide that, after 90 days,
Prudential may effect a private sale of Common Stock to an institutional
investor as long as such institutional investor executes a similar lock-up
agreement for the remainder of the 180 day period).
Prior to this offering, there has not been any public market for the Common
Stock of the Company. Consequently, the initial public offering price for the
Shares of Common Stock included in this offering has been determined by
negotiations between the Company and the Representatives. Among the factors
considered in determining such price were the history of and prospects for the
Company's business and the industry in which it competes, an assessment of the
Company's management and the present state of the Company's development, the
past and present revenues and earnings of the Company, the prospects for
growth of the Company's revenues and earnings, the current state of the
economy in the United States and the current level of economic activity in the
industry in which the Company competes and in related or comparable
industries, and currently prevailing conditions in the securities markets,
including current market valuations of publicly traded companies which are
comparable to the Company.
The Company and the Underwriters have agreed to indemnify each other against
certain liabilities, including liabilities under the Securities Act of 1933.
LEGAL MATTERS
Certain matters relating to this Offering are being passed upon for the
Company by O'Melveny & Myers LLP, Newport Beach, California. Gibson, Dunn &
Crutcher LLP, Los Angeles, California will act as counsel for the
Underwriters.
EXPERTS
The consolidated financial statements and schedule of the Company and the
combined statement of revenue and expenses for National Education Centers,
Inc., to the extent and for the periods indicated in their reports, have been
audited by Arthur Andersen LLP, independent public accountants, and are
included herein in reliance upon the authority of said firm as experts in
giving said reports.
The combined financial statements of the Seventeen Operating Companies owned
by Phillips Colleges, Inc. to the extent and for the periods indicated in
their reports have been audited by PricewaterhouseCoopers LLP, independent
accountants, and are included herein in reliance upon the authority of said
firm as experts in giving said reports.
77
<PAGE>
AVAILABLE INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"SEC"), in Washington, D.C., a Registration Statement on Form S-1 under the
Securities Act with respect to the Common Stock offered hereby. This
Prospectus does not contain all of the information set forth in the
Registration Statement and the exhibits thereto. Certain items are omitted in
accordance with the rules and regulations of the SEC. For further information
with respect to the Company and the Common Stock offered hereby, reference is
made to the Registration Statement and the exhibits filed as a part thereof.
Statements contained in this Prospectus as to the contents of any contract or
other document filed as an exhibit to the Registration Statement are, in each
case, qualified in all respects by reference to such exhibit. Upon completion
of the Offering, the Company will be subject to the informational requirements
of the Securities Exchange Act of 1934, as amended, and in accordance
therewith, will file reports and other information with the SEC. The
Registration Statement, including exhibits thereto, as well as the reports and
other information filed by the Company with the SEC, may be inspected without
charge at the Public Reference Room of the SEC at 450 Fifth Street, N.W.,
Washington, D.C. 20549, and at the SEC's regional offices at Seven World Trade
Center, 13th Floor, New York, New York 10048, and Citicorp Center, 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of such materials
can also be obtained at prescribed rates from the Public Reference Section of
the SEC at 450 Fifth Street, N.W., Washington, D.C. 20549. Electronic filings
made through the Electronic Data Gathering Analysis and Retrieval System are
publicly available through the SEC's Web Site (http://www.sec.gov).
The Company will issue to its stockholders annual reports and, upon request,
will make available unaudited quarterly reports for the first three quarters
of each fiscal year. Annual reports will include audited financial statements
and reports of its independent auditors with respect to the examination of
such financial statements.
78
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Consolidated Financial Statements of Corinthian Colleges, Inc. and
Subsidiaries:
Report of Independent Public Accountants................................ F-2
Consolidated Balance Sheets as of June 30, 1997 and 1998 and September
30, 1998 (unaudited)................................................... F-3
Consolidated Statements of Operations for the years ended June 30, 1996,
1997 and 1998 and for the three months ended September 30, 1997 and
1998 (unaudited)....................................................... F-4
Consolidated Statements of Stockholders' Equity for the years ended June
30, 1996, 1997 and 1998 and for the three months ended September 30,
1998 (unaudited)....................................................... F-5
Consolidated Statements of Cash Flows for the years ended June 30, 1996,
1997 and 1998 and for the three months ended September 30, 1997 and
1998 (unaudited)....................................................... F-6
Notes to Consolidated Financial Statements.............................. F-7
Combined Financial Statements of Phillips Colleges, Inc.:
Report of Independent Accountants....................................... F-22
Combined Balance Sheets as of December 31, 1995 and October 16, 1996.... F-23
Combined Statements of Income for the year ended December 31, 1995 and
for the period ended October 16, 1996.................................. F-24
Combined Statements of Stockholders' Equity for the year ended December
31, 1995 and for the period ended October 16, 1996..................... F-25
Combined Statements of Cash Flows for the year ended December 31, 1995
and for the period ended October 16, 1996.............................. F-26
Notes to Combined Financial Statements.................................. F-27
Combined Financial Statement of Eleven Career Colleges Purchased From
National Education Centers, Inc.:
Report of Independent Public Accountants................................ F-33
Combined Statement of Revenues and Direct Expenses for the year ended
December 31, 1995 ..................................................... F-34
Notes to Combined Financial Statement................................... F-35
</TABLE>
F-1
<PAGE>
To Corinthian Colleges, Inc:
After the completion of the planned stock split and increase in authorized
shares discussed in Note 12, we expect to be in a position to render the
following audit report and the report on schedules included elsewhere in this
Registration Statement.
/s/ Arthur Andersen LLP
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Corinthian Colleges, Inc.:
We have audited the accompanying consolidated balance sheets of CORINTHIAN
COLLEGES, INC. (a Delaware corporation) and subsidiaries as of June 30, 1997
and 1998 and the related consolidated statements of operations, stockholders'
equity and cash flows for each of the three years in the period ended June 30,
1998. These consolidated 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 audits 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 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Corinthian
Colleges, Inc. and subsidiaries, as of June 30, 1997 and 1998, and the results
of their operations and their cash flows for each of the three years in the
period ended June 30, 1998 in conformity with generally accepted accounting
principles.
Orange County, California
August 28, 1998
F-2
<PAGE>
CORINTHIAN COLLEGES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
Pro forma
Stockholders'
June 30, Equity at
------------------------ September 30, September 30,
1997 1998 1998 1998
----------- ----------- ------------- -------------
(unaudited) (unaudited)
(Note 6)
<S> <C> <C> <C> <C>
ASSETS
------
CURRENT ASSETS:
Cash and cash
equivalents............ $ 2,820,831 $ 2,401,527 $ 212,942
Restricted cash......... 1,010,000 760,000 760,000
Accounts receivable,
net of allowance for
doubtful accounts of
$2,762,577, $3,518,804
and $3,348,193 at June
30, 1997 and 1998 and
September 30, 1998,
respectively........... 9,256,935 10,077,221 11,327,049
Student notes
receivable, net of
allowance for doubtful
accounts of $106,949,
$457,290 and $389,941
at June 30, 1997 and
1998 and September 30,
1998, respectively..... 904,636 1,776,320 1,579,638
Income tax refund
receivable............. 195,507 -- --
Deferred income taxes... 1,463,962 2,395,564 2,395,564
Prepaid expenses and
other current assets... 1,397,078 3,126,238 4,219,749
----------- ----------- -----------
Total current assets.. 17,048,949 20,536,870 20,494,942
PROPERTY AND EQUIPMENT,
net..................... 10,174,959 10,331,623 10,544,800
OTHER ASSETS:
Intangibles, net of
accumulated
amortization of
$890,144, $2,010,423
and $2,286,971 at
June 30, 1997 and 1998
and September 30,
1998, respectively..... 23,839,246 22,718,967 22,442,419
Student notes
receivable, net of
allowance for doubtful
accounts of $754,118,
$1,829,162 and
$1,559,765 at June 30,
1997 and 1998 and
September 30, 1998,
respectively........... 1,312,818 4,407,615 4,646,233
Deposits and other
assets................. 1,433,298 1,909,552 2,281,934
----------- ----------- -----------
TOTAL ASSETS.......... $53,809,270 $59,904,627 $60,410,328
=========== =========== ===========
<CAPTION>
LIABILITIES AND
STOCKHOLDERS' EQUITY
--------------------
<S> <C> <C> <C> <C>
CURRENT LIABILITIES:
Accounts payable........ $ 5,147,116 $ 4,727,242 $ 5,131,388
Accrued compensation
and related
liabilities............ 3,220,922 3,703,678 3,797,130
Accrued expenses........ 707,582 880,087 779,269
Accrued interest........ 743,314 1,295,408 1,427,889
Income tax payable...... -- 1,739,277 829,064
Prepaid tuition......... 5,264,176 2,951,442 4,375,210
Current portion of
long-term debt......... 121,472 4,633,659 3,836,918
----------- ----------- -----------
Total current
liabilities.......... 15,204,582 19,930,793 20,176,868
----------- ----------- -----------
LONG-TERM DEBT, net of
current portion......... 36,168,324 31,534,666 31,499,186
----------- ----------- -----------
DEFERRED INCOME TAXES.... 273,284 121,334 121,334
----------- ----------- -----------
COMMITMENTS AND
CONTINGENCIES
REDEEMABLE PREFERRED
STOCK................... 2,041,767 2,167,058 2,199,564
----------- ----------- -----------
CONVERTIBLE PREFERRED
STOCK................... -- 5,173,860 5,273,860 $ 340,000
----------- ----------- ----------- ----------
STOCKHOLDERS' EQUITY:
Common Stock, $0.0001
par value:
Common Stock,
40,000,000 shares
authorized, 4,923,594
shares issued and
outstanding at
June 30, 1997 and
1998 and
September 30, 1998... 492 492 492 531
Nonvoting Common
Stock, 2,500,000
shares authorized,
1,414,994 issued and
outstanding at June
30, 1997 and 1998 and
September 30, 1998... 141 141 141 180
Additional paid-in
capital.............. 1,374,567 1,374,567 1,374,567 6,308,349
Notes receivable for
stock.................. (187,312) (187,312) (187,312) (187,312)
Accumulated deficit..... (1,066,575) (210,972) (48,372) (48,372)
----------- ----------- ----------- ----------
Total stockholders'
equity............... 121,313 976,916 1,139,516 6,073,376
----------- ----------- -----------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY. $53,809,270 $59,904,627 $60,410,328
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
F-3
<PAGE>
CORINTHIAN COLLEGES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Three Months Ended
Years Ended June 30, September 30,
-------------------------------------- ------------------------
1996 1997 1998 1997 1998
----------- ----------- ------------ ----------- -----------
(unaudited)
<S> <C> <C> <C> <C> <C>
NET REVENUES............ $31,498,352 $77,201,176 $106,485,912 $24,345,706 $30,296,346
----------- ----------- ------------ ----------- -----------
OPERATING EXPENSES:
Educational services
(including a
provision for bad
debt expense of
$978,997, $3,554,232,
$5,962,885,
$1,327,547 and
$1,594,741 for the
years ended June 30,
1996, 1997 and 1998,
and for the three
months ended
September 30, 1997
and 1998,
respectively)........ 18,593,569 50,567,978 65,927,247 15,412,118 17,978,344
General and
administrative....... 3,298,332 8,101,177 10,776,708 2,560,858 3,289,225
Marketing and
advertising.......... 7,562,504 18,999,560 24,268,303 6,302,568 7,636,061
----------- ----------- ------------ ----------- -----------
Total operating
expenses........... 29,454,405 77,668,715 100,972,258 24,275,544 28,903,630
----------- ----------- ------------ ----------- -----------
Income (loss) from
operations......... 2,043,947 (467,539) 5,513,654 70,162 1,392,716
INTEREST EXPENSE, net... 273,802 2,524,984 3,304,350 808,607 902,610
----------- ----------- ------------ ----------- -----------
Income (loss) before
provision (benefit)
for income taxes... 1,770,145 (2,992,523) 2,209,304 (738,445) 490,106
PROVISION (BENEFIT) FOR
INCOME TAXES........... 722,130 (1,107,200) 988,410 (311,000) 195,000
----------- ----------- ------------ ----------- -----------
NET INCOME (LOSS)....... $ 1,048,015 $(1,885,323) $ 1,220,894 $ (427,445) $ 295,106
=========== =========== ============ =========== ===========
INCOME (LOSS)
ATTRIBUTABLE TO COMMON
STOCKHOLDERS:
Net income (loss)..... $ 1,048,015 $(1,885,323) $ 1,220,894 $ (427,445) $ 295,106
Less preferred stock
dividends ........... (111,221) (118,046) (365,291) (30,627) (132,506)
----------- ----------- ------------ ----------- -----------
Income (loss)
attributable to
common
stockholders....... $ 936,794 $(2,003,369) $ 855,603 $ (458,072) $ 162,600
=========== =========== ============ =========== ===========
Net income (loss) per
common share:
Basic ................ $ 0.21 $ (0.41) $ 0.16 $ (0.09) $ 0.03
=========== =========== ============ =========== ===========
Diluted............... $ 0.15 $ (0.41) $ 0.12 $ (0.09) $ 0.02
=========== =========== ============ =========== ===========
Weighted average number
of common shares
outstanding:
Basic................. 4,409,452 4,895,682 5,236,224 4,960,634 5,236,224
=========== =========== ============ =========== ===========
Diluted............... 6,338,588 4,895,682 7,125,235 4,960,634 7,326,887
=========== =========== ============ =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-4
<PAGE>
CORINTHIAN COLLEGES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Nonvoting Common Retained
Common Stock Stock Additional Earnings Total
------------------- ------------------- Paid-In Notes (Accumulated Stockholders'
Shares Par Value Shares Par Value Capital Receivable Deficit) Equity
--------- --------- --------- --------- ---------- ---------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at June 30,
1995................... 4,868,476 $487 1,194,521 $119 $1,374,394 $(187,312) $ -- $ 1,187,688
Redeemable Preferred
Stock dividend
accrual.............. -- -- -- -- -- -- (111,221) (111,221)
Net income............ -- -- -- -- -- -- 1,048,015 1,048,015
--------- ---- --------- ---- ---------- --------- ----------- -----------
Balance at June 30,
1996................... 4,868,476 487 1,194,521 119 1,374,394 (187,312) 936,794 2,124,482
Exercise of warrants
for Common Stock..... 55,118 5 -- -- 95 -- -- 100
Exercise of warrants
for Nonvoting Common
Stock................ -- -- 220,473 22 78 -- -- 100
Redeemable Preferred
Stock dividend
accrual.............. -- -- -- -- -- -- (118,046) (118,046)
Net loss.............. -- -- -- -- -- -- (1,885,323) (1,885,323)
--------- ---- --------- ---- ---------- --------- ----------- -----------
Balance at June 30,
1997................... 4,923,594 492 1,414,994 141 1,374,567 (187,312) (1,066,575) 121,313
Redeemable Preferred
Stock dividend
accrual.............. -- -- -- -- -- -- (125,291) (125,291)
Convertible Preferred
Stock dividend
accrual.............. -- -- -- -- -- -- (240,000) (240,000)
Net income............ -- -- -- -- -- -- 1,220,894 1,220,894
--------- ---- --------- ---- ---------- --------- ----------- -----------
Balance at June 30,
1998................... 4,923,594 492 1,414,994 141 1,374,567 (187,312) (210,972) 976,916
Redeemable Preferred
Stock dividend
accrual.............. -- -- -- -- -- -- (32,506) (32,506)
Convertible Preferred
Stock dividend
accrual.............. -- -- -- -- -- -- (100,000) (100,000)
Net income............ -- -- -- -- -- -- 295,106 295,106
--------- ---- --------- ---- ---------- --------- ----------- -----------
Balance at September 30,
1998 (unaudited)....... 4,923,594 $492 1,414,994 $141 $1,374,567 $(187,312) $ (48,372) $ 1,139,516
========= ==== ========= ==== ========== ========= =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-5
<PAGE>
CORINTHIAN COLLEGES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Three Months
Years Ended June 30, Ended September 30,
-------------------------------------- ------------------------
1996 1997 1998 1997 1998
----------- ------------ ----------- ----------- -----------
(unaudited)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM
OPERATING ACTIVITIES:
Net income (loss)...... $ 1,048,015 $ (1,885,323) $ 1,220,894 $ (427,445) $ 295,106
Adjustments to
reconcile net income
(loss) to net cash
provided by (used in)
operating activities--
Depreciation and
amortization......... 681,903 2,070,015 3,051,113 731,257 821,368
Deferred income
taxes................ (141,514) (1,049,164) (1,083,552) -- --
Changes in assets and
liabilities, net of
effects from
acquisitions:
Accounts receivable. (1,896,000) (1,505,078) (820,286) 210,549 (1,249,828)
Student notes
receivable......... -- (476,337) (3,966,481) (1,664,950) (41,936)
Income tax refund
receivable......... (746,356) 550,849 195,507 (334,163) --
Prepaid expenses and
other assets....... (315,435) 176,118 (2,183,931) (1,133,168) (1,507,626)
Accounts payable.... 1,217,000 2,859,383 (419,874) 337,638 404,146
Accrued expenses.... 1,561,000 2,085,426 1,207,355 (502,856) 125,115
Income tax payable.. -- -- 1,739,277 -- (910,213)
Prepaid tuition..... (412,000) (1,830,464) (2,312,734) 2,341,141 1,423,768
----------- ------------ ----------- ----------- -----------
Net cash provided by
(used in) operating
activities........... 996,613 995,425 (3,372,712) (441,997) (640,100)
----------- ------------ ----------- ----------- -----------
CASH FLOWS FROM
INVESTING ACTIVITIES:
Acquisitions of schools
and colleges, net of
cash acquired......... (3,048,616) (24,227,318) -- -- --
Change in restricted
cash.................. (200,000) (810,000) 250,000 -- --
Capital expenditures... (1,046,000) (5,936,073) (1,926,580) (434,349) (716,264)
----------- ------------ ----------- ----------- -----------
Net cash used in
investing
activities........... (4,294,616) (30,973,391) (1,676,580) (434,349) (716,264)
----------- ------------ ----------- ----------- -----------
CASH FLOWS FROM
FINANCING ACTIVITIES:
Proceeds from sale of
convertible preferred
stock................. -- -- 4,933,860 -- --
Proceeds from exercise
of warrants........... -- 200 -- -- --
Increase in deferred
financing costs....... -- (962,950) (182,400) -- --
Borrowings under long-
term debt............. 4,300,000 36,251,692 3,000,000 1,000,000 1,200,000
Principal repayments on
long-term debt........ (397,000) (4,314,096) (3,121,472) (1,429,297) (2,032,221)
----------- ------------ ----------- ----------- -----------
Net cash provided by
(used in) financing
activities........... 3,903,000 30,974,846 4,629,988 (429,297) (832,221)
----------- ------------ ----------- ----------- -----------
NET INCREASE (DECREASE)
IN CASH AND CASH
EQUIVALENTS............ 604,997 996,880 (419,304) (1,305,643) (2,188,585)
CASH AND CASH
EQUIVALENTS, beginning
of period.............. 1,218,954 1,823,951 2,820,831 2,820,831 2,401,527
----------- ------------ ----------- ----------- -----------
CASH AND CASH
EQUIVALENTS, end of
period................. $ 1,823,951 $ 2,820,831 $ 2,401,527 $ 1,515,188 $ 212,942
=========== ============ =========== =========== ===========
SUPPLEMENTAL DISCLOSURE
OF CASH FLOW
INFORMATION:
Cash paid during the
period for:
Income taxes.......... $ 1,610,000 $ -- $ 334,479 $ -- $ 1,107,522
=========== ============ =========== =========== ===========
Interest.............. $ 198,581 $ 1,754,981 $ 3,192,152 $ 897,221 $ 1,524,906
=========== ============ =========== =========== ===========
SUPPLEMENTAL DISCLOSURE
OF NON CASH
INVESTING AND FINANCING
ACTIVITIES:
Software acquired
under a capital lease
arrangement........... $ 62,641 $ -- $ -- $ -- $ --
=========== ============ =========== =========== ===========
Preferred stock
dividend accrual...... $ 111,221 $ 118,046 $ 365,291 $ 30,627 $ 132,506
=========== ============ =========== =========== ===========
Acquisitions of
various schools and
colleges--
Fair value of assets
acquired............. $ 4,661,380 $ 31,147,526 $ -- $ -- $ --
Net cash used in
acquisitions......... (3,048,616) (24,227,318) -- -- --
----------- ------------ ----------- ----------- -----------
Liabilities assumed
or incurred......... $ 1,612,764 $ 6,920,208 $ -- $ -- $ --
=========== ============ =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-6
<PAGE>
CORINTHIAN COLLEGES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1--DESCRIPTION OF THE BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
Description of the Business
Corinthian Schools, Inc. ("CSi"), a Delaware corporation, was formed in
February 1995 for the purpose of acquiring certain schools from National
Education Centers, Inc., and until July 1995 its operations were not
significant (see Note 4--CSi Acquisitions). In September 1996, Corinthian
Colleges, Inc. ("CCi"), a Delaware corporation, was formed as a wholly owned
subsidiary of CSi. Concurrently, CCi formed a wholly owned subsidiary, Rhodes
Colleges, Inc. ("RCi"), for the purpose of acquiring certain colleges from
Phillips Colleges, Inc. ("Phillips") (see Note 4--RCi acquisitions). In
October 1996, CCi and CSi completed a reorganization transaction whereby CSi
became a wholly-owned subsidiary of CCi. This transaction was accounted for as
a recapitalization. Corinthian Property Group, Inc. ("CPGI"), a Delaware
Corporation, was formed in April 1997 to hold certain real properties
previously acquired by CCi. These entities are collectively referred to as the
"Company."
The Company's primary business is the operation of degree and non-degree
granting private, for-profit post-secondary schools devoted to career program
training primarily in the medical, technical and business fields. The Company
operates a total of 35 private colleges located in 16 states: Virginia, West
Virginia, Texas, Michigan, Massachusetts, Louisiana, California, Oregon,
Colorado, Nevada, Utah, Missouri, Pennsylvania, New York, Washington and
Florida. Revenues generated from these schools consist primarily of tuition
and fees paid by students. To pay for a substantial portion of their tuition,
the majority of students rely on funds received from federal financial aid
programs under Title IV ("Title IV Programs") of the Higher Education Act of
1965, as amended ("HEA"). For further discussion see Concentration of Risk
below and Note 11--Governmental Regulation.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
CCi and each of its wholly owned subsidiaries, CSi, RCi and CPGI. All
intercompany activity has been eliminated in consolidation.
Financial Statement Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions. Such estimates and assumptions affect the reported amounts of
assets and liabilities and disclosure of contingent assets and 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
estimated amounts.
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents.
Restricted Cash
Restricted cash primarily consists of amounts to secure a letter of credit
in favor of the U.S. Department of Education ("DOE").
F-7
<PAGE>
CORINTHIAN COLLEGES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Revenue Recognition
Revenues consist primarily of tuition derived from courses taught in the
Company's career colleges. Tuition revenues are recognized on a straight-line
basis over the term of the applicable course. If a student withdraws from a
course or program, the paid but unearned portion of the student tuition is
refunded. Textbook sales and other revenues are recognized as sales occur or
services are performed and represent less than 10 percent of total revenues.
Prepaid tuition is the portion of payments received but not earned and is
reflected as a current liability in the accompanying consolidated balance
sheet as such amount is expected to be earned within the next year.
Educational Services
Educational services include direct operating expenses of the schools
consisting primarily of payroll and payroll related, occupancy and supplies
costs, as well as amortization of goodwill.
Marketing and Advertising
Marketing and advertising consists primarily of payroll and payroll related,
direct-response and other advertising, promotional materials and other related
marketing costs. All marketing and advertising costs are expensed as incurred.
Property and Equipment
Property and equipment are stated at cost and are being depreciated or
amortized utilizing the straight-line method over the following estimated
useful lives:
<TABLE>
<S> <C>
Furniture and equipment................ 7 years
Computer hardware and software......... 3-5 years
Leasehold improvements................. Shorter of 7 years or term of lease
Buildings.............................. 39 years
</TABLE>
Deferred Financing Costs
Costs incurred in connection with obtaining financing are capitalized and
amortized over the maturity period of the debt and are included in deposits
and other assets in the accompanying consolidated balance sheets.
Intangible Assets
Intangible assets consist of goodwill, trade names and course curriculum.
Goodwill represents the excess of cost over the fair market value of net
assets acquired, including identified intangible assets. Goodwill is amortized
using the straight-line method over 40 years. Course curriculum represents the
cost of acquiring such curriculum and is amortized using the straight-line
method over 15 years. Trade names represents the cost to acquire and use the
names of the colleges acquired and are amortized using the straight line
method over 40 years. Amortization of curriculum and tradenames is included in
general and administrative expenses in the accompanying consolidated
statements of operations. Management evaluates the realizability of
intangibles periodically as events or circumstances indicate a possible
inability to recover the carrying amount. 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.
Fair Value of Financial Instruments
The carrying value of cash and cash equivalents, restricted cash,
receivables and accounts payable approximates the fair value. In addition, the
carrying value of all borrowings approximate fair value based on interest
rates currently available to the Company.
F-8
<PAGE>
CORINTHIAN COLLEGES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Income Taxes
The Company accounts for income taxes as prescribed by the Statement of
Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income
Taxes." SFAS No. 109 prescribes the use of the asset and liability method to
compute the differences between the tax basis of assets and liabilities and
the related financial amounts, using currently enacted tax laws. Valuation
allowances are established, when necessary, to reduce deferred tax assets to
the amount that more likely than not will be realized.
Stock-Based Compensation
In accordance with SFAS No. 123 "Accounting for Stock-Based Compensation",
the Company accounts for stock option grants in accordance with Accounting
Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to
Employees," and has adopted the "disclosure only" alternative allowed under
SFAS No. 123.
Net Income (Loss) Per Common Share
The Company accounts for net income per common share in accordance with SFAS
No. 128 "Earnings Per Share" and SFAS No. 129, "Disclosure of Information
about Capital Structure." Basic net income (loss) per common share is computed
by dividing income (loss) available to common stockholders by the weighted
average number of common shares outstanding. Diluted net income (loss) per
common share is computed by dividing income (loss) available to common
stockholders by the weighted average number of common shares outstanding plus
the effect of any dilutive stock options, common stock warrants and
convertible preferred stock, utilizing the treasury stock method.
Unaudited Interim Information
The accompanying financial information as of September 30, 1998 and for the
three months ended September 30, 1997 and 1998 is unaudited and has been
prepared on substantially the same basis as the annual consolidated financial
statements. In the opinion of management, the unaudited information contains
all adjustments (consisting of normal recurring accruals) necessary to present
fairly the financial position and results of operations as of such date and
for such periods.
New Accounting Pronouncements
Recent pronouncements of the Financial Accounting Standards Board ("FASB")
include SFAS No. 133, "Accounting for Derivative Instruments and for Hedging
Activities", SFAS No. 132, "Employers Disclosures about Pension and Other Post
Retirement Benefits", SFAS No. 131, "Disclosure about Segments of an
Enterprise and Related Information", and SFAS No. 130, "Reporting
Comprehensive Income". The Statements are effective for fiscal years beginning
after December 15, 1997 and earlier application is not permitted. The adoption
of these Statements is not expected to have a material effect on the Company's
consolidated financial position or results of operations. The impact of these
pronouncements on the disclosures in the consolidated financial statements has
not been determined.
Concentration of Risk
The Company extends credit for tuition to a majority of the students. A
substantial portion is repaid through the student's participation in federally
funded financial aid programs. Transfers of funds from the financial aid
programs to the Company are made in accordance with the DOE requirements.
Approximately 73 percent 75 percent, 72 percent of the Company's revenues (on
a cash basis) were collected from funds distributed under Title IV Programs of
the HEA for the years ended June 30, 1996, 1997 and 1998, respectively. The
F-9
<PAGE>
CORINTHIAN COLLEGES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
financial aid and assistance programs are subject to political and budgetary
considerations. There is no assurance that such funding will be maintained at
current levels. Extensive and complex regulations in the U.S. govern all the
government financial assistance programs in which the Company's students
participate. The Company's administration of these programs is periodically
reviewed by various regulatory agencies. Any regulatory violation could be the
basis for the initiation of a suspension, limitation or termination proceeding
which could have a material adverse effect to the Company.
The Company has routinely afforded relatively short-term installment payment
plans to many of its students to supplement their federally funded financial
aid. During fiscal 1998, the Company expanded the internal loan program to
assist students in those colleges that lost access to Federal Family Education
Loans ("FFEL") (see Note 11). While these loans are unsecured, the Company
believes it has adequate reserves against these loan balances. However, there
can be no assurance that losses will not exceed reserves. Losses in excess of
reserves could have a material adverse effect on the Company's business.
NOTE 2--DETAIL OF SELECTED BALANCE SHEET ACCOUNTS
Prepaid expenses and other current assets consist of the following:
<TABLE>
<CAPTION>
June 30,
------------------------ September 30,
1997 1998 1998
----------- ----------- -------------
<S> <C> <C> <C>
Course materials, net............ $ 1,086,913 $ 1,463,176 $ 1,589,867
Prepaids......................... 241,796 1,227,417 2,068,321
Other current assets............. 68,369 435,645 561,561
----------- ----------- -----------
$ 1,397,078 $ 3,126,238 $ 4,219,749
=========== =========== ===========
Property and equipment consist of the following:
<CAPTION>
June 30,
------------------------ September 30,
1997 1998 1998
----------- ----------- -------------
<S> <C> <C> <C>
Furniture and equipment.......... $ 5,932,564 $ 6,461,720 $ 7,012,777
Computer hardware and software... 2,157,149 2,956,045 3,023,545
Leasehold improvements........... 381,644 980,172 1,077,879
Land............................. 2,248,792 2,248,792 2,248,792
Buildings........................ 1,178,558 1,178,558 1,178,558
----------- ----------- -----------
11,898,707 13,825,287 14,541,551
Less--accumulated depreciation
and amortization................ (1,723,748) (3,493,664) (3,996,751)
----------- ----------- -----------
$10,174,959 $10,331,623 $10,544,800
=========== =========== ===========
</TABLE>
F-10
<PAGE>
CORINTHIAN COLLEGES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Depreciation and amortization expense associated with property and equipment
was $524,643, $1,199,105, $1,778,446, $140,261 and $503,087 for the years
ended June 30, 1996, 1997 and 1998, and the three months ended September 30,
1997 and 1998, respectively.
Intangible assets consist of the following:
<TABLE>
<CAPTION>
June 30,
------------------------ September 30,
1997 1998 1998
----------- ----------- -------------
<S> <C> <C> <C>
Goodwill.......................... $ 8,285,445 $ 8,285,445 $ 8,285,445
Curriculum........................ 11,405,140 11,405,140 11,405,140
Trade names....................... 5,038,805 5,038,805 5,038,805
----------- ----------- -----------
24,729,390 24,729,390 24,729,390
Less--accumulated amortization.... (890,144) (2,010,423) (2,286,971)
----------- ----------- -----------
$23,839,246 $22,718,967 $22,442,419
=========== =========== ===========
</TABLE>
Amortization expense associated with intangibles was $126,817, $763,327,
$1,120,279, $283,671 and $276,548 for the years ended June 30, 1996, 1997 and
1998, and the three months ended September 30, 1997 and 1998, respectively.
NOTE 3--STUDENT NOTES RECEIVABLE
Student notes receivable represent loans which have maturity dates of 6
months to 84 months from the loan origination date. The interest charged on
the notes ranges from 8.25 to 15.00 percent per annum.
The following reflects on analysis of student notes receivable at June 30,
1998:
<TABLE>
<CAPTION>
Net
Student Allowance Gross
Notes for Doubtful Student Notes
Receivable Accounts Receivable
---------- ------------ -------------
<S> <C> <C> <C>
Current................................ $1,776,320 $ 457,290 $ 2,233,610
Long-term.............................. 4,407,615 1,829,162 6,236,777
Add-unearned portion................. 6,163,166
Add-unrecorded interest.............. 3,713,282
-----------
Total.................................. $18,346,835
===========
</TABLE>
Payments due under student notes receivable are as follows:
<TABLE>
<CAPTION>
Years Ending
June 30,
------------
<S> <C>
1999......................................................... $ 5,449,887
2000......................................................... 3,872,286
2001......................................................... 3,695,337
2002......................................................... 2,791,560
2003......................................................... 1,494,850
Thereafter................................................... 1,042,915
-----------
Total........................................................ $18,346,835
===========
</TABLE>
F-11
<PAGE>
CORINTHIAN COLLEGES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 4--BUSINESS ACQUISITIONS
CSi Acquisitions
In June 1995, the Company entered into an asset purchase agreement with
National Education Centers, Inc. to purchase certain assets and assume certain
liabilities of 16 career colleges for approximately $4.7 million in cash. The
acquisitions of these colleges occurred in three ownership transfers
effectively completed in June 1995 for approximately $1.7 million and in
September and December of 1995 for approximately $3.0 million.
In the first quarter of fiscal 1997, the Company entered into asset purchase
agreements with Repose, Inc. and Concorde Career Colleges, Inc. to purchase
certain assets and assume certain liabilities of the Bryman Colleges, in
Bellevue, Washington and San Jose, California for $600,000 in cash. The
colleges currently offer career training in the medical and technical fields.
Subsequent to the acquisition, the Bellevue location moved to SeaTac,
Washington.
RCi Acquisitions
Effective October 1996, the Company entered into an asset purchase agreement
with Phillips Colleges, Inc. ("Phillips") to purchase certain assets and
assume certain liabilities of 17 colleges currently operating under the names
of Rhodes Colleges, Inc., and Florida Metropolitan University, Inc., for $6.0
million in cash. Additionally, the Company entered into a separate transaction
with Phillips to purchase certain curriculum and trade names. The cost to
purchase the curriculum, trade names and other intangibles was approximately
$17.6 million.
Accounting for Acquisitions
All acquisitions have been accounted for under the purchase method of
accounting. Accordingly, the purchase price has been allocated to the assets
acquired and liabilities assumed based on their estimated fair market values
at the dates of the acquisitions. The results of operations of each
acquisition are included in the consolidated results of the Company beginning
on the effective dates of the acquisitions.
The purchase price of the CSi and RCi transactions were allocated as follows
during fiscal 1996 and 1997, respectively:
<TABLE>
<CAPTION>
1996 1997
---------- -----------
<S> <C> <C>
Tangible assets.................................. $4,540,764 $ 7,052,287
Identified intangible assets..................... -- 16,443,945
Goodwill......................................... 120,616 7,651,294
Liabilities assumed.............................. (758,003) (772,703)
Prepaid tuition.................................. (854,761) (6,147,505)
---------- -----------
Net assets acquired............................ $3,048,616 $24,227,318
========== ===========
</TABLE>
F-12
<PAGE>
CORINTHIAN COLLEGES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 5--LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
June 30,
------------------------ September 30,
1997 1998 1998
----------- ----------- -------------
<S> <C> <C> <C>
Senior Secured Notes, as amended, due
October 2004, with interest at 11.02
percent per annum payable quarterly
in January, April, July and October
of each year beginning January 1997,
secured by substantially all assets,
excluding real estate. A $2.5 million
and $5.0 million principal payment is
due October 1998 and 1999,
respectively. The remaining $15
million is amortized quarterly
through October 2004................. $22,500,000 $22,500,000 $22,500,000
Senior Secured Revolving Note, as
amended due October 2000, with
interest at the lenders' LIBOR rate,
as defined, plus 3.50 percent
(9.25 percent at September 30, 1998),
secured by substantially all assets,
excluding real estate. Available
borrowing under this facility reduces
to $3.0 million effective August 1999
with the remaining balance due
October 2000......................... 5,000,000 5,000,000 4,200,000
Subordinated Notes, as amended, due
October 2005, interest at 12.00
percent per annum payable quarterly,
principal payable in quarterly
installments of $281,250 beginning
October 2001, subordinated to the
Senior Secured Notes and Revolving
Note shown above..................... 5,000,000 5,000,000 5,000,000
Promissory note due April 2007, with
interest at 10.95 percent per annum,
secured by certain land and
improvements......................... 3,751,692 3,645,880 3,617,577
Other................................. 38,104 22,445 18,527
----------- ----------- -----------
36,289,796 36,168,325 35,336,104
Less--current portion................. (121,472) (4,633,659) (3,836,918)
----------- ----------- -----------
$36,168,324 $31,534,666 $31,499,186
=========== =========== ===========
</TABLE>
The Senior Secured Notes and Senior Secured Revolving Note, pursuant to the
Senior Credit Agreement, as well as the Subordinated Notes (collectively
referred to as "the Notes"), contain various financial and non-financial
covenants. At June 30, 1997, the Company was not in compliance with certain
covenant requirements of these Notes. However, on November 7, 1997, the
Company entered into agreements amending the terms of these Notes (the
"Amended Notes"). The Amended Notes waived all covenant violations through
September 30, 1997, extended the principal payment dates, adjusted certain
interest rates and reset the financial ratios to be consistent with the
Company's current operating plan. The Company is required to maintain certain
financial ratios throughout the term of the Amended Notes. Examples of such
ratios are a quick ratio of 60 percent increasing to 100 percent by September
2000, certain levels of senior debt to adjusted cash flows, various measures
of debt to equity, minimum levels of cash flows and operating lease payments
to fixed charges. Pursuant to the terms of the Amended Notes and the
promissory note, the Company is restricted from paying dividends, as defined,
selling or disposing of certain assets or subsidiaries and issuing
subordinated debt.
At June 30, 1998, the Company was in compliance with all covenant
requirements except for a minimum annual cash flow from operations requirement
which was subsequently waived by the lenders.
F-13
<PAGE>
CORINTHIAN COLLEGES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Principal payments due under the long-term debt arrangements discussed above
are as follows:
<TABLE>
<CAPTION>
Years Ending
June 30,
------------
<S> <C>
1999........................................................ $ 4,633,659
2000........................................................ 6,313,000
2001........................................................ 5,698,000
2002........................................................ 3,830,000
2003........................................................ 4,431,880
Thereafter.................................................. 11,261,786
-----------
$36,168,325
===========
</TABLE>
NOTE 6--PREFERRED STOCK AND COMMON STOCKHOLDERS' EQUITY
The Company is authorized to issue 500,000 shares of preferred stock.
Preferred stock outstanding consists of Series 1 Preferred Stock, $1.00 par
value ("Redeemable Preferred Stock"), Series 2 Preferred Stock, $1.00 par
value ("Series 2 Convertible Preferred Stock") and Series 3 Preferred Stock,
$1.00 par value ("Series 3 Convertible Preferred Stock").
Redeemable Preferred Stock
There are 18,125 shares of Redeemable Preferred Stock issued and outstanding
at June 30, 1997 and 1998 and September 30, 1998. CSi issued the shares on
June 30, 1995 for $100 per share. In connection with the reorganization
transaction described in Note 1, the Redeemable Preferred Stock became an
outstanding security of CCi. The Redeemable Preferred stockholders are
entitled to dividends that accrue daily at 6 percent per annum until June 30,
2002 and 12 percent thereafter. These shares have a defined liquidation value
of $100 per share plus all accrued and unpaid dividends. Accrued dividends on
the Redeemable Preferred Stock at June 30, 1997 and 1998 and September 30,
1998 are $229,267, $354,558 and $387,064, respectively, and are included in
Redeemable Preferred Stock in the accompanying consolidated balance sheets.
Upon the completion of a Qualified Initial Public Offering, as defined, or at
any time after June 30, 2001, the holders may require the shares be redeemed
provided that such redemption would not constitute a default under the Senior
Credit Agreement. The Company shall redeem all outstanding Redeemable
Preferred Shares on October 31, 2005. As long as the Redeemable Preferred
Stock is outstanding, the Company shall not redeem, purchase or otherwise
acquire any other shares of stock.
Convertible Preferred Stock
There are 25,000 shares each of Series 2 and Series 3 Convertible Preferred
Stock outstanding at June 30, and September 30, 1998. The shares were issued
in November 1997 for $100 per share. The Series 2 and Series 3 Convertible
Preferred Stockholders are entitled to dividends that accrue daily at 8
percent per annum. These shares have a defined Liquidation value of $100 per
shares plus all accrued and unpaid dividends. Accrued dividends on the
Convertible Preferred Stock at June 30, 1998 and September 30, 1998 were
$240,000 and $340,000, respectively, and are included in Convertible Preferred
Stock in the accompanying consolidated balance sheets. The Series 2 and Series
3 Convertible Preferred Stock is convertible into Nonvoting Common Stock and
Common Stock, respectively.
At any time after June 30, 2001, the holders of the Series 2 and Series 3
Convertible Preferred Stock may require that the Company redeem a portion of
the shares that have a liquidation value not in excess of $4,000,000, or in
any amount after October 17, 2004, provided that such redemption would not
constitute a
F-14
<PAGE>
CORINTHIAN COLLEGES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
default under the Senior Credit Agreement. Additionally, the Company may
require conversion upon the results of a Qualified Initial Public Offering, as
defined. The conversion to common stock is computed by multiplying the number
of shares to be converted by $100 and dividing the result by the Conversion
Price then in effect. The initial Conversion Price is $5.783, subject to
adjustment to prevent dilution of the conversion rights. The Company must pay
dividends quarterly beginning December 1998, or upon certain events of
noncompliance, as defined. If such payments are not made, the holders of the
preferred stock may demand immediate redemption, except in the event such
redemption results in a default under the Senior Credit Agreement.
Unaudited Pro Forma Stockholders' Equity
Concurrent with the consummation of the Initial Public Offering of the
Company's common stock (see Note 12), the Company will cause the conversion of
all existing Series 2 and Series 3 Convertible Preferred Stock into 388,334
shares of Nonvoting Common Stock and 388,334 shares of Common Stock. The
unaudited pro forma stockholders' equity at September 30, 1998 gives effect to
this conversion.
Common Stock
On June 30, 1995, CSi sold for cash 4,868,476 and 367,748 shares of Class A
and Class B common stock, respectively. In connection with the reorganization
transaction described in Note 1, the Class A and Class B common stock became
an outstanding security of CCi. Class A common stock (referred to herein as
the "Common Stock") is entitled to one vote per share on all matters. Class B
common stock (referred to herein as the "Nonvoting Common Stock") has no
voting rights, except the Nonvoting Common Stock together with Common Stock,
as one class, has the right to vote on (i) any merger or consolidation of the
Company with or into another company, (ii) any sale of all or substantially
all of the Company's assets and (iii) any amendment to the Company's
Certificate of Incorporation.
In connection with 2,204,726 of the 4,868,476 shares of Common Stock issued
on June 30, 1995, the Company entered into various Executive Stock Agreements
(the "Agreements"), as amended, with each of its principal executives. Under
the terms of these Agreements, the shares of Common Stock acquired by the
executives vest over time or based on certain qualifying events as defined. At
June 30, 1997 and 1998, 75.0 percent (1,653,545 shares) and 87.5 percent
(1,929,135 shares), respectively, were vested. The remaining shares vest on
June 30, 1999.
On June 30, 1995, the Company also sold 826,773 shares of Nonvoting Common
Stock at $0.2268 per share to certain executives. Subject to the Agreements,
the executives paid cash of $0.00023 per share, for total consideration of
$188, with the remaining balance of $187,312 included in notes receivable for
stock on the accompanying consolidated balance sheets. These shares vest at
the earlier occurrence of a Qualifying Initial Public Offering of the
Company's common stock or sale of the Company, as defined, or the passage of
time. At June 30, 1996, 1997 and 1998 and September 30, 1998, none of these
shares were vested.
F-15
<PAGE>
CORINTHIAN COLLEGES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Warrants
The following represents a summary of the warrant activity:
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
--------------------------------------------------- THREE MONTHS ENDED
1996 1997 1998 SEPTEMBER 30, 1998
--------------- ------------------ --------------- -------------------
WTD AVG WTD AVG
EX WTD AVG EX WTD AVG
SHARES PRICE SHARES EX PRICE SHARES PRICE SHARES EX PRICE
------- ------- -------- -------- ------- ------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Outstanding, beginning
of the period.......... 275,591 $0.0007 275,591 $ 0.0007 525,328 $0.0005 967,884 $ 0.0004
Granted................. -- -- 525,328 0.0005 442,556 0.0002 -- --
Exercised............... -- -- (275,591) (0.0007) -- -- -- --
------- ------- -------- -------- ------- ------- --------- ---------
Outstanding, end of the
period................. 275,591 $0.0007 525,328 $ 0.0005 967,884 $0.0004 967,884 $ 0.0004
======= ======= ======== ======== ======= ======= ========= =========
</TABLE>
The warrants outstanding at June 30, 1995 and the warrants granted during
fiscal 1997 were issued to lenders in conjunction with loans made to the
Company (See Note 5--Long-Term Debt). No amount was allocated to these
warrants because management believes the effect would not be material to the
consolidated results of operations. In November 1997, in connection with the
amended Senior Credit Agreement, the lenders received additional warrants
equivalent to two percent of the Company on a fully diluted basis, exercisable
at $0.0002 per share. These warrants are subject to forfeiture by the lenders
if the Company attains certain performance criteria, as defined. As a result,
management believes the fair value of these warrants is nominal and therefore
no amount has been allocated to the warrants. Outstanding warrants at June 30,
1998 and September 30, 1998 include 679,247 Common Stock warrants exercisable
into Common Stock and 288,637 Nonvoting Common Stock warrants exercisable into
Nonvoting Common Stock. 525,328 warrants outstanding at June 30, 1998 and
September 30, 1998 are exercisable and the remaining average contractual life
of all warrants is approximately 6.3 years at June 30, 1998.
Stock options
On April 28, 1998, the Board of Directors adopted the 1998 Performance Award
Plan (the Plan). Under the Plan, 529,134 options, stock appreciation rights or
other common stock based securities may be granted to directors, officers,
employees and other eligible persons. On June 30, 1998, the Company granted
121,039 stock options to various officers and employees. The options vest 25
percent each year and expire ten years from the date of grant. The exercise
price of all options granted was $12.47, which represented the fair value of
the Company's common stock as determined by an independent valuation firm.
Additionally, the Company intends to grant 24,000 stock options to non-
employee directors concurrent with, and conditioned upon, the Offering at the
Offering price. Accordingly, no compensation expense was recorded for the June
30, 1998 grants and none will be recorded for the grants to non-employee
directors pursuant to APB Opinion No. 25.
Pursuant to SFAS No. 123, the fair value of each option granted on June 30,
1998 was $4.01. The fair value was estimated using the Black-Scholes option
pricing model using the following assumptions: no dividend yield, nominal
factor for volatility, weighted-average risk-free rate of 5.54 percent and
expected life of seven years. As discussed in Note 1, the Company elected the
"disclosure alternative" allowed under SFAS No. 123. Accordingly, the Company
is required to disclose pro forma net income over the vesting period of the
options. As all options were granted on the last day of the fiscal year, the
pro forma effect for 1998 is immaterial.
F-16
<PAGE>
CORINTHIAN COLLEGES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 7--WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING:
The table below indicates the weighted average number of common share
calculations used in computing basic and diluted net income (loss) per common
share utilizing the treasury stock method:
<TABLE>
<CAPTION>
June 30, September 30,
----------------------------- -------------------
1996 1997 1998 1997 1998
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Basic common shares
outstanding................. 4,409,452 4,895,682 5,236,224 4,960,634 5,236,224
Effects of dilutive
securities:
Warrants................... 275,591 -- 786,647 -- 967,884
Non-vested executive Common
Stock..................... 826,772 -- 275,591 -- 275,591
Non-vested executive
Nonvoting Common Stock.... 826,773 -- 826,773 -- 826,773
Stock options.............. n/a n/a -- n/a 20,415
--------- --------- --------- --------- ---------
Diluted common shares
outstanding................. 6,338,588 4,895,682 7,125,235 4,960,634 7,326,887
========= ========= ========= ========= =========
</TABLE>
For the year ended June 30, 1997 and the three months ended September 30,
1997, the effect of all common stock warrants and non-vested executive Common
and Nonvoting Common Stock was excluded from the computation of diluted loss
per common share as the effect of such inclusion would be antidilutive.
Additionally, the computation of diluted net income per common share for the
year ended June 30, 1998 and the three months ended September 30, 1998 did not
assume the conversion of the Convertible Preferred Stock as it would have been
antidilutive.
NOTE 8--INCOME TAXES
The components of the income tax provisions (benefit) are as follows:
<TABLE>
<CAPTION>
Years Ended June 30,
-----------------------------------
1996 1997 1998
--------- ----------- -----------
<S> <C> <C> <C>
Current provision:
Federal.................................. $ 671,627 $ (172,736) $ 1,561,791
State.................................... 192,017 114,700 510,171
--------- ----------- -----------
863,644 (58,036) 2,071,962
--------- ----------- -----------
Deferred provision:
Federal.................................. (116,815) (806,964) (856,499)
State.................................... (24,699) (242,200) (227,053)
--------- ----------- -----------
(141,514) (1,049,164) (1,083,552)
--------- ----------- -----------
Total provision (benefit) for income
taxes................................. $ 722,130 $(1,107,200) $ 988,410
========= =========== ===========
</TABLE>
F-17
<PAGE>
CORINTHIAN COLLEGES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Actual income tax provision (benefit) differs from the income tax provision
(benefit) computed by applying the U.S. federal statutory tax rate of 34
percent to income (loss) before provision for income taxes as follows:
<TABLE>
<CAPTION>
Years Ended June 30,
------------------------------
1996 1997 1998
-------- ----------- --------
<S> <C> <C> <C>
Provision (benefit) at the statutory rate....... $601,849 $(1,017,458) $751,163
State income tax provision (benefit), net of
federal benefit................................ 88,507 (149,626) 186,858
Other........................................... 31,774 59,884 50,389
-------- ----------- --------
$722,130 $(1,107,200) $988,410
======== =========== ========
</TABLE>
The components of the Company's deferred tax asset and liability are as
follows:
<TABLE>
<CAPTION>
June 30,
----------------------
1997 1998
---------- ----------
<S> <C> <C>
Current deferred tax asset:
Accounts receivable allowance for doubtful accounts... $ 181,072 $1,196,105
Accrued vacation...................................... 302,221 373,890
Accrued bonuses....................................... 35,972 112,200
Other accrued liabilities............................. -- 244,800
State taxes........................................... 224,697 468,569
Net operating loss carryforward....................... 720,000 --
---------- ----------
Current deferred tax asset.......................... 1,463,962 2,395,564
---------- ----------
Non-current deferred tax liability:
Notes receivable allowance for doubtful accounts...... -- 564,263
Depreciation.......................................... (84,660) (303,433)
Amortization.......................................... (188,624) (382,164)
---------- ----------
Non-current deferred tax liability.................. (273,284) (121,334)
---------- ----------
$1,190,678 $2,274,230
========== ==========
</TABLE>
NOTE 9--COMMITMENTS AND CONTINGENCIES
Leases
The Company leases most of its operating facilities and various equipment
under noncancellable operating leases expiring at various dates through 2017.
The facilities leases require the Company to pay various operating expenses of
the facilities in addition to base monthly lease payments.
Future minimum lease payments under operating leases are as follows:
<TABLE>
<CAPTION>
Years
Ending
June 30,
--------
<S> <C>
1999....................................................... $ 8,398,539
2000....................................................... 7,486,671
2001....................................................... 6,250,188
2002....................................................... 5,143,471
2003....................................................... 3,175,104
Thereafter................................................. 9,013,919
-----------
$39,467,892
===========
</TABLE>
F-18
<PAGE>
CORINTHIAN COLLEGES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Rent expense for the years ended June 30, 1996, 1997 and 1998 and the three
months ended September 30, 1997 and 1998 amounted to $2,200,657, $7,835,384,
$9,077,764, $2,229,788 and $2,343,577 respectively, and is reflected in
educational services and general and administrative expense in the
accompanying consolidated statements of operations.
Legal Matters
The Company is involved in various legal proceedings which have been routine
and in the normal course of business. In the opinion of management, after
consultation with legal counsel, the resolution of these matters will not have
a material adverse impact on the Company's financial position or results of
operations.
NOTE 10--EMPLOYEE SAVINGS PLAN
The Company has established an employee savings plan under Section 401(k) of
the Internal Revenue Code. All employees with at least one year and 1,000
hours of employment are eligible to participate. Contributions to the plan by
the Company are discretionary. The plan provides for vesting of Company
contributions over a five-year period. Employees previously employed by each
of the sellers (see Note 4) shall vest in the plan based on total service
time. Company contributions to the plan were $131,309, $243,570 and $292,572
for the years ended June 30, 1996, 1997 and 1998, respectively.
NOTE 11--GOVERNMENTAL REGULATION
The Company and each school is subject to extensive regulation by
governmental agencies and accrediting bodies. In particular, the HEA and the
regulations promulgated thereunder by the DOE subject the Company's operations
to regulatory scrutiny. Schools must satisfy certain criteria in order to
participate in various financial assistance programs under Title IV of the
HEA. For example, various financial responsibility tests must be met which
include (i) 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) positive tangible net worth at
the end of each fiscal year and (iii) not having a cumulative net operating
loss during its two most recent fiscal years that results in a decline of more
than 10 percent of the schools tangible net worth. Additionally, each school
must not collect more than 85 percent of its cash revenues from Title IV
Program funds in any fiscal year and must not have cohort default rates
("CDR") on federally funded or federally guaranteed student loans in excess of
25 percent for each of the most recent three federal fiscal years. Any
regulatory violation could be the basis for the initiation of a suspension,
limitation or termination proceeding against the Company or any of its
schools.
In November 1997, the DOE published new regulations regarding financial
responsibility that took effect July 1, 1998. The new 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 to the Company. 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 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 years,
consecutive years, the institution will be required to post a letter of credit
in favor of the DOE.
The Company believes that the DOE will consider the new financial
responsibility regulations or the current regulations, whichever are more
favorable to the Company, for the audited financial statements filed with the
DOE subsequent to publication of the new regulations in November 1997. The
Company filed its 1997 audited
F-19
<PAGE>
CORINTHIAN COLLEGES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
financial statements with the DOE in December 1997 and believes the DOE will
apply such new regulations to the Company if they prove more favorable. Under
the new regulations, only one of the Company's schools at June 30, 1997 (FMU
in Ft. Lauderdale, Florida) would not be considered financially responsible
based on the new required calculations. However, this college would
nevertheless be considered to be financially responsible by virtue of being on
the reimbursement program and being covered by the existing letter of credit
for RCi. Two of the Company's schools (Blair College in Aurora, Colorado and
NIT in Wyoming, Michigan) are in the intermediate zone at June 30, 1997 and
thus meet financial responsibility tests under additional monitoring and
reporting procedures for up to three years. The Company's two operating
divisions both meet the financial responsibility criteria under the new
regulations, but the Company, on a consolidated basis, does not meet the
standards at June 30, 1997. Based on the audit as of June 30, 1998, all of the
Company's schools exceed the requirement for financial responsibility on an
individual basis. Also, the Company's two operating divisions both meet the
requirements. However, as in 1997, the Company, on a consolidated basis does
not meet the new standards.
Based on the June 30, 1997 financial statements, eight of the Company's
colleges failed to meet one or more of the financial responsibility tests
under the former regulations. Three of the colleges failed to meet the acid
test ratio (Blair College in Colorado Springs, Colorado; FMU in Melbourne,
Florida; and FMU in Fort Lauderdale, Florida) and five of the colleges failed
to meet the profitability test (Bryman College in Seatac, Washington; NIT in
Wyoming, Michigan; Bryman College (North) in San Jose, California; Parks
College in Aurora, Colorado; and Springfield College in Springfield,
Missouri). In addition, the Company, on a consolidated basis, failed to meet
the financial responsibility tests. However, at the CSi operating company
level, and at the RCi operating company level, all financial responsibility
tests were met.
There can be no assurance at this time that the DOE, upon review of fiscal
1997 and 1998 financial statements, will not require that the Company post
additional letters of credit in accordance with its regulations. Since RCi is
already on reimbursement, and since the Company has posted a letter of credit
as required by the regulations, by definition the Company believes that it
currently meets financial responsibility standards as set forth by the DOE.
There is no assurance, however, that the DOE will not impose additional
requirements for letters of credit based upon its review of the Company's
fiscal 1997 and 1998 financial statements. Such actions or other similar
actions, could have a material adverse effect on the Company's business,
results of operations and financial condition, and on its ability to generate
sufficient liquidity to continue to fund growth in its operations and purchase
other institutions.
As of June 30, 1998, all schools except for seven (Bryman in El Monte,
California; Bryman in Los Angeles, California; Bryman in Brookline,
Massachusetts; NIT in Wyoming, Michigan; Bryman in New Orleans, Louisiana;
Bryman College (South) in San Jose, California; and Skadron College in San
Bernardino, California) were eligible to receive federal funding, including
loan funds. These schools were ineligible for federal loan funds as they
exceeded the CDR threshold. On June 3, 1998, the DOE proposed to reinstate
three of the seven colleges provided that the Company agrees not to pursue
remedies for reinstatement for the remaining four campuses. The Company has
agreed to the terms of the proposal and the DOE has reinstated eligibility to
participate in the FFEL program for the three campuses. Of the remaining four
campuses, NIT in Wyoming, Michigan will be eligible for reinstatement in 1999
and Bryman in New Orleans, Louisiana, Bryman College (South) in San Jose,
California and Skadron College in San Bernardino, California will be eligible
for reinstatement in 2000.
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 by the state agency in which it operates. Additionally,
each institution must be accredited by an agency recognized by the DOE. As of
June 30, 1998, management believes all of the Company's schools meet these
requirements.
F-20
<PAGE>
CORINTHIAN COLLEGES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The financial aid and assistance programs, in which most of the Company's
students participate, are subject to political and budgetary considerations.
There is no assurance that such funding will be maintained at current levels.
The Company's administration of these programs is periodically reviewed by
various regulatory agencies. The failure by the Company and its colleges and
schools to comply with applicable, federal, state or accrediting agency
requirements could result in the limitation, suspension or termination of the
ability to participate in Title IV Programs or the loss of the state licensure
or accreditation. The loss of or a significant reduction in Title IV Program
funds would have a material adverse effect on the Company's revenues and cash
flows because the colleges' and schools' student enrollment would likely
decline as a result of its students' inability to finance their education
without the availability of Title IV Program funds. Additionally, if
alternative financing was made available to students it would be on longer
terms which could have a material adverse effect on the Company's cash flows.
Because the Company operates in a highly regulated industry, it, like other
industry participants, may be subject from time to time to investigations,
claims of non-compliance, or lawsuits by governmental agencies or third
parties which allege statutory violations, regulatory infractions or common
law causes of action. In October 1998, the Inspector General's Office (IG) of
the DOE visited the Company's headquarters to examine the Company's compliance
with the 85/15 rule and to review in general the Company's administration of
Title IV funds. This examination is part of a broader review conducted by the
IG of proprietary institutions' compliance with these requirements. The
Company provided all information and documentation requested by the IG. To
date, the Company has not received a response from the IG regarding its
review. However, the Company believes that its institutions are in compliance
with the 85/15 rule and all other federal regulations. The Company believes
that it has taken effective steps to monitor compliance with governmental
regulations and other legal requirements. However, there can be no assurance
that regulatory agencies or third parties will not undertake investigations or
make claims against the Company, or that such claims, if made, will not have a
material adverse effect on the Company's business, results of operations or
financial condition.
NOTE 12--INITIAL PUBLIC OFFERING
On July 21, 1998, the Company's Board of Directors authorized management to
pursue an Initial Public Offering of the Company's common stock ("IPO"). An S-
1 Registration Statement was filed with the Securities and Exchange Commission
to sell common stock to the public. The proceeds of the IPO will be used, in
part to repay debt and a prepayment penalty of approximately $2.3 million.
Prior to the IPO, the Company intends to complete a 44.094522 for one stock
split and increase the number of authorized shares from 9,000,000 to
43,000,000 and 500,000 to 2,500,000 for Common Stock and Nonvoting Common
Stock, respectively. Additionally, the Company intends to change the par value
of its Common Stock and Nonvoting Common Stock from $0.01 to $0.0001 per
share. All share and per share amounts shown in the accompanying consolidated
financial statements have been retroactively adjusted to reflect this stock
split, increase in authorized shares and change in par value.
F-21
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
Phillips Colleges, Inc.
We have audited the accompanying combined balance sheets of the Seventeen
Operating Companies owned by Phillips Colleges, Inc. (the "Companies"), as of
December 31, 1995 and October 16, 1996, and the related combined statements of
income, stockholders' equity and cash flows for the year ended December 31,
1995 and for the period January 1, 1996 to October 16, 1996. These combined
financial statements are the responsibility of the Companies' management. Our
responsibility is to express an opinion on these combined 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,
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.
As discussed in Note 9 to the combined financial statements, certain
operating assets and liabilities of the Companies were sold to an independent
third party on October 17, 1996.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the combined financial position of the
Companies as of December 31, 1995 and October 16, 1996, and the combined
results of their operations and their cash flows for the year ended December
31, 1995 and for the period January 1, 1996 to October 16, 1996 in conformity
with generally accepted accounting principles.
/s/ PricewaterhouseCoopers LLP
Jacksonville, Florida
August 15, 1997
F-22
<PAGE>
SEVENTEEN OPERATING COMPANIES OWNED BY PHILLIPS COLLEGES, INC.
COMBINED BALANCE SHEETS
December 31, 1995 and October 16, 1996
<TABLE>
<CAPTION>
1995 1996
------------ ------------
ASSETS
------
<S> <C> <C>
Current assets:
Cash.............................................. $ 314,561 $ 339,159
Accounts receivable--students, current portion,
net of allowance for doubtful accounts of
$525,232 and $703,271 in 1995 and 1996,
respectively..................................... 8,378,236 16,467,436
Accounts receivable--other........................ 341,611 15,349
Inventories and prepaid expenses.................. 1,158,145 1,505,927
Refundable income taxes........................... 86,626 150,587
Deferred income taxes............................. 144,105 120,000
------------ ------------
Total current assets............................ 10,423,284 18,598,458
------------ ------------
Property and equipment:
Land.............................................. 3,610,839 3,624,414
Buildings......................................... 7,672,989 7,672,989
Leasehold improvements............................ 1,878,542 1,878,372
Furniture and equipment........................... 8,983,903 9,098,281
------------ ------------
22,146,273 22,274,056
Less accumulated depreciation and amortization.... (11,629,279) (12,286,294)
------------ ------------
10,516,994 9,987,762
------------ ------------
Other assets:
Accounts receivable--students, net of current
portion.......................................... 2,532,646 2,617,893
Deferred income taxes............................. 275,130 190,380
Intangible assets, net of accumulated
amortization of $1,307,304 and $1,433,114 in
1995 and 1996, respectively...................... 5,276,726 5,150,916
Investment in Perkins loan, net of allowances for
unrecoverable investment of $593,194 and
$587,386 in 1995 and 1996, respectively.......... -- --
Other assets...................................... 230,574 100,527
------------ ------------
Total other assets.............................. 8,315,076 8,059,716
------------ ------------
$ 29,255,354 $ 36,645,936
============ ============
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
<S> <C> <C>
Current liabilities:
Accounts payable.................................. $ 2,500,730 $ 1,291,271
Accrued expenses.................................. 682,899 672,008
Advance student payments.......................... 336,711 113,116
Current portion of deferred tuition............... 9,524,119 20,817,733
Current maturities of long-term debt.............. 318,014 2,326,183
Current maturities of capital lease obligation.... 219,345 28,081
------------ ------------
Total current liabilities....................... 13,581,818 25,248,392
------------ ------------
Deferred tuition, less current portion............. 59,130 --
Long-term debt, less current portion............... 2,409,854 73,660
Capital lease obligation, less current maturities.. 1,342 --
Deferred income taxes.............................. 61,366 45,654
------------ ------------
16,113,510 25,367,706
------------ ------------
Commitments and contingencies
Stockholders' equity:
Common stock, 153,800 stocks authorized; 28,950
stocks issued and outstanding.................... 123,550 123,550
Non-cumulative preferred stock, $100 par value,
100 stocks authorized, 50 stocks issued and
outstanding...................................... 5,000 5,000
Additional paid-in capital........................ 11,279,408 9,147,294
Retained earnings................................. 1,733,886 2,002,386
------------ ------------
13,141,844 11,278,230
------------ ------------
$ 29,255,354 $ 36,645,936
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-23
<PAGE>
SEVENTEEN OPERATING COMPANIES OWNED BY PHILLIPS COLLEGES, INC.
COMBINED STATEMENTS OF INCOME
For the Year Ended December 31, 1995 and the Period Ended October 16, 1996
<TABLE>
<CAPTION>
1995 1996
----------- -----------
<S> <C> <C>
Revenue:
Tuition.............................................. $43,323,794 $32,889,855
Other................................................ 1,381,293 1,109,629
----------- -----------
44,705,087 33,999,484
----------- -----------
Expenses:
Academic............................................. 11,043,931 9,423,602
Admissions........................................... 3,398,202 2,718,943
Advertising.......................................... 2,249,106 2,187,789
Administrative....................................... 15,404,790 11,792,855
Depreciation and amortization........................ 939,130 709,326
Amortization of intangibles.......................... 158,088 125,810
Interest............................................. 439,185 260,351
Bad debts............................................ 2,328,561 1,696,360
Management fees...................................... 8,152,448 4,587,625
----------- -----------
44,113,441 33,502,661
----------- -----------
Income from operations................................. 591,646 496,823
Income tax expense..................................... 280,030 228,323
----------- -----------
Net income............................................. $ 311,616 $ 268,500
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-24
<PAGE>
SEVENTEEN OPERATING COMPANIES OWNED BY PHILLIPS COLLEGES, INC.
COMBINED STATEMENTS OF STOCKHOLDERS' EQUITY
For the Year Ended December 31, 1995 and the Period Ended October 16, 1996
<TABLE>
<CAPTION>
Noncumulative Additional
Common Preferred Paid-In Retained Stockholders'
Stock Stock Capital Earnings Equity
-------- ------------- ----------- ---------- -------------
<S> <C> <C> <C> <C> <C>
Balance at December 31,
1994................... $123,550 $5,000 $10,231,718 $1,422,270 $11,782,538
Contributions of land,
building, and
furniture and
equipment by parent
company.............. -- -- 1,884,057 -- 1,884,057
Increase in
intercompany net
receivable........... -- -- (836,367) -- (836,367)
Net income............ -- -- -- 311,616 311,616
-------- ------ ----------- ---------- -----------
Balance at December 31,
1995................... 123,550 5,000 11,279,408 1,733,886 13,141,844
Increase in
intercompany net
receivable........... -- -- (2,132,114) -- (2,132,114)
Net income............ -- -- -- 268,500 268,500
-------- ------ ----------- ---------- -----------
Balance at October 16,
1996................... $123,550 $5,000 $ 9,147,294 $2,002,386 $11,278,230
======== ====== =========== ========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-25
<PAGE>
SEVENTEEN OPERATING COMPANIES OWNED BY PHILLIPS COLLEGES, INC.
COMBINED STATEMENTS OF CASH FLOWS
For the Year Ended December 31, 1995 and the Period Ended October 16, 1996
<TABLE>
<CAPTION>
1995 1996
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net income........................................ $ 311,616 $ 268,500
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization................... 939,130 709,326
Amortization of intangibles..................... 158,088 125,810
Allowance for doubtful accounts................. 158,275 178,039
Loss on disposal of property and equipment...... 6,922 --
Allowance for Perkins Loan Program.............. 284 (5,808)
Deferred income taxes........................... 121,025 (93,144)
Changes in assets and liabilities:
Accounts receivable........................... 1,485,432 (8,174,447)
Inventories and prepaid expenses.............. (25,816) (347,782)
Refundable income taxes....................... (59,330) (63,961)
Other assets.................................. (16,066) 412,244
Accounts payable.............................. 547,004 (1,209,459)
Accrued expenses.............................. (168,071) (10,891)
Advance student payments...................... (489,416) (223,595)
Deferred tuition.............................. (1,853,808) 11,234,484
----------- -----------
Net cash provided by operating activities... 1,115,269 2,799,316
----------- -----------
Cash flows from investing activities:
Purchase of property and equipment................ (124,677) (127,781)
Proceeds from sale of property and equipment...... 1,060 --
Proceeds from Perkins liquidation................. 45,109 5,808
----------- -----------
Net cash used in investing activities....... (78,508) (121,973)
----------- -----------
Cash flows from financing long-term activities:
Proceeds from issuance of long-term debt.......... 282,101 --
Principal payments on debt........................ (218,006) (328,025)
Principal payments under capital lease
obligations...................................... (233,059) (192,606)
Intercompany advances............................. (922,183) (2,132,114)
----------- -----------
Net cash used in financing activities....... (1,091,147) (2,652,745)
----------- -----------
Net increase (decrease) in cash..................... (54,386) 24,598
Cash at beginning of year........................... 368,947 314,561
----------- -----------
Cash at end of year................................. 314,561 339,159
=========== ===========
Supplemental schedule of cash flow information:
Cash paid during the year for:
Interest........................................ $ 429,356 $ 273,574
=========== ===========
Income taxes.................................... $ 74,801 $ 60,925
=========== ===========
Schedule of noncash investing and financing
activities:
</TABLE>
During 1995, the Parent Company contributed land, building, and furniture
and equipment to the Companies with a net book value of $1,884,057.
The accompanying notes are an integral part of these financial statements.
F-26
<PAGE>
SEVENTEEN OPERATING COMPANIES OWNED BY PHILLIPS COLLEGES, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
1. General:
The seventeen operating companies owned by Phillips Colleges, Inc. and
combined in these financial statements (the "Companies") are engaged in the
business of conducting general academic and vocational/technical instruction
programs leading toward degrees or certificates of higher education. The
Companies are wholly owned subsidiaries of Phillips Colleges, Inc. (the
"Parent Company") and operate 18 colleges located in various cities in the
United States. The colleges are: Western Business College, Portland, Oregon
and Vancouver, Washington; Blair Junior College, Colorado Springs, Colorado;
Parks College, Denver, Colorado; Parks College, Aurora, Colorado; Phillips
College, Las Vegas, Nevada; Phillips Junior College of Salt Lake City, Salt
Lake City, Utah; Phillips Junior College, Springfield, Missouri; Duff's
Business Institute, Pittsburgh, Pennsylvania; Rochester Business Institute,
Rochester, New York; Ft. Lauderdale College, Ft. Lauderdale, Florida; Orlando
College--North, Orlando, Florida; Orlando College--South Orlando, Florida;
Orlando College, Melbourne, Florida; Tampa College--Main, Tampa, Florida;
Tampa College--Brandon, Tampa, Florida; Tampa College--Pinellas, Clearwater,
Florida; and Tampa College, Lakeland, Florida.
2. Summary of Significant Accounting Policies:
Inventories--Inventories consist primarily of textbooks and media materials
and are stated at the lower of cost (first-in, first-out) or market.
Property and Equipment--Land is recorded at cost. Buildings are recorded at
cost and are depreciated by the straight-line method over the estimated useful
lives of the assets, ranging from 25 to 35 years.
Furniture and equipment are recorded at cost and are depreciated principally
by the straight-line method over the estimated useful lives of the assets,
ranging from 3 to 10 years.
Leasehold improvements are recorded at cost and are amortized using the
straight-line method over the shorter of the estimated useful life of the
asset or the term of the noncancelable lease.
Major renewals and betterments are capitalized while replacements,
maintenance and repairs which do not improve or extend the useful lives of the
respective assets are expensed as incurred. Gains and losses on the retirement
or disposal of individual assets are recorded as income or expense.
Tuition Revenue--Tuition for a student's program is recorded at the
beginning of each academic year and is deferred and recognized ratably over
the number of months in the program.
Intangible Assets--Intangible assets remaining at October 16, 1996 consist
of excess of costs over net assets acquired and are amortized using the
straight-line method based on a 40-year life.
Income Taxes--The Companies recognize the future tax consequences of
transactions or events in the period the transactions or events are recognized
in the financial statements. Deferred tax assets and liabilities are recorded
for temporary differences by applying enacted statutory tax rates applicable
to the future years to differences between financial statement carrying
amounts and the tax bases of existing assets and liabilities. Valuation
allowances required for the consolidated group are recorded by the Parent
Company to reduce net deferred tax assets to amounts that are more likely than
not to be realized.
Stock--Common stock is recorded at par or stated value. Par values of common
stock issued and outstanding range between no par and $100. Preferred stock is
noncumulative and is recorded at par value.
Significant Estimates, Risks and Uncertainties--The preparation of financial
statements in conformity with generally accepted accounting principles
requires management to make estimates and assumptions that
F-27
<PAGE>
SEVENTEEN OPERATING COMPANIES OWNED BY PHILLIPS COLLEGES, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Recoverability of Long-Lived Assets--The Companies record losses on
impairment of property and equipment and intangible assets whenever events or
changes in circumstances indicate that the carrying amount of these assets may
not be recoverable.
3. Income Taxes:
The income tax expense for the year ended December 31, 1995 and the period
ended October 31, 1996 includes the following:
<TABLE>
<CAPTION>
1995 1996
-------- --------
<S> <C> <C>
Federal income tax expense.............................. $255,070 $201,349
State income tax expense................................ 24,960 26,974
-------- --------
Income tax expense...................................... $280,030 $228,323
======== ========
</TABLE>
The Companies file consolidated federal income tax returns with the Parent
Company. Current and deferred taxes are allocated to the Companies as if they
were separate taxpayers. The Companies' use of federal net operating losses
generated by other members of the consolidated group resulted in an
intercompany payable to the Parent Company of $1,768,332 and $2,062,824 at
December 31, 1995 and October 16, 1996, respectively. Such amounts are netted
with the intercompany receivable from the Parent Company reflected as a
reduction or increase of contributed capital.
For the year ended December 31, 1995 and period ended October 16, 1996, the
differences between the federal income tax expense and the amount calculated
by applying the 34% statutory rate to pre-tax earnings result primarily from
state income taxes and miscellaneous non-deductible items are as follows:
<TABLE>
<CAPTION>
1995 1996
-------- --------
<S> <C> <C>
Income tax expense at a statutory rate of 34%.......... $201,160 $168,920
Amortization of intangibles............................ 58,950 39,100
State income tax benefit............................... (8,486) (9,171)
Miscellaneous other.................................... 3,446 2,500
-------- --------
Federal income tax expense............................. 255,070 201,349
State income taxes..................................... 24,960 26,974
-------- --------
$280,030 $228,323
======== ========
</TABLE>
At December 31, 1995 and October 16, 1996 the components of net deferred
taxes recognized in the Companies' balance sheets were:
<TABLE>
<CAPTION>
1995 1996
-------- --------
<S> <C> <C>
Current deferred tax assets........................... $144,105 $120,000
======== ========
Non-current deferred tax assets....................... $280,617 $190,380
Non-current deferred tax liabilities.................. (5,487) --
-------- --------
Net non-current deferred tax assets................... $275,130 $190,380
======== ========
Non-current deferred tax assets....................... $ 12,874 $ --
Non-current deferred tax liabilities.................. (74,240) (45,654)
-------- --------
Net non-current deferred tax liabilities.............. $(61,366) $(45,654)
======== ========
</TABLE>
F-28
<PAGE>
SEVENTEEN OPERATING COMPANIES OWNED BY PHILLIPS COLLEGES, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
Deferred tax assets result primarily from allowances recorded for doubtful
accounts and capitalized leases. Deferred tax liabilities result primarily
from depreciation.
At December 31, 1995, the Companies had state net operating loss
carryforwards of approximately $1,000,000 expiring in tax years 1996 through
1998.
4. Retirement Plans:
In 1991, the Parent Company established the Phillips Colleges, Inc. Employee
Retirement Savings Plan (the "Plan"), a defined contribution plan [Section
401(k) plan] covering all eligible employees. Employees are eligible to
participate after one year of service and upon attaining the age of 21.
The Parent Company did not provide contributions to the Plan in 1995 or
1996. The Plan was terminated with an effective termination date of January
31, 1996.
The Plan was fully funded at termination. Plan assets were paid out to
participants upon receipt of a determination letter from the Internal Revenue
Service.
5. Leases:
The Companies lease administrative and classroom facilities and certain
equipment. In 1992, the Companies entered into several leases for computer
equipment which qualified as capitalized leases. All noncancelable facility
leases are operating leases and contain various renewal options and escalation
clauses and require that the Companies pay for utilities, taxes, insurance and
maintenance expenses.
As of October 16, 1996, future minimum rental payments on all noncancelable
capital and operating leases, along with the present value of the net minimum
capital lease payments are:
<TABLE>
<CAPTION>
Operating Capital
----------- --------
<S> <C> <C>
Remainder of 1996................................... $ 1,114,991 $ 28,957
1997................................................ 3,343,962 --
1998................................................ 2,609,254 --
1999................................................ 1,662,591 --
2000................................................ 1,019,273 --
Thereafter.......................................... 1,259,700 --
----------- --------
Total minimum lease payments........................ $11,009,771 28,957
===========
Less amount representing interest................... (876)
--------
28,081
--------
Less current maturities of obligation under capital
leases............................................. (28,081)
--------
Long-term obligation under capital leases........... $ --
========
</TABLE>
The cost and accumulated depreciation of equipment under capital leases were
$1,122,957 and $974,558, respectively, as of December 31, 1995 and $1,122,957
and $1,094,610, respectively, as of October 16, 1996.
Rent expense charged to operations in 1995 and 1996 was $5,238,106 and
$4,204,142, respectively.
Certain of the Companies lease housing facilities which are in turn
subleased to students. Sublease income in 1995 and 1996 was $191,452 and
$46,931, respectively.
F-29
<PAGE>
SEVENTEEN OPERATING COMPANIES OWNED BY PHILLIPS COLLEGES, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
6. Intangibles:
Details relating to costs of intangibles and their amortization are as
follows:
<TABLE>
<CAPTION>
Amortization
--------------------
Cost Expense Accumulated
---------- -------- -----------
<S> <C> <C> <C>
December 31, 1995
Excess of costs over net assets acquired... $6,584,030 $158,088 $1,307,304
========== ======== ==========
Period ended October 16, 1996
Excess of costs over net assets acquired... $6,584,000 $125,810 $1,433,114
========== ======== ==========
</TABLE>
7. Long-Term Debt:
Long-term debt consists of the following as of December 31, 1995 and October
16, 1996:
<TABLE>
<CAPTION>
1995 1996
---------- ----------
<S> <C> <C>
Prime rate plus 2% note payable to a financial
institution, with monthly installments of $11,556
principal and accrued interest; remaining principal
due January 2, 1997; collateralized by real property
located at Tampa, Florida........................... $2,009,783 $1,663,528
Uncollateralized note payable dated July 15, 1993,
due in 30 monthly installments, including interest
at 8%, beginning November 30, 1994.................. 79,904 23,134
Uncollateralized note payable dated May 14, 1996, due
in 27 monthly installments, including interest at
8%, beginning June 15, 1996......................... -- 157,999
Uncollateralized note payable dated July 14, 1995,
due in 18 monthly installments, including interest
at 8%, beginning January 10, 1996................... 136,332 73,563
Uncollateralized note payable dated March 15, 1982,
with monthly installments of $8,093 principal and
accrued interest at 14.875%, remaining principal due
March 15, 1997...................................... 501,849 481,619
---------- ----------
2,727,868 2,399,843
Less current maturities.............................. 318,014 2,326,183
---------- ----------
$2,409,854 $ 73,660
========== ==========
</TABLE>
Scheduled repayment of debt for the next five years and thereafter is as
follows:
<TABLE>
<S> <C>
Remainder of 1996............................................. $ 57,776
1997.......................................................... 2,282,771
1998.......................................................... 59,296
1999.......................................................... --
2000.......................................................... --
Thereafter.................................................... --
----------
$2,399,843
----------
</TABLE>
Subsequent to the transaction described in Note 9 to these financial
statements, all long-term debt obligations were settled by the Parent Company
using some of the proceeds from the sale of the Companies (Note 9).
F-30
<PAGE>
SEVENTEEN OPERATING COMPANIES OWNED BY PHILLIPS COLLEGES, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
8. Related Party Transactions:
At December 31, 1995 and October 16, 1996, the Companies had intercompany
receivables from the Parent Company of $11,134,374 and $13,011,312,
respectively, which are reclassified as reductions of additional paid-in
capital.
At December 31, 1995 and October 16, 1996, the Companies had intercompany
payables due to the Parent Company of $2,131,711 and $1,876,535, respectively,
which are reclassified as additions to additional paid-in capital. The Parent
Company and the Companies have not executed a formal note agreement;
therefore, no interest income or expense has been recorded pursuant to this
arrangement for the year ended December 31, 1995 and the period ended October
16, 1996.
The Parent Company's management services agreement with the Companies
stipulates that management fees charged to subsidiaries are calculated based
upon the Companies' gross revenues and operating profit (defined by the
agreement as gross revenue less operating expenses except for amortization,
management fees and income taxes). The Parent Company will not charge
management fees beyond defined maximum limits. Therefore, management fees will
not cause the Companies to have a loss after considering all income statement
items except for income taxes.
9. Commitments and Contingencies:
The Federal Regulations, as amended in 1994, (34 CFR, section 600.5)
implemented the statutory requirement that an institution eligible for Title
IV student aid funding must not receive more than 85% of its total revenue
from Title IV sources. This requirement is calculated on an annual basis, and
the Companies were in compliance with this requirement at December 31, 1995.
In the ordinary course of business, the Companies' federal financial
assistance programs are subject to ongoing program reviews by the Department
of Education ("ED") and Title IV program audits by external auditors. The
Parent Company and the Companies are parties to various pending or threatened
legal proceedings generally incidental to its business. Management of the
Parent Company does not believe that the results of these matters will have a
material impact on the financial statements.
At October 16, 1996, all assets of the Companies are pledged as collateral
under various debt arrangements entered into by the Parent Company.
During 1995, the Companies' Parent recorded a reserve for regulatory
assessments payable to the ED in an amount greatly exceeding the resources of
the Parent and all subsidiaries of the Parent, including the Companies. As a
result of the assessment, the Companies, the Parent Company, the ED and the
Companies' bankers agreed upon a plan of voluntary liquidation in which the
Parent Company was obligated to sell all of the assets of the Companies. The
proceeds would then be used by the Parent Company to satisfy its
aforementioned obligation. Due to the terms of this agreement, the regulatory
assessment was not recorded on an individual company basis. In accordance with
the Plan, all assets of the Parent and the Companies were sold with net
proceeds of the sale distributed to the bankers and the ED. Additionally,
pursuant to the terms of the Plan, purchasers of the assets of the Companies
were not required to assume any part of the regulatory assessment liability.
On October 17, 1996, the Parent Company entered into a transaction at a gain
in which substantially all of the Companies' operating assets were bought and
certain liabilities assumed (principally the Companies' contractual liability
to perform its educational obligation related to tuition collected or tuition
receivable and the assumption of building and equipment leases beginning
October 17, 1996) by an independent third party.
F-31
<PAGE>
SEVENTEEN OPERATING COMPANIES OWNED BY PHILLIPS COLLEGES, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
10. Concentration of Credit Risk:
Substantially all of the Companies' business is with students who rely to
varying degrees on student financial assistance of the ED. Collection from the
ED is reasonably assured provided the Companies have complied with the ED
student financial assistance requirements. Changes in the ED funding levels
could have a significant impact on the Companies' ability to attract students.
The receivables from students and the ED are not collateralized.
The Companies maintain their cash in bank deposit accounts which, at times,
may exceed federally insured limits. The Companies have not experienced any
losses in such accounts.
11. Fair Value of Financial Instruments:
In the normal course of business, the Companies use various financial
instruments to manage their interest rate risk, for purposes other than
trading. By nature all such instruments involve risk, including the credit
risk of nonperformance by counterparties, and the maximum potential loss may
exceed the amount recognized in the balance sheet. However, at October 16,
1996, in management's opinion there was no significant risk of loss in the
event of nonperformance of the counterparties to these financial instruments.
The following methods and assumptions were uses to estimate the fair value
of each class of financial instruments held or issued for purposes other than
trading.
<TABLE>
<CAPTION>
Financial Instrument Valuation method
-------------------- ----------------
<S> <C>
Accounts receivable--students... Carrying amounts
Accounts receivable--other...... Carrying amounts
Long-term debt.................. Carrying amounts which approximate market
</TABLE>
F-32
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Corinthian Colleges, Inc.:
We have audited the accompanying combined statement of revenues and direct
expenses of eleven career colleges purchased from National Education Centers,
Inc. (see Note 1) for the year ended December 31, 1995, respectively. This
statement is the responsibility of the Company's management. Our
responsibility is to express an opinion on this statement based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the statement is free of material
misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the statement. An audit also
includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the combined statement referred to above presents fairly, in
all material respects, the revenue and direct expenses of eleven career
colleges purchased from National Education Centers, Inc, for the year ended
December 31, 1995, in conformity with generally accepted accounting
principles.
/s/ Arthur Andersen LLP
Orange County, California
July 15, 1997
F-33
<PAGE>
ELEVEN CAREER COLLEGES
NATIONAL EDUCATION CENTERS, INC.
COMBINED STATEMENT OF REVENUES AND DIRECT EXPENSES
For Tier 2 and Tier 3 Schools (see Note 1)
<TABLE>
<CAPTION>
From January 1995
through the dates
of the
acquisitions
(see Note 1)
-----------------
<S> <C>
REVENUES:
Tuition revenue............................................. $22,230,293
-----------
DIRECT OPERATING EXPENSES:
Course materials, services and instruction.................. 13,251,585
Marketing and advertising................................... 3,999,879
Total direct operating expenses........................... 17,251,464
-----------
EXCESS OF REVENUES OVER DIRECT OPERATING EXPENSES............. $ 4,978,829
===========
</TABLE>
The accompanying notes are an integral part of this statement.
F-34
<PAGE>
NATIONAL EDUCATION CENTERS, INC.
NOTES TO COMBINED FINANCIAL STATEMENT
December 31, 1995
1. Operations and Significant Accounting Policies
a. Operations
Corinthian Schools, Inc. ("CSi"), a Delaware corporation, was incorporated
in February 1995 to acquire and operate non-degree granting proprietary
schools devoted to career program training primarily in the medical,
technical, and business fields. In September 1996, Corinthian Colleges, Inc.
(the "Company") completed a reorganization transaction whereby CSi became a
wholly owned subsidiary of the Company. The Company's corporate headquarters
are located in Santa Ana, California.
In June 1995 (amended August 30, 1995 and September 27, 1995), CSi entered
into an asset purchase agreement with National Education Centers, Inc.
("NECI") to purchase certain assets and assume certain liabilities of 16
career colleges for approximately $4.7 million. Department of Education
("DOE") approval was required for the transfer of ownership; thus the Company
staged the acquisition date on all 16 schools over a period of six months. The
school, location and date acquired for each school are as follows:
<TABLE>
<CAPTION>
School Location Date Acquired
------ -------- -------------
<S> <C> <C>
Tier 1
National Institute of Technology....... San Antonio, TX June 30, 1995
National Institute of Technology....... Cross Lanes, WV
Bryman College......................... Orange, CA
Bryman College......................... Winnetka, CA
Skadron College........................ San Bernardino, CA
Tier 2
National Institute of Technology....... Wyoming, MI September 30, 1995
Bryman College......................... San Francisco, CA
Bryman College......................... San Jose, CA
Bryman College......................... New Orleans, LA
Kee Business College................... Newport News, VA
Tier 3
National Institute of Technology....... Livonia, MI December 31, 1995
Bryman Institute....................... Brookline, MA
Bryman College......................... Los Angeles, CA
Bryman College......................... Rosemead, CA
Bryman College......................... Torrance, CA
Sawyer College......................... Sacramento, CA
</TABLE>
The accompanying combined statement of revenues and direct expenses includes
the operating results of only the tier 2 and tier 3 schools from January 1,
1995 through the date of acquisition.
b. Basis of Statements
The combined statement of revenues and direct expenses has been prepared on
a basis permitted by the Securities and Exchange Commission in a letter dated
April 8, 1997. In accordance with the terms of that letter, the balance sheet
of NECI as of December 31, 1995, and the statement of cash flows for the year
ended December 31, 1995 have been omitted. Additionally, certain indirect
expenses (interest and corporate overhead) were omitted. Management believes
it would have been extremely impractical to include such statements and
F-35
<PAGE>
NATIONAL EDUCATION CENTERS, INC.
NOTES TO COMBINED FINANCIAL STATEMENT--(Continued)
expense items because such statements and expense items would have required
many assumptions and estimates which are subject to a high degree of
inaccuracy. Consequently, the combined statement of revenues and direct
expenses is not intended to be a complete presentation of operations.
2. Revenue Recognition
Revenues are derived primarily from tuition on courses taught in the
Company's colleges. Revenues are recognized on a straight-line basis over the
length of the applicable course. If a student withdraws from a course, the
unearned tuition that the student has paid is refunded in accordance with
federal, state and accrediting agency standards.
3. Marketing and Advertising
Marketing and advertising costs include primarily marketing salaries,
direct-response and other advertising, promotional materials and other related
marketing costs. All advertising costs are expensed as incurred.
4. Governmental Regulation
The Company and each school are subject to extensive regulation by
governmental agencies and accrediting bodies. In particular, TITLE IV of the
Higher Education Act of 1965, as amended ("HEA") and the regulations
promulgated thereunder by the DOE subject the Company's operations to
regulatory scrutiny. Schools must satisfy certain criteria in order to
participate in programs under Title IV of the HEA. For example, each school
must (i) have an acid test ratio (defined as the ratio of cash, cash
equivalents, and current accounts receivable to current liabilities) of at
least 1:1 at the end of each fiscal year, (ii) have a positive tangible net
worth at the end of each fiscal year, (iii) not have a cumulative net
operating loss during its two most recent fiscal years that results in a
decline of more than 10 percent of the schools tangible net worth, (iv)
collect no more than 85 percent of its revenues from Title IV Program funds in
any fiscal year, and (v) not have cohort default rates ("CDR") on federally
funded or federally guaranteed student loans in excess of 25 percent for each
of the most recent three federal fiscal years. Any regulatory violation could
be the basis for the initiation of a suspension, limitation or termination
proceeding against the Company or any of its schools.
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 by the state agency in which it operates. Additionally,
each institution must be accredited by an agency recognized by the DOE.
The financial aid and assistance programs are subject to political and
budgetary considerations. There is no assurance that such funding will be
maintained at current levels. The Company's administration of these programs
is periodically reviewed by various regulatory agencies. Any regulatory
violation could be the basis for the initiation of a suspension, limitation or
termination proceeding against the Company, which could have a material
adverse effect on the Company.
5. Concentration of Risk
A substantial portion of the revenues and accounts receivable reflected in
the accompanying financial statement are a direct result of the Company's
participation in Government student financial assistance programs for the
payment of student tuition. The loss of Title IV funding by a number of
schools would have a material adverse impact on the Company.
F-36
<PAGE>
EDGAR DESCRIPTION OF
PROSPECTUS COLORWORK IBC]1
Graphic of the United States, indicating the geographic distribution
of the Corinthian Colleges campuses.
CORINTHIAN COLLEGES, INC.
CAMPUSES
<TABLE>
<CAPTION>
<S> <C> <C>
CALIFORNIA LOUISIANA PENNSYLVANIA
Bryman College Bryman College Duff's Business Institute
El Monte New Orleans Pittsburgh
Gardena TEXAS
Los Angeles MASSACHUSETTS National Institute of
Orange Bryman Institute Technology
Reseda Brookline San Antonio
San Francisco
San Jose North MICHIGAN
San Jose South National Institute of Technology UTAH
Skadron College Southfield Mountain West College
San Bernardino Wyoming Salt Lake City
COLORADO MISSOURI VIRGINIA
Blair College Springfield College Kee Business College
Colorado Springs Springfield Newport News
Parks College
Denver NEVADA WASHINGTON
Aurora Las Vegas College Bryman College
Las Vegas SeaTac
FLORIDA Western Business College
Florida Metropolitan University NEW YORK Vancouver
Fort Lauderdale Rochester Business Institute
Melbourne Rochester
Orlando-North WEST VIRGINIA
Orlando-South OREGON National Institute of Technology
Brandon Western Business College Cross Lanes
Tampa Portland
Lakeland
Pinellas
</TABLE>
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
No dealer, salesperson or other person has been authorized to give any
information or to make any representations other than those contained in this
Prospectus in connection with the offer contained herein, and, if given or
made, such information or representations must not be relied upon as having
been authorized by the Company or by any of the Underwriters. This Prospectus
does not constitute an offer of any securities other than those to which it
relates or an offer to sell, or a solicitation of an offer to buy, those to
which it relates in any state to any person to whom it is not lawful to make
such offer in such state. The delivery of this Prospectus at any time does not
imply that the information herein is correct as of any time subsequent to its
date.
------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary........................................................ 3
Risk Factors.............................................................. 8
The Transactions.......................................................... 21
Use of Proceeds........................................................... 22
Dividend Policy........................................................... 22
Dilution.................................................................. 23
Capitalization............................................................ 24
Selected Historical Consolidated Financial and Other Data................. 25
Management's Discussion and Analysis of Financial Condition and Results of
Operations .............................................................. 27
Business.................................................................. 36
Financial Aid and Regulations............................................. 47
Management................................................................ 59
Certain Relationships and Transactions.................................... 65
Security Ownership of Certain Beneficial Owners and Management............ 67
Description of Capital Stock.............................................. 70
Shares Eligible for Future Sale........................................... 75
Underwriting.............................................................. 76
Legal Matters............................................................. 77
Experts................................................................... 77
Available Information..................................................... 78
Index to Financial Statements............................................. F-1
</TABLE>
Until , 1999 (25 days after the commencement of the offering), all dealers
effecting transactions in the Common Stock, whether or not participating in
the distribution, may be required to deliver a Prospectus. This is in addition
to the obligation of dealers to deliver a Prospectus when acting as
Underwriters and with respect to their unsold allotments or subscriptions.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
2,700,000 Shares
CORINTHIAN
COLLEGES, INC.
Common Stock
[LOGO OF CORINTHIAN COLLEGES, INC.]
--------
PROSPECTUS
, 1999
--------
Salomon Smith Barney
Credit Suisse First Boston
Piper Jaffray Inc.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution
The following table sets forth the expenses, other than the underwriting
discount, payable by the Company in connection with the issuance and
distribution of the Common Stock being registered. All amounts are estimates
except the Securities and Exchange Commission registration fee, the NASD
filing fee and the Nasdaq listing fee.
<TABLE>
<S> <C>
Securities and Exchange Commission registration fee.............. $ 15,267
NASD filing fee.................................................. 5,675
Nasdaq listing fee............................................... 75,625
Accounting fees and expenses..................................... 750,000
Legal fees and expenses.......................................... 700,000
Blue Sky qualification fees and expenses......................... 7,500
Printing and engraving expenses.................................. 300,000
Transfer agent and registrar fees................................ 15,000
Miscellaneous.................................................... 130,933
----------
Total.......................................................... $2,000,000
==========
</TABLE>
The Company intends to pay all expenses of registration, issuance and
distribution, excluding the underwriters' discount and commissions, with
respect to the shares being sold by the Selling Stockholders.
Item 14. Indemnification of Directors and Officers
The Company's Certificate of Incorporation provides that a director of the
Company shall not be liable to the Company or its stockholders for monetary
damages for breach of fiduciary duty as a director except to the extent
provided by applicable law for any breach of the director's duty of loyalty to
the Corporation or its stockholders, for acts or omissions not in good faith
or which involve intentional misconduct or a knowing violation of law,
pursuant to Section 174 of the Delaware General Corporation Law (the "DGCL")
or for any transaction from which such director derived an improper personal
benefit. Under the DGCL, liability of a director may not be limited (i) for
any breach of the director's duty of loyalty to the Company or its
stockholders, (ii) for acts or omissions not in good faith or that involve
intentional misconduct or a knowing violation of law, (iii) in respect of
certain unlawful dividend payments or stock redemptions or repurchases and
(iv) for any transaction from which the director derives an improper personal
benefit. The effect of the provisions of the Company's Certificate of
Incorporation is to eliminate the rights of the Company and its stockholders
(through stockholders' derivative suits on behalf of the Company) to recover
monetary damages against a director for breach of the fiduciary duty of care
as a director (including breaches resulting from negligent or grossly
negligent behavior), except as provided in the Company's Certificate of
Incorporation and in the situations described in clauses (i) through (iv)
above. This provision does not limit or eliminate the rights of the Company or
any stockholder to seek nonmonetary relief such as an injunction or rescission
in the event of a breach of a director's duty of care. The Bylaws of the
Company (the "Bylaws") provide that the Company will indemnify its directors
and officers to the fullest extent permitted by the DGCL.
The Form of Underwriting Agreement filed as Exhibit 1.1 to this Registration
Statement provides for indemnification by the Underwriters of the Company and
its directors and officers for certain liabilities arising under the
Securities Act or otherwise.
II-1
<PAGE>
Item 15. Recent Sales of Unregistered Securities
The following is a summary of transactions by the Company since its
incorporation involving sales of the Company's securities that were not
registered under the Securities Act:
On June 30, 1995, Corinthian Schools, Inc. ("CSi"), the predecessor to the
Company, issued the following securities:
(1) 10,000 shares of Class A Common Stock to each of David Moore, Paul St.
Pierre, Frank McCord, Lloyd Holland, and Dennis Devereux at $10 per share.
Payment for the stock by each consisted of $80,000 cash, plus the surrender
of previous stock and a credit for a previous capital contribution in the
total amount of $20,000;
(2) 55,000 shares of Class A Common Stock to Primus Capital Fund III
Limited Partnership ("Primus") at $10 per share, for a total payment of
$55,000 cash;
(3) 5,410 shares of Class A Common Stock to Banc One Capital Partners
("Banc One") at $10 per share, for a total payment of $54,100 cash;
(4) 6,250 shares of Class B Common Stock to David Moore at $10 per share,
for a total purchase price of $62,500 (payment consisted of $62.50 cash
plus a note in the amount of $62,437.50 for the balance);
(5) 5,000 shares of Class B Common Stock to Paul St. Pierre at $10 per
share, for a total purchase price of $50,000 (payment consisted of $50 cash
plus a note in the amount of $49,950 for the balance);
(6) 2,500 shares of Class B Common Stock to each of Frank McCord, Lloyd
Holland, and Dennis Devereux at $10 per share, for an aggregate price by
all three of $75,000 (payment for each consisted of $25 cash plus a note in
the amount of $24,975 for the balance); (Earnback shares)
(7) 8,340 shares of Class B Common Stock to Banc One at $10 per share, for
a total payment of $83,400 cash;
(8) 14,500 shares of Class A Series Preferred Stock (the "Redeemable
Preferred") to Primus and 3,625 shares of Redeemable Preferred to Banc One
at $100 per share, for a total payment of $1,812,500 cash;
(9) A $2.0 million note to Banc One due June 30, 2000;
(10) A $500,000 note to Primus due June 30, 2000; and
(11) Warrants to Primus and Banc One to purchase 1,250 shares of Class A
Common Stock (the "1995 Primus Warrant") and 5,000 shares of Class B Common
Stock (the "1995 Banc One Warrant"), respectively, each for an aggregate
price of $100, and each at an aggregate exercise price of $100. These
Warrants were also issued in connection with the note issuances noted
above. Neither warrant contained an actual "per share" exercise price.
However, the 1995 Primus Warrant had an effective "per share" exercise
price of $0.08 per share ($100 / 1,250 shares) and the 1995 Banc One
Warrant had an effective "per share" exercise price of $0.02 per share
($100 / 5,000 shares).
On October 3, 1996, the Company underwent a reverse triangular merger with
CSi whereby CSi became a subsidiary of the Company and all previously issued
and outstanding shares of CSi were canceled in exchange for Company equivalent
stock. Each of the previously issued shares of CSi thus became shares of the
Company. On that same date, Primus and Banc One exercised their warrants and
the Company issued 1,250 shares of Class A Common Stock to Primus and 5,000
shares of Class B Common Stock to Banc One, each at an aggregate exercise
price of $100 cash.
On October 17, 1996, the Company issued the following securities:
(1) A $22.5 million senior term note (together with a $5.0 million
revolving credit facility) to Prudential Insurance Company of America
("Prudential"), maturing on October 17, 2004;
(2) A $4.0 million subordinated term note maturing on October 17, 2005 to
Banc One;
(3) A $1.0 million subordinated term note maturing on October 17, 2005 to
Primus;
II-2
<PAGE>
(4) A warrant to Primus to purchase 806.45 shares of Class A Common Stock
(the "1996 Primus Warrant") and a warrant to Banc One to purchase 3,225.81
shares of Class B Common Stock (the "1996 Banc One Warrant"), each at an
aggregate exercise price of $100. Neither the 1996 Primus Warrant nor the
1996 Banc One Warrant contain actual "per share" exercise prices. However,
the 1996 Primus Warrant initially had an effective "per share" exercise
price of $0.12 per share ($100.00 / 806.45 shares) and the 1996 Banc One
Warrant initially had an effective "per share" exercise price of $0.03 per
share ($100.00 / 3225.81 shares). After a 44.094522 for 1 stock split in
connection with the Offering, these warrants will have effective exercise
prices of $.0028 per share and $.0007 per share, respectively. The Company
also simultaneously granted a "Contingent Warrant" to each of Primus and
Banc One to purchase a certain number of shares of Class A Common Stock and
Class B Common Stock, respectively, depending on the vesting of Common
Stock held by certain executives of the Company (the "Management
Earnback"). Both of the Contingent Warrants have exercise prices of $0.01
per share. (Each of these warrants were issued in connection with debt
issuances as of the same date for no independent consideration); and
(5) A warrant to Prudential to purchase 5,376.34 shares of Class A Common
Stock at an exercise price of $0.01 per share, together with a Contingent
Warrant to purchase a certain number of shares of Class A Common Stock at
an exercise price of $0.01 per share, depending on the Management Earnback
(this warrant was issued in connection with the debt issuance to Prudential
as of the same date for no independent consideration).
On November 24, 1997, the Company issued the following stock:
(1) 25,000 shares of Series 2 Class A Convertible Preferred Stock to Banc
One at $100 per share, for a total payment of $2,500,000 cash;
(2) 25,000 shares of Series 3 Class convertible Preferred Stock to Primus
at $100 per share, for a total payment of $2,500,000 cash;
(3) A warrant to Prudential to purchase 3,683.28 shares of Class A Common
Stock for an exercise price of $0.01 per share (contains a claw-back
feature that will result in the early termination of the warrant upon the
occurrence of certain events, including the Offering); this warrant was
issued in connection with the refinancing of the $22.5 million senior term
note held by Prudential for no independent consideration;
(4) A warrant to Primus to purchase 4,228.8 shares of Class A Common Stock
for an exercise price of $0.01 per share (contains a claw-back feature that
will result in the early termination of the warrant upon the occurrence of
certain events, including the Offering); this warrant was issued in
connection with the refinancing of the $22.5 million senior term note held
by Prudential for no independent consideration; and
(5) A warrant to Banc One to purchase 2,010.04 shares of Class B Common
Stock for an exercise price of $0.01 per share (contains a claw-back
feature that will result in the early termination of the warrant upon the
occurrence of certain events, including the Offering); this warrant was
issued in connection with the refinancing of the $22.5 million senior term
note held by Prudential for no independent consideration.
None of the foregoing transactions involved any public offering, and the
Company believes that each transaction was exempt from the registration
requirements of the Securities Act by virtue of Section 4(2) thereof. The
recipients in such transactions represented their intention to acquire the
securities for investment only and not with a view to or for sale in
connection with any distribution thereof, and appropriate legends were affixed
to the share certificates and instruments issued in such transactions. All
recipients had adequate access to information about the Company.
II-3
<PAGE>
Item 16. Exhibits and Financial Statement Schedules
(a) Exhibits.
<TABLE>
<CAPTION>
Exhibit
Number Description of Exhibit
------- ----------------------
<C> <S>
1.1 Form of Underwriting Agreement.
2.1* Asset Purchase Agreement, dated as of June 28, 1995, among Corinthian
Schools, Inc., National Education Centers, Inc. and National
Education Corporation, and schedules thereto.
2.2* Asset Purchase Agreement, dated as of March 20, 1996, by and between
Corinthian Schools, Inc. and Repose, Inc.
2.3* Asset Purchase Agreement, dated as of July 11, 1996, by and between
Corinthian Schools, Inc. and Concorde Career Colleges, Inc.
2.4* Amendment to Asset Purchase Agreement, made as of August 29, 1996, by
and between Corinthian Schools, Inc. and Concorde Career Colleges,
Inc.
2.5* Master Asset Purchase Agreement, dated as of October 17, 1996, by and
between the Company and Phillips Colleges, Inc.
2.6* Schools Acquisition Agreement, dated as of October 17, 1996, by and
between Rhodes Colleges, Inc., Rhodes Business Group, Inc., Florida
Metropolitan University, Inc. and Phillips Colleges, Inc.
2.7* Provisions Concerning Purchase and Sale of Real Estate, dated as of
October 17, 1996, by and among Blair Business College, Inc., Phillips
College of Denver, Inc., Phillips Educational Group of Central
Florida, Inc., the Company and Phillips Colleges, Inc.
2.8* Amendment to Provisions Concerning Purchase and Sale of Real Estate,
dated as of November 25, 1996, by and among Blair Business College,
Inc., Phillips College of Denver, Inc., Phillips Educational Group of
Central Florida, Inc., the Company and Phillips Colleges, Inc.
3.1* Second Restated Certificate of Incorporation of the Company, dated as
of November 21, 1997.
3.2* Certificate of Amendment of Second Restated Certificate of
Incorporation, dated December 10, 1998.
3.3 Form of Restated Certificate of Incorporation.
3.4* Bylaws of the Company, certified as of September 19, 1996.
4.1* Promissory Note, dated as of July 1, 1996, by Corinthian Schools, Inc.
in favor of Repose, Inc., in the amount of $50,000.
4.2* Promissory Note, dated as of August 31, 1996, made by Corinthian
Schools, Inc. in favor of Concorde Career Colleges, Inc. in the
amount of $300,000.
4.3* 10.27% Senior Secured Term Note dated October 17, 1996 in the original
principal amount of $22,500,000 registered in the name of The
Prudential Insurance Company of America.
4.4* Senior Secured Revolving Note dated October 17, 1996 in the original
principal amount of $5,000,000 registered in the name of The
Prudential Insurance Company of America.
4.5* Subordinated Note dated October 17, 1996, in the principal amount of
$1,000,000 registered in the name of Primus Capital Fund III Limited
Partnership.
4.6* Subordinated Note, dated October 17, 1996, in the principal amount of
$4,000,000, from the Company to Banc One Capital Partners II, Ltd.
4.7* Promissory Note (Secured) dated April 30, 1997, by Corinthian Property
Group, Inc. in favor of Banc One Capital Partners VI, Ltd. in the
amount of $3,760,000.
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description of Exhibit
------- ----------------------
<C> <S>
4.8* Senior Secured Note, dated October 17, 1997, in the principal amount
of $22,500,000 from the Company to The Prudential Insurance Company
of America.
4.9* Specimen Common Stock Certificate of the Company.
5.1 Opinion of O'Melveny & Myers LLP.
10.1* Promissory Note from David Moore to the Company, dated as of June 30,
1995, in the principal amount of $62,437.50.
10.2* Promissory Note from Paul St. Pierre to the Company, dated as of June
30, 1995, in the principal amount of $49,950.
10.3* Promissory Note from Frank McCord to the Company, dated as of June 30,
1995, in the principal amount of $24,975.
10.4* Promissory Note from Dennis Devereux to the Company, dated as of June
30, 1995, in the principal amount of $24,975.
10.5* Promissory Noted from Lloyd Holland to the Company, dated as of June
30, 1995, in the principal amount of $24,975.
10.6* Subordinated Secured Note and Warrant Purchase Agreement, dated as of
June 30, 1995, by and among Corinthian Schools, Inc., Primus Capital
Fund III Limited Partnership and Banc One Capital Partners II,
Limited Partnership.
10.7* Credit Facility Agreement, dated as of June 30, 1995, by and between
Corinthian Schools, Inc. and Banc One Capital Partners II, Limited
Partnership.
10.8* Warrant Certificate for 5,000 shares of Class B Non-Voting Common
Stock, dated as of June 30, 1995, issued to Banc One Capital Partners
II, Limited Partnership by Corinthian Schools, Inc.
10.9* Warrant Certificate for 1,250 shares of Class A Voting Common Stock,
dated as of June 30, 1995, issued to Primus Capital Fund III Limited
Partnership by Corinthian Schools, Inc.
10.10* Security Agreement, dated as of June 30, 1995, by Corinthian Schools,
Inc. for the benefit of Primus Capital Fund III Limited Partnership
and Banc One Capital Partners II, Limited Partnership, and UCC-1
Financing Statements.
10.11* Purchase Agreement, dated June 30, 1995, between Corinthian Schools,
Inc., Primus Capital Fund III Limited Partnership and Banc One
Capital Partners II, Limited Partnership, and schedules thereto.
10.12* Amended and Restated Registration Agreement dated October 17, 1996, by
and between the Company, Primus Capital Fund III Limited Partnership,
The Prudential Insurance Company of America, Banc One Capital
Partners II, LLC, Banc One Capital Partners II, Limited Partnership,
David G. Moore, Paul St. Pierre, Frank J. McCord, Dennis L. Devereux
and Lloyd W. Holland.
10.13* First Amendment to the Amended and Restated Registration Agreement,
dated as of November 24, 1997, by and between the Company, Primus
Capital Fund III Limited Partnership, BOCP II Limited Liability
Company, Banc One Capital Partners II, LLC, David G. Moore, Paul St.
Pierre, Frank J. McCord, Dennis L. Devereux, Lloyd W. Holland and The
Prudential Insurance Company of America.
10.14 Amended and Restated Executive Stock Agreement, dated November 24,
1997, between Corinthian Schools, Inc. and Dennis L. Devereux.
10.15 Amended and Restated Executive Stock Agreement, dated November 24,
1997, between Corinthian Schools, Inc. and Lloyd W. Holland.
10.16 Amended and Restated Executive Stock Agreement, dated November 24,
1997, between Corinthian Schools, Inc. and Frank J. McCord.
</TABLE>
II-5
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description of Exhibit
------- ----------------------
<C> <S>
10.17 Amended and Restated Executive Stock Agreement, dated November 24,
1997, between Corinthian Schools, Inc. and David G. Moore.
10.18 Amended and Restated Executive Stock Agreement, dated November 24,
1997, between Corinthian Schools, Inc. and Paul St. Pierre.
10.19* Executive Stock Pledge Agreement, dated as of June 30, 1995, between
Corinthian Schools, Inc. and Lloyd W. Holland.
10.20* Executive Stock Pledge Agreement, dated as of June 30, 1995, between
Corinthian Schools, Inc. and Dennis L. Devereux.
10.21* Executive Stock Pledge Agreement, dated as of June 30, 1995, between
Corinthian Schools, Inc. and David G. Moore.
10.22* Executive Stock Pledge Agreement, dated as of June 30, 1995 between
Corinthian Schools, Inc. and Frank J. McCord.
10.23* Executive Stock Pledge Agreement, dated as of June 30, 1995, between
Corinthian Schools, Inc. and Paul St. Pierre.
10.24* Escrow Agreement, dated as of March 20, 1996, by and between
Corinthian Schools, Inc., Repose, Inc. and Key Trust Company, as
escrow agent.
10.25* Certificate of Merger of Corinthian Schools, Inc., dated as of
September 30, 1996.
10.26* Revolving Loan Request dated October 17, 1996 from Corinthian
Colleges, Inc. to The Prudential Insurance Company of America.
10.27* Contingent Stock Warrant dated October 17, 1996, for The Prudential
Insurance Company of America.
10.28* Subordinated Note and Warrant Purchase Agreement dated October 17,
1996 by and between Corinthian Colleges, Inc., Primus Capital
Fund III Limited Partnership and Banc One Capital Partners II, LLC.
10.29* Amendment dated November 24, 1997, to the Subordinated Note and
Warrant Purchase Agreement dated October 17, 1996, by and between the
Company, Primus Capital Fund III Limited Partnership, and Banc One
Capital Partners II, LLC.
10.30* Warrant Certificate for Class A Common Stock, dated October 17, 1996
for Primus Capital Fund III Limited Partnership.
10.31* Warrant Certificate for Class B Common Stock, dated October 17, 1996
for Banc One Capital Partners II, Limited Partnership.
10.32* Contingent Stock Warrant, dated October 17, 1996, for Primus Capital
Fund III Limited Partnership.
10.33* Contingent Stock Warrant, dated October 17, 1996, for Banc One Capital
Partners II, Limited Partnership.
10.34* Contingent Stock Warrant, dated October 17, 1996, for BOCP II, Limited
Liability Company.
10.35* Rights Agreement dated October 17, 1996 between the Company,
Corinthian Schools, Inc., Primus Capital Fund III Limited
Partnership, BOCP II, Limited Liability Company, Banc One Capital
Partners II, Limited Partnership and David G. Moore, Paul St. Pierre,
Frank J. McCord, Dennis L. Devereux and Lloyd W. Holland.
10.36* Amendment to the Rights Agreement, dated November 24, 1997, by and
between the Company, Primus Capital Fund III Limited Partnership,
BOCP II Limited Liability Company, Banc One Capital Partners II, LLC,
David G. Moore, Paul St. Pierre, Frank J. McCord, Dennis L. Devereux
and Lloyd W. Holland.
</TABLE>
II-6
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description of Exhibit
------- ----------------------
<C> <S>
10.37* Pledge Agreement, dated as of October 17, 1996, by and between the
Company and Rhodes Colleges, Inc., in favor of The Prudential
Insurance Company of America.
10.38* Escrow Agreement, dated as of October 17, 1996, by and between the
Company, Phillips Colleges, Inc. and Wells Fargo Bank, N.A. as escrow
agent.
10.39* Guaranty, dated as of October 17, 1996, by the Company in favor of
Phillips Colleges, Inc.
10.40* Escrow Funding Note, dated as of October 17, 1996, made by the Company
in favor of Phillips Colleges, Inc. in the amount of $2,900,000.
10.41* Interim Promissory Note, dated as of October 17, 1996, made by the
Company in favor of Phillips Colleges, Inc., in the amount of
$1,100,000.
10.42* Note Purchase and Revolving Credit Agreement dated October 17, 1996,
by and between the Company and The Prudential Insurance Company of
America, in the amount of $22,500,000.
10.43* Security Agreement, dated October 17, 1996, by and between the
Company, Corinthian Schools, Inc., Rhodes Colleges, Inc., Rhodes
Business Group, Inc., Florida Metropolitan University, Inc. and the
Prudential Insurance Company of America.
10.44* Stock Subscription Warrant, dated October 17, 1996, to The Prudential
Insurance Company of America for Class A Common Stock.
10.45* Loan Agreement dated April 30, 1997 by and between Corinthian Property
Group, Inc. and Banc One Capital Partners VI, Ltd., in the amount of
$3,760,000.
10.46* Limited Guaranty and Indemnity Agreement dated as of April 30, 1997 by
the Company in favor of Banc One Capital Partners VI, Ltd.
10.47* Default Waiver and Third Amendment, dated October 31, 1997, under Note
Purchase and Revolving Credit Agreement dated October 17, 1996, from
The Prudential Insurance Company of America to the Company.
10.48* Purchase Agreement, dated as of November 7, 1997, by and between the
Company, Primus Capital Fund III Limited Partnership and Banc One
Capital Partners II, LLC.
10.49* Stock Subscription Warrant, dated November 24, 1997, to purchase Class
B Common Stock, issued to Banc One Capital Partners II, LLC.
10.50* Stock Subscription Warrant, dated November 24, 1997, to purchase Class
A Common Stock, issued to Primus Capital Fund III Limited
Partnership.
10.51* Stock Subscription Warrant, dated November 25, 1997, to purchase Class
A Common Stock, issued to the Prudential Insurance Company of
America.
10.52* 1998 Performance Award Plan of the Company.
10.53 Agreement Regarding Registration Rights and Amendment to Warrant dated
as of January 7, 1999, by and among the Company, Primus Capital Fund
III Limited Partnership, Banc One Capital Partners II, LLC and BOCP
II, Limited Liability Company, The Prudential Insurance Company of
America, David G. Moore, Paul St. Pierre, Frank J. McCord, Dennis L.
Devereux and Lloyd W. Holland.
23.1 Consent of Arthur Andersen LLP.
23.2 Consent of PricewaterhouseCoopers LLP.
23.3 Consent of O'Melveny & Myers LLP (included in Exhibit 5.1).
24.1* Power of Attorney (contained on page II-4).
27.1 Financial Data Schedule
99.1* Consent of Houlihan Valuation Advisors
99.2* Consent of Jack Massimino
99.3* Consent of Carol D'Amico
99.4* Consent of Linda Skladany
</TABLE>
- --------
* Previously filed
II-7
<PAGE>
(b) Financial Statement Schedules.
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
Item 17. Undertakings
(a) The undersigned Registrant hereby undertakes to provide to the
Underwriters at the closing specified in the Underwriting Agreement
certificates in the denominations and registered in the names as required by
the Underwriters to permit prompt delivery to each purchaser.
(b) Insofar as indemnification for liabilities arising under the Securities
Act of 1933, as amended (the "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 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 the indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
(c) The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act of
1933, as amended, the information omitted from the form of prospectus filed
as part of a 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 Act shall be deemed to be part of the
registration statement as of the time it was declared effective.
(2) For purposes of determining any liability under the Act, 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 those securities at that time shall be deemed to be the
initial bona fide offering thereof.
II-8
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this Amendment to Registration Statement to be
signed on its behalf by the undersigned, thereunto duly authorized, in the
City of Santa Ana, County of Orange, State of California, on the 1st day of
February, 1999.
CORINTHIAN COLLEGES, INC.
By: *
----------------------------------
David G. Moore
President, Chief Executive
Officer and Director
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Amendment to Registration Statement has been signed below by the following
persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
* President, Chief February 1, 1999
____________________________________ Executive Officer and
David G. Moore Director
* Executive Vice February 1, 1999
____________________________________ President, Marketing
Paul St. Pierre and Director
/s/ Frank J. McCord Executive Vice President February 1, 1999
____________________________________ and Chief Financial
Frank J. McCord Officer
* Director February 1, 1999
____________________________________
Loyal Wilson
</TABLE>
*By: /s/ Frank J. McCord
--------------------------
Frank J. McCord,
Attorney-in fact
II-9
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Corinthian Colleges, Inc.
We have audited in accordance with generally accepted auditing standards,
the financial statements of Corinthian Colleges, Inc. (a Delaware corporation)
and subsidiaries included in this Form S-1 Registration Statement and have
issued our report thereon dated August 28, 1998. Our audit was made for the
purpose of forming an opinion on the basic financial statements taken as a
whole. The schedule listed in the index above is the responsibility of the
Company's management and is presented for purposes of complying with the
Securities and Exchange Commission's rules and is not part of the basic
financial statements and, in our opinion, fairly states in all material
respects the financial data required to be set forth therein in relation to
the basic financial statements taken as a whole.
/s/ Arthur Andersen LLP
Orange County, California
August 28, 1998
S-1
<PAGE>
CORINTHIAN COLLEGES, INC.
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
Additions
-----------------------
Balance at Charged to Charged to Balance at
Beginning Costs and Other End of
of Period Expenses Accounts(1) Deductions(2) Period
---------- ---------- ----------- ------------- ----------
<S> <C> <C> <C> <C> <C>
Allowance for doubtful
accounts
Accounts receivable:
Year ended June 30,
1996............... $ -- $ 978,997 $1,345,858 $ (739,426) $1,585,429
Year ended June 30,
1997............... 1,585,429 3,665,071 126,019 (2,613,942) 2,762,577
Year ended June 30,
1998............... 2,762,577 4,254,694 -- (3,498,467) 3,518,804
Three-months ended
September 30, 1997
(unaudited)........ 2,762,577 887,799 -- (411,857) 3,238,519
Three-months ended
September 30, 1998
(unaudited)........ 3,518,804 1,580,459 -- (1,751,070) 3,348,193
Student notes
receivable:
Year ended June 30,
1996............... -- -- -- -- --
Year ended June 30,
1997............... -- (110,839) 1,634,400 (662,494) 861,067
Year ended June 30,
1998............... 861,067 1,708,191 -- (282,806) 2,286,452
Three-months ended
September 30, 1997
(unaudited)........ 861,067 439,748 -- (149,593) 1,151,222
Three-months ended
September 30, 1998
(unaudited)........ 2,286,452 14,282 -- (351,028) 1,949,706
</TABLE>
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(1) Represents allowances assumed from acquisitions
(2) Represents accounts written off
S-2
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description of Exhibit
------- ----------------------
<C> <S>
1.1 Form of Underwriting Agreement.
2.1* Asset Purchase Agreement, dated as of June 28, 1995, among Corinthian
Schools, Inc., National Education Centers, Inc. and National
Education Corporation, and schedules thereto.
2.2* Asset Purchase Agreement, dated as of March 20, 1996, by and between
Corinthian Schools, Inc. and Repose, Inc.
2.3* Asset Purchase Agreement, dated as of July 11, 1996, by and between
Corinthian Schools, Inc. and Concorde Career Colleges, Inc.
2.4* Amendment to Asset Purchase Agreement, made as of August 29, 1996, by
and between Corinthian Schools, Inc. and Concorde Career Colleges,
Inc.
2.5* Master Asset Purchase Agreement, dated as of October 17, 1996, by and
between the Company and Phillips Colleges, Inc.
2.6* Schools Acquisition Agreement, dated as of October 17, 1996, by and
between Rhodes Colleges, Inc., Rhodes Business Group, Inc., Florida
Metropolitan University, Inc. and Phillips Colleges, Inc.
2.7* Provisions Concerning Purchase and Sale of Real Estate, dated as of
October 17, 1996, by and among Blair Business College, Inc., Phillips
College of Denver, Inc., Phillips Educational Group of Central
Florida, Inc., the Company and Phillips Colleges, Inc.
2.8* Amendment to Provisions Concerning Purchase and Sale of Real Estate,
dated as of November 25, 1996, by and among Blair Business College,
Inc., Phillips College of Denver, Inc., Phillips Educational Group of
Central Florida, Inc., the Company and Phillips Colleges, Inc.
3.1* Second Restated Certificate of Incorporation of the Company, dated as
of November 21, 1997.
3.2* Certificate of Amendment of Second Restated Certificate of
Incorporation, dated December 10, 1998.
3.3 Form of Restated Certificate of Incorporation.
3.4* Bylaws of the Company, certified as of September 19, 1996.
4.1* Promissory Note, dated as of July 1, 1996, by Corinthian Schools, Inc.
in favor of Repose, Inc., in the amount of $50,000.
4.2* Promissory Note, dated as of August 31, 1996, made by Corinthian
Schools, Inc. in favor of Concorde Career Colleges, Inc. in the
amount of $300,000.
4.3* 10.27% Senior Secured Term Note dated October 17, 1996 in the original
principal amount of $22,500,000 registered in the name of The
Prudential Insurance Company of America.
4.4* Senior Secured Revolving Note dated October 17, 1996 in the original
principal amount of $5,000,000 registered in the name of The
Prudential Insurance Company of America.
4.5* Subordinated Note dated October 17, 1996, in the principal amount of
$1,000,000 registered in the name of Primus Capital Fund III Limited
Partnership.
4.6* Subordinated Note, dated October 17, 1996, in the principal amount of
$4,000,000, from the Company to Banc One Capital Partners II, Ltd.
4.7* Promissory Note (Secured) dated April 30, 1997, by Corinthian Property
Group, Inc. in favor of Banc One Capital Partners VI, Ltd. in the
amount of $3,760,000.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description of Exhibit
------- ----------------------
<C> <S>
4.8* Senior Secured Note, dated October 17, 1997, in the principal amount
of $22,500,000 from the Company to The Prudential Insurance Company
of America.
4.9* Specimen Common Stock Certificate of the Company.
5.1 Opinion of O'Melveny & Myers LLP.
10.1* Promissory Note from David Moore to the Company, dated as of June 30,
1995, in the principal amount of $62,437.50.
10.2* Promissory Note from Paul St. Pierre to the Company, dated as of June
30, 1995, in the principal amount of $49,950.
10.3* Promissory Note from Frank McCord to the Company, dated as of June 30,
1995, in the principal amount of $24,975.
10.4* Promissory Note from Dennis Devereux to the Company, dated as of June
30, 1995, in the principal amount of $24,975.
10.5* Promissory Noted from Lloyd Holland to the Company, dated as of June
30, 1995, in the principal amount of $24,975.
10.6* Subordinated Secured Note and Warrant Purchase Agreement, dated as of
June 30, 1995, by and among Corinthian Schools, Inc., Primus Capital
Fund III Limited Partnership and Banc One Capital Partners II,
Limited Partnership.
10.7* Credit Facility Agreement, dated as of June 30, 1995, by and between
Corinthian Schools, Inc. and Banc One Capital Partners II, Limited
Partnership.
10.8* Warrant Certificate for 5,000 shares of Class B Non-Voting Common
Stock, dated as of June 30, 1995, issued to Banc One Capital Partners
II, Limited Partnership by Corinthian Schools, Inc.
10.9* Warrant Certificate for 1,250 shares of Class A Voting Common Stock,
dated as of June 30, 1995, issued to Primus Capital Fund III Limited
Partnership by Corinthian Schools, Inc.
10.10* Security Agreement, dated as of June 30, 1995, by Corinthian Schools,
Inc. for the benefit of Primus Capital Fund III Limited Partnership
and Banc One Capital Partners II, Limited Partnership, and UCC-1
Financing Statements.
10.11* Purchase Agreement, dated June 30, 1995, between Corinthian Schools,
Inc., Primus Capital Fund III Limited Partnership and Banc One
Capital Partners II, Limited Partnership, and schedules thereto.
10.12* Amended and Restated Registration Agreement dated October 17, 1996, by
and between the Company, Primus Capital Fund III Limited Partnership,
The Prudential Insurance Company of America, Banc One Capital
Partners II, LLC, Banc One Capital Partners II, Limited Partnership,
David G. Moore, Paul St. Pierre, Frank J. McCord, Dennis L. Devereux
and Lloyd W. Holland.
10.13* First Amendment to the Amended and Restated Registration Agreement,
dated as of November 24, 1997, by and between the Company, Primus
Capital Fund III Limited Partnership, BOCP II Limited Liability
Company, Banc One Capital Partners II, LLC, David G. Moore, Paul St.
Pierre, Frank J. McCord, Dennis L. Devereux, Lloyd W. Holland and The
Prudential Insurance Company of America.
10.14 Amended and Restated Executive Stock Agreement, dated November 24,
1997, between Corinthian Schools, Inc. and Dennis L. Devereux.
10.15 Amended and Restated Executive Stock Agreement, dated November 24,
1997, between Corinthian Schools, Inc. and Lloyd W. Holland.
10.16 Amended and Restated Executive Stock Agreement, dated November 24,
1997, between Corinthian Schools, Inc. and Frank J. McCord.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description of Exhibit
------- ----------------------
<C> <S>
10.17 Amended and Restated Executive Stock Agreement, dated November 24,
1997, between Corinthian Schools, Inc. and David G. Moore.
10.18 Amended and Restated Executive Stock Agreement, dated November 24,
1997, between Corinthian Schools, Inc. and Paul St. Pierre.
10.19* Executive Stock Pledge Agreement, dated as of June 30, 1995, between
Corinthian Schools, Inc. and Lloyd W. Holland.
10.20* Executive Stock Pledge Agreement, dated as of June 30, 1995, between
Corinthian Schools, Inc. and Dennis L. Devereux.
10.21* Executive Stock Pledge Agreement, dated as of June 30, 1995, between
Corinthian Schools, Inc. and David G. Moore.
10.22* Executive Stock Pledge Agreement, dated as of June 30, 1995 between
Corinthian Schools, Inc. and Frank J. McCord.
10.23* Executive Stock Pledge Agreement, dated as of June 30, 1995, between
Corinthian Schools, Inc. and Paul St. Pierre.
10.24* Escrow Agreement, dated as of March 20, 1996, by and between
Corinthian Schools, Inc., Repose, Inc. and Key Trust Company, as
escrow agent.
10.25* Certificate of Merger of Corinthian Schools, Inc., dated as of
September 30, 1996.
10.26* Revolving Loan Request dated October 17, 1996 from Corinthian
Colleges, Inc. to The Prudential Insurance Company of America.
10.27* Contingent Stock Warrant dated October 17, 1996, for The Prudential
Insurance Company of America.
10.28* Subordinated Note and Warrant Purchase Agreement dated October 17,
1996 by and between Corinthian Colleges, Inc., Primus Capital
Fund III Limited Partnership and Banc One Capital Partners II, LLC.
10.29* Amendment dated November 24, 1997, to the Subordinated Note and
Warrant Purchase Agreement dated October 17, 1996, by and between the
Company, Primus Capital Fund III Limited Partnership, and Banc One
Capital Partners II, LLC.
10.30* Warrant Certificate for Class A Common Stock, dated October 17, 1996
for Primus Capital Fund III Limited Partnership.
10.31* Warrant Certificate for Class B Common Stock, dated October 17, 1996
for Banc One Capital Partners II, Limited Partnership.
10.32* Contingent Stock Warrant, dated October 17, 1996, for Primus Capital
Fund III Limited Partnership.
10.33* Contingent Stock Warrant, dated October 17, 1996, for Banc One Capital
Partners II, Limited Partnership.
10.34* Contingent Stock Warrant, dated October 17, 1996, for BOCP II, Limited
Liability Company.
10.35* Rights Agreement dated October 17, 1996 between the Company,
Corinthian Schools, Inc., Primus Capital Fund III Limited
Partnership, BOCP II, Limited Liability Company, Banc One Capital
Partners II, Limited Partnership and David G. Moore, Paul St. Pierre,
Frank J. McCord, Dennis L. Devereux and Lloyd W. Holland.
10.36* Amendment to the Rights Agreement, dated November 24, 1997, by and
between the Company, Primus Capital Fund III Limited Partnership,
BOCP II Limited Liability Company, Banc One Capital Partners II, LLC,
David G. Moore, Paul St. Pierre, Frank J. McCord, Dennis L. Devereux
and Lloyd W. Holland.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description of Exhibit
------- ----------------------
<C> <S>
10.37* Pledge Agreement, dated as of October 17, 1996, by and between the
Company and Rhodes Colleges, Inc., in favor of The Prudential
Insurance Company of America.
10.38* Escrow Agreement, dated as of October 17, 1996, by and between the
Company, Phillips Colleges, Inc. and Wells Fargo Bank, N.A. as escrow
agent.
10.39* Guaranty, dated as of October 17, 1996, by the Company in favor of
Phillips Colleges, Inc.
10.40* Escrow Funding Note, dated as of October 17, 1996, made by the Company
in favor of Phillips Colleges, Inc. in the amount of $2,900,000.
10.41* Interim Promissory Note, dated as of October 17, 1996, made by the
Company in favor of Phillips Colleges, Inc., in the amount of
$1,100,000.
10.42* Note Purchase and Revolving Credit Agreement dated October 17, 1996,
by and between the Company and The Prudential Insurance Company of
America, in the amount of $22,500,000.
10.43* Security Agreement, dated October 17, 1996, by and between the
Company, Corinthian Schools, Inc., Rhodes Colleges, Inc., Rhodes
Business Group, Inc., Florida Metropolitan University, Inc. and the
Prudential Insurance Company of America.
10.44* Stock Subscription Warrant, dated October 17, 1996, to The Prudential
Insurance Company of America for Class A Common Stock.
10.45* Loan Agreement dated April 30, 1997 by and between Corinthian Property
Group, Inc. and Banc One Capital Partners VI, Ltd., in the amount of
$3,760,000.
10.46* Limited Guaranty and Indemnity Agreement dated as of April 30, 1997 by
the Company in favor of Banc One Capital Partners VI, Ltd.
10.47* Default Waiver and Third Amendment, dated October 31, 1997, under Note
Purchase and Revolving Credit Agreement dated October 17, 1996, from
The Prudential Insurance Company of America to the Company.
10.48* Purchase Agreement, dated as of November 7, 1997, by and between the
Company, Primus Capital Fund III Limited Partnership and Banc One
Capital Partners II, LLC.
10.49* Stock Subscription Warrant, dated November 24, 1997, to purchase Class
B Common Stock, issued to Banc One Capital Partners II, LLC.
10.50* Stock Subscription Warrant, dated November 24, 1997, to purchase Class
A Common Stock, issued to Primus Capital Fund III Limited
Partnership.
10.51* Stock Subscription Warrant, dated November 25, 1997, to purchase Class
A Common Stock, issued to the Prudential Insurance Company of
America.
10.52* 1998 Performance Award Plan of the Company.
10.53 Agreement Regarding Registration Rights and Amendment to Warrant dated
as of January 7, 1999, by and among the Company, Primus Capital Fund
III Limited Partnership, Banc One Capital Partners II, LLC and BOCP
II, Limited Liability Company, The Prudential Insurance Company of
America, David G. Moore, Paul St. Pierre, Frank J. McCord, Dennis L.
Devereux and Lloyd W. Holland.
23.1 Consent of Arthur Andersen LLP.
23.2 Consent of PricewaterhouseCoopers LLP.
23.3 Consent of O'Melveny & Myers LLP (included in Exhibit 5.1).
24.1* Power of Attorney (contained on page II-4).
27.1 Financial Data Schedule
99.1* Consent of Houlihan Valuation Advisors
99.2* Consent of Jack Massimino
99.3* Consent of Carol D'Amico
99.4* Consent of Linda Skladany
</TABLE>
- --------
* Previously filed
<PAGE>
EXHIBIT 1.1
Corinthian Colleges, Inc.
2,700,000 Shares/1/
Common Stock
($0.0001 par value)
Underwriting Agreement
New York, New York
February ___, 1999
Salomon Smith Barney Inc.
Credit Suisse First Boston Corporation
Piper Jaffray Inc.
As Representatives of the several Underwriters,
c/o Salomon Smith Barney Inc.
388 Greenwich Street
New York, New York 10013
Ladies and Gentlemen:
Corinthian Colleges, Inc., a Delaware corporation (the "Company"), proposes
to sell to the several underwriters named in Schedule I hereto (the
"Underwriters"), for whom you (the "Representatives") are acting as
representatives, 2,700,000 shares of Common Stock, $0.0001 par value ("Common
Stock") of the Company (said shares to be issued and sold by the Company being
hereinafter called the "Underwritten Securities"). The persons named in
Schedule II hereto, including The Prudential Insurance Company of America
("Prudential") and the persons listed as Executive Selling Stockholders on such
Schedule II (the "Executive Selling Stockholders" and, collectively with
Prudential, the "Selling Stockholders"), also propose to grant to the
Underwriters an option to purchase up to 405,000 additional shares of Common
Stock to cover over-allotments (the "Option Securities"; the Option Securities,
together with the Underwritten Securities, being hereinafter called the
"Securities"). To the extent there are no additional Underwriters listed on
Schedule I other than you, the term Representatives as used herein shall mean
you, as Underwriters, and the terms Representatives and Underwriters shall mean
either the singular or plural as the context requires. In addition, to the
extent that there is not more than one Selling Stockholder named in Schedule II,
the term Selling Stockholder shall mean either the singular or plural. The use
of the neuter in this Agreement shall include the feminine and masculine
wherever appropriate. Certain terms used herein are defined in Section 17
hereof.
______________
/1/ Plus an option to purchase from the Selling Stockholders up to 405,000
-------
additional Securities to cover over-allotments.
<PAGE>
As part of the offering contemplated by this Agreement, Salomon Smith
Barney Inc. has agreed to reserve out of the Securities set forth opposite its
name on Schedule II to this Agreement, up to ______ shares for sale to the
Company's employees, officers, and directors and other parties associated with
the Company (collectively, the "Participants"), as set forth in the Prospectus
under the heading "Underwriting" (the "Directed Share Program"). The Securities
to be sold by Salomon Smith Barney Inc. pursuant to the Directed Share Program
(the "Directed Shares") will be sold by Salomon Smith Barney Inc. pursuant to
this Agreement at the public offering price. Any Directed Shares not orally
confirmed for purchase by any Participants by the end of the business day on
which this Agreement is executed will be offered to the public by Salomon Smith
Barney Inc. as set forth in the Prospectus.
1. Representations and Warranties.
-------------------------------
(i) The Company and the Executive Selling Stockholders jointly and
severally represent and warrant to, and agree with, each Underwriter as set
forth below in this Section 1.
(a) The Company has prepared and filed with the Commission a
registration statement (file number 333-59505) on Form S-1, including a
related preliminary prospectus, for registration under the Act of the
offering and sale of the Securities. The Company may have filed one or
more amendments thereto, including a related preliminary prospectus, each
of which has previously been furnished to you. The Company will next file
with the Commission either (1) prior to the Effective Date of such
registration statement, a further amendment to such registration statement
(including the form of final prospectus) or (2) after the Effective Date of
such registration statement, a final prospectus in accordance with Rules
430A and 424(b). In the case of clause (2), the Company has included in
such registration statement, as amended at the Effective Date, all
information (other than Rule 430A Information) required by the Act and the
rules thereunder to be included in such registration statement and the
Prospectus. As filed, such amendment and form of final prospectus, or such
final prospectus, shall contain all Rule 430A Information, together with
all other such required information, and, except to the extent the
Representatives shall agree in writing to a modification, shall be in all
substantive respects in the form furnished to you prior to the Execution
Time or, to the extent not completed at the Execution Time, shall contain
only such specific additional information and other changes (beyond that
contained in the latest Preliminary Prospectus) as the Company has advised
you, prior to the Execution Time, will be included or made therein.
(b) On the Effective Date, the Registration Statement did or
will, and when the Prospectus is first filed (if required) in accordance
with Rule 424(b) and on the Closing Date (as defined herein) and on any
date on which Option Securities are purchased, if such date is not the
Closing Date (a "settlement date"), the Prospectus (and any supplements
thereto) will, comply in all material respects with the applicable
requirements of the Act and the rules thereunder; on the Effective Date and
at the Execution Time, the Registration Statement did not or will not
contain any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary in order to make
the statements therein not misleading; and, on the Effective
2
<PAGE>
Date, the Prospectus, if not filed pursuant to Rule 424(b), will not, and
on the date of any filing pursuant to Rule 424(b) and on the Closing Date
and any settlement date, the Prospectus (together with any supplement
thereto) will not, include any untrue statement of a material fact or omit
to state a material fact necessary in order to make the statements therein,
in the light of the circumstances under which they were made, not
misleading; provided, however, that the Company and the Executive Selling
-------- -------
Stockholders make no representations or warranties as to the information
contained in or omitted from the Registration Statement or the Prospectus
(or any supplement thereto) in reliance upon and in conformity with
information furnished herein or in writing to the Company by or on behalf
of any Underwriter through the Representatives specifically for inclusion
in the Registration Statement or the Prospectus (or any supplement
thereto).
(c) Each of the Company and its subsidiaries listed on Annex A
attached hereto (the "Subsidiaries") has been duly incorporated and is
validly existing as a corporation in good standing under the laws of the
jurisdiction in which it is incorporated with full corporate power and
corporate authority to own or lease, as the case may be, and to operate its
properties and conduct its business as described in the Prospectus, and is
duly qualified to do business as a foreign corporation and is in good
standing under the laws of each jurisdiction which requires such
qualification, except where the failure to be so qualified would not have a
material adverse effect on the condition (financial or otherwise),
prospects, earnings, business or properties of the Company and its
Subsidiaries, taken as a whole.
(d) All the outstanding shares of capital stock of each
Subsidiary of the Company have been duly authorized and validly issued and
are fully paid and nonassessable, and, except as otherwise set forth in the
Prospectus, all outstanding shares of capital stock of such Subsidiaries
are owned by the Company either directly or through wholly owned
subsidiaries, free and clear of any perfected security interest or any
other security interests, claims, liens or encumbrances, except for any
security interest, claim, lien or encumbrance granted (i) to Prudential, or
its affiliates, in connection with indebtedness owed by the Company to
Prudential, which indebtedness will be paid upon the Closing Date as
described in the Prospectus, or (ii) to Union Bank of California, or its
affiliates, in connection with the Proposed Bank Line of Credit (as defined
in the Prospectus).
(e) The Company's authorized equity capitalization is as set
forth in the Prospectus; the capital stock of the Company conforms in all
material respects to the description thereof contained in the Prospectus;
the outstanding shares of Common Stock (including the Securities being sold
hereunder by the Selling Stockholders) have been duly authorized and
validly issued and are fully paid and nonassessable; the Securities being
sold hereunder by the Company have been duly and validly authorized, and,
when issued and delivered to and paid for by the Underwriters pursuant to
this Agreement, will be fully paid and nonassessable; the certificates for
the Securities are in valid and sufficient form; the holders of outstanding
shares of capital stock of the Company are not entitled to preemptive or
other rights to subscribe for the Securities; and, except as set forth in
the Prospectus, no options, warrants or other rights to purchase,
agreements or other
3
<PAGE>
obligations to issue, or rights to convert any obligations into or exchange
any securities for, shares of capital stock of or ownership interests in
the Company are outstanding.
(f) There is no instrument, contract or other document of a
character required to be described in the Registration Statement or
Prospectus, or to be filed as an exhibit thereto, which is not described or
filed as required; and the statements in the Prospectus under the heading
"Financial Aid and Regulations" fairly summarize the matters therein
described.
(g) This Agreement has been duly authorized, executed and
delivered by the Company and, assuming the due authorization, execution and
delivery by all parties hereto other than the Company, constitutes a valid
and binding obligation of the Company, enforceable in accordance with its
terms, except as to rights to indemnity and contribution hereunder, which
may be limited by federal or state securities laws or the policies
underlying such laws, and subject to the qualification that the
enforceability of the obligations of the Company hereunder may be limited
by applicable bankruptcy, fraudulent conveyance, insolvency,
reorganization, moratorium or other laws relating to or affecting
creditors' rights generally and by general principles of equity.
(h) The Company is not and, after giving effect to the offering
and sale of the Securities and the application of the proceeds thereof as
described in the Prospectus, will not be an "investment company" as defined
in the Investment Company Act of 1940, as amended.
(i) No consent, approval, authorization, filing with or order of
any court or governmental agency or body is required in connection with the
transactions contemplated herein, except such as have been obtained under
the Act and such as may be required under the blue sky laws of any
jurisdiction in connection with the purchase and distribution of the
Securities by the Underwriters in the manner contemplated herein and in the
Prospectus.
(j) Neither the issue and sale of the Securities nor the
consummation of any other of the transactions herein contemplated nor the
fulfillment of the terms hereof will conflict with, result in a breach or
violation or imposition of any lien, charge or encumbrance upon any
property or assets of the Company or any of its Subsidiaries pursuant to,
(i) the charter or bylaws of the Company or any of its Subsidiaries, (ii)
the terms of any indenture, contract, lease, mortgage, deed of trust, note
agreement, loan agreement or other agreement, obligation, condition,
covenant or instrument to which the Company or any of its Subsidiaries is a
party or bound or to which its or their property is subject, or (iii) any
statute, law, rule, regulation, judgment, order or decree applicable to the
Company or any of its Subsidiaries of any court, regulatory body,
administrative agency, governmental body, arbitrator or other authority
having jurisdiction over the Company or any of its Subsidiaries or any of
its or their properties, including, without limitation, the Higher
Education Act of 1965, as amended, and the regulations promulgated
thereunder (the "HEA"), except for any such conflict, breach or violation
of items (i), (ii) or (iii), above, that would not (A) have a material
adverse effect on the
4
<PAGE>
performance by the Company of this Agreement or the consummation of the
transactions contemplated hereby, or (B) have a material adverse effect on
the condition (financial or otherwise), prospects, earnings, business or
properties of the Company and its Subsidiaries, taken as a whole. The issue
and sale of the Securities and the consummation of the transactions herein
contemplated will not constitute a change in ownership resulting in a
"change of control" of the Company as defined under HEA.
(k) No holders of securities of the Company have rights to the
registration of such securities under the Registration Statement, except
for (i) any such holders who have effectively waived such rights or (ii)
any Selling Stockholder whose status as such is derived from the exercise
of such registration rights.
(l) The consolidated historical financial statements and
schedules of the Company and its consolidated Subsidiaries included in the
Prospectus and the Registration Statement present fairly in all material
respects the financial condition, results of operations and cash flows of
the Company as of the dates and for the periods indicated, comply as to
form with the applicable accounting requirements of the Act and have been
prepared in conformity with generally accepted accounting principles
applied on a consistent basis throughout the periods involved (except as
otherwise noted therein). The selected consolidated financial data set
forth under the caption "Selected Historical Consolidated Financial and
Other Data" in the Prospectus and Registration Statement fairly present, on
the basis stated in the Prospectus and the Registration Statement, the
information included therein.
(m) No action, suit or proceeding by or before any court or
governmental agency, authority or body or any arbitrator involving the
Company or any of its Subsidiaries or its or their property is pending or,
to the knowledge of the Company, threatened that (i) could reasonably be
expected to have a material adverse effect on the performance of this
Agreement or the consummation of any of the transactions contemplated
hereby or (ii) could reasonably be expected to have a material adverse
effect on the condition (financial or otherwise), prospects, earnings,
business or properties of the Company and its Subsidiaries, taken as a
whole, whether or not arising from transactions in the ordinary course of
business, except as set forth in or contemplated in the Prospectus
(exclusive of any supplement thereto).
(n) Each of the Company and its Subsidiaries owns or leases all
such properties as are necessary to the conduct of its operations as
presently conducted.
(o) Neither the Company nor any Subsidiary is in violation or
default of (i) any provision of its charter or bylaws, (ii) the terms of
any indenture, contract, lease, mortgage, deed of trust, note agreement,
loan agreement or other agreement, obligation, condition, covenant or
instrument to which it is a party or bound or to which its property is
subject (except for any such violation or default that has been effectively
waived by the other parties thereto), or (iii) any statute, including,
without limitation, the HEA, any law, rule, regulation, judgment, order or
decree of any court, regulatory body, administrative agency, governmental
body, arbitrator or other authority having jurisdiction over the
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Company or such Subsidiary or any of its properties, as applicable, except
for any such violation or default of items (i), (ii) or (iii), above, that
would not (A) have a material adverse effect on the performance by the
Company of this Agreement or the consummation of the transactions
contemplated hereby, or (B) have a material adverse effect on the condition
(financial or otherwise), prospects, earnings, business or properties of
the Company and its Subsidiaries, taken as a whole.
(p) Arthur Andersen LLP, who have certified certain financial
statements of the Company and its consolidated subsidiaries and delivered
their report with respect to the audited consolidated financial statements
and schedules included in the Prospectus, are independent public
accountants with respect to the Company within the meaning of the Act and
the applicable published rules and regulations thereunder.
(q) There are no transfer taxes or other similar fees or charges
under Federal law or the laws of any state, or any political subdivision
thereof, required to be paid in connection with the execution and delivery
of this Agreement by the Company or the issuance by the Company or sale by
the Company of the Securities, except for fees or charges that may be
required to be paid in connection with applicable blue sky laws, which fees
and charges the Company has, pursuant to Section 5(i)(h) hereof, agreed to
pay.
(r) The Company has filed all federal, state and local tax
returns that are required to be filed or has requested extensions thereof
(except in any case in which the failure so to file or to request an
extension would not have a material adverse effect on the condition
(financial or otherwise), prospects, earnings, business or properties of
the Company and its Subsidiaries, taken as a whole, whether or not arising
from transactions in the ordinary course of business, except as set forth
in or contemplated in the Prospectus (exclusive of any supplement thereto))
and has paid all taxes required to be paid by it and any other assessment,
fine or penalty levied against it, to the extent that any of the foregoing
is due and payable, except for any such assessment, fine or penalty that is
currently being contested in good faith or as would not have a material
adverse effect on the condition (financial or otherwise), prospects,
earnings, business or properties of the Company and its Subsidiaries, taken
as a whole, whether or not arising from transactions in the ordinary course
of business, except as set forth in or contemplated in the Prospectus
(exclusive of any supplement thereto).
(s) No labor problem or dispute with the employees of the Company
or any of its Subsidiaries exists or, to the knowledge of the Company, is
threatened or imminent, and the Company is not aware of any existing or
imminent labor disturbance by the employees of any of its or its
Subsidiaries' principal suppliers, contractors or customers, that
reasonably could be expected to have a material adverse effect on the
condition (financial or otherwise), prospects, earnings, business or
properties of the Company and its Subsidiaries, taken as a whole, whether
or not arising from transactions in the ordinary course of business, except
as set forth in or contemplated in the Prospectus (exclusive of any
supplement thereto).
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<PAGE>
(t) The Company and each of its Subsidiaries are insured by
insurers of recognized financial responsibility against such losses and
risks and in such amounts as are customary in the businesses in which they
are engaged; all policies of insurance insuring the Company or any of its
Subsidiaries or their respective businesses, assets, employees, officers
and directors are in full force and effect; the Company and its
Subsidiaries are in compliance with the terms of such policies and
instruments in all material respects; and there are no material claims by
the Company or any of its Subsidiaries under any such policy or instrument
as to which any insurance company is denying liability or defending under a
reservation of rights clause; and neither the Company nor any such
Subsidiary has any reason to believe that it will not be able to renew its
existing insurance coverage as and when such coverage expires or to obtain
similar coverage from similar insurers as may be necessary to continue its
business at a cost that would not have a material adverse effect on the
condition (financial or otherwise), prospects, earnings, business or
properties of the Company and its Subsidiaries, taken as a whole, whether
or not arising from transactions in the ordinary course of business, except
as set forth in or contemplated in the Prospectus (exclusive of any
supplement thereto).
(u) No Subsidiary of the Company is currently prohibited,
directly or indirectly, from paying any dividends to the Company, from
making any other distribution on such Subsidiary's capital stock, from
repaying to the Company any loans or advances to such Subsidiary from the
Company or from transferring any of such Subsidiary's property or assets to
the Company or any other subsidiary of the Company, except as described in
or contemplated by the Prospectus.
(v) The Company and its Subsidiaries possess all licenses,
certificates, permits and other authorizations issued by the appropriate
federal, state or foreign regulatory authorities, including, without
limitation, all authorizations required for participation in federal
financial aid programs under Title IV ("Title IV Program") of the HEA, as
are necessary to conduct their respective businesses, except for any such
licenses, certificates, permits and authorizations, the failure to so
possess would not have a material adverse effect on the condition
(financial or otherwise), prospects, earnings, business or properties of
the Company and its Subsidiaries, taken as a whole, and neither the Company
nor any such Subsidiary has received any notice of proceedings relating to
the revocation or modification of any such certificate, authorization or
permit which, singly or in the aggregate, if the subject of an unfavorable
decision, ruling or finding, would have a material adverse effect on the
condition (financial or otherwise), prospects, earnings, business or
properties of the Company and its Subsidiaries, taken as a whole, whether
or not arising from transactions in the ordinary course of business, except
as set forth in or contemplated in the Prospectus (exclusive of any
supplement thereto).
(w) The Company and each of its Subsidiaries maintain a system of
internal accounting controls sufficient to provide reasonable assurance
that (i) transactions are executed in accordance with management's general
or specific authorizations; (ii) transactions are recorded as necessary to
permit preparation of financial statements in conformity with generally
accepted accounting principles and to maintain asset accountability; (iii)
access to assets is permitted only in accordance with management's
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<PAGE>
general or specific authorization; and (iv) the recorded accountability for
assets is compared with the existing assets at reasonable intervals and
appropriate action is taken with respect to any differences.
(x) The Company has not taken, directly or indirectly, any
action designed to or which has constituted or which might reasonably be
expected to cause or result, under the Exchange Act or otherwise, in
stabilization or manipulation of the price of any security of the Company
to facilitate the sale or resale of the Securities.
(y) The Company and its Subsidiaries are (i) in compliance with
any and all applicable foreign, federal, state and local laws and
regulations relating to the protection of human health and safety, the
environment or hazardous or toxic substances or wastes, pollutants or
contaminants ("Environmental Laws"), (ii) have received and are in
compliance with all permits, licenses or other approvals required of them
under applicable Environmental Laws to conduct their respective businesses
and (iii) have not received notice of any actual or potential liability for
the investigation or remediation of any disposal or release of hazardous or
toxic substances or wastes, pollutants or contaminants, except where such
non-compliance with Environmental Laws, failure to receive required
permits, licenses or other approvals, or liability would not, individually
or in the aggregate, have a material adverse effect on the condition
(financial or otherwise), prospects, earnings, business or properties of
the Company and its Subsidiaries, taken as a whole, whether or not arising
from transactions in the ordinary course of business, except as set forth
in or contemplated in the Prospectus (exclusive of any supplement thereto).
Except as set forth in the Prospectus, neither the Company nor any of the
Subsidiaries has been named as a "potentially responsible party" under the
Comprehensive Environmental Response, Compensation, and Liability Act of
1980, as amended, or has any material contingent liability in connection
with the disposal or release of hazardous or toxic substances or wastes,
pollutants or contaminants.
(z) Each of the Company and its Subsidiaries has fulfilled its
obligations, if any, under the minimum funding standards of Section 302 of
the United States Employee Retirement Income Security Act of 1974 ("ERISA")
and the regulations and published interpretations thereunder with respect
to each "plan" (as defined in Section 3(3) of ERISA and such regulations
and published interpretations) in which employees of the Company and its
Subsidiaries are eligible to participate and each such plan is in
compliance in all material respects with the presently applicable
provisions of ERISA and such regulations and published interpretations.
The Company and its Subsidiaries have not incurred any unpaid liability to
the Pension Benefit Guaranty Corporation (other than for the payment of
premiums in the ordinary course) or to any such plan under Title IV of
ERISA.
(aa) The subsidiaries listed on Annex A attached hereto are the
only significant subsidiaries of the Company as defined by Rule 1-02 of
Regulation S-X.
(bb) The Company and its Subsidiaries own, possess, license or
have other rights to use, on reasonable terms, all patents, patent
applications, trade and service
8
<PAGE>
marks, trade and service mark registrations, trade names, copyrights,
licenses, inventions, trade secrets, technology, know-how and other
intellectual property (collectively, the "Intellectual Property") material
to the conduct of the Company's business as now conducted. Except as set
forth in the Prospectus, (a) there are no rights of third parties to any
such Intellectual Property (except for the rights of licensors of any such
Intellectual Property); (b) to the Company's knowledge, there is no
material infringement by third parties of any such Intellectual Property;
(c) there is no pending or, to the Company's knowledge, threatened action,
suit, proceeding or claim by others challenging the Company's rights in or
to any such Intellectual Property, and the Company is unaware of any facts
which would form a reasonable basis for any such claim; (d) to the
Company's knowledge, there is no pending or threatened action, suit,
proceeding or claim by others challenging the validity or scope of any such
Intellectual Property, and the Company is unaware of any facts which would
form a reasonable basis for any such claim; (e) there is no pending or, to
the Company's knowledge, threatened action, suit, proceeding or claim by
others that the Company infringes or otherwise violates any patent,
trademark, copyright, trade secret or other proprietary rights of others,
and the Company is unaware of any other fact which would form a reasonable
basis for any such claim; (f) to the Company's knowledge, there is no U.S.
patent or published U.S. patent application which contains claims that
dominate or may dominate any Intellectual Property described in the
Prospectus as being owned by or licensed to the Company or that interferes
with the issued or pending claims of any such Intellectual Property; and
(g) there is no prior act of which the Company is aware that may render any
U.S. patent held by the Company invalid or any U.S. patent application held
by the Company unpatentable which has not been disclosed to the U.S. Patent
and Trademark Office.
(cc) Except as disclosed in the Registration Statement and the
Prospectus, the Company, to its knowledge, (i) does not have any material
lending or other relationship with any bank or lending affiliate of Salomon
Smith Barney Inc. and (ii) does not intend to use any of the proceeds from
the sale of the Securities hereunder to repay any outstanding debt owed to
any affiliate of Salomon Smith Barney Inc.
(dd) The Company and its Subsidiaries are implementing a Company-
wide (including the Subsidiaries) program to analyze and address the risk
that the computer hardware and software used by them may be unable to
recognize and properly execute date-sensitive functions involving certain
dates prior to and any dates after December 31, 1999 (the "Year 2000
Problem"), and reasonably believe that (i) such risk will be remedied on a
timely basis and at a cost that will not materially deviate from the
estimated costs set forth in the Prospectus and (ii) such costs will not
have a material adverse effect upon the financial condition and results of
operations of the Company and its Subsidiaries, taken as a whole; and the
Company believes, after reasonable inquiry, that each supplier, vendor or
financial service organization (other than the Department of Education, as
to which no representation is made) used or serviced by the Company and its
Subsidiaries has remedied or will remedy on a timely basis the Year 2000
Problem, except to the extent that a failure to remedy by any such
supplier, vendor, customer or financial service organization would not have
a material adverse effect on the Company and its subsidiaries, taken as a
whole.
9
<PAGE>
(ee) The Company has not offered, or caused the Underwriters to
offer, Securities to any person pursuant to the Directed Share Program with
the specific intent to unlawfully influence (i) a customer or supplier of
the Company to alter the customer's or supplier's level or type of business
with the Company, or (ii) a trade journalist or publication to write or
publish favorable information about the Company or its products.
Furthermore, the Company represents and warrants to Salomon Smith
Barney Inc. that (i) the Registration Statement, the Prospectus and any
preliminary prospectus comply, and any further amendments or supplements thereto
will comply, with any applicable laws or regulations of foreign jurisdictions
outside the United States in which the Prospectus or any preliminary prospectus,
as amended or supplemented, if applicable, are distributed in connection with
the Directed Share Program, and that (ii) no authorization, approval, consent,
license, order, registration or qualification of or with any government,
governmental instrumentality or court, other than such as have been obtained, is
necessary under the securities laws and regulations of any foreign jurisdiction
in which the Directed Shares are offered outside the United States.
Any certificate signed by any officer of the Company (in his capacity
as such and not in his capacity as an Executive Selling Stockholder) and
delivered to the Representatives or counsel for the Underwriters in connection
with the offering of the Securities shall be deemed a representation and
warranty by the Company, as to matters covered thereby, to each Underwriter.
(ii) Prudential, as to itself, represents and warrants to, and agrees
with, each Underwriter, and each Executive Selling Stockholder, as to
themselves, represents and warrants to, and agrees with, each Underwriter,
that:
(a) Such Selling Stockholder is the legal and beneficial owner of
the Securities to be sold by such Selling Stockholder hereunder and upon
sale and delivery of, and payment for, such Securities, as provided herein,
such Selling Stockholder will convey to the Underwriters good and
marketable title to such Securities, free and clear of all liens,
encumbrances, equities and claims whatsoever.
(b) Such Selling Stockholder has not taken, directly or
indirectly, any action designed to or which has constituted or which might
reasonably be expected to cause or result, under the Exchange Act or
otherwise, in stabilization or manipulation of the price of any security of
the Company to facilitate the sale or resale of the Securities.
(c) Certificates in negotiable form for such Executive Selling
Stockholder's Securities have been placed in custody, for delivery pursuant
to the terms of this Agreement, under a Custody Agreement and Power of
Attorney executed and delivered by such Executive Selling Stockholder, in
the form heretofore furnished to you (the "Custody Agreement") with U.S.
Stock Transfer Corporation, as Custodian (the "Custodian"); the Securities
represented by the certificates so held in custody for each Executive
Selling Stockholder are subject to the interests hereunder of the
Underwriters; the arrangements for custody and delivery of such
certificates, made by such Executive Selling Stockholder hereunder and
under the Custody Agreement, are not subject to termination by any acts of
such Executive Selling Stockholder, or by operation of law,
10
<PAGE>
whether by the death or incapacity of such Executive Selling Stockholder or
the occurrence of any other event; and if any such death, incapacity or any
other such event shall occur before the delivery of such Securities
hereunder, certificates for the Securities will be delivered by the
Custodian in accordance with the terms and conditions of this Agreement and
the Custody Agreement as if such death, incapacity or other event had not
occurred, regardless of whether or not the Custodian shall have received
notice of such death, incapacity or other event.
(d) No consent, approval, authorization or order of any court or
governmental agency or body is required for the consummation by such
Selling Stockholder of the transactions contemplated herein, except such as
may have been obtained under the Act and such as may be required under the
blue sky laws of any jurisdiction in connection with the purchase and
distribution of the Securities by the Underwriters and such other approvals
as have been obtained.
(e) Neither the sale of the Securities being sold by such Selling
Stockholder nor the consummation of any other of the transactions herein
contemplated by such Selling Stockholder or the fulfillment of the terms
hereof by such Selling Stockholder will conflict with, result in a breach
or violation of, or constitute a default under any law or the terms of any
indenture or other agreement or instrument to which such Selling
Stockholder is a party or bound, or any judgment, order or decree
applicable to such Selling Stockholder of any court, regulatory body,
administrative agency, governmental body or arbitrator having jurisdiction
over such Selling Stockholder.
Any certificate signed by any Selling Stockholder and delivered
to the Representatives or counsel for the Underwriters on behalf of such
Selling Stockholder in connection with the offering of the Securities shall
be deemed a representation and warranty by such Selling Stockholder, as to
matters covered thereby, to each Underwriter.
2. Purchase and Sale. (a) Subject to the terms and conditions and in
------------------
reliance upon the representations and warranties herein set forth, the Company
agrees to sell to each Underwriter, and each Underwriter agrees, severally and
not jointly, to purchase from the Company at a purchase price of $______________
per share, the amount of the Underwritten Securities set forth opposite such
Underwriter's name in Schedule I hereto.
(b) Subject to the terms and conditions and in reliance upon the
representations and warranties herein set forth, the Selling Stockholders named
in Schedule II hereto hereby grant an option to the several Underwriters to
purchase, severally and not jointly, up to 405,000 Option Securities at the same
purchase price per share as the Underwriters shall pay for the Underwritten
Securities. Said option may be exercised only to cover over-allotments in the
sale of the Underwritten Securities by the Underwriters. Said option may be
exercised in whole or in part at any time (but not more than once) on or before
the 30th day after the date of the Prospectus upon written or facsimile notice
by the Representatives to such Selling Stockholders setting forth the number of
shares of the Option Securities as to which the several Underwriters are
exercising the option and the settlement date. The maximum aggregate number of
Option Securities to be sold by the Selling Stockholders is 405,000. The
maximum number of
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Option Securities which each Selling Stockholder agrees to sell is set forth in
Schedule II hereto. In the event that the Underwriters exercise less than their
full over-allotment option, Option Securities shall first be sold by Prudential
until all of the amount set forth with respect to Prudential on Schedule II is
sold; the number of Option Securities to be sold by each Executive Selling
Stockholder listed on Schedule II shall be, as nearly as practicable, in the
same proportion as the maximum number of Option Securities to be sold by each
Executive Selling Stockholder bears to the maximum aggregate number of Option
Securities to be sold by all Executive Selling Stockholders. The number of
Option Securities to be purchased by each Underwriter shall be the same
percentage of the total number of shares of the Option Securities to be
purchased by the several Underwriters as such Underwriter is purchasing of the
Underwritten Securities, subject to such adjustments as you in your absolute
discretion shall make to eliminate any fractional shares.
3. Delivery and Payment. Delivery of and payment for the Underwritten
---------------------
Securities and the Option Securities (if the option provided for in Section 2(b)
hereof shall have been exercised on or before the third Business Day prior to
the Closing Date) shall be made at 10:00 AM, New York City time, on
_____________________, 1999, or at such time on such later date not more than
three Business Days after the foregoing date as the Representatives shall
designate, which date and time may be postponed by agreement among the
Representatives, the Company and the Selling Stockholders or as provided in
Section 9 hereof (such date and time of delivery and payment for the Securities
being herein called the "Closing Date"). Delivery of the Securities shall be
made to the Representatives for the respective accounts of the several
Underwriters against payment by the several Underwriters through the
Representatives of the respective aggregate purchase prices of the Securities
being sold by the Company and each of the Selling Stockholders to or upon the
order of the Company and the Selling Stockholders by wire transfer payable in
same-day funds to the accounts specified by the Company and the Selling
Stockholders. Delivery of the Underwritten Securities and the Option Securities
shall be made through the facilities of The Depository Trust Company unless the
Representatives shall otherwise instruct.
Each Selling Stockholder will pay all applicable state transfer taxes, if
any, involved in the transfer to the several Underwriters of the Securities to
be purchased by them from such Selling Stockholder and the respective
Underwriters will pay any additional stock transfer taxes involved in further
transfers.
If the option provided for in Section 2(b) hereof is exercised after the
third Business Day prior to the Closing Date, the Company and the Selling
Stockholders named in Schedule II hereto will deliver the Option Securities (at
the expense of the Company) to the Representatives on the date specified by the
Representatives (which shall be within three Business Days after exercise of
said option) for the respective accounts of the several Underwriters, against
payment by the several Underwriters through the Representatives of the purchase
price thereof to or upon the order of the Selling Stockholders named in Schedule
II by wire transfer payable in same-day funds to the accounts specified by the
Selling Stockholders named in Schedule II hereto. If settlement for the Option
Securities occurs after the Closing Date, such Selling Stockholders will deliver
to the Representatives on the settlement date for the Option Securities, and the
obligation of the Underwriters to purchase the Option Securities shall be
conditioned upon receipt of, supplemental
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<PAGE>
opinions, certificates and letters confirming as of such date the opinions,
certificates and letters delivered on the Closing Date pursuant to Section 6
hereof.
4. Offering by Underwriters. It is understood that the several
-------------------------
Underwriters propose to offer the Securities for sale to the public as set forth
in the Prospectus.
5. Agreements.
-----------
(i) The Company agrees with the several Underwriters that:
(a) The Company will use its best efforts to cause the
Registration Statement, if not effective at the Execution Time, and any
amendment thereof, to become effective. Prior to the termination of the
offering of the Securities, the Company will not file any amendment of the
Registration Statement or supplement to the Prospectus or any Rule 462(b)
Registration Statement unless the Company has furnished you a copy for your
review prior to filing and will not file any such proposed amendment or
supplement to which you reasonably object. Subject to the foregoing
sentence, if the Registration Statement has become or becomes effective
pursuant to Rule 430A, or filing of the Prospectus is otherwise required
under Rule 424(b), the Company will cause the Prospectus, properly
completed, and any supplement thereto to be filed with the Commission
pursuant to the applicable paragraph of Rule 424(b) within the time period
prescribed and will provide evidence satisfactory to the Representatives of
such timely filing. The Company will promptly advise the Representatives
(1) when the Registration Statement, if not effective at the Execution
Time, shall have become effective, (2) when the Prospectus, and any
supplement thereto, shall have been filed (if required) with the Commission
pursuant to Rule 424(b) or when any Rule 462(b) Registration Statement
shall have been filed with the Commission, (3) when, prior to termination
of the offering of the Securities, any amendment to the Registration
Statement shall have been filed or become effective, (4) of any request by
the Commission or its staff for any amendment of the Registration
Statement, or any Rule 462(b) Registration Statement, or for any supplement
to the Prospectus or for any additional information, (5) of the issuance by
the Commission of any stop order suspending the effectiveness of the
Registration Statement or the institution or threatening of any proceeding
for that purpose and (6) of the receipt by the Company of any notification
with respect to the suspension of the qualification of the Securities for
sale in any jurisdiction or the institution or threatening of any
proceeding for such purpose. The Company will use its best efforts to
prevent the issuance of any such stop order or the suspension of any such
qualification and, if issued, to obtain as soon as possible the withdrawal
thereof.
(b) If, at any time when a prospectus relating to the Securities
is required to be delivered under the Act, any event occurs as a result of
which the Prospectus as then supplemented would include any untrue
statement of a material fact or omit to state any material fact necessary
to make the statements therein in the light of the circumstances under
which they were made not misleading, or if it shall be necessary to amend
the Registration Statement or supplement the Prospectus to comply with the
Act or the rules thereunder, the Company promptly will (1) notify the
Representatives of any
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such event; (2) prepare and file with the Commission, subject to the second
sentence of paragraph (i)(a) of this Section 5, an amendment or supplement
which will correct such statement or omission or effect such compliance;
and (3) supply any supplemented Prospectus to you in such quantities as you
may reasonably request.
(c) As soon as practicable, the Company will make generally
available to its security holders and to the Representatives an earnings
statement or statements of the Company and its subsidiaries which will
satisfy the provisions of Section 11(a) of the Act and Rule 158 under the
Act.
(d) The Company will furnish to the Representatives and counsel
for the Underwriters signed copies of the Registration Statement (including
exhibits thereto) and to each other Underwriter a copy of the Registration
Statement (without exhibits thereto) and, so long as delivery of a
prospectus by an Underwriter or dealer may be required by the Act, as many
copies of each Preliminary Prospectus and the Prospectus and any supplement
thereto as the Representatives may reasonably request.
(e) The Company will cooperate with you and with counsel for the
Underwriters in connection with the qualification of the Securities for
sale under the laws of such jurisdictions as the Representatives may
designate and will maintain such qualifications in effect so long as
required for the distribution of the Securities; provided that in no event
shall the Company be obligated to qualify to do business in any
jurisdiction where it is not now so qualified or to take any action that
would subject it to service of process in suits, other than those arising
out of the offering or sale of the Securities, in any jurisdiction where it
is not now so subject.
(f) The Company will not, without the prior written consent of
Salomon Smith Barney Inc., for a period of 180 days following the Execution
Time, offer, sell or contract to sell, or otherwise dispose of (or enter
into any transaction which is designed to, or might reasonably be expected
to, result in the disposition (whether by actual disposition or effective
economic disposition due to cash settlement or otherwise) by the Company or
any affiliate of the Company or any person in privity with the Company or
any affiliate of the Company) directly or indirectly, or announce the
offering of, any other shares of Common Stock or any securities convertible
into, or exchangeable for, shares of Common Stock; provided, however, that
the Company may issue and sell Common Stock pursuant to any employee stock
option plan, stock ownership plan or dividend reinvestment plan of the
Company in effect at the Execution Time and the Company may issue Common
Stock issuable upon the conversion of securities or the exercise of
warrants outstanding at the Execution Time.
(g) The Company will not take, directly or indirectly, any action
designed to or which has constituted or which might reasonably be expected
to cause or result, under the Exchange Act or otherwise, in stabilization
or manipulation of the price of any security of the Company to facilitate
the sale or resale of the Securities.
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<PAGE>
(h) The Company agrees to pay the costs and expenses relating to
the following matters: (i) the preparation, printing or reproduction and
filing with the Commission of the Registration Statement (including
financial statements and exhibits thereto), each Preliminary Prospectus,
the Prospectus, and each amendment or supplement to any of them; (ii) the
printing (or reproduction) and delivery (including postage, air freight
charges and charges for counting and packaging) of such copies of the
Registration Statement, each Preliminary Prospectus, the Prospectus, and
all amendments or supplements to any of them, as may, in each case, be
reasonably requested for use in connection with the offering and sale of
the Securities; (iii) the preparation, printing, authentication, issuance
and delivery of certificates for the Securities, including any stamp or
transfer taxes in connection with the original issuance and sale of the
Securities; (iv) the printing (or reproduction) and delivery of this
Agreement, any blue sky memorandum and all other agreements or documents
printed (or reproduced) and delivered in connection with the offering of
the Securities; (v) the registration of the Securities under the Exchange
Act and the listing of the Securities on the Nasdaq National Market; (vi)
any registration or qualification of the Securities for offer and sale
under the securities or blue sky laws of the several states (including
filing fees and the reasonable fees and expenses of counsel for the
Underwriters relating to such registration and qualification); (vii) any
filings required to be made with the National Association of Securities
Dealers, Inc. (including filing fees and the reasonable fees and expenses
of counsel for the Underwriters relating to such filings); (viii) the
transportation and other expenses incurred by or on behalf of Company
representatives in connection with presentations to prospective purchasers
of the Securities; (ix) the fees and expenses of the Company's accountants
and the fees and expenses of counsel (including local and special counsel)
for the Company and the Selling Stockholders; and (x) all other costs and
expenses incident to the performance by the Company and the Selling
Stockholders of their obligations hereunder (excluding discounts and
commissions charged to the Selling Stockholders in connection with their
sale of Option Securities).
(i) In connection with the Directed Share Program, the Company
will ensure that the Directed Shares will be restricted to the extent
required by the National Association of Securities Dealers, Inc. (the
"NASD") or the NASD rules from sale, transfer, assignment, pledge or
hypothecation for a period of three months following the date of the
effectiveness of the Registration Statement. Salomon Smith Barney Inc.
will notify the Company as to which Participants will need to be so
restricted. The Company will direct the transfer restrictions during such
period of time.
(j) The Company will pay all fees and disbursements of counsel
incurred by the Underwriters in connection with the Directed Share Program
and stamp duties, similar taxes or duties or other taxes, if any, incurred
by the Underwriters in connection with the Directed Share Program.
Furthermore, the Company covenants with Salomon Smith Barney Inc. that
the Company will comply with all applicable securities and other applicable
laws, rules and regulations in each foreign jurisdiction in which the Directed
Shares are offered in connection with the Directed Share Program.
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(ii) Each Selling Stockholder, severally as to itself and not jointly
or jointly and severally, agrees with the several Underwriters that:
(a) Such Selling Stockholder will not, without the prior written
consent of Salomon Smith Barney Inc., offer, sell, contract to sell, pledge
or otherwise dispose of, or file (or participate in the filing of) a
registration statement with the Commission in respect of, or establish or
increase a put equivalent position or liquidate or decrease a call
equivalent position within the meaning of Section 16 of the Exchange Act
with respect to, any shares of capital stock of the Company or any
securities convertible into or exercisable or exchangeable for such capital
stock, or publicly announce an intention to effect any such transaction,
for a period of 180 days after the date of this Agreement, other than
shares of Common Stock disposed of as bona fide gifts approved by Salomon
Smith Barney Inc. Notwithstanding the foregoing, nothing herein shall
prohibit Prudential from effecting, after the lapse of 90 days from the
date hereof, a private sale of shares of Common Stock to an institutional
investor, in accordance with applicable federal and state securities laws,
as long as such institutional investor, prior to or concurrently with such
sale, executes an agreement providing that such institutional investor
shall be subject to the restrictions set forth in the preceding sentence
for the remainder of such 180 day period.
(b) Such Selling Stockholder will not take any action designed
to or which has constituted or which might reasonably be expected to cause
or result, under the Exchange Act or otherwise, in stabilization or
manipulation of the price of any security of the Company to facilitate the
sale or resale of the Securities.
(c) Such Selling Stockholder will, if such Selling Stockholder
is an Executive Selling Stockholder, advise you promptly, and if requested
by you, will confirm such advice in writing, so long as delivery of a
prospectus relating to the Securities by an underwriter or dealer may be
required under the Act, of (i) any material change in the Company's
condition (financial or otherwise), prospects, earnings, business or
properties, (ii) any change in information in the Registration Statement or
the Prospectus relating to such Selling Stockholder or (iii) any new
material information relating to the Company or relating to any matter
stated in the Prospectus which comes to the attention of such Selling
Stockholder.
(d) Such Selling Stockholder will, if such Selling Stockholder
is Prudential, advise you promptly, and if requested by you, will confirm
such advice in writing, so long as delivery of a prospectus relating to the
Securities by an underwriter or dealer may be required under the Act, of
any change in information in the Registration Statement or the Prospectus
relating to Prudential.
6. Conditions to the Obligations of the Underwriters. The obligations of
-------------------------------------------------
the Underwriters to purchase the Underwritten Securities and the Option
Securities, as the case may be, shall be subject to the accuracy of the
representations and warranties on the part of the Company and the Selling
Stockholders contained herein as of the Execution Time, the Closing Date and any
settlement date pursuant to Section 3 hereof, to the accuracy of the statements
of
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<PAGE>
the Company and the Selling Stockholders made in any certificates pursuant to
the provisions hereof, to the performance by the Company and the Selling
Stockholders of their respective obligations hereunder and to the following
additional conditions:
(a) If the Registration Statement has not become effective prior
to the Execution Time, unless the Representatives agree in writing to a
later time, the Registration Statement will become effective not later than
(i) 6:00 PM New York City time on the date of determination of the public
offering price, if such determination occurred at or prior to 3:00 PM New
York City time on such date or (ii) 9:30 AM on the Business Day following
the day on which the public offering price was determined, if such
determination occurred after 3:00 PM New York City time on such date; if
filing of the Prospectus, or any supplement thereto, is required pursuant
to Rule 424(b), the Prospectus, and any such supplement, will be filed in
the manner and within the time period required by Rule 424(b); and no stop
order suspending the effectiveness of the Registration Statement shall have
been issued and no proceedings for that purpose shall have been instituted
or threatened.
(b) The Company shall have caused O'Melveny & Myers LLP, counsel
for the Company, to have furnished to the Representatives its opinion,
dated the Closing Date and addressed to the Representatives (a copy of
which shall be delivered to Prudential, but upon which Prudential shall not
be entitled to rely), to the effect that:
(i) each of the Company and each Subsidiary has been duly
incorporated and is validly existing as a corporation in good standing
under the laws of the jurisdiction in which it is incorporated, with
the corporate power and the corporate authority to own or lease, as
the case may be, and to operate its properties and conduct its
business as described in the Prospectus, and is duly qualified to do
business as a foreign corporation in, and is in good standing under
the laws under, each of the applicable jurisdictions set forth on
Annex A hereto;
(ii) all the outstanding shares of capital stock of each
Subsidiary have been duly authorized by all necessary corporate action
on the part of such Subsidiary, validly issued and are fully paid and
nonassessable, and, except as otherwise set forth in the Prospectus,
are owned of record by the Company either directly or through wholly
owned subsidiaries;
(iii) the statements in the Prospectus under the caption
"Description of Capital Stock", insofar as they summarize provisions
of the Certificate of Incorporation and Bylaws of the Company, fairly
present the information required by Form S-1; the outstanding shares
of Common Stock (including the Securities being sold hereunder by the
Selling Stockholders) have been duly authorized by all necessary
corporate action on the part of the Company, and are validly issued,
fully paid and nonassessable; the Securities have been duly authorized
by all necessary corporate action on the part of the Company and, upon
payment for and delivery of the Securities in accordance with this
Agreement and the countersigning of the certificate or certificates
representing the Securities by a
17
<PAGE>
duly authorized signatory of the registrar for the Company's Common
Stock, the Securities will be validly issued, fully paid and non-
assessable; the certificates for the Securities comply with the
provisions of the Delaware General Corporation Law; the holders of
outstanding shares of capital stock of the Company are not entitled to
preemptive or other rights to subscribe for the Securities or any
additional shares of the Company's capital stock under the Company's
Certificate of Incorporation and Bylaws, or, to the knowledge of such
counsel based solely on a review of corporate minutes and factual
certificates of responsible officers of the Company, any other
agreement or instrument; and, except as set forth in the Prospectus,
based solely upon the review by such counsel of corporate minutes for
matters occurring after June 1, 1995 and upon factual certificates of
responsible officers of the Company, the authorized but unissued
shares of capital stock of the Company are not subject to any
warrants, options, rights or commitments granted by the Company, and
the Company is not obligated to issue, purchase or redeem any shares
of the Company's capital stock;
(iv) the Registration Statement has been declared effective
under the Act; any required filing of the Prospectus, and any
supplements thereto, pursuant to Rule 424(b) has been made in the
manner and within the time period required by Rule 424(b); to the
knowledge of such counsel, based solely upon telephonic advice from
the Commission, no stop order suspending the effectiveness of the
Registration Statement has been issued, and proceedings for that
purpose have been instituted or threatened, and the Registration
Statement and the Prospectus (other than the financial statements and
other financial information contained therein, as to which such
counsel need express no opinion) each appear on their face to comply
as to form in all material respects with the applicable requirements
of the Act and the rules thereunder;
(v) in connection with such counsel's participation in
conferences in connection with the preparation of the Registration
Statement and the Prospectus, such counsel has not independently
verified the accuracy, completeness or fairness of the statements
contained therein, and the limitations inherent in the examination
made by such counsel and the knowledge available to such counsel are
such that such counsel is unable to assume, and does not assume, any
responsibility for such accuracy, completeness and fairness; however,
on the basis of such counsel's review and participation in conferences
in connection with the preparation of the Registration Statement and
Prospectus, and relying as to materiality to an extent upon opinions
of officers and other representatives of the Company, such counsel
does not believe that the Registration Statement as of the Effective
Date contained any untrue statement of a material fact or omitted to
state a material fact required to be stated therein or necessary to
make the statements included therein not misleading, and such counsel
does not believe that the Prospectus on the date hereof and as of the
Closing Date contains any untrue statement of a material fact or omits
to state a material fact necessary to make the statements therein, in
light of the circumstances under which they were made, not misleading;
provided, however, that such counsel need not express any opinion or
18
<PAGE>
belief as to the financial statements and other financial information
contained in the Registration Statement or Prospectus;
(vi) the Company has the corporate power and corporate
authority to enter into this Agreement and to issue and sell the
Securities as provided herein, and the execution and delivery of this
Agreement have been duly authorized by all necessary corporate action
on the part of the Company;
(vii) the Company is not and, after giving effect to the
offering and sale of the Securities and the application of the
proceeds thereof as described in the Prospectus, will not be, an
"investment company" as defined in the Investment Company Act of 1940,
as amended;
(viii) no order, consent, permit, approval or filing with
or of any federal, New York or California governmental authority is
required on the part of the Company for the execution and delivery of
this Agreement, or for the issuance and sale of the Securities, except
such as have been obtained under the Act and such as may be required
under applicable Blue Sky or state securities laws;
(ix) neither the issue and sale of the Securities, nor the
Company's execution and delivery of, and the performance of its
obligations under, this Agreement, will result in a breach or
violation of or imposition of any lien, charge or encumbrance upon any
property or assets of the Company or its Subsidiaries pursuant to, (i)
the charter or bylaws of the Company or its Subsidiaries, (ii) any
existing obligation of, or restriction on, the Company or its
Subsidiaries under any instrument, agreement or contract filed as an
exhibit to the Registration Statement, (iii) any federal, New York or
California statute, rule or regulation (except that such counsel need
express no opinion regarding any federal securities laws or Blue Sky
or state securities laws or Section 8 hereof, except as otherwise
expressly stated herein), or (iv) any judgment, order or decree of any
federal, New York or California governmental authority having
jurisdiction over the Company or its Subsidiaries or any of its or
their properties, which such judgment, order or decree has been
identified, in a certificate of responsible officers of the Company,
to such counsel as being applicable to the Company or its
Subsidiaries;
(x) no holder of securities of the Company has the right
under any instrument, agreement or contract filed as an exhibit to the
Registration Statement to register such securities on or as part of
the Registration Statement, except for (i) any such holder who has
effectively waived such right, and (ii) each Selling Stockholder who
has agreed to exercise such right only with respect to the Option
Securities which are proposed to be sold by such Selling Stockholder
hereunder.
In rendering such opinion, such counsel (A) may rely as to matters of fact,
to the extent they deem proper, on certificates of responsible officers of
the Company and public officials and (B), need express no opinion regarding
the matters addressed in the opinion
19
<PAGE>
of Drinker, Biddle & Reath LLP, including specifically the Company's
compliance with, and authorization to participate in, federal Title IV
Programs and other federal or state laws or regulations governing or
concerning educational services. References to the Prospectus in this
paragraph (b) include any supplements thereto at the Closing Date.
(c) The Company shall have caused Drinker, Biddle & Reath LLP,
special regulatory counsel for the Company, to have furnished to the
Representatives their opinion, dated the Closing Date and addressed to the
Representatives (a copy of which shall be delivered to Prudential, but upon
which Prudential shall not be entitled to rely), to the effect that:
(i) The statements in the Prospectus under the captions
"Risk Factors-Substantial Dependence on Student Financial Aid;
Potential Adverse Effects of Governmental Regulation," "Risk Factors-
Risk That Legislative Action Will Reduce Financial Aid Funding or
Increase Regulatory Burden," "Financial Aid and Regulation," and other
references therein to educational regulatory matters, insofar as such
statements constitute a summary of applicable federal and state laws
and regulations or a summary of judicial or administrative
proceedings, are accurate and present fairly the information purported
to be shown;
(ii) Such counsel have no knowledge that leads them to
believe that the information contained in the Registration Statement
and the Prospectus forming a part thereof under the captions "Risk
Factors-Substantial Dependence on Student Financial Aid; Potential
Adverse Effects of Governmental Regulation," "Risk Factors-Risk That
Legislative Action Will Reduce Financial Aid Funding or Increase
Regulatory Burden," "Financial Aid and Regulation," as of the
Effective Date and as of the date of the Prospectus and as of the
Closing Date, contained any untrue statement of a material fact, or
omitted to state any material fact required to be stated therein or
necessary to make the statements therein not misleading;
(iii) The Offering will not constitute a change in
ownership resulting in a change in control under the HEA; and
(iv) To the best of such counsel's knowledge, each of the
Company and the Subsidiaries has all necessary licenses, certificates,
permits and other authorizations required for each of the Company and
the Subsidiaries to participate in Title IV Programs or pursuant to
which the Company or any of the Subsidiaries must be authorized by
applicable states to engage in rendering educational services as
described in the Prospectus except where the failure to so have any
such licenses, certificates, permits and other authorizations,
individually or in the aggregate, would not have a material adverse
effect on the condition (financial or otherwise), prospects, earnings,
business or properties of the Company and its Subsidiaries, taken as a
whole.
20
<PAGE>
(d) The Executive Selling Stockholders shall have caused
O'Melveny & Myers LLP, counsel for the Executive Selling Stockholders, to
have furnished to the Representatives their opinions dated the Closing Date
and addressed to the Representatives, to the effect that:
(i) this Agreement and the Custody Agreement and Power of
Attorney have been duly executed and delivered by the Executive
Selling Stockholders, the Custody Agreement is valid and binding on
the respective Executive Selling Stockholders and the respective
Executive Selling Stockholders have full legal right and authority to
sell, transfer and deliver in the manner provided in this Agreement
and the Custody Agreement the Securities being sold by the respective
Executive Selling Stockholders hereunder;
(ii) upon payment for and delivery of the Securities by the
Executive Selling Stockholders in accordance with this Agreement,
assuming the Underwriters are acquiring the Securities without notice
of any adverse claims, the several Underwriters will acquire the
Securities free and clear of any adverse claims; and
(iii) no order, consent, permit, approval or filing with or
of any California, New York or federal governmental authority that
such counsel has, in the exercise of customary professional diligence,
recognized as applicable to transactions of the type contemplated by
this Agreement, is required for the consummation by the respective
Executive Selling Stockholders of the transactions contemplated
herein, except such as may have been obtained under the Act and such
as may be required under the blue sky laws of any jurisdiction in
connection with the purchase and distribution of the Securities by the
Underwriters and such other approvals (specified in such opinion) as
have been obtained.
In rendering such opinion, such counsel (A) may rely as to matters of fact,
to the extent they deem proper, on certificates of responsible officers of
the respective Executive Selling Stockholders and public officials and (B),
need express no opinion regarding the matters addressed in the opinion of
Drinker, Biddle & Reath LLP, including specifically the compliance of the
Company or any Executive Selling Stockholder with, and authorization to
participate in, federal Title IV Programs and other federal or state laws
or regulations governing or concerning educational services.
(e) Prudential shall have caused the Assistant General Counsel
of Prudential to have furnished to the Representatives his or her opinion
dated the Closing Date and addressed to the Representatives, to the effect
that:
(i) this Agreement has been duly executed and delivered by
Prudential and Prudential has full legal right and authority to sell,
transfer and deliver in the manner provided in this Agreement the
Securities being sold by Prudential hereunder;
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<PAGE>
(ii) the delivery by Prudential to the several Underwriters
of certificates for the Securities being sold hereunder by Prudential
against payment therefor as provided herein, will pass good and
marketable title to such Securities to the several Underwriters, free
and clear of all liens, encumbrances, equities and claims created by,
or with the knowledge of, Prudential;
(iii) no consent, approval, authorization or order of any
federal, New York (assuming New York law is identical to Illinois law)
court or governmental agency or body is required for the consummation
by Prudential of the transactions contemplated herein, except such as
may have been obtained under the Act and such as may be required under
the blue sky laws of any jurisdiction in connection with the purchase
and distribution of the Securities by the Underwriters and such other
approvals (specified in such opinion) as have been obtained; and
(iv) neither the sale of the Securities being sold by
Prudential nor the consummation of any other of the transactions
herein contemplated by Prudential or the fulfillment of the terms
hereof by Prudential will conflict with, result in a breach or
violation of, or constitute a default under any federal, New York
(assuming New York law is identical to Illinois) law or the terms of
any indenture or other agreement or instrument known to such counsel
(and identified to such counsel in a certificate of Prudential) and to
which Prudential is a party or bound, or any judgment, order or decree
known to such counsel to be applicable to Prudential of any court,
regulatory body, administrative agency, governmental body or
arbitrator having jurisdiction over Prudential.
In rendering such opinion, such counsel may rely as to matters of fact, to
the extent they deem proper, on certificates of responsible officers of
Prudential and public officials.
(f) The Representatives shall have received from Gibson, Dunn &
Crutcher LLP, counsel for the Underwriters, such opinion or opinions, dated
the Closing Date and addressed to the Representatives, with respect to the
issuance and sale of the Securities, the Registration Statement, the
Prospectus (together with any supplement thereto) and other related matters
as the Representatives may reasonably require, and the Company and each
Selling Stockholder shall have furnished to such counsel such documents as
they request for the purpose of enabling them to pass upon such matters.
(g) The Company shall have furnished to the Representatives a
certificate of the Company (a copy of which shall be delivered to
Prudential), signed by the Chairman of the Board or the President and the
principal financial or accounting officer of the Company, dated the Closing
Date, to the effect that the signers of such certificate have carefully
examined the Registration Statement, the Prospectus, any supplements to the
Prospectus and this Agreement and that:
(i) the representations and warranties of the Company in
this Agreement are true and correct in all material respects on and as
of the Closing
22
<PAGE>
Date with the same effect as if made on the Closing Date and the
Company has complied with all the agreements and satisfied all the
conditions on its part to be performed or satisfied at or prior to the
Closing Date;
(ii) no stop order suspending the effectiveness of the
Registration Statement has been issued and no proceedings for that
purpose have been instituted or, to the Company's knowledge,
threatened; and
(iii) since the date of the most recent financial
statements included in the Prospectus (exclusive of any supplement
thereto), there has been no material adverse effect on the condition
(financial or otherwise), prospects, earnings, business or properties
of the Company and its subsidiaries, taken as a whole, whether or not
arising from transactions in the ordinary course of business, except
as set forth in or contemplated in the Prospectus (exclusive of any
supplement thereto).
(h) Each Executive Selling Stockholder shall have furnished to
the Representatives a certificate (a copy of which shall be delivered to
Prudential), signed by such Executive Selling Stockholder, dated the
Closing Date, to the effect that the signer of such certificate have
carefully examined the Registration Statement, the Prospectus, any
supplement to the Prospectus and this Agreement and that the
representations and warranties of such Executive Selling Stockholder in
this Agreement are true and correct in all material respects on and as of
the Closing Date to the same effect as if made on the Closing Date.
Prudential shall have furnished to the Representatives a certificate,
signed by Prudential, dated the Closing Date, to the effect that the signer
of such certificate shall have carefully examined the information in the
Prospectus relating to Prudential furnished to the Company in writing by or
on behalf of Prudential specifically for inclusion therein, and that the
representations and warranties of Prudential in this Agreement are true and
correct in all material respects on and as of the Closing Date to the same
effect as if made on the Closing Date.
(i) The Company shall have caused Arthur Andersen LLP to have
furnished to the Representatives letters (a copy of which shall be
delivered to Prudential), at the Execution Time and at the Closing Date,
dated respectively as of the Execution Time and as of the Closing Date, in
form and substance satisfactory to the Representatives, confirming that
they are independent accountants within the meaning of the Act and the
applicable published rules and regulations thereunder, and stating in
effect that:
(i) in their opinion the consolidated financial statements
and financial statement schedules audited by them and included in the
Registration Statement and the Prospectus comply as to form in all
material respects with the applicable accounting requirements of the
Act and the related published rules and regulations;
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<PAGE>
(ii) on the basis of a reading of the latest unaudited
financial statements made available by the Company and its
subsidiaries; carrying out certain specified procedures (but not an
examination in accordance with generally accepted auditing standards)
which would not necessarily reveal matters of significance with
respect to the comments set forth in such letter; a reading of the
minutes of the meetings of the stockholders, directors and relevant
committees of the Company and the Subsidiaries; and inquiries of
certain officials of the Company who have responsibility for financial
and accounting matters of the Company and its subsidiaries as to
transactions and events subsequent to June 30, 1998, nothing came to
their attention which caused them to believe that:
(1) with respect to the period subsequent to September 30, 1998,
there were any changes, at a specified date not more than five
days prior to the date of the letter, in the capital stock, long-
term debt, consolidated net current assets or stockholders'
equity of the Company and its Subsidiaries, in each case as
compared with the amounts shown on the September 30, 1998
consolidated balance sheet included in the Registration Statement
and the Prospectus, except in all instances for changes or
decreases set forth in such letter, in which case the letter
shall be accompanied by an explanation by the Company as to the
significance thereof unless said explanation is not deemed
necessary by the Representatives; or
(2) the information included in the Registration Statement and
Prospectus in response to Regulation S-K, Item 301 (Selected
Financial Data), Item 302 (Supplementary Financial Information),
Item 402 (Executive Compensation) and Item 503(d) (Ratio of
Earnings to Fixed Charges) is not in conformity with the
applicable disclosure requirements of Regulation S-K; and
(iii) they have performed certain other specified procedures
as a result of which they determined that certain information of an
accounting, financial or statistical nature (which is limited to
accounting, financial or statistical information derived from the
general accounting records of the Company and its subsidiaries) set
forth in the Registration Statement and the Prospectus, agrees with
the accounting records of the Company and its subsidiaries, excluding
any questions of legal interpretation.
References to the Prospectus in this paragraph (i) include any
supplement thereto at the date of the letter.
(j) Subsequent to the Execution Time or, if earlier, the dates
as of which information is given in the Registration Statement (exclusive
of any amendment thereof) and the Prospectus (exclusive of any supplement
thereto), there shall not have been (i) any change or decrease specified in
the letter or letters referred to in paragraph (i) of this Section 6 or
(ii) any change, or any development involving a prospective change, in or
affecting the condition (financial or otherwise), earnings, business or
properties of the
24
<PAGE>
Company and its subsidiaries taken as a whole, whether or not arising from
transactions in the ordinary course of business, except as set forth in or
contemplated in the Prospectus (exclusive of any supplement thereto) the
effect of which, in any case referred to in clause (i) or (ii) above, is,
in the sole judgment of the Representatives, so material and adverse as to
make it impractical or inadvisable to proceed with the offering or delivery
of the Securities as contemplated by the Registration Statement (exclusive
of any amendment thereof) and the Prospectus (exclusive of any supplement
thereto).
(k) The Securities shall have been listed and admitted and
authorized for trading on the Nasdaq Stock Market's National Market, and
satisfactory evidence of such actions shall have been provided to the
Representatives.
(l) At the Execution Time, the Company shall have furnished to
the Representatives a letter substantially in the form of Exhibit A hereto
from each executive officer, director and stockholder of the Company
addressed to the Representatives.
(m) Each of the Transactions (as defined in the Prospectus) has
been approved by all necessary corporate action on behalf of the Company
and, on the Closing Date, such Transactions shall have been effectuated.
(n) On the Closing Date, the Company shall have furnished to the
Representatives evidence reasonably satisfactory to the Representatives and
their counsel of the execution and delivery of that certain Credit
Agreement, dated as of the Closing Date, among the Company, as borrower,
and Union Bank of California, as lender.
(o) Prior to the Closing Date, the Company and the Selling
Stockholders shall have furnished to the Representatives such further
information, certificates and documents as the Representatives may
reasonably request.
If any of the conditions specified in this Section 6 shall not have been
fulfilled in all material respects when and as provided in this Agreement, or if
any of the opinions and certificates mentioned above or elsewhere in this
Agreement shall not be in all material respects reasonably satisfactory in form
and substance to the Representatives and counsel for the Underwriters, this
Agreement and all obligations of the Underwriters hereunder may be canceled at,
or at any time prior to, the Closing Date by the Representatives. Notice of
such cancellation shall be given to the Company and each Selling Stockholder in
writing or by telephone or facsimile confirmed in writing.
The documents required to be delivered by this Section 6 shall be delivered
at the offices of O'Melveny & Myers LLP, counsel for the Company, 610 Newport
Center Drive, Newport Beach, California 92660, on the Closing Date.
7. Reimbursement of Underwriters' Expenses. If the sale of the Securities
---------------------------------------
provided for herein is not consummated because any condition to the obligations
of the Underwriters set forth in Section 6 hereof (other than Section 6(f)
hereof) is not satisfied, because of any termination pursuant to Section 10
hereof or because of any refusal, inability or failure on the part
25
<PAGE>
of the Company or any Selling Stockholders to perform any agreement herein or
comply with any provision hereof other than by reason of a default by any of the
Underwriters, the Company will reimburse the Underwriters severally through
Salomon Smith Barney Inc. on demand for all out-of-pocket expenses (including
reasonable fees and disbursements of counsel) that shall have been incurred by
them in connection with the proposed purchase and sale of the Securities.
8. Indemnification and Contribution.
---------------------------------
(a) The Company and, subject to the limitations of Section 8(h)
hereof, the Executive Selling Stockholders, jointly and severally, agree to
indemnify and hold harmless each Underwriter, the directors, officers, employees
and agents of each Underwriter and each person who controls any Underwriter
within the meaning of either the Act or the Exchange Act against any and all
losses, claims, damages or liabilities, joint or several, to which they or any
of them may become subject under the Act, the Exchange Act or other Federal or
state statutory law or regulation, at common law or otherwise, insofar as such
losses, claims, damages or liabilities (or actions in respect thereof) arise out
of or are based upon any untrue statement or alleged untrue statement of a
material fact contained in the registration statement for the registration of
the Securities as originally filed or in any amendment thereof, or in any
Preliminary Prospectus or the Prospectus, or in any amendment thereof or
supplement thereto, or arise out of or are based upon the omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, and agrees to reimburse
each such indemnified party, as incurred, for any legal or other expenses
reasonably incurred by them in connection with investigating or defending any
such loss, claim, damage, liability or action; provided, however, that the
-------- -------
Company and the Executive Selling Stockholders will not be liable in any such
case to the extent that any such loss, claim, damage or liability arises out of
or is based upon any such untrue statement or alleged untrue statement or
omission or alleged omission made therein in reliance upon and in conformity
with written information furnished to the Company by or on behalf of any
Underwriter through the Representatives specifically for inclusion therein,
provided further, however, that the indemnification provided in this paragraph
-------
(a) with respect to any Preliminary Prospectus shall not inure to the benefit of
any Underwriter (or to the benefit of any person controlling such Underwriter)
on account of any such losses, claims, damages or liabilities arising from the
sale of the Securities by such Underwriter to any person if a copy of the
Prospectus shall not have been delivered or sent to such person within the time
required by the Act and the regulations thereunder, and the untrue statement or
alleged untrue statement or omission or alleged omission of a material fact
contained in such Preliminary Prospectus was corrected in the Prospectus,
provided that the Company has delivered the Prospectus to the several
Underwriters in requisite quantity on a timely basis to permit such delivery or
sending. This indemnity agreement will be in addition to any liability which
the Company or the Executive Selling Stockholders may otherwise have.
(b) The Company agrees to indemnify and hold harmless Salomon Smith
Barney Inc., the directors, officers, employees and agents of Salomon Smith
Barney Inc. and each person who controls Salomon Smith Barney Inc. within the
meaning of either the Act or the Exchange Act (collectively, the "Salomon Smith
Barney Inc. Entities"), against any and all losses, claims, damages and
liabilities to which they may become subject under the Act, the Exchange Act or
other Federal or state statutory law or regulation, at common law or otherwise,
insofar as
26
<PAGE>
such losses, claims, damages or liabilities (or actions in respect thereof) (i)
arise out of or are based upon any untrue statement or alleged untrue statement
of a material fact contained in the prospectus wrapper material prepared by or
with the consent of the Company for distribution in foreign jurisdictions in
connection with the Directed Share Program attached to the Prospectus or any
preliminary prospectus, or arise out of or are based upon the omission or
alleged omission to state therein a material fact required to be stated therein
or necessary to make the statement therein, when considered in conjunction with
the Prospectus or any applicable preliminary prospectus, not misleading; (ii)
caused by the failure of any Participant to pay for and accept delivery of the
securities which immediately following the Effective Date of the Registration
Statement, were subject to a properly confirmed agreement to purchase; or (iii)
related to, arising out of, or in connection with the Directed Share Program,
provided that the Company will not be liable in any such case to the extent that
any such loss, claim, damage or liability arises out of or is based upon any
such untrue statement or alleged untrue statement or omission or alleged
omission made therein in reliance upon and in conformity with written
information furnished to the Company by or on behalf of Salomon Smith Barney
Inc. specifically for inclusion therein.
(c) Prudential agrees to indemnify and hold harmless the Company,
each of its directors, each of its officers who signs the Registration
Statement, and each person who controls the Company within the meaning of either
the Act or the Exchange Act, and each Underwriter, the directors, officers,
employees and agents of each Underwriter and each person who controls any
Underwriter within the meaning of either the Act or the Exchange Act, to the
same extent as the foregoing indemnity from the Company to each Underwriter, but
only with reference to information relating to Prudential furnished to the
Company in writing by or on behalf of Prudential specifically for inclusion in
the documents referred to in the foregoing indemnity. This indemnity agreement
will be in addition to any liability which Prudential may otherwise have. The
Company and each Underwriter acknowledge that the statements regarding
Prudential set forth in the Prospectus under the heading "Security Ownership of
Certain Beneficial Owners and Management" constitute the only information
furnished in writing by or on behalf of Prudential for inclusion in any
Preliminary Prospectus or the Prospectus.
(d) Each Underwriter severally and not jointly agrees to indemnify
and hold harmless the Company, each of its directors, each of its officers who
signs the Registration Statement, and each person who controls the Company
within the meaning of either the Act or the Exchange Act, each Selling
Stockholder, the directors, officers, employees and agents of each Selling
Stockholder and each person who controls such Selling Stockholder within the
meaning of either the Act or the Exchange Act, to the same extent as the
foregoing indemnity to each Underwriter, but only with reference to written
information relating to such Underwriter furnished to the Company by or on
behalf of such Underwriter through the Representatives specifically for
inclusion in the documents referred to in the foregoing indemnity. This
indemnity agreement will be in addition to any liability which any Underwriter
may otherwise have. The Company and each Selling Stockholder acknowledge that
the statements set forth in the last paragraph of the cover page regarding
delivery of the Securities, the legend in block capital letters on the inside
front cover related to stabilization, syndicate covering transactions and
penalty bids and, under the heading "Underwriting", (i) the paragraph related to
concessions and reallowances and (ii) the paragraph related to stabilization,
syndicate covering transactions and penalty bids in any Preliminary Prospectus
and the Prospectus constitute the only information furnished in writing by
27
<PAGE>
or on behalf of the several Underwriters for inclusion in any Preliminary
Prospectus or the Prospectus.
(e) Promptly after receipt by an indemnified party under this Section
8 of notice of the commencement of any action, such indemnified party will, if a
claim in respect thereof is to be made against the indemnifying party under this
Section 8, notify the indemnifying party in writing of the commencement thereof;
but the failure so to notify the indemnifying party (i) will not relieve it from
liability under paragraph (a), (b), (c) or (d) above unless and to the extent it
did not otherwise learn of such action and such failure results in the
forfeiture by the indemnifying party of substantial rights and defenses and (ii)
will not, in any event, relieve the indemnifying party from any obligations to
any indemnified party other than the indemnification obligation provided in
paragraph (a), (b), (c) or (d) above. The indemnifying party shall be entitled
to appoint counsel of the indemnifying party's choice at the indemnifying
party's expense to represent the indemnified party in any action for which
indemnification is sought (in which case the indemnifying party shall not
thereafter be responsible for the fees and expenses of any separate counsel
retained by the indemnified party or parties except as set forth below);
provided, however, that such counsel shall be satisfactory to the indemnified
- -------- -------
party. Notwithstanding the indemnifying party's election to appoint counsel to
represent the indemnified party in an action, the indemnified party shall have
the right to employ separate counsel (including local counsel), and the
indemnifying party shall bear the reasonable fees, costs and expenses of such
separate counsel if (i) the use of counsel chosen by the indemnifying party to
represent the indemnified party would present such counsel with a conflict of
interest, (ii) the actual or potential defendants in, or targets of, any such
action include both the indemnified party and the indemnifying party and the
indemnified party shall have reasonably concluded that there may be legal
defenses available to it and/or other indemnified parties which are different
from or additional to those available to the indemnifying party, (iii) the
indemnifying party shall not have employed counsel satisfactory to the
indemnified party to represent the indemnified party within a reasonable time
after notice of the institution of such action or (iv) the indemnifying party
shall authorize the indemnified party to employ separate counsel at the expense
of the indemnifying party. An indemnifying party will not, without the prior
written consent of the indemnified parties, settle or compromise or consent to
the entry of any judgment with respect to any pending or threatened claim,
action, suit or proceeding in respect of which indemnification or contribution
may be sought hereunder (whether or not the indemnified parties are actual or
potential parties to such claim or action) unless such settlement, compromise or
consent includes an unconditional release of each indemnified party from all
liability arising out of such claim, action, suit or proceeding.
(f) Notwithstanding anything contained herein to the contrary, if
indemnity may be sought pursuant to Section 8(b) hereof in respect of such
action or proceeding, then in addition to such separate firm for the indemnified
parties, the indemnifying party shall be liable for the reasonable fees and
expenses of no more than one separate firm (in addition to any local counsel)
for the Salomon Smith Barney Inc. Entities for the defense of any losses,
claims, damages and liabilities arising out of the Directed Share Program.
(g) In the event that the indemnity provided in paragraph (a), (b),
(c) or (d) of this Section 8 is unavailable to or insufficient to hold harmless
an indemnified party for any reason, the Company and the Executive Selling
Stockholders, on a joint and several basis,
28
<PAGE>
Prudential (with respect to claims under Section 8(c) only) and the Underwriters
agree to contribute to the aggregate losses, claims, damages and liabilities
(including legal or other expenses reasonably incurred in connection with
investigating or defending same) (collectively "Losses") to which the Company,
one or more of the Executive Selling Stockholders, Prudential (with respect to
claims under Section 8(c) only) and one or more of the Underwriters may be
subject in such proportion as is appropriate to reflect the relative benefits
received by the Company, by the Executive Selling Stockholders, by Prudential
and by the Underwriters from the offering of the Securities; provided, however,
-------- -------
that in no case shall any Underwriter (except as may be provided in any
agreement among underwriters relating to the offering of the Securities) be
responsible for any amount in excess of the underwriting discount or commission
applicable to the Securities purchased by such Underwriter hereunder. If the
allocation provided by the immediately preceding sentence is unavailable for any
reason, the Company and the Executive Selling Stockholders, on a joint and
several basis, Prudential (with respect to claims under Section 8(c) only) and
the Underwriters shall contribute in such proportion as is appropriate to
reflect not only such relative benefits but also the relative fault of the
Company, of the Executive Selling Stockholders, of Prudential and of the
Underwriters in connection with the statements or omissions which resulted in
such Losses as well as any other relevant equitable considerations. Benefits
received by the Company, by the Executive Selling Stockholders and by Prudential
shall be deemed to be equal to the total net proceeds from the offering (before
deducting expenses) received by each of them, and benefits received by the
Underwriters shall be deemed to be equal to the total underwriting discounts and
commissions, in each case as set forth on the cover page of the Prospectus.
Relative fault shall be determined by reference to, among other things, whether
any untrue or any alleged untrue statement of a material fact or the omission or
alleged omission to state a material fact relates to information provided by (i)
the Company, (ii) the Executive Selling Stockholders, (iii) Prudential and (iv)
the Underwriters, the intent of the parties and their relative knowledge, access
to information and opportunity to correct or prevent such untrue statement or
omission. The Company, the Executive Selling Stockholders, Prudential and the
Underwriters agree that it would not be just and equitable if contribution were
determined by pro rata allocation or any other method of allocation which does
not take account of the equitable considerations referred to above.
Notwithstanding the provisions of this paragraph (g), no person guilty of
fraudulent misrepresentation (within the meaning of Section 11(f) of the Act)
shall be entitled to contribution from any person who was not guilty of such
fraudulent misrepresentation. For purposes of this Section 8, each person who
controls an Underwriter within the meaning of either the Act or the Exchange Act
and each director, officer, employee and agent of an Underwriter shall have the
same rights to contribution as such Underwriter, and each person who controls
the Company within the meaning of either the Act or the Exchange Act, each
officer of the Company who shall have signed the Registration Statement and each
director of the Company shall have the same rights to contribution as the
Company, subject in each case to the applicable terms and conditions of this
paragraph (g).
(h) The total liability of each Selling Stockholder under such
Selling Stockholder's representations and warranties contained in Section 1
hereof and under the indemnity and contribution agreements contained in this
Section 8 shall be limited to an amount equal to the proceeds, net of the
underwriting discounts, from the sale of the Securities sold by such Selling
Stockholder to the Underwriters. The Company and the Selling Stockholders may
29
<PAGE>
agree, as among themselves and without limiting the rights of the Underwriters
under this Agreement, as to the respective amounts of such liability for which
they each shall be responsible.
9. Default by an Underwriter. If any one or more Underwriters shall fail
--------------------------
to purchase and pay for any of the Securities agreed to be purchased by such
Underwriter or Underwriters hereunder and such failure to purchase shall
constitute a default in the performance of its or their obligations under this
Agreement, the remaining Underwriters shall be obligated severally to take up
and pay for (in the respective proportions which the amount of Securities set
forth opposite their names in Schedule I hereto bears to the aggregate amount of
Securities set forth opposite the names of all the remaining Underwriters) the
Securities which the defaulting Underwriter or Underwriters agreed but failed to
purchase; provided, however, that in the event that the aggregate amount of
-------- -------
Securities which the defaulting Underwriter or Underwriters agreed but failed to
purchase shall exceed 10% of the aggregate amount of Securities set forth in
Schedule I hereto, the remaining Underwriters shall have the right to purchase
all, but shall not be under any obligation to purchase any, of the Securities,
and if such nondefaulting Underwriters do not purchase all the Securities, this
Agreement will terminate without liability to any nondefaulting Underwriter, the
Selling Stockholders or the Company. In the event of a default by any
Underwriter as set forth in this Section 9, the Closing Date shall be postponed
for such period, not exceeding five Business Days, as the Representatives shall
determine in order that the required changes in the Registration Statement and
the Prospectus or in any other documents or arrangements may be effected.
Nothing contained in this Agreement shall relieve any defaulting Underwriter of
its liability, if any, to the Company, the Selling Stockholders and any
nondefaulting Underwriter for damages occasioned by its default hereunder.
10. Termination. This Agreement shall be subject to termination in the
------------
absolute discretion of the Representatives, by notice given to the Company prior
to delivery of and payment for the Securities, if at any time prior to such time
(i) trading in the Company's Common Stock shall have been suspended by the
Commission or the Nasdaq National Market or trading in securities generally on
the New York Stock Exchange or the Nasdaq National Market shall have been
suspended or limited or minimum prices shall have been established on either of
such Exchange or National Market, (ii) a banking moratorium shall have been
declared either by Federal or New York State authorities or (iii) there shall
have occurred any outbreak or escalation of hostilities, declaration by the
United States of a national emergency or war, or other calamity or crisis the
effect of which on financial markets is such as to make it, in the sole judgment
of the Representatives, impractical or inadvisable to proceed with the offering
or delivery of the Securities as contemplated by the Prospectus (exclusive of
any supplement thereto).
11. Representations and Indemnities to Survive. The respective agreements,
-------------------------------------------
representations, warranties, indemnities and other statements of the Company or
its officers, of each Selling Stockholder and of the Underwriters set forth in
or made pursuant to this Agreement will remain in full force and effect,
regardless of any investigation made by or on behalf of any Underwriter, any
Selling Stockholder or the Company or any of the officers, directors or
controlling persons referred to in Section 8 hereof, and will survive delivery
of and payment for the Securities. The provisions of Sections 7 and 8 hereof
shall survive the termination or cancellation of this Agreement.
30
<PAGE>
12. Notices. All communications hereunder will be in writing and
--------
effective only on receipt, and, if sent to the Representatives, will be mailed,
delivered or telefaxed to the Salomon Smith Barney Inc. General Counsel (fax
no.: (212) 816-7912) and confirmed to Salomon Smith Barney Inc. at 7 World
Trade Center, New York, New York, 10048, Attention: General Counsel; or, if sent
to the Company, will be mailed, delivered or telefaxed to (714) 427-3013 and
confirmed to it at (714) 427-3000, attention of the Legal Department; or if sent
to any Selling Stockholder, will be mailed, delivered or telefaxed and confirmed
to it at the address set forth in Schedule II hereto.
13. Successors. This Agreement will inure to the benefit of and be
-----------
binding upon the parties hereto and their respective successors and the officers
and directors and controlling persons referred to in Section 8 hereof, and no
other person will have any right or obligation hereunder.
14. Applicable Law. This Agreement will be governed by and construed in
---------------
accordance with the laws of the State of New York applicable to contracts made
and to be performed within the State of New York.
15. Counterparts. This Agreement may be signed in one or more
------------
counterparts, each of which shall constitute an original and all of which
together shall constitute one and the same agreement.
16. Headings. The section headings used herein are for convenience only
---------
and shall not affect the construction hereof.
17. Definitions. The terms which follow, when used in this Agreement,
------------
shall have the meanings indicated.
"Act" shall mean the Securities Act of 1933, as amended, and the rules and
regulations of the Commission promulgated thereunder.
"Business Day" shall mean any day other than a Saturday, a Sunday or a
legal holiday or a day on which banking institutions or trust companies are
authorized or obligated by law to close in New York City.
"Commission" shall mean the Securities and Exchange Commission.
"Effective Date" shall mean each date and time that the Registration
Statement, any post-effective amendment or amendments thereto and any Rule
462(b) Registration Statement became or become effective.
"Exchange Act" shall mean the Securities Exchange Act of 1934, as amended,
and the rules and regulations of the Commission promulgated thereunder.
"Execution Time" shall mean the date and time that this Agreement is
executed and delivered by the parties hereto.
31
<PAGE>
"Preliminary Prospectus" shall mean any preliminary prospectus referred to
in paragraph 1(i)(a) above and any preliminary prospectus included in the
Registration Statement at the Effective Date that omits Rule 430A Information.
"Prospectus" shall mean the prospectus relating to the Securities that is
first filed pursuant to Rule 424(b) after the Execution Time or, if no filing
pursuant to Rule 424(b) is required, shall mean the form of final prospectus
relating to the Securities included in the Registration Statement at the
Effective Date.
"Registration Statement" shall mean the registration statement referred to
in paragraph 1(i)(a) above, including exhibits and financial statements, as
amended at the Execution Time (or, if not effective at the Execution Time, in
the form in which it shall become effective) and, in the event any post-
effective amendment thereto or any Rule 462(b) Registration Statement becomes
effective prior to the Closing Date, shall also mean such registration statement
as so amended or such Rule 462(b) Registration Statement, as the case may be.
Such term shall include any Rule 430A Information deemed to be included therein
at the Effective Date as provided by Rule 430A.
"Rule 424", "Rule 430A" and "Rule 462" refer to such rules under the Act.
"Rule 430A Information" shall mean information with respect to the
Securities and the offering thereof permitted to be omitted from the
Registration Statement when it becomes effective pursuant to Rule 430A.
"Rule 462(b) Registration Statement" shall mean a registration statement
and any amendments thereto filed pursuant to Rule 462(b) relating to the
offering covered by the registration statement referred to in Section 1(a)
hereof.
32
<PAGE>
If the foregoing is in accordance with your understanding of our agreement,
please sign and return to us the enclosed duplicate hereof, whereupon this
letter and your acceptance shall represent a binding agreement among the Company
and the several Underwriters.
Very truly yours,
CORINTHIAN COLLEGES, INC.
By:
--------------------------------------
Name:
---------------------------------
Title:
--------------------------------
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
By:
----------------------------------------
Name:
----------------------------------
Title:
---------------------------------
------------------------------------------
David Moore
------------------------------------------
Paul St. Pierre
------------------------------------------
Lloyd Holland
------------------------------------------
Frank McCord
------------------------------------------
Dennis Devereux
33
<PAGE>
The foregoing Agreement is hereby
confirmed and accepted as of the
date first above written.
Salomon Smith Barney Inc.
Credit Suisse First Boston Corporation
Piper Jaffray Inc.
By: Salomon Smith Barney Inc.
By:
-----------------------------------
Name:
Title:
For themselves and the other
several Underwriters named in
Schedule I to the foregoing
Agreement.
34
<PAGE>
SCHEDULE I
----------
Number of Underwritten
Securities to be
Underwriters Purchased
- ------------ ---------
Salomon Smith Barney Inc. ___________________
Credit Suisse First Boston Corporation ___________________
Piper Jaffray Inc. ___________________
_________________________ ___________________
_________________________ ___________________
_________________________ ___________________
_________________________ ___________________
_________________________ ___________________
_________________________ ___________________
_________________________ ___________________
TOTAL 2,700,000
=========
<PAGE>
SCHEDULE II
-----------
SELLING STOCKHOLDERS
<TABLE>
<CAPTION>
Maximum Number of Option
Executive Selling Stockholders Securities to be Sold
- ------------------------------ ---------------------
<S> <C>
David Moore ______
Paul St. Pierre ______
Lloyd Holland ______
Frank McCord ______
Dennis Devereux ______
c/o Corinthian Colleges, Inc.
6 Hutton Centre Drive, Suite 400
Santa Ana, CA 92707-5765
Facsimile: (714) 427-3013
Prudential
- ----------
The Prudential Insurance Company of America
4 Embarcadero Center
Suite 2700
San Francisco, CA 94111
Attn: James F. Evert
Facsimile: 415-296-5661 _______
TOTAL 405,000
=======
</TABLE>
<PAGE>
ANNEX A
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------
Qualification as a Foreign
Subsidiary Incorporation Corporation
- ------------------------------------------------------------------------------
<S> <C> <C>
Corinthian Schools, Inc.
- ------------------------------------------------------------------------------
Rhodes Colleges, Inc.
- ------------------------------------------------------------------------------
Florida Metropolitan
University, Inc.
- ------------------------------------------------------------------------------
Rhodes Business Group, Inc.
- ------------------------------------------------------------------------------
Corinthian Property Group,
Inc.
- ------------------------------------------------------------------------------
<CAPTION>
- ------------------------------------------------------------------------------
Qualification as a Foreign
Company Incorporation Corporation
- ------------------------------------------------------------------------------
<S> <C> <C>
- ------------------------------------------------------------------------------
Corinthian Colleges, Inc. Delaware
- ------------------------------------------------------------------------------
</TABLE>
<PAGE>
EXHIBIT A
[Form of Lock-Up Agreement]
[Letterhead of officer, director or major stockholder of
Corinthian Colleges, Inc.]
Corinthian Colleges, Inc.
-------------------------
Public Offering of Common Stock
-------------------------------
________________, 1999
Salomon Smith Barney Inc.
Credit Suisse First Boston Corporation
Piper Jaffray Inc.
As Representatives of the several Underwriters,
c/o Salomon Smith Barney Inc.
388 Greenwich Street
New York, New York 10013
Ladies and Gentlemen:
This letter is being delivered to you in connection with the proposed
Underwriting Agreement (the "Underwriting Agreement"), between Corinthian
Colleges, Inc., a Delaware corporation (the "Company"), and each of you as
representatives of a group of Underwriters named therein, relating to an
underwritten public offering of Common Stock, $0.0001 par value (the "Common
Stock"), of the Company.
In order to induce you and the other Underwriters to enter into the
Underwriting Agreement, the undersigned will not, without the prior written
consent of Salomon Smith Barney Inc., offer, sell, contract to sell, pledge or
otherwise dispose of, or file (or participate in the filing of) a registration
statement with the Securities and Exchange Commission in respect of, or
establish or increase a put equivalent position or liquidate or decrease a call
equivalent position within the meaning of Section 16 of the Securities Exchange
Act of 1934, as amended, and the rules and regulations of the Securities and
Exchange Commission promulgated thereunder with respect to, any shares of
capital stock of the Company or any securities convertible into or exercisable
or exchangeable for such capital stock, or publicly announce an intention to
effect any such transaction, for a period of 180 days after the date of this
Agreement, other than shares of Common Stock disposed of as bona fide gifts
approved by Salomon Smith Barney Inc.*
<PAGE>
If for any reason the Underwriting Agreement shall be terminated prior to
the Closing Date (as defined in the Underwriting Agreement), the agreement set
forth above shall likewise be terminated.
Yours very truly,
[Name]
[Address]
* The actual Lock-Up Agreement executed by Prudential shall include the
following:
Notwithstanding the foregoing, nothing herein shall prohibit Prudential from
effecting, after the lapse of 90 days from the date hereof, a private sale of
shares of Common Stock to an institutional investor, in accordance with
applicable federal and state securities laws, as long as such institutional
investor, prior to or concurrently with such sale, executes an agreement
providing that such institutional investor shall be subject to the restrictions
set forth in the preceding sentence for the remainder of such 180 day period.
<PAGE>
EXHIBIT 3.3
FORM OF
RESTATED CERTIFICATE OF INCORPORATION OF
CORINTHIAN COLLEGES, INC.
Article I: Name
----
The name of this corporation (the "Corporation") is Corinthian
Colleges, Inc.
Article II: Registered Office
-----------------
The address of the registered office of the Corporation in the State
of Delaware is 1013 Centre Road, in the City of Wilmington, County of New
Castle, and the name of its registered agent at that address is Corporate
Agents, Inc.
Article III: Purpose
-------
The purpose of the Corporation is to engage in any lawful act or
activity for which corporations may be organized under the General Corporation
Law of Delaware.
Article IV: Capital Stock
-------------
A. Authorized Stock
----------------
The total number of shares of capital stock which the Corporation has
authority to issue is 43,000,000 shares, consisting of:
(1) 500,000 shares of Preferred Stock, par value $1.00 per share (the
"Preferred Stock");
(2) 40,000,000 shares of Common Stock, par value $.0001 per share (the
"Common Stock"); and
(3) 2,500,000 shares of Nonvoting Common Stock, par value $.0001 per
share (the "Nonvoting Common Stock").
The Common Stock and the Nonvoting Common Stock are hereafter
collectively referred to as the "Classes of Common Stock."
Immediately upon the effectiveness of this Restated Certificate of
Incorporation, (i) each outstanding share of the Corporation's Class A Common
Stock, par value $.01 per share, shall without further action by the Corporation
or the holder thereof be reclassified, changed and converted into 44.094522
shares of Common Stock, par value $.0001 per share, and (ii) each outstanding
share of the Corporation's Class B Common Stock, par value $.01 per share, shall
without further action by the Corporation or the holder thereof be reclassified,
changed and converted into 44.094522 shares of Nonvoting Common Stock, par value
$.0001 per share.
1
<PAGE>
B. Preferred Stock
---------------
Shares of Preferred Stock may be issued from time to time in one or
more series. The Board of Directors of the Corporation is hereby authorized to
determine and alter all rights, preferences, privileges and qualifications,
limitations and restrictions thereof (including, without limitation, voting
rights and the limitation and exclusion thereof) granted to or imposed upon any
wholly unissued series of Preferred Stock and the number of shares constituting
any such series and the designation thereof, and to increase or decrease (but
not below the number of shares of such series then outstanding) the number of
shares of any series subsequent to the issue of shares of that series then
outstanding. In the event that the number of shares of any series is so
decreased, the shares constituting such reduction shall resume the status which
such shares had prior to the adoption of the resolution originally fixing the
number of shares of such series.
Pursuant to the provisions of this Article IV, there is hereby created
a series of Preferred Stock designated as "Class A Series 1 Preferred Stock"
consisting of 18,125 shares (the "Series 1 Preferred"), a series of Preferred
Stock designated as "Class A Series 2 Preferred Stock" consisting of 25,000
shares (the "Series 2 Preferred"), and a series of Preferred Stock designated as
"Class A Series 3 Preferred Stock" consisting of 25,000 shares (the "Series 3
Preferred" and together with the Series 2 Preferred, the "Convertible
Preferred"), in each case having designations, powers, rights and preferences as
follows (the Series 1 Preferred, Series 2 Preferred and the Series 3 Preferred
collectively referred to herein as the "Class A Preferred"):
Section 1. Dividends.
----------
1A. General Obligation. When and as declared by the Corporation's
Board of Directors and to the extent permitted under the General
Corporation Law of Delaware, the Corporation shall pay preferential
dividends to the holders of the Class A Preferred as provided in this
Section 1. Except as otherwise provided herein, dividends on each share of
the Series 1 Preferred shall accrue on a daily basis at the rate of 6% per
annum until June 30, 2002 and 12% per annum thereafter of the sum of the
Liquidation Value thereof plus all accumulated and unpaid dividends
thereon, from and including the date of issuance to and including the date
on which the Liquidation Value of such share of Series 1 Preferred (plus
all accrued and unpaid dividends thereon) is paid. Except as otherwise
provided herein, dividends on each share of the Convertible Preferred shall
accrue on a daily basis at the rate of 8% per annum of the sum of the
Liquidation Value thereof plus all accumulated and unpaid dividends
thereon, from and including the date of issuance to and including the first
to occur of (i) the date on which the Liquidation Value of such share of
Convertible Preferred (plus all accrued and unpaid dividends thereon) is
paid to the holder thereof in connection with the liquidation of the
Corporation or the redemption of such share by the Corporation, (ii) the
date on which such share of Convertible Preferred is converted into shares
of Conversion Stock hereunder or (iii) the date on which such share of
Convertible Preferred is otherwise acquired by the Corporation. Such
dividends shall accrue whether or not they have been declared and whether
or not there are profits, surplus or other funds of the Corporation legally
available for the payment of dividends. Such dividends shall be cumulative
such that all accrued and unpaid dividends shall be fully paid or declared
with funds irrevocably set apart for payment before any dividend,
distribution or payment may be made with respect to any
2
<PAGE>
Junior Securities. The date on which the Corporation initially issues any
share of Class A Preferred (a "Share") shall be deemed to be its "date of
issuance" regardless of the number of times transfer of such Share is made
on the stock records maintained by or for the Corporation and regardless of
the number of certificates which may be issued to evidence such Share.
1B. Dividend Reference Dates. To the extent not paid on March 31,
------------------------
June 30, September 30 and December 31 of each year, beginning September 30,
1995 (the "Dividend Reference Dates"), all dividends which have accrued on
each Share outstanding during the three-month period (or other period in
the case of the initial Dividend Reference Date) ending upon each such
Dividend Reference Date shall be accumulated and shall remain accumulated
dividends with respect to such Share until paid.
1C. Distribution of Partial Dividend Payments. Except as otherwise
-----------------------------------------
provided herein, if at any time the Corporation pays less than the total
amount of dividends then accrued with respect to the Class A Preferred,
such payment shall be distributed ratably among the holders of the Class A
Preferred based upon the aggregate accrued but unpaid dividends on the
Shares held by each such holder.
1D. Participating Dividends. In addition to the dividends accruing
-----------------------
on the Convertible Preferred under paragraph 1A above, in the event that
the Corporation declares or pays any dividends upon the Classes of Common
Stock (whether payable in cash, securities or other property) other than
dividends payable solely in shares of the Classes of Common Stock, the
Corporation shall also declare and pay to the holders of the Convertible
Preferred at the same time that it declares and pays such dividends to the
holders of the Classes of Common Stock, the dividends which would have been
declared and paid with respect to the Classes of Common Stock issuable upon
conversion of the Convertible Preferred had all of the outstanding
Convertible Preferred been converted immediately prior to the record date
for such dividend, or if no record date is fixed, the date as of which the
record holders of the Classes of Common Stock entitled to such dividends
are to be determined.
Section 2. Liquidation. Upon any liquidation, dissolution or winding up
-----------
of the Corporation, each holder of Series 1 Preferred shall be entitled to be
paid, pari passu with the holders of the Convertible Preferred pursuant to
clause (a) below and before any distribution or payment is made upon any Junior
Securities, an amount in cash equal to the aggregate Liquidation Value (plus all
accrued and unpaid dividends) of all shares of Series 1 Preferred held by such
holder, and the holders of Series 1 Preferred shall not be entitled to any
further payment. Upon any liquidation, dissolution or winding up of the
Corporation, each holder of Convertible Preferred shall be entitled to be paid
the greater of (a) an amount in cash equal to the aggregate Liquidation Value
(plus all accrued and unpaid dividends) of all Shares of Convertible Preferred
held by such holder, pari passu with the holders of the Series 1 Preferred and
before any distribution or payment is made upon any Junior Securities or (b) the
amount that such holder of the Convertible Preferred would receive on an "as if"
converted basis with the holders of the Classes of Common Stock as a single
class in the distribution of assets of the Corporation with respect to the
Classes of Common Stock after payment of all amounts to the holders of Series 1
3
<PAGE>
Preferred pursuant to this Section 2, and the holders of Convertible Preferred
shall not be entitled to any further payment. If upon any such liquidation,
dissolution or winding up of the Corporation, the Corporation's assets to be
distributed among the holders of the Class A Preferred are insufficient to
permit payment to such holders of the aggregate amount which they are entitled
to be paid, then the entire assets to be distributed shall be distributed
ratably among such holders based upon the aggregate Liquidation Value (plus all
accrued and unpaid dividends) of the Class A Preferred held by each such holder.
The Corporation shall mail written notice of such liquidation, dissolution or
winding up, not less than 60 days prior to the payment date stated therein, to
each record holder of Class A Preferred. Neither the consolidation or merger of
the Corporation into or with any other entity or entities, nor the sale or
transfer by the Corporation of all or any part of its assets, nor the reduction
of the capital stock of the Corporation, shall be deemed to be a liquidation,
dissolution or winding up of the Corporation within the meaning of this Section
2.
Section 3. Priority of Class A Preferred. So long as any Class A Preferred
-----------------------------
remains outstanding, neither the Corporation nor any Subsidiary shall redeem,
purchase or otherwise acquire directly or indirectly any Junior Securities, nor
shall the Corporation directly or indirectly pay or declare any dividend or make
any distribution upon any Junior Securities; provided that the Corporation may
purchase shares of either of the Classes of Common Stock from present or former
employees of the Corporation and its Subsidiaries in accordance with the
provisions of the Executive Stock Agreement so long as no Event of Noncompliance
is in existence at the time of or immediately after such purchase.
Section 4. Redemptions.
-----------
4A. Scheduled Redemptions of Series 1 Preferred; Optional
-----------------------------------------------------
Redemption by the Holders of the Series 1 Preferred. The Corporation shall
---------------------------------------------------
redeem all outstanding Shares of Series 1 Preferred on October 31, 2005
(the "Scheduled Redemption Date") at a price per Share equal to the
Liquidation Value thereof (plus all accrued and unpaid dividends thereon).
At any time and from time to time after June 30, 2001, the holders of a
majority of the outstanding Shares of Series 1 Preferred may request
redemption of all or any portion of their Shares of Series 1 Preferred by
delivering written notice of such request to the Corporation; provided that
such redemption would not conflict with the terms of or constitute a
default or event of default under the Note Agreement or the Sub-Debt
Agreement. Within five days after receipt of such request, the Corporation
shall give written notice of such request to all other holders of Series 1
Preferred, and such other holders may request redemption of all or any
portion of their Shares of Series 1 Preferred by delivering written notice
to the Corporation within ten days after receipt of the Corporation's
notice. The Corporation shall be required to redeem all Shares with respect
to which such redemption requests have been made pursuant to this paragraph
4A which would not conflict with the terms of or constitute a default or
event of default under the Note Agreement or the Sub-Debt Agreement at a
price per Share equal to the Liquidation Value thereof (plus all accrued
and unpaid dividends thereon) within 60 days after receipt of the initial
redemption request therefor. No redemptions pursuant to this paragraph 4A
shall be requested for less than an aggregate of 100 Shares (or such lesser
number of Shares of Series 1 Preferred then outstanding), and redemptions
made
4
<PAGE>
pursuant to this paragraph shall not relieve the Corporation of its obligation
to redeem Shares of the Series 1 Preferred on the Scheduled Redemption Date.
4B. Optional Redemptions by the Corporation of Series 1 Preferred. The
-------------------------------------------------------------
Corporation may at any time, and from time to time, redeem all or any portion of
the Series 1 Preferred then outstanding. In connection with any such
redemption, the Corporation shall pay a price per Share equal to the Liquidation
Value thereof (plus all accrued and unpaid dividends thereon) if such redemption
would not conflict with the terms of or constitute a default or event of default
under the Note Agreement or the Sub-Debt Agreement. No redemption pursuant to
this paragraph may be made for less than 100 Shares (or such lesser number of
Shares of Series 1 Preferred then outstanding), and redemptions made pursuant to
this paragraph shall not relieve the Corporation of its obligation to redeem
Shares of the Series 1 Preferred on the Scheduled Redemption Date.
4C. Redemption of Series 1 Preferred After Public Offering. The
------------------------------------------------------
Corporation shall, at the request (by written notice given to the Corporation)
of the holders of a majority of the Series 1 Preferred, apply the net cash
proceeds from any Public Offering remaining after deduction of all discounts,
underwriters' commissions and other reasonable expenses to redeem Shares of
Series 1 Preferred at a price per Share equal to the Liquidation Value thereof
(plus all accrued and unpaid dividends thereon) if such redemption would not
conflict with the terms of or constitute a default or event of default under the
Note Agreement or the Sub-Debt Agreement. Such redemption shall take place on a
date fixed by the Corporation, which date shall be not more than five days after
the Corporation's receipt of such proceeds. Redemptions of Shares of Series 1
Preferred pursuant to this paragraph shall not relieve the Corporation of its
obligation to redeem Shares of Series 1 Preferred on the Scheduled Redemption
Date.
4D. Optional Redemptions by the Holders of Convertible Preferred. At any
------------------------------------------------------------
time and from time to time after June 30, 2001, the holders of a majority of the
outstanding Convertible Preferred may request redemption of all or any portion
of their Shares of Convertible Preferred by delivering written notice of such
request to the Corporation; provided that in no event will the Corporation
redeem Shares of Convertible Preferred in connection with such request having a
Liquidation Value in excess of $4,000,000 (the "Optional Redemption Limit") and
in no event will the Corporation redeem Shares of Convertible Preferred in
connection with such request if such redemption would conflict with the terms of
or constitute a default or event of default under the Note Agreement or the Sub-
Debt Agreement. Within five days after receipt of such request, the Corporation
shall give written notice of such request to all other holders of Convertible
Preferred, and such other holders may request redemption of all or any portion
of their Shares of Convertible Preferred by delivering written notice to the
Corporation within ten days after receipt of the Corporation's notice. If the
Liquidation Value of the Shares requested to be included in such redemption
exceeds the Optional Redemption Limit, the Corporation shall include in such
redemption the number of Shares requested to be included pro rata among the
respective holders thereof based upon the aggregate Liquidation Value of such
Shares (plus all accrued and unpaid dividends thereon) held by such holder. At
any time and from time to time after October 17, 2004, the holders of a majority
of the outstanding Convertible Preferred may request
5
<PAGE>
redemption of all or any portion of the remaining Shares of Convertible
Preferred by delivering written notice of such request to the Corporation if
such redemption would not conflict with the terms of or constitute a default or
event of default under the Note Agreement or the Sub-Debt Agreement. Within five
days after receipt of such request, the Corporation shall give written notice of
such request to all other holders of Convertible Preferred, and such other
holders may request redemption of all or any portion of their Shares of
Convertible Preferred by delivering written notice to the Corporation within ten
days after receipt of the Corporation's notice. The Corporation shall be
required to redeem all Shares with respect to which such redemption requests
have been made pursuant to this paragraph 4D at a price per Share equal to the
Liquidation Value thereof (plus all accrued and unpaid dividends thereon) within
60 days after receipt of the initial redemption request therefor. No redemptions
pursuant to this paragraph 4D shall be requested for less than an aggregate of
100 Shares (or such lesser number of Shares of Convertible Preferred then
outstanding), and redemptions pursuant to this paragraph 4D shall not relieve
the Corporation of its obligation to redeem Shares pursuant to paragraph 4K
below.
4E. Redemption Payment. For each Share which is to be redeemed, the
------------------
Corporation shall be obligated on the Redemption Date to pay to the holder
thereof (upon surrender by such holder at the Corporation's principal office of
the certificate representing such Share) an amount in immediately available
funds equal to the Liquidation Value of such Share (plus all accrued and unpaid
dividends thereon). If the funds of the Corporation legally available for
redemption of Share on any Redemption Date are insufficient to redeem the total
number of Shares to be redeemed on such date, those funds which are legally
available shall be used to redeem the maximum possible number of Shares ratably
among the holders of the Shares to be redeemed based upon the aggregate
Liquidation Value of such Shares (plus all accrued and unpaid dividends thereon)
held by each such holder. At any time thereafter when additional funds of the
Corporation are legally available for the redemption of Shares, such funds shall
immediately be used to redeem the balance of the Shares which the Corporation
has become obligated to redeem on any Redemption Date but which it has not
redeemed.
4F. Notice of Redemption. Except as otherwise provided herein, the
--------------------
Corporation shall mail written notice of each redemption of the Class A
Preferred to each record holder of the Class A Preferred not more than 60 nor
less than 10 days prior to the date on which such redemption is to be made. Upon
mailing any notice of redemption which relates to a redemption at the
Corporation's option, the Corporation shall become obligated to redeem the total
number of Shares specified in such notice at the time of redemption specified
therein. In case fewer than the total number of Shares represented by any
certificate are redeemed, a new certificate representing the number of
unredeemed Shares shall be issued to the holder thereof without cost to such
holder within three business days after surrender of the certificate
representing the redeemed Shares.
4G. Determination of the Number of Each Holder's Shares to be Redeemed.
------------------------------------------------------------------
Except as otherwise proved herein, the number of Shares of Class A Preferred to
be redeemed from each holder thereof in redemptions hereunder shall be the
number of Shares determined by multiplying the total number of Shares to be
redeemed times a
6
<PAGE>
fraction, the numerator of which shall be the aggregate Liquidation Value (plus
all accrued but unpaid dividends thereon) of all Shares then held by such holder
and the denominator of which shall be the aggregate Liquidation Value (plus all
accrued but unpaid dividends thereon) of all Shares then outstanding.
4H. Dividends After Redemption Date. No Share is entitled to any
-------------------------------
dividends accruing after the date on which the Liquidation Value of such Share
(plus all accrued and unpaid dividends thereon) is paid to the holder thereof.
On such date all rights of the holder of such Share shall cease, and such Share
shall not be deemed to be outstanding.
4I. Redeemed or Otherwise Acquired Shares. Any Shares which are
-------------------------------------
redeemed or otherwise acquired by the Corporation shall be canceled and shall
not be reissued, sold or transferred.
4J. Other Redemptions or Acquisitions. Neither the Corporation nor any
---------------------------------
Subsidiary shall redeem or otherwise acquire any Class A Preferred, except as
expressly authorized herein.
4K. Special Redemptions.
-------------------
(i) If a Change in Ownership has occurred or the Corporation obtains
knowledge that a Change in Ownership is to occur, the Corporation shall
give prompt written notice of such Change in Ownership describing in
reasonable detail the definitive terms and date of consummation thereof to
each holder of Class A Preferred, but in any event such notice shall not be
given later than five days after the occurrence of such Change in
Ownership. The holder or holders of a majority of the Class A Preferred
then outstanding may require the Corporation to redeem all or any portion
of the Class A Preferred owned by such holder or holders at a price per
Share equal to the Liquidation Value thereof (plus all accrued and unpaid
dividends thereon) by giving written notice to the Corporation of such
election prior to the later of (a) 21 days after receipt of the
Corporation's notice and (b) five days prior to the consummation of the
Change in Ownership (the "Expiration Date"). The Corporation shall give
prompt written notice of any such election to all other holders of Class A
Preferred within five days after the receipt thereof, and each such holder
shall have until the later of (a) the Expiration Date or (b) 10 days after
receipt of such second notice to request redemption (by giving written
notice to the Corporation) of all or any portion of the Class A Preferred
owed by such holder. Upon receipt of such election(s), the Corporation
shall be obligated to redeem the aggregate number of Shares specified
therein on the later of (a) the occurrence of the Change in Ownership or
(b) five days after the Corporation's receipt of such election(s). If in
any case a proposed Change in Ownership does not occur, all requests for
redemption in connection therewith shall be automatically rescinded. The
term "Change in Ownership" means any sale or issuance or series of sales
and/or issuances of shares of the Classes of Common Stock by the
Corporation or any holders thereof which results in any Person or group of
affiliated Persons (other than the owners of the Classes of Common Stock as
of the filing of the Restated Certificate of
7
<PAGE>
Incorporation, filed with the Secretary of State of the State of Delaware
on November 21, 1997) owning more than 50% of the Classes of Common Stock
outstanding at the time of such sale or issuance or series of sales and/or
issuances.
(ii) If a Fundamental Change is proposed to occur, the Corporation
shall give written notice of such Fundamental Change describing in
reasonable detail the definitive terms and date of consummation thereof to
each holder of Class A Preferred not more than 45 days nor less than 10
days prior to the consummation thereof. The holder or holders of a majority
of the Class A Preferred then outstanding may require the Corporation to
redeem all or any portion of the Class A Preferred owned by such holder or
holders at a price per share equal to the Liquidation Value thereof (plus
all accrued and unpaid dividends thereon) by giving written notice to the
Corporation of such election prior to the later of (a) 10 days prior to
consummation of the Fundamental Change or (b) 10 days after receipt of
notice from the Corporation. The Corporation shall give prompt written
notice of such election to all other holders of Class A Preferred (but in
any event within five days prior to the consummation of the Fundamental
Change), and each such holder shall have until two days after the receipt
of such notice to request redemption (by written notice given to the
Corporation) of all or any portion of the Class A Preferred owned by such
holder. Upon receipt of such election(s), the Corporation shall be
obligated to redeem the aggregate number of Shares specified therein upon
the consummation of such Fundamental Change. If any proposed Fundamental
Change does not occur, all requests for redemption in connection therewith
shall be automatically rescinded. The term "Fundamental Change" means (a) a
sale or transfer of more than 50% of the assets of the Corporation and its
Subsidiaries on a consolidated basis (measured by either book value in
accordance with generally accepted accounting principles consistently
applied or fair market value determined in the reasonable good faith
judgment of the Corporation's Board of Directors) in any transaction or
series of transactions (other than sales in the ordinary course of
business) and (b) any merger or consolidation to which the Corporation is a
party, except for a merger in which the Corporation is the surviving
corporation and, after giving effect to such merger, the holders of the
Corporation's outstanding capital stock possessing the voting power (under
ordinary circumstances) to elect a majority of the Corporation's board of
directors immediately prior to the merger shall own the Corporation's
outstanding capital stock possessing the voting power (under ordinary
circumstances) to elect a majority of the Corporation's Board of Directors.
(iii) Redemptions made pursuant to this paragraph 4K shall not relieve
the Corporation of its obligation to redeem Series 1 Preferred on the
Scheduled Redemption Date pursuant to paragraph 4A hereof.
Section 5. Events of Noncompliance.
-----------------------
5A. Definition. An "Event of Noncompliance" shall be deemed to have
----------
occurred if:
8
<PAGE>
(i) the Corporation (a) fails to pay on any Dividend Reference Date
(beginning with the Dividend Reference Date on December 31, 1998) the full
amount of dividends then accrued on the Series 1 Preferred, whether or not
such payment is legally permissible or is prohibited by any agreement to
which the Corporation is subject or (b) fails to pay on any Dividend
Reference Date (beginning with the Dividend Reference Date on December 31,
1998) the full amount of dividends then accrued on the Convertible
Preferred, whether or not such payment is legally permissible or is
prohibited by any agreement to which the Corporation is subject;
(ii) the Corporation fails to make any redemption payment with
respect to the Class A Preferred which it is obligated to make hereunder,
whether or not such payment is legally permissible or is prohibited by any
agreement to which the Corporation is subject;
(iii) the Corporation breaches or otherwise fails to perform or
observe any other covenant or agreement set forth herein or in the Purchase
Agreements or the Registration Agreement;
(iv) any representation or warranty contained in the Purchase
Agreements or required to be furnished to any holder of Class A Preferred
pursuant to the Purchase Agreements, or any information contained in
writing furnished by the Corporation or any Subsidiary to any holder of
Class A Preferred, is false or misleading in any material respect on the
date made or furnished;
(v) the Corporation or any Subsidiary makes an assignment for the
benefit of creditors or admits in writing its ability to pay its debts
generally as they become due; or any order, judgment or decree is entered
adjudicating the Corporation or any Subsidiary bankrupt or insolvent; or
any order for relief with respect to the Corporation or any Subsidiary is
entered under the Federal Bankruptcy Code; or the Corporation or any
Subsidiary petitions or applies to any tribunal for the appointment of a
custodian, trustee, receiver or liquidator of the Corporation or any
Subsidiary or of any substantial part of the assets of the Corporation or
any Subsidiary, or commences any proceeding (other than a proceeding for
the voluntary liquidation and dissolution of a Subsidiary) relating to the
Corporation or any Subsidiary under any bankruptcy, reorganization,
arrangement, insolvency, readjustment of debt, dissolution or liquidation
law of any jurisdiction; or any such petition or application is filed, or
any such proceeding is commenced, against the Corporation of any Subsidiary
and either (a) the Corporation or any such Subsidiary by any act indicates
its approval thereof, consent thereto or acquiescence therein or (b) such
petition, application or proceeding is not dismissed within 60 days;
(vi) a judgment in excess of $50,000 is rendered against the
Corporation or any Subsidiary and, within 60 days after entry thereof, such
9
<PAGE>
judgment is not discharged or execution thereof stayed pending appeal, or
within 60 days after the expiration of any such stay, such judgment is not
discharged;
(vii) the Corporation or any Subsidiary defaults in the performance
of any obligation or agreement if the effect of such default is to cause an
amount exceeding $50,000 to become due prior to its stated maturity or to
permit the holder or holders of any obligation to cause an amount exceeding
$50,000 to become due prior to its stated maturity; or
(viii) any of the provisions of the Executive Stock Agreements that
are for the benefit of the "Investors" (as such term is defined therein)
are violated by any of the "Executives" (as such term is defined therein).
Notwithstanding the foregoing, the foregoing clauses (i) through (iv) and (vi)
through (viii) of this paragraph 5A shall not be deemed Events of Non-Compliance
so long as the "Debt" (as defined in the Note Agreement) in outstanding
----
principal amounts, plus amounts which the Corporation is permitted to borrow
thereunder, aggregate to at least $2.5 million).
5B. Consequences of Events of Noncompliance.
---------------------------------------
(i) If any Event of Noncompliance has occurred, the holder or
holders of a majority of the Class A Preferred then outstanding may demand
(by written notice delivered to the Corporation) immediate redemption of
all or any portion of the Class A Preferred owned by such holder or holders
at a price per Share equal to the Liquidation Value thereof (plus all
accrued and unpaid dividends thereon). The Corporation shall give prompt
written notice of such election to the other holders of Class A Preferred
(but in any event within five days after receipt of the initial demand for
redemption), and each such other holder may demand immediate redemption of
all or any portion of such holder's Class A Preferred by giving written
notice thereof to the Corporation within seven days after receipt of the
Corporation's notice. The Corporation shall redeem all Class A Preferred as
to which rights under this paragraph have been exercised within 15 days
after receipt of the initial demand for redemption.
(ii) If any Event of Noncompliance exists, each holder of Class A
Preferred shall also have any other rights which such holder is entitled to
under any contract or agreement at any time and any other rights which such
holder may have pursuant to applicable law.
Section 6. Conversion.
----------
6A. Conversion Procedure.
--------------------
(i) At any time and from time to time, any holder of Convertible
Preferred may convert all or any portion of the Convertible Preferred held
by such holder into a number of shares of Conversion Stock computed by
multiplying the
10
<PAGE>
number of Shares to be converted by $100 and dividing the result by the
Conversion Price then in effect.
(ii) Except as otherwise provided herein, each conversion of
Convertible Preferred shall be deemed to have been effected as of the close
of business on the date on which the certificate or certificates
representing the Convertible Preferred to be converted have been
surrendered for conversion at the principal office of the Corporation. At
the time any such conversion has been effected, the rights of the holder of
the Shares converted as a holder of Convertible Preferred shall cease and
the Person or Persons in whose name or names any certificate or
certificates for shares of Conversion Stock are to be issued upon such
conversion shall be deemed to have become the holder or holders of record
of the shares of Conversion Stock represented thereby.
(iii) The conversion rights of any Share subject to redemption
hereunder shall terminate on the Redemption Date for such Share unless the
Corporation has failed to pay to the holder thereof the Liquidation Value
of such Share (plus all accrued and unpaid dividends thereon).
(iv) Notwithstanding any other provision hereof, if a conversion of
Convertible Preferred is to be made in connection with a Public Offering, a
Change in Ownership, a Fundamental Change or other transaction affecting
the Corporation, the conversion of any Shares of Convertible Preferred may,
at the election of the holder thereof, be conditioned upon the consummation
of such transaction, in which case such conversion shall not be deemed to
be effective until immediately prior to the consummation of such
transaction.
(v) As soon as possible after a conversion has been effected (but in
any event within five business days in the case of subparagraph (a) below),
the Corporation shall deliver to the converting holder:
(a) a certificate or certificates representing the number of
shares of Conversion Stock issuable by reason of such conversion in
such name or names and such denomination or denominations as the
converting holder has specified;
(b) payment in an amount equal to all accrued dividends with
respect to each Share converted which have not been paid prior thereto
in accordance with the provisions of subparagraph (vi) below, plus the
amount payable under subparagraph (x) below with respect to such
conversion; and
(c) a certificate representing any Shares of Convertible
Preferred which were represented by the certificate or certificates
delivered to the Corporation in connection with such conversion but
which were not converted.
11
<PAGE>
(vi) If the Corporation is not permitted under applicable law
to pay any portion of the accrued and unpaid dividends on the
Convertible Preferred being converted, the Corporation shall pay such
dividends to the converting holder as soon thereafter as funds of the
Corporation are legally available for such payment. At the request of
any such converting holder, the Corporation shall provide such holder
with written evidence of its obligation to such holder.
Notwithstanding the foregoing provisions of this subparagraph (vi), if
for any reason the Corporation is unable to pay any portion of the
accrued and unpaid dividends on Convertible Preferred being converted,
such dividends may, at the converting holder's option, be converted
into an additional number of shares of Conversion Stock determined by
dividing the amount of the unpaid dividends to be applied for such
purpose, by the Conversion Price then in effect.
(vii) The issuance of certificates for shares of Conversion
Stock upon conversion of Convertible Preferred shall be made without
charge to the holders of such Convertible Preferred for any issuance
tax in respect thereof or other cost incurred by the Corporation in
connection with such conversion and the related issuance of shares of
Conversion Stock. Upon conversion of each Share of Convertible
Preferred, the Corporation shall take all such actions as are
necessary in order to ensure that the Conversion Stock issuable with
respect to such conversion shall be validly issued, fully paid and
nonassessable, free and clear of all taxes (other than any taxes
relating to any dividends paid with respect thereto), liens, charges
and encumbrances with respect to the issuance thereof.
(viii) The Corporation shall not close its books against the
transfer of Convertible Preferred or of Conversion Stock issued or
issuable upon conversion of Convertible Preferred in any manner which
interferes with the timely conversion of Convertible Preferred. The
Corporation shall assist and cooperate with any holder of Shares
required to make any governmental filings or obtain any governmental
approval prior to or in connection with any conversion of Shares
hereunder (including, without limitation, making any filings required
to be made by the Corporation).
(ix) The Corporation shall at all times reserve and keep
available out of its authorized but unissued shares of Conversion
Stock, solely for the purpose of issuance upon the conversion of the
Convertible Preferred, such number of shares of Conversion Stock
issuable upon the conversion of all outstanding Convertible Preferred.
All shares of Conversion Stock which are so issuable shall, when
issued, be duly and validly issued, fully paid and nonassessable and
free from all taxes, liens and charges. The Corporation shall take all
such actions as may be necessary to assure that all such shares of
Conversion Stock may be so issued without violation of any applicable
law or governmental regulation or any requirements of any domestic
securities exchange upon which shares of Conversion Stock may be
listed (except for official notice of issuance which shall be
immediately delivered by the Corporation upon each such issuance). The
Corporation shall not take any action which would cause the number of
authorized but unissued shares of Conversion Stock to be less than the
number of
12
<PAGE>
such shares required to be reserved hereunder for issuance upon
conversion of the Convertible Preferred.
(x) If any fractional interest in a share of Conversion Stock
would, except for the provisions of this subparagraph, be delivered
upon any conversion of the Convertible Preferred, the Corporation, in
lieu of delivering the fractional share therefor, shall pay an amount
to the holder thereof equal to the Market Price of such fractional
interest as of the date of conversion.
(xi) If the shares of Conversion Stock issuable by reason of
conversion of Convertible Preferred are convertible into or
exchangeable for any other stock or securities of the Corporation, the
Corporation shall, at the converting holder's option, upon surrender
of the Shares to be converted by such holder as provided herein
together with any notice, statement or payment required to effect such
conversion or exchange of Conversion Stock, deliver to such holder or
as otherwise specified by such holder a certificate or certificates
representing the stock or securities into which the shares of
Conversion Stock issuable by reason of such conversion are so
convertible or exchangeable, registered in such name or names and in
such denomination or denominations as such holder has specified.
6B. Conversion Price.
----------------
(i) The initial Conversion Price shall be $254,975. In order to
prevent dilution of the conversion rights granted under this Section
6, the Conversion Price shall be subject to adjustment from time to
time pursuant to this paragraph 6B.
(ii) If and whenever after the original date of issuance of the
Convertible Preferred the Corporation issues or sells, or in
accordance with paragraph 6C is deemed to have issued or sold, any
share of the Classes of Common Stock for a consideration per share
less than the Conversion Price in effect immediately prior to such
time, then immediately upon such issue or sale or deemed issue or sale
the Conversion Price shall be reduced, except in cases where the
second sentence of subparagraph 6B(iii) is applicable or in cases
where subparagraph 6C(ix) is applicable, to the lowest net price per
share at which any such share of the Classes of Common Stock has been
issued or sold or is deemed to have been issued or sold.
(iii) For the purposes of this paragraph 6B and paragraph 6C, any
Nonvoting Common Stock purchased by the Executives pursuant to the
Executive Stock Agreements which will vest upon a Trigger Event (the
"Earnback Shares") and any of the Classes of Common Stock issuable
---------------
upon exercise of the Contingent Warrants (the "Contingent Warrant
------------------
Shares") shall not be deemed to be issued and outstanding on the date
------
of issuance of the Convertible Preferred and shall be deemed to be
issued at the time of vesting of the Earnback Shares as a result of
the occurrence of such Trigger Event. Notwithstanding anything to the
contrary set forth in this paragraph 6B or in paragraph 6C, if the
Earnback Shares
13
<PAGE>
vest and/or the Contingent Warrant Shares are issuable, the
Conversion Price shall be reduced to the Conversion Price determined
by dividing (a) the product derived by multiplying the Conversion
Price in effect immediately prior to such vesting by the number of
shares of the Classes of Common Stock Deemed Outstanding immediately
prior to such vesting by (b) the number of shares of the Classes of
Common Stock Deemed Outstanding (including Earnback Shares and shares
issuable upon exercise of the Contingent Warrants immediately after
such vesting).
(iv) In the event the Corporation shall consummate a Qualified
Initial Public Offering on or prior to October 31, 1999, the
Conversion Price shall be increased to the Conversion Price
determined by dividing:
(a) the product derived by multiplying (1) the Conversion
Price in effect immediately prior to such Qualified Initial
Public Offering by (2) the number of shares of Conversion Stock
issuable to the holders of the Convertible Preferred at the
Conversion Price in effect immediately prior to such Qualified
Initial Public Offering by
(b) the difference of (1) the number of shares of Conversion
Stock issuable to the holders of the Convertible Preferred at the
Conversion Price in effect immediately prior to such Qualified
Initial Public Offering and (2) the product derived by
multiplying the Maximum Conversion Adjustment by the Percentage
Conversion Adjustment.
6C. Effect on Conversion Price of Certain Events. For purposes of
--------------------------------------------
determining the adjusted Conversion Price under paragraph 6B, the following
shall be applicable:
(i) Issuance of Rights or Options. If the Corporation in any
-----------------------------
manner grants or sells any Option and the lowest price per share for
which any one share of the Classes of Common Stock is issuable upon
the exercise of any such Option, or upon conversion or exchange of
any Convertible Security issuable upon exercise of any such Option,
is less than the Conversion Price in effect immediately prior to the
time of the granting or sale of such Option, then such share of the
Classes of Common Stock shall be deemed to be outstanding and to have
been issued and sold by the Corporation at the time of the granting
or sale of such Option for such price per share. For purposes of this
paragraph, the "lowest price per share for which any one share of the
Classes of Common Stock is issuable" shall be equal to the sum of the
lowest amounts of consideration (if any) received or receivable by
the Corporation with respect to any one share of the Classes of
Common Stock upon the granting or sale of the Option, upon exercise
of the Option and upon conversion or exchange of any Convertible
Security issuable upon exercise of such Option. No further adjustment
of the Conversion Price shall be made upon the actual issue of such
shares of the Classes of Common Stock or such Convertible Security
upon the exercise of such Options or
14
<PAGE>
upon the actual issue of such shares of the Classes of Common Stock upon
conversion or exchange of such Convertible Security.
(ii) Issuance of Convertible Securities. If the Corporation in any
----------------------------------
manner issues or sells any Convertible Security and the lowest price per
share for which any one share of the Classes of Common Stock is issuable
upon conversion or exchange thereof is less than the Conversion Price in
effect immediately prior to the time of such issue or sale, then such share
of the Classes of Common Stock shall be deemed to be outstanding and to
have been issued and sold by the Corporation at the time of the issuance or
sale of such Convertible Securities for such price per share. For the
purposes of this paragraph, the "lowest price per share for which any one
share of the Classes of Common Stock is issuable" shall be equal to the sum
of the lowest amounts of consideration (if any) received or receivable by
the Corporation with respect to any one share of the Classes of Common
Stock upon the issuance or sale of the Convertible Security and upon the
conversion or exchange of such Convertible Security. No further adjustment
of the Conversion Price shall be made upon the actual issue of such share
of the Classes of Common Stock upon conversion or exchange of any
Convertible Security, and if any such issue or sale of such Convertible
Security is made upon exercise of any Options for which adjustments of the
Conversion Price had been or are to be made pursuant to other provisions of
this Section 6, no further adjustment of the Conversion Price shall be made
by reason of such issue or sale.
(iii) Change in Option Price or Conversion Rate. If the purchase
-----------------------------------------
price provided for in any Option, the additional consideration (if any)
payable upon the issue, conversion or exchange of any Convertible Security
or the rate at which any Convertible Security is convertible into or
exchangeable for shares of the Classes of Common Stock changes at any time,
the Conversion Price in effect at the time of such change shall be adjusted
immediately to the Conversion Price which would have been in effect at such
time had such Option or Convertible Security originally provided for such
changed purchase price, additional consideration or conversion rate, as the
case may be, at the time initially granted, issued or sold. For purposes of
paragraph 6C, if the terms of any Option or Convertible Security which was
outstanding as of the date of issuance of the Convertible Preferred are
changed in the manner described in the immediately preceding sentence, then
such Option or Convertible Security and the shares of the Classes of Common
Stock deemed issuable upon exercise, conversion or exchange thereof shall
be deemed to have been issued as of the date of such change; provided that
no change shall at any time cause the Conversion Price hereunder to be
increased above the Conversion Price in effect immediately prior to the
issuance of such Option or Convertible Security.
(iv) Treatment of Expired Options and Unexercised Convertible
--------------------------------------------------------
Securities. Upon the expiration of any Option or the termination of any
----------
right to convert or exchange any Convertible Security without the exercise
of any such Option or right, the Conversion Price then in effect hereunder
shall be adjusted immediately to the Conversion Price which would have been
in effect at the time
15
<PAGE>
of such expiration or termination had such Option or Convertible Security,
to the extent outstanding immediately prior to such expiration or
termination, never been issued. For purposes of paragraph 6C, the
expiration or termination of any Option or Convertible Security which was
outstanding as of the date of issuance of the Convertible Preferred shall
not cause the Conversion Price hereunder to be adjusted unless, and only to
the extent that, a change in the terms such Option or Convertible Security
caused it to be deemed to have been issued after the date of issuance of
the Convertible Preferred.
(v) Calculation of Consideration Received. If any shares of the
-------------------------------------
Classes of Common Stock, Option or Convertible Security is issued or sold
or deemed to have been issued or sold for cash, the consideration received
therefor shall be deemed to be the amount received by the Corporation
therefor (net of discounts, commissions and related expenses). If any
shares of the Classes of Common Stock, Option or Convertible Security is
issued or sold for a consideration other than cash, the amount of the
consideration other than cash received by the Corporation shall be the fair
value of such consideration, except where such consideration consists of
securities, in which case the amount of consideration received by the
Corporation shall be the Market Price thereof as of the date of receipt. If
any shares of the Classes of Common Stock, Option or Convertible Security
is issued to the owners of the non-surviving entity in connection with any
merger in which the Corporation is the surviving corporation, the amount of
consideration therefor shall be deemed to be the fair value of such portion
of the net assets and business of the non-surviving entity as is
attributable to such shares of the Classes of Common Stock, Option or
Convertible Security, as the case may be. The fair value of any
consideration other than cash and securities shall be determined jointly by
the corporation and the holders of a majority of the outstanding
Convertible Preferred. If such parties are unable to reach agreement within
a reasonable period of time, the fair value of such consideration shall be
determined by an independent appraiser experienced in valuing such type of
consideration jointly selected by the Corporation and the holders of a
majority of the outstanding Convertible Preferred. The determination of
such appraiser shall be final and binding upon the parties, and the fees
and expenses of such appraiser shall be borne equally by the Corporation
and the holders of the Convertible Preferred.
(vi) Integrated Transactions. In case any Option is issued in
-----------------------
connection with the issue or sale of other securities of the Corporation,
together comprising one integrated transaction in which no specific
consideration is allocated to such Option by the parties thereto, the
Option shall be deemed to have been issued for a consideration of $.01.
(vii) Treasury Shares. The number of shares of the Classes of
---------------
Common Stock outstanding at any given time shall not include shares owned
or held by or for the account of the Corporation or any Subsidiary, and the
disposition of any shares so owned or held shall be considered an issue or
sale of such shares of the Classes of Common Stock.
16
<PAGE>
(viii) Record Date. If the Corporation takes a record of the holders
-----------
of the Classes of Common Stock for the purpose of entitling them (a) to
receive a dividend or other distribution payable in shares of the Classes
of Common Stock, Options or in Convertible Securities or (b) to subscribe
for or purchase shares of the Classes of Common Stock, Options or
Convertible Securities, then such record date shall be deemed to be the
date of the issue or sale of the shares of the Classes of Common Stock
deemed to have been issued or sold upon the declaration of such dividend or
upon the making of such other distribution or the date of the granting of
such right of subscription or purchase, as the case may be.
(ix) Notwithstanding the foregoing, there shall be no adjustment in
the Conversion Price as a result of (a) the issuance of any shares of the
Classes of Common Stock upon the exercise of the Existing Warrants, (b) the
issuance of any shares of the Classes of Common Stock upon the exercise of
the New Warrants and (c) any issue or sale (or deemed issue or sale) of
shares of the Classes of Common Stock to employees of the Corporation and
its Subsidiaries pursuant to stock option plans and stock ownership plans
approved by the Corporation's Board of Directors.
6D. Subdivision or Combination of Classes of Common Stock. If the
-----------------------------------------------------
Corporation at any time subdivides (by any stock split, stock dividend,
recapitalization or otherwise) its outstanding shares of the Classes of Common
Stock into a greater number of shares, the Conversion Price in effect
immediately prior to such subdivision shall be proportionately reduced, and if
the Corporation at any time combines (by reverse stock split or otherwise) one
or more classes of its outstanding shares of the Classes of Common Stock into a
smaller number of shares, the Conversion Price in effect immediately prior to
such combination shall be proportionately increased.
6E. Reorganization, Reclassification, Consolidation, Merger or Sale. Any
---------------------------------------------------------------
recapitalization, reorganization, reclassification, consolidation, merger, sale
of all or substantially all of the Corporation's assets or other transaction, in
each case which is effected in such a manner that the holders of the Classes of
Common Stock are entitled to receive (either directly or upon subsequent
liquidation) stock, securities or assets with respect to or in exchange for the
Classes of Common Stock, is referred to herein as an "Organic Change." Prior to
the consummation of any Organic Change, the Corporation shall make appropriate
provisions (in form and substance satisfactory to the holders of a majority of
the Convertible Preferred then outstanding) to insure that each of the holders
of Convertible Preferred shall thereafter have the right to acquire and receive,
in lieu of or in addition to (as the case may be) the shares of Conversion Stock
immediately theretofore acquirable and receivable upon the conversion of such
holder's Convertible Preferred, such shares of stock, securities or assets as
such holder would have received in connection with such Organic Change if such
holder had converted its Convertible Preferred immediately prior to such Organic
Change. In each such case, the Corporation shall also make appropriate
provisions (in form and substance satisfactory to the holders of a majority of
the Convertible Preferred then outstanding) to insure that the provisions of
this Section 6 and Sections 7 and 8 shall thereafter be applicable to the
Convertible Preferred (including, in the case of any such consolidation, merger
or sale in which the
17
<PAGE>
successor entity or purchasing entity is other than the Corporation, an
appropriate adjustment of the Conversion Price and a corresponding adjustment in
the number of shares of Conversion Stock acquirable and receivable upon
conversion of Convertible Preferred to reflect the treatment of the Classes of
Common Stock in such consolidation, merger or sale). The Corporation shall not
effect any such consolidation, merger or sale, unless prior to the consummation
thereof, the successor entity (if other than the Corporation) resulting from
such consolidation or merger or the entity purchasing such assets assumes by
written instrument (in form and substance satisfactory to the holders of a
majority of the Convertible Preferred then outstanding), the obligation to
deliver to each such holder such shares of stock, securities or assets as, in
accordance with the foregoing provisions, such holder may be entitled to
acquire.
6F. Certain Events. If any event occurs of the type contemplated by the
--------------
provisions of this Section 6 but not expressly provided for by such provisions
(including, without limitation, the granting of stock appreciation rights,
phantom stock rights or other rights with equity features), then the
Corporation's Board of Directors shall make an appropriate adjustment in the
Conversion Price so as to protect the rights of the holders of Convertible
Preferred; provided that no such adjustment shall increase the Conversion Price
as otherwise determined pursuant to this Section 6 or decrease the number of
shares of Conversion Stock issuable upon conversion of each Share of Convertible
Preferred, except as a result of the subsequent cancellation or termination of
any such arrangements without such arrangements being exercised; provided,
further that such subsequent cancellation or termination of any such arrangement
shall not, under any circumstances, increase the Conversion Price above the
Conversion Price in effect immediately prior to the event which reduced the
Conversion Price as contemplated in this paragraph 6F.
6G. Notices.
-------
(i) Immediately upon any adjustment of the Conversion Price, the
Corporation shall give written notice thereof to all holders of Convertible
Preferred, setting forth in reasonable detail and certifying the
calculation of such adjustment.
(ii) The Corporation shall give written notice to all holders of
Convertible Preferred at least 20 days prior to the date on which the
Corporation closes its books or takes a record (a) with respect to any
dividend or distribution upon the Classes of Common Stock, (b) with respect
to any pro rata subscription offer to holders of the Classes of Common
Stock or (c) for determining rights to vote with respect to any Organic
Change, dissolution or liquidation.
(iii) The Corporation shall also give written notice to the holders of
Convertible Preferred at least 20 days prior to the date on which any
Organic Change shall take place.
6H. Public Offering Conversion. At such time as the Corporation shall
--------------------------
effect a Qualified Initial Public Offering, the Corporation may, at its option
and by delivering 10 days' prior written notice to the holders of Convertible
Preferred, require the conversion
18
<PAGE>
of all Shares of the Convertible Preferred (including any fraction of a Share)
into shares of Conversion Stock. Any such conversion shall only be effected at
the time of and shall be subject to the closing of the sale of shares of the
Classes of Common Stock pursuant to such Qualified Initial Public Offering.
6I. Limitation on Conversion. Notwithstanding any other provisions
------------------------
hereof, no holder of Shares of Convertible Preferred shall be entitled to
exercise the conversion rights under this Section 6 to acquire any share or
shares of Conversion Stock if, as a result of such conversion, such holder
and its affiliates, directly or indirectly, would own, control or have
power to vote a greater quantity of securities of any kind issued by the
Corporation than such holder and its affiliates is to be permitted to own,
control or have power to vote under any law or under any regulation, rules
or other requirement of any governmental authority at any time applicable
to such holder and its affiliates. For purposes of this paragraph, a
written statement of the holder involved, to the effect that such holder is
legally entitled to exercise its conversion rights under this Section 6 to
acquire shares of Conversion Stock and that such holder shall not violate
the prohibitions set forth in the preceding sentence, shall be sufficient
evidence of the legality thereof and shall obligate the Corporation to
deliver certificates representing the shares of Conversion Stock so
purchased in accordance with the other provisions hereof.
Section 7. Liquidating Dividends.
---------------------
If the Corporation declares or pays a dividend upon the Classes of
Common Stock payable otherwise than in cash out of earnings or earned surplus
(determined in accordance with generally accepted accounting principles,
consistently applied) except for a stock dividend payable in shares of the
Classes of Common Stock (a "Liquidating Dividend"), then the Corporation shall
pay to the holders of Convertible Preferred at the time of payment thereof of
the Liquidating Dividends which would have been paid on the shares of Conversion
Stock had such Convertible Preferred been converted immediately prior to the
date on which a record is taken for such Liquidating Dividend, or, if no record
is taken, the date of which the record holders of the Classes of Common Stock
entitled to such dividends are to be determined; provided that if the
Liquidating Dividends consist of voting securities, the Liquidating Dividends
consisting of securities which are nonvoting (except as otherwise required by
law), which are otherwise identical to the Liquidating Dividends consisting of
voting securities and which are convertible into such voting securities on the
same terms as Nonvoting Common Stock is convertible into Common Stock.
Section 8. Purchase Rights.
---------------
If at any time the Corporation grants, issues or sells any Options,
Convertible Securities or rights to purchase stock, warrants, securities or
other property pro rata to the record holders of any class of the Classes of
Common Stock (the "Purchase Rights"), then each holder of Convertible Preferred
shall be entitled to acquire, upon the terms applicable to such Purchase Rights,
the aggregate Purchase Rights which such holder could have acquired if such
holder had held the number of shares of Conversion Stock acquirable upon
conversion of such holder's Convertible Preferred immediately before the date on
which a record is taken for the grant, issuance or sale of such Purchase Rights,
or if no such record is taken, the date as of which the
19
<PAGE>
record holders of Common Stock are to be determined for the grant, issue or sale
of such Purchase Rights; provided that if the Purchase Rights involve voting
securities, the Corporation shall make available to each holder of Series 2
Preferred, at such holder's request, Purchase Rights involving securities which
are nonvoting (except as otherwise required by law), which are otherwise
identical to the Purchase Rights involving voting securities and which are
convertible into such voting securities on the same terms as Nonvoting Common
Stock is convertible into Common Stock.
Section 9. Voting Rights.
-------------
Each holder of Class A Preferred shall be entitled to notice of all
stockholders meetings at the same time and in the same manner as notice is given
to the stockholders entitled to vote at such meeting. Except as otherwise
provided herein and as otherwise required by law, the holders of Class A
Preferred shall have no right to vote on any matters to be voted on by the
Stockholders of the Corporation; provided that the holders of Class A Preferred
shall have the right to vote as a separate class on any amendment to the
Certificate of Incorporation of the Corporation or any equivalent action by the
Corporation that alters the term of the Class A Preferred.
Section 10. Registration of Transfer.
------------------------
The Corporation shall keep at its principal office a register for the
registration of Class A Preferred. Upon the surrender of any certificate
representing Class A Preferred at such place, the Corporation shall, at the
request of the record holder of such certificate, execute and deliver (at the
Corporation's expense) a new certificate or certificates in exchange therefor
representing in the aggregate the number of Shares represented by the
surrendered certificate. Each such new certificate shall be registered in such
name and shall represent such number of Shares as is requested by the holder of
the surrendered certificate and shall be substantially identical in form to the
surrendered certificate, and dividends shall accrue on the Class A Preferred
represented by such new certificate from the date to which dividends have been
fully paid on such Class A Preferred represented by the surrendered certificate.
Section 11. Replacement.
-----------
Upon receipt of evidence reasonably satisfactory to the Corporation
(an affidavit of the registered holder shall be satisfactory) of the ownership
and the loss, theft, destruction or mutilation of any certificate evidencing
Shares of Class A Preferred, and in the case of any such loss, theft or
destruction, upon receipt of indemnity reasonably satisfactory to the
Corporation (provided that if the holder is a financial institution or other
institutional investor its own agreement shall be satisfactory), or, in the case
of any such mutilation upon surrender of such certificate the Corporation shall
(at its expense) execute and deliver in lieu of such certificate a new
certificate of like kind representing the number of Shares represented by such
lost, stolen, destroyed or mutilated certificate and dated on the date of such
lost, stolen, destroyed or mutilated certificate, and dividends shall accrue on
the Class A Preferred represented by such new certificate from the date to which
dividends have been fully paid on such lost, stolen, destroyed or mutilated
certificate.
20
<PAGE>
Section 12. Definitions.
-----------
"Classes of Common Stock" means, collectively, the Corporation's
-----------------------
Common Stock, the Corporation's Nonvoting Common Stock and any capital stock of
any class of the Corporation hereafter authorized which is not limited to a
fixed sum or percentage of par or stated value in respect to the rights of the
holders thereof to participate in dividends or in the distribution of assets
upon any liquidation, dissolution or winding up of the Corporation.
"Classes of Common Stock Deemed Outstanding" means, at any given time,
------------------------------------------
the number of shares of the Classes of Common Stock actually outstanding at such
time, plus the number of shares of the Classes of Common Stock deemed to be
outstanding pursuant to paragraph 6C hereof whether or not the Options or
Convertible Securities are actually exercisable at such time, but excluding any
shares of the Classes of Common Stock issuable upon conversion of the
Convertible Preferred.
"Contingent Warrants" shall mean the Contingent Stock Warrants, dated
-------------------
October 17, 1996, issued to The Prudential Insurance Company of America, Primus
Capital Fund III Limited Partnership, Banc One Capital Partners II, Ltd. and
BOCP II, Limited Liability Company.
"Conversion Stock" means, (i) with respect to any holder of Series 2
----------------
Preferred, shares of the Corporation's Nonvoting Common Stock and (ii) with
respect to any holder of Series 3 Preferred, shares of the Corporation's Common
Stock; provided that if there is a change such that the securities issuable upon
conversion of the Convertible Preferred are issued by an entity other than the
Corporation or there is a change in the type or class of securities so issuable,
then the term "Conversion Stock" shall mean one share of the security issuable
upon conversion of the Convertible Preferred if such security is issuable in
shares, or shall mean the smallest unit in which such security is issuable if
such security is not issuable in shares; and provided further that if such
securities issuable on conversion of the Series 2 Preferred involve voting
securities, such entity or the Corporation, as the case may be, shall make
available to each holder of Series 2 Preferred, at such holder's request,
securities issuable upon conversion of the Series 2 Preferred which are
Nonvoting (except as otherwise required by law), which are otherwise identical
to the securities issuable upon conversion of the Series 2 Preferred which are
voting securities and which are convertible into such voting securities on the
same terms as nonvoting Common Stock is convertible into Common Stock.
"Convertible Preferred Purchase Agreement" means the Purchase
----------------------------------------
Agreement, dated as of November 7, 1997, by and among the Corinthian Schools,
Inc., Primus Capital Fund III Limited Partnership and Banc One Capital Partners
II, Limited Liability Company, as such agreement may from time to time be
amended in accordance with its terms.
"Convertible Securities" means any stock or securities directly or
----------------------
indirectly convertible into or exchangeable the Classes of Common Stock.
"Executives" means the Executives as defined in the Purchase
----------
Agreements.
"Executive Stock Agreements" means the Executive Stock Agreements as
--------------------------
defined in the Purchase Agreements.
21
<PAGE>
"Existing Warrants" means, collectively, the warrants to acquire
-----------------
shares of the Classes of Common Stock; (i) issued in connection with the Note
Purchase and Revolving Credit Agreement, dated October 17, 1996, between the
Corporation and Prudential, (ii) issued in connection with the Subordinated Note
and Warrant Purchase Agreement, dated October 17, 1996, among the Corporation
and the other signatories thereto and (iii) any warrants or other rights to
acquire shares of the Classes of Common Stock issued in exchange for or in
replacement of such warrants, but in each case excluding the Contingent
Warrants.
"IPO Valuation" means 50% of the aggregate market value of the
-------------
Corporation's Classes of Common Stock immediately prior to the consummation of a
Qualified Initial Public Offering (with such aggregate market value being
determined by multiplying (i) the sum of (A) the number of shares of the Classes
of Common Stock issued pursuant to the Purchase Agreements and the Executive
Stock Agreements (including the Earnback Shares) and (B) the number of shares of
the Classes of Common Stock issued or issuable upon conversion of the
Convertible Preferred and upon exercise of all of the Existing Warrants, the
Contingent Warrants and the New Warrants (as each such number of shares shall be
proportionally adjusted for any stock split, stock combination or other
recapitalization of the Corporation) by (ii) the price per share of the Classes
of Common Stock paid by the public in connection with such Qualified Initial
Public Offering.
"Junior Securities" means any capital stock or other equity securities
-----------------
of the Corporation other than the Class A Preferred.
"Liquidation Value" of any Share as of any particular date shall be
-----------------
equal to $100.
"Market Price" of any security means the average of the closing prices
------------
of such security's sales on all securities exchanges on which such security may
at the time be listed, or, if there has been no sales on any such exchange on
any day, the average of the highest bid and lowest asked prices on all such
exchanges at the end of such day, or, if on any day such security is not so
listed, the average of the representative bid and asked prices quoted in the
NASDAQ System as of 4:00 P.M., New York time, or, if on any day such security is
not quoted in the NASDAQ System, the average of the highest bid and lowest asked
prices on such day in the domestic over-the-counter market as reported by the
National Quotation Bureau, Incorporated, or any similar successor organization,
in each such case averaged over a period of 21 days consisting of the day as of
which "Market Price" is being determined and the 20 consecutive business days
prior to such day. If at any time such security is not listed on any securities
exchange or quoted in the NASDAQ System or the over-the-counter market, the
"Market Price" shall be the fair value thereof determined jointly by the
Corporation and the holders of a majority of the Class A Preferred. If such
parties are unable to reach agreement within a reasonable period of time, such
fair value shall be determined by an independent appraiser experienced in
valuing securities jointly selected by the Corporation and the holders of a
majority of the Class A Preferred. The determination of such appraiser shall be
final and binding upon the parties, and the Corporation and the holders of the
Class A Preferred shall pay the fees and expenses of such appraiser.
22
<PAGE>
"Maximum Conversion Adjustment" means 5,161.91, as such number may be
-----------------------------
proportionately adjusted to reflect any stock split, stock combination or other
recapitalization of the Corporation.
"New Warrants" means, collectively, the warrants to acquire shares of
------------
the Classes of Common Stock: (i) issued to Prudential in connection with the
Default Waiver and Third Amendment under the Note Agreement, dated October 31,
1997, between the Corporation and Prudential, (ii) issued in connection with the
Convertible Preferred Purchase Agreement and (iii) any warrants or other rights
to acquire shares of the Classes of Common Stock issued in exchange for or in
replacement of such warrants.
"Note Agreement" means the Note Purchase and Revolving Credit
--------------
Agreement, dated October 17, 1996, between the Corporation and Prudential, as
amended.
"Options" means any rights, warrants or options to subscribe for or
-------
purchase the Classes of Common Stock or Convertible Securities.
"Percentage Conversion Adjustment" means the quotient determined by
--------------------------------
dividing the amount by which the IPO valuation exceeds $40,000,000 (as such
number is proportionally adjusted for any stock split, stock combination or
other recapitalization of the Corporation) by $10,000,000 (as such number is
proportionally adjusted for any stock split, stock combination or other
recapitalization of the Corporation); provided that in no event shall the
Percentage Conversion Adjustment be greater than one or less than zero.
For example, if the IPO Valuation at the time of the
Qualified Initial Public Offering is $48,000,000 then the Percentage
Conversion Adjustment shall be 80% ((48,000,000 - 40,000,000) /
10,000,000).
"Person" means an individual, a partnership, a corporation, a limited
------
liability company, an association, a joint stock company, a trust, a joint
venture, an unincorporated organization or a governmental entity or any
department, agency or political subdivision thereof.
"Prudential" means The Prudential Insurance Corporation of America.
----------
"Public Offering" means any offering by the Corporation of its equity
---------------
securities to the public pursuant to an effective registration statement under
the Securities Act of 1933, as then in effect, or any comparable statement under
any similar federal statute then in force provided that for purposes of
paragraph 4C or paragraph 6H hereof, a Public Offering shall not include an
offering made in connection with a business acquisition or combination or an
employee benefit plan.
"Purchase Agreements" means, collectively, (i) the Purchase Agreement,
-------------------
dated as of June 30, 1995, by and among the Corporation (the assignee of the
rights and obligations thereunder of Corinthian Schools, Inc.), Primus Capital
Fund III Limited Partnership and BOCP II, Limited Liability Company, an Ohio
limited liability company and successor-in-interest to Banc One Capital Partners
II, Limited Partnership, as such agreement may from time to time be amended in
accordance with its terms and (ii) the Convertible Preferred Purchase Agreement.
23
<PAGE>
"Qualified Initial Public Offering" means the sale by the Corporation,
---------------------------------
in an underwritten initial Public Offering of shares of the Corporation's
Classes of Common Stock having an aggregate offering value of at least $25
million and where the aggregate market value of the Corporation's Classes of
Common Stock immediately prior to the consummation of such Public Offering shall
be at least $80 million (with such aggregate market value being determined by
multiplying (A) the sum of (1) the number of shares of the Classes of Common
Stock issued pursuant to the Purchase Agreements and the Executive Stock
Agreements (including the Earnback Shares) and (2) the number of shares of the
Classes of Common Stock issued or issuable upon conversion of the Convertible
Preferred and upon exercise of all of the Existing Warrants, the Contingent
Warrants and the New Warrants (as each such number of shares shall be
proportionally adjusted for any stock split, stock combination or other
recapitalization of the Corporation) by (B) the price per share of the Classes
of Common Stock paid by the public in connection with such Public Offering).
"Registration Agreement" means the Registration Agreement as defined
----------------------
in the Purchase Agreements.
"Redemption Date" as to any Share means the date specified in the
---------------
notice of any redemption at the Corporation's option or at the holder's option
or the applicable date specified herein in the case of any other redemption;
provided that no such date shall be a Redemption Date unless the Liquidation
Value of such Share (plus all accrued and unpaid dividends thereon) is actually
paid in full on such date, and if not so paid in full, the Redemption Date shall
be the date on which such amount is fully paid.
"Share" has the meaning specified in paragraph 1A of Section 1 of this
-----
Part B.
"Sub-Debt Agreement" means the Subordinated Note and Warrant Purchase
------------------
Agreement, dated October 17, 1996, among the Corporation and the other
signatories thereto, as amended.
"Subsidiary" means, with respect to any Person, any corporation,
----------
limited liability company, partnership, association or other business entity of
which (a) if a corporation, a majority of the total voting power of shares of
stock entitled (without regard to the occurrence of any contingency) to vote in
the election of directors, managers or trustees thereof is at the time owned or
controlled, directly or indirectly, by that Person or one or more of the other
Subsidiaries of that Person or a combination thereof, or (b) if a partnership,
association or other business entity, a majority of the partnership or other
similar ownership interest thereof is at the time owned or controlled, directly
or indirectly, by any Person or one or more Subsidiaries of that person or a
combination thereof. For purposes hereof, a Person or Persons shall be deemed
to have a majority ownership interest in a partnership, association or other
business entity if such person or Persons shall be allocated a majority of
partnership, association or other business entity gains or losses or shall be or
control the managing general partner of such partnership, association or other
business entity.
"Trigger Event" means a Trigger Event as defined in the Executive
-------------
Stock Agreements.
24
<PAGE>
Section 13. Amendment and Waiver.
--------------------
No amendment, modification or waiver shall be binding or effective
with respect to any provision of this Part B without the prior written consent
of the holders of at least a majority of each Series of the Class A Preferred
outstanding at the time such action is taken.
Section 14. Notices.
-------
Except as otherwise expressly provided hereunder, all notices referred
to herein shall be in writing and shall be delivered by registered or certified
mail, return receipt requested and postage prepaid, or by reputable overnight
courier service, charges prepaid, and shall be deemed to have been given when so
mailed or sent (a) to the Corporation, at its principal executive offices and
(b) to any stockholder, at such holder's address as it appears in the stock
records of the Corporation (unless otherwise indicated by any such holder).
C. Classes of Common Stock
-----------------------
Except as otherwise provided in this Part C or as otherwise required
by applicable law, all shares of Common Stock and Nonvoting Common Stock shall
be identical in all respects and shall entitle the holders thereof to the same
rights, preferences and privileges, subject to the same qualifications,
limitations and restrictions, as set forth herein.
Section 1. Voting Rights.
-------------
Except as otherwise provided in this part C or as otherwise required
by applicable law, the holders of Common Stock shall be entitled to one vote per
share on all matters to be voted on by the stockholders of the Corporation, and
the holders of Nonvoting Common Stock shall have no right to vote on any matters
to be voted on by the stockholders of the Corporation; provided that the holders
of Nonvoting Common Stock shall have the right to one vote per share together
with the Common Stock as one class on (i) any merger or consolidation of the
Corporation with or into another entity or entities, (ii) any sale of all or
substantially all of the Corporation's assets and (iii) any amendment to the
Corporation's Certificate of Incorporation.
Section 2. Dividends.
---------
As and when dividends are declared or paid with respect to shares of
the Classes of Common Stock, whether in cash, property or securities of the
Corporation, the holders of Common Stock and the holders of Nonvoting Common
Stock shall be entitled to receive such dividends pro rata at the same rate per
share of the Classes of Common Stock; provided that (i) if dividends are
declared or paid in shares of the Classes of Common Stock, the dividends payable
to the holders of Common Stock shall be payable in shares of Common Stock and
the dividends payable to the holders of nonvoting Common Stock shall be payable
in shares of Nonvoting Common Stock and (ii) if the dividends consist of other
voting securities of the Corporation, the Corporation shall make available to
each holder of Nonvoting Common Stock, at such holder's request, dividends
consisting of nonvoting securities (except as otherwise required by law) of the
Corporation which are otherwise identical to the voting securities and which are
convertible into such voting securities on the same terms as the Nonvoting
Common Stock is convertible into the
25
<PAGE>
Common Stock. The right of the holders of the Classes of Common Stock to receive
dividends are subject to the provisions of the Preferred Stock.
Section 3. Liquidation.
-----------
Subject to the provisions of the Class A Preferred Stock, the holders
of the Common Stock and the holders of the Nonvoting Common Stock shall be
entitled to participate pro rata at the same rate per share of each of the
Classes of Common Stock in all distributions to the holders of the Classes of
Common Stock in any liquidation, dissolution or winding up of the Corporation.
Section 4. Conversion.
----------
4A. Conversion of Common Stock. Each holder of Common Stock shall be
--------------------------
entitled at any time to convert any or all of the shares of such holder's
Common Stock into an equal number of shares of Nonvoting Common Stock.
4B. Conversion of Nonvoting Common Stock.
------------------------------------
(i) In connection with the occurrence (or the expected
occurrence as described in (iii) below) of any Conversion Event, each
holder of Nonvoting Common Stock shall be entitled to convert into an
equal number of shares of Common Stock any or all of the shares of
such holder's Nonvoting Common Stock being (or expected to be)
distributed, disposed of or sold in connection with such Conversion
Event.
(ii) For purposes of this paragraph 4B, a "Conversion Event"
shall mean (a) any public offering or public sale of securities of the
Corporation (including a public offering registered under the
Securities Act of 1933 and a public sale pursuant to Rule 144 of the
Securities and Exchange Commission or any similar rule then in force),
(b) any sale of securities of the Corporation to a person or group of
persons (within the meaning of the Securities Exchange Act of 1934, as
amended (the "1934 Act")), if, after such sale, such person or group
of persons in the aggregate would own or control securities which
possess in the aggregate the ordinary voting power to elect a majority
of the Corporation's directors (provided that such sale has been
approved by the Corporation's Board of Directors or a committee
thereof), (c) any sale of securities of the Corporation to a person or
group of persons (within the meaning of the 1934 Act) if, after such
sale, such person or group of persons in the aggregate would own or
control securities of the Corporation (excluding any Nonvoting Common
Stock being converted and disposed of in connection with such
Conversion Event) which possess in the aggregate the ordinary voting
power to elect a majority of the Corporation's directors, (d) any sale
of securities of the Corporation to a person or group of persons
(within the meaning of the 1934 Act) is, after such sale, such person
or group of persons would not, in the aggregate, own, control or have
the right to acquire more than two percent (2%) of the outstanding
securities of any class of voting securities of the Corporation, and
(e) a merger, consolidation or
26
<PAGE>
similar transaction involving the Corporation if, after such
transaction, a person or group of persons (within the meaning of the
1934 Act) in the aggregate would own or control securities which
possess in the aggregate the ordinary voting power to elect a majority
of the surviving corporation's directors (provided that the
transaction has been approved by the Corporation's Board of Directors
or a committee thereof). For purpose of this paragraph 4B, "person"
shall include any natural person and any corporation, partnership,
joint venture, trust, unincorporated organization and any other entity
or organization.
(iii) Each holder of Nonvoting Common Stock shall be entitled to
convert shares of Nonvoting Common Stock in connection with any
Conversion Event if such holder reasonably believes that such
Conversion Event shall be consummated, and a written request for
conversion from any holder of Nonvoting Common Stock to the
Corporation stating such holder's reasonable belief that a Conversion
Event shall occur shall be conclusive and shall obligate the
Corporation to effect such conversion in a timely manner so as to
enable each such holder to participate in such Conversion Event. The
Corporation shall not cancel the shares of Nonvoting Common Stock so
converted before the tenth day following such Conversion Event and
shall reserve such shares until such tenth day for reissuance in
compliance with the next sentence. If any shares of Nonvoting Common
Stock are converted into shares of Common Stock in connection with a
Conversion Event and such shares of Common Stock are not actually
distributed, disposed of or sold pursuant to such Conversion Event,
such shares of Common Stock shall be promptly converted back into the
same number of shares of Nonvoting Common Stock.
4C. Conversion Procedure.
--------------------
(i) Unless otherwise provided in connection with a Conversion
Event with respect to the Nonvoting Common Stock, each conversion of
shares of one of the Classes of Common Stock into shares of the other
class of the Classes of Common Stock shall be effected by the
surrender of the certificate or certificates representing the shares
to be converted at the principal office of the Corporation at any time
during normal business hours, together with a written notice by the
holder of such Classes of Common Stock stating that such holder
desires to convert the shares, or a stated number of the shares, of
such class of the Classes of Common Stock represented by such
certificate or certificates into shares of the other class of the
Classes of Common Stock. Unless otherwise provided in connection with
a Conversion Event, each conversion shall be deemed to have been
effected as of the close of business on the date on which such
certificate or certificates have been surrendered and such notice has
been received, and at such time the rights of the holder of the
converted Nonvoting Common Stock or Common Stock, as the case may be,
as such holder shall cease and the person or persons in whose name or
names the certificate or certificates for shares of Common Stock or
Nonvoting Common Stock are to be issued upon such conversion shall be
deemed to have become the holder or holders of record of the shares of
Common Stock or Nonvoting Common Stock represented thereby.
27
<PAGE>
(ii) Promptly after the surrender of certificates and the
receipt of written notice, the Corporation shall issue and deliver in
accordance with the surrendering holder's instructions (a) the
certificate or certificates for the Common Stock or Nonvoting Common
Stock issuable upon such conversion and (b) a certificate representing
any Nonvoting Common Stock or Common Stock which was represented by
the certificate or certificates delivered to the Corporation in
connection with such conversion but which was not converted.
(iii) issuance of certificates for Common Stock upon conversion
of Nonvoting Common Stock and for Nonvoting Common Stock upon
conversion of Common Stock shall be made without charge to the holders
of such shares for any issuance tax in respect thereof or other cost
incurred by the Corporation in connection with such conversion and the
related issuance of Common Stock or Nonvoting Common Stock, as the
case may be.
(iv) The Corporation shall at all times reserve and keep
available out of its authorized but unissued shares of Common Stock
and Nonvoting Common Stock, solely for the purpose of issuance upon
the conversion of the Nonvoting Common Stock and Common Stock,
respectively, such number of shares of Nonvoting Common Stock and
Common Stock issuable upon the conversion of all outstanding Common
Stock and Nonvoting Common Stock, as the case may be. All shares of
the Classes of Common Stock which are so issuable shall, when issued,
be duly and validly issued, fully paid and nonassessable and free from
all taxes, liens and charges. The Corporation shall take all such
actions as may be necessary to assure that all such shares of the
Classes of Common Stock may be so issued without violation of any
applicable law or governmental regulation or any requirements of any
domestic securities exchange upon which shares of the Classes of
Common Stock may be listed (except for official notice of issuance
which shall be immediately transmitted by the Corporation upon
issuance).
(v) The Corporation shall not close its books against the
transfer of shares of the Classes of Common Stock in any manner which
would interfere with the timely conversion of any shares of the
Classes of Common Stock. The Corporation shall assist and cooperate
with any holder of the Classes of Common Stock required to make any
governmental filings or obtain any governmental approval prior to or
in connection with any conversion of the Classes of Common Stock
hereunder (including without limitation, making any filings required
to be made by the Corporation).
Section 5. Stock Splits.
------------
If the Corporation in any manner subdivides or combines the
outstanding shares of one class of the Classes of Common Stock, the outstanding
shares of the other class of the Classes of Common Stock shall be
proportionately subdivided or combined in a similar manner.
28
<PAGE>
Section 6. Registration of Transfer.
------------------------
The Corporation shall keep at its principal office (or such other
place as the Corporation reasonably designates) a register for the registration
of shares of the Classes of Common Stock. Upon the surrender of any certificate
representing shares of any class of the Classes of Common Stock at such place,
the Corporation shall, at the request of the registered holder of such
certificate, execute and deliver a new certificate or certificates in exchange
therefor representing in the aggregate the number of shares of such class
represented by the surrendered certificate, and the Corporation forthwith shall
cancel such surrendered certificate. Each such new certificate shall be
registered in such name and shall represent such number of shares of such class
as is requested by the holder of the surrendered certificate and shall be
substantially identical in form to the surrendered certificate. The issuance of
new certificates shall be made without charge to the holders of the surrendered
certificates for any issuance tax in respect thereof or other cost incurred by
the Corporation in connection with such issuance.
Section 7. Replacement.
-----------
Upon receipt of evidence reasonably satisfactory to the Corporation
(an affidavit of the registered holder shall be satisfactory) of the ownership
and the loss, theft, destruction or mutilation of any certificate evidencing one
or more shares of any class of the Classes of Common Stock, and in the case of
any such loss, theft or destruction, upon receipt of indemnity reasonably
satisfactory to the Corporation (provided that if the holder is a financial
institution or other institutional investor its own agreement shall be
satisfactory), or, in the case of any such mutilation upon surrender of such
certificate, the Corporation shall (at its expense) execute and deliver in lieu
of such certificate a new certificate of like kind representing the number of
shares of such class represented by such lost, stolen, destroyed or mutilated
certificate and dated the date of such lost, stolen, destroyed or mutilated
certificate.
Section 8. Notices.
-------
All notices referred to herein shall be in writing, shall be delivered
personally or by first class mail, postage prepaid, and shall be deemed to have
been given when so delivered or mailed to the Corporation at its principal
executive offices and to any stockholder at such holder's address as it appears
in the stock records of the Corporation (unless otherwise specified in a written
notice to the Corporation by such holder).
Section 9. Amendment and Waiver.
--------------------
No amendment or waiver of any provision of this Part C shall be
effective without the prior approval of (i) the holders of a majority of the
then outstanding Common Stock voting as a separate class and (ii) the holders of
a majority of the then outstanding Nonvoting Common Stock voting as a separate
class.
Article V: Board of Directors
------------------
5A. The business and affairs of the Corporation shall be managed by
or under the direction of the Board of Directors of the Corporation. All
vacancies and newly created directorships resulting from any increase in
the authorized number of directors, as
29
<PAGE>
well as any other vacancies, shall be filled exclusively by a majority of
the directors in office immediately prior to such increase. All of the
powers of the Corporation, insofar as the same may be lawfully vested by
this Certificate of Incorporation in the Board of Directors, are hereby
conferred upon the Board of Directors of the Corporation.
5B. The number of directors constituting the entire Board shall be
not less than three nor more than nine as fixed from the time to time, in
accordance with the Bylaws, provided, however, that the number of directors
shall not be reduced so as to shorten the term of any director at the time
in office, and provided further, that the number of directors constituting
the entire Board shall be seven until otherwise fixed in accordance with
the Bylaws.
5C. The Board of Directors shall be divided into three classes, as
nearly equal in numbers as the then number of directors constituting the
entire Board permits with the term of office of one class expiring each
year. The three classes of directors shall be designated Class I, Class
II, and Class III. The Board of Directors shall (i) assign one of the
three current directors to each of Class I, Class II, and Class III,
respectively (ii) determine, within the constraints of this Article V the
number of directors of each class, and (iii) pursuant to this Article V
fill any vacancies. The initial term of office of the directors of Class I
shall expire at the annual meeting to be held during fiscal year 2000, the
initial term of office of the directors of Class II shall expire at the
annual meeting to be held during fiscal year 2001 and the initial term of
office of the directors of Class III shall expire at the annual meeting to
be held during fiscal year 2002. At each annual meeting, commencing with
the annual meeting to be held during fiscal year 2000, each of the
successors to the directors of the class whose term shall have expired at
such annual meeting shall be elected for a term running until the third
annual meeting next succeeding his or her election and until his or her
successor shall have been duly elected and qualified.
5D. Notwithstanding any other provision contained in this Certificate
of Incorporation or the Bylaws of the Corporation, any director or the
entire Board of Directors of the Corporation may be removed, but only for
cause and only by the affirmative vote of the holders of a majority of the
outstanding shares of capital stock of the Corporation then entitled to
vote generally in the election of directors (considered for this purpose as
one class) cast at a meeting of the stockholders called for that purpose.
Article VI: Limitation of Director Liability and Indemnification
----------------------------------------------------
To the fullest extent permitted by the Delaware General Corporation
Law as the same exists or may hereafter be amended, a director of this
Corporation shall not be liable to the Corporation or its stockholders for
monetary damages for breach of fiduciary duty as a director. The liability of a
director of the Corporation to the Corporation or its stockholders for monetary
damages shall be eliminated to the fullest extent permissible under applicable
law in the event it is determined that Delaware law does not apply. The
Corporation shall, to the fullest extent permitted by law, as now or hereafter
in effect, indemnify its directors and officers against any liabilities, losses
or related
30
<PAGE>
expenses which they may incur by reason of serving or having served as directors
or officers of the Corporation, or serving or having served at the request of
the Corporation as directors, officers, trustees, partners, employees or agents
of any entity in which the Corporation has an interest. Such right to
indemnification shall continue as to a person who has ceased to be a director or
officer of the Corporation and shall inure to the benefit of such person's
heirs, executors and personal and legal representatives. The right to
indemnification conferred by this Article VI shall include the right to be paid
by the Corporation the expenses incurred in defending or otherwise participating
in any proceeding in advance of its final disposition. Notwithstanding the
foregoing, the Corporation shall not be obligated to indemnify any director or
officer (or any of such person's heirs, executors or personal or legal
representatives) in connection with a proceeding (or part thereof) initiated by
such person (except for a proceeding to enforce rights to indemnification)
unless such proceeding (or part thereof) was authorized or consented to by the
Board of Directors.
The Corporation may, to the extent authorized from time to time by the Board of
Directors, provide rights to indemnification and to the advancement of expenses
to employees and agents of the Corporation similar to those conferred in this
Article VI to directors and officers of the Corporation.
The rights to indemnification and to the advance of expenses conferred in this
Article VI shall not be exclusive of any other right which any person may have
or hereafter acquire under this Certificate of Incorporation, the Bylaws of the
Corporation, any statute, agreement, vote of stockholders or disinterested
directors or otherwise.
Any repeal or modification of this Article VI shall not result in any liability
of a director, or any change or reduction in the indemnification to which a
director, officer, employee or agent would otherwise be entitled, with respect
to any action or omission occurring prior to such repeal or modification.
Article VII: Call of Special Meetings
------------------------
Special meetings of the stockholders of the Corporation for any
purpose or purposes may be called at any time by the Board of Directors, or by a
majority of the members of the Board. Special meetings of the stockholders may
not be called by the stockholders.
Article VIII: Definition of Voting Stock
--------------------------
For the purposes of this Restated Certificate of Incorporation,
"Voting Stock" means all outstanding shares of capital stock of the Corporation
entitled to vote generally in the election of directors of the Corporation, and
each reference to a percentage or portion of shares of Voting Stock shall refer
to such percentage or portion of the votes entitled to be cast by such shares.
Article IX: No Stockholder Action by Written Consent
----------------------------------------
No action required to be taken or which may be taken at any annual or
special meeting of stockholders of the Corporation may be taken without a
meeting, and the powers of stockholders to consent in writing, without a
meeting, to the taking of any action is specifically denied.
Article X: Amendment of Corporate Documents
--------------------------------
Section 1. Restated Certificate of Incorporation. In addition to any
-------------------------------------
affirmative vote required by applicable law and any voting rights granted to or
held by the holders of Preferred Stock, any alteration, amendment, repeal or
rescission of any provision of this Third Restated Certificate of Incorporation
must be approved by a majority of the directors of the Corporation then in
office and by the affirmative vote of the holders of two-thirds of the
outstanding Voting Stock of the Corporation.
Subject to the foregoing, the Corporation reserves the right to amend,
alter, repeal or rescind any provision contained in this Third Restated
Certificate of Incorporation in the manner now or hereafter prescribed by law,
and all rights conferred on stockholders herein are granted subject to this
reservation.
Section 2. Bylaws. The Board of Directors of the Corporation shall have
------
the power to adopt, amend, alter, change and repeal any Bylaws of the
Corporation by vote of a majority of the members of the Board of Directors of
the Corporation then in office.
31
<PAGE>
6. The foregoing Restated Certificate of Incorporation has been
approved by the Corporation's Board of Directors by written consent in
accordance with Section 141(f) of the Delaware General Corporation Law.
7. Pursuant to the provisions of Section 228 of the Delaware General
Corporation Law, the stockholders of this Corporation consented to the above
Restated Certificate of Incorporation.
IN WITNESS WHEREOF, Corinthian Colleges, Inc. has caused this Restated
Certificate of Incorporation to be signed by David Moore, its President, and
attested by Paul St. Pierre, its Secretary, this ____ day of
____________________, 1999.
CORINTHIAN COLLEGES, INC.
By: _______________________________________
David Moore
President
ATTEST:
By: ________________________________
Paul St. Pierre
Secretary
32
<PAGE>
EXHIBIT 5.1
[LETTERHEAD OF O'MELVENY & MYERS LLP]
February 1, 1999
OUR FILE NUMBER
178,254-7
Corinthian Colleges, Inc.
6 Hutton Centre Drive
Suite 400
Santa Ana, California 92707-5765
Ladies and Gentlemen:
At your request, we have examined the Registration Statement on Form S-1
(Registration No. 333-59505) (the "Registration Statement") filed by Corinthian
Colleges, Inc. (the "Company") with the Securities and Exchange Commission in
connection with the registration under the Securities Act of 1933, as amended,
of (a) 2,700,000 shares (the "Company Shares") of Common Stock, $0.0001 par
value per share, of the Company ("Common Stock"), and (b) an additional 405,000
shares of Common Stock (the "Selling Stockholders' Shares") that may be sold by
several of the Company's existing stockholders pursuant to an over-allotment
option to be granted to the underwriters.
We are familiar with the proceedings heretofore taken, and with the
additional proceedings proposed to be taken (as contemplated by the Registration
Statement), by the Company in connection with the authorization and issuance of
the Company Shares and the Selling Stockholders' Shares.
It is our opinion that, subject to said proceedings being duly taken and
completed by the Company as contemplated by the Registration Statement prior to
the issuance of the Company Shares, the Company Shares will be duly authorized
by all necessary corporate action on the part of the Company and, upon payment
for and delivery of the Company Shares in the manner contemplated by the
Registration Statement and the countersigning of the certificate or certificates
representing the Company Shares by a duly authorized signatory of the registrar
for the Company's Common Stock, the Company Shares will be validly issued, fully
paid and nonassessable shares of Common Stock of the Company. It is also our
opinion that the Selling Stockholders' Shares have been duly authorized by all
necessary corporate action on the part of the Company and are, or in the case of
shares which are proposed to be sold by Prudential Insurance Company of America
("Prudential"), following the exercise of certain warrants held by Prudential
(the "Prudential Warrants"), the payment of the aggregate warrant purchase price
as provided in the Prudential Warrants and the countersigning of the certificate
or certificates representing such shares by a duly authorized signatory of the
registrar for the Company's Common Stock, will be, validly issued, fully paid
and nonassessable shares of Common Stock of the Company.
The law covered by this opinion is limited to the present General
Corporation Law of the State of Delaware. We express no opinion as to the laws
of any other jurisdiction and no opinion regarding the statutes, administrative
decisions, rules, regulations or requirements of any county, municipality,
subdivision or local authority of any jurisdiction.
<PAGE>
O'MELVENY & MYERS LLP
Corinthian Colleges, Inc., February 1, 1999 - Page 2
We consent to the use of this opinion as an exhibit to the Registration
Statement and to the reference to our firm in the Prospectus which is a part of
the Registration Statement under the caption "Legal Matters."
Respectfully submitted,
/s/ O'MELVENY & MYERS LLP
O'MELVENY & MYERS LLP
<PAGE>
EXHIBIT 10.14
AMENDED AND RESTATED
EXECUTIVE STOCK AGREEMENT
-------------------------
THIS AMENDED AND RESTATED EXECUTIVE STOCK AGREEMENT (the "Agreement")
is made as of November 24, 1997, between Corinthian Colleges, Inc., a Delaware
corporation (the "Company"), and Dennis L. Devereux ("Executive").
The Company and Executive desire to amend and restate that certain
executive stock agreement by and between Executive and Corinthian Schools, Inc.
("CSI"), a wholly-owned subsidiary of the Company, dated June 30, 1995, and as
previously amended pursuant to the First Amendment to Executive Stock Agreement,
dated October 17, 1996 (as amended, the "Original Executive Stock Agreement"),
----------------------------------
pursuant to which Executive purchased, and CSI sold, 10,000 shares of CSI's
Class A Common Stock, par value $.01 per share, and 2,500 shares of CSI Class B
Common Stock , par value $.01 per share (together with the Class A Common Stock
of CSI, the "Old Common"). Executive paid a portion of such purchase price by
delivering to CSI for cancellation shares of common stock purchased by Executive
prior to the Original Executive Stock Agreement, and with respect to which
Executive has made additional capital contributions, the total amount previously
paid being $20,000. Pursuant to the Agreement of Merger adopted by the Company
in September 1996, each share of CSI Class A Common Stock was converted into the
right to receive one share of the Company's Class A Common Stock (the "Class A
Common") and each share of CSI Class B Common Stock was converted into the right
to receive one share of the Company's Class B Common Stock (the "Class B Common"
and, together with the Class A Common, the "Common Stock"). All of such shares
of Common Stock and all shares of Common Stock hereafter acquired by Executive
are referred to herein as "Executive Stock." Certain definitions are set forth
in paragraph 11 of this Agreement.
Certain provisions of this Agreement are intended for the benefit of,
and shall be enforceable by, the Investors and the other persons who are
entering into similar agreements ("Executive Stock Agreements") with the Company
as of the date hereof (Executive and such persons are collectively referred to
as "Executives").
The parties hereto agree to amend and restate the Original Executive
Stock Agreement as follows:
1. Purchase and Sale of Executive Stock.
------------------------------------
(a) Upon execution of this Agreement, Executive shall purchase, and
the Company shall sell, 10,000 shares of Class A Common at a price of $10.00 per
share and 2,500 shares of Class B Common at a price of $10.00 per share. The
Company shall deliver to Executive a copy of the certificates representing such
shares of Common Stock, and Executive shall deliver to the Company a cashier's
or certified check or wire transfer of funds in the
-1-
<PAGE>
aggregate amount of $80,025.00, a promissory note in the form of Annex A
-------
attached hereto in an aggregate principal amount of $24,975 (the "Executive
Note") and the certificates for the Old Common. Executive's obligations under
the Executive Note shall be secured by a pledge of all of the shares of Class B
Common to the Company, and in connection therewith, Executive shall enter into a
pledge agreement in the form of Annex B attached hereto.
-------
(b) The Company shall hold each certificate representing Executive
Stock until such time as the Executive Stock represented by such certificate is
released from the pledge to the Company, if any, and is fully vested hereunder.
(c) Within 30 days after Executive purchases any Executive Stock from
the Company, Executive shall make an effective election with the Internal
Revenue Service under Section 83(b) of the Internal Revenue Code and the
regulations promulgated thereunder and the equivalent election with the State of
California.
(d) In connection with the purchase and sale of the Executive Stock
hereunder, Executive represents and warrants to the Company that:
(i) The Executive Stock to be acquired by Executive pursuant
to this Agreement shall be acquired for Executive's own account and not
with a view to, or intention of, distribution thereof in violation of the
1933 Act, or any applicable state securities laws, and the Executive Stock
shall not be disposed of in contravention of the 1933 Act or any applicable
state securities laws.
(ii) Executive is an executive officer of the Company, is
sophisticated in financial matters and is able to evaluate the risks and
benefits of the investment in the Executive Stock.
(iii) Executive is able to bear the economic risk of his
investment in the Executive Stock for an indefinite period of time because
the Executive Stock has not been registered under the 1933 Act and,
therefore, cannot be sold unless subsequently registered under the 1933 Act
or an exemption from such registration is available.
(iv) Executive has had an opportunity to ask questions and
receive answers concerning the terms and conditions of the offering of
Executive Stock and has had full access to such other information
concerning the Company as he has requested. Executive has also reviewed,
or has had an opportunity to review, the following documents: (A) the
Company's Certificate of Incorporation and Bylaws; and (B) the agreements,
notes and related documents with the Company's lenders and equity
investors.
(v) This Agreement constitutes the legal, valid and binding
obligation of Executive, enforceable in accordance with its terms, and the
execution, delivery and
-2-
<PAGE>
performance of this Agreement by Executive does not and shall not conflict
with, violate or cause a breach of any agreement, contract or instrument to
which Executive is a party or any judgment, order or decree to which
Executive is subject.
(vi) Executive has obtained advice from persons other than the
Investors and their counsel regarding the tax effects of the transaction
contemplated hereby.
(e) Executive acknowledges and agrees that neither the issuance of the
Executive Stock to Executive nor any provision contained herein shall entitle
Executive to remain in the employment of the Company and its Subsidiaries.
(f) The Company and Executive acknowledge and agree that this
Agreement has been executed and delivered, and the Executive Stock has been
issued hereunder, in connection with and as a part of the compensation and
incentive arrangements between the Company and Executive.
(g) The Company acknowledges that Executive is given certain
contractual preemptive rights, together with the Investors, in the Purchase
Agreement (paragraph 3J) with respect to future issuances of equity securities
of the Company notwithstanding the fact that Executive is not a named party
thereto.
(h) Executive represents and warrants to the Company and the Investors
that he has not entered and will not during the term of this Agreement enter
into any agreement with any of the other Executives with respect to the voting
of his or their shares or the sharing of the economic benefits thereof.
2. Vesting of Executive Stock.
--------------------------
(a) (i) Except as otherwise provided in paragraph 2(b) below, the
Executive Stock which is Class A Common shall become vested in accordance with
the following schedule, if as of each such date Executive is employed by the
Company or any of its Subsidiaries:
Cumulative
Percentage of Class A Executive
Date Stock Vested
---------- -------------------------------
the date hereof 75.0%
June 30, 1998 87.5%
June 30, 1999 100.0%
(ii) Except as otherwise provided in paragraph 2(b) below, the
Executive Stock which is Class B Common (the "Performance Vesting Shares") shall
become vested if:
(A) The Executive is employed by the Company and any of its
Subsidiaries on June 30, 2005 and there has been no Sale of the Company (as
defined herein); or
-3-
<PAGE>
(B) (1) on or before December 31, 1999, a Trigger Event, as defined
below, has occurred, (2) Executive is employed by the Company or any of its
Subsidiaries on the date of closing of such Trigger Event and (3):
(I) as to one-third of the Performance Vesting Shares (the "2.5%
Shares") the Total Company Value shall equal or exceed $50,000,000, and
(II) as to the remaining Performance Vesting Shares (the "5% Shares")
to the extent that the Total Company Value exceeds $50,000,000, the number
of 5% Shares which shall vest is equal to the product of (I) the quotient
determined by dividing the amount that the Total Company Value exceeds
$50,000,000 by $20,000,000 and (II) the maximum number of 5% Shares.
For example, if the Total Company Value at the time of the
Trigger Event is $58,000,000 and the maximum number of 5% Shares
is 3,333 (assuming, for purposes of this example only, a maximum
of 5,000 Performance Vesting Shares) then the number of 5% Shares
which shall become vested is 1333 (8,000,000 / 20,000,000 x
3,333 = 1333).
The determination of the Total Company Value, shall be made upon occurrence of
and as of the date of closing of either of the following "Trigger Events":
(A) the Company has closed an underwritten initial public offering
("IPO") of Common Stock registered under the 1933 Act in which the net proceeds
to the Company is at least $20,000,000, provided however, that prior to or as a
result of the IPO all outstanding shares of the Company's Series A Preferred
Stock (the "Preferred Stock") are redeemed by the Company, or;
(B) a "Sale of the Company" as defined herein.
(b) Upon the occurrence of a Sale of the Company, a Qualified Public
Offering or the death or permanent disability of Executive, all shares of
Executive Stock which are Class A Common which have not yet become vested shall
become vested at the time of such event. For purposes of this paragraph 2(b),
the determination of permanent disability shall be made in good faith by the
Company's board of directors (the "Board"). Shares of Executive Stock which
have become vested are referred to herein as "Vested Shares," and all other
shares of Executive Stock are referred to herein as "Unvested Shares."
(c) The Company shall upon the written request of a holder of
Executive Stock which is Class B Common Stock issue and exchange therefor shares
of Class A Common on a share-for-share basis at any time on or after a Sale of
the Company or a Qualified Public Offering.
3. Repurchase Option.
-----------------
(a) In the event (i) Executive ceases to be employed by the Company
and its Subsidiaries for any reason (the "Termination"), the Executive Stock
(whether held by Executive or one or more of Executive's transferees) or (ii)
there is a Sale of the Company after December 31, 1999, the Unvested Shares of
the Performance Vesting Shares (whether held by Executive
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<PAGE>
or one or more of Executive's transferees) shall be subject to repurchase by the
Company and the Investors pursuant to the terms and conditions set forth in this
paragraph 3 (the "Repurchase Option"); provided that the Repurchase Option shall
not apply to the shares which vest on the date hereof unless Executive
voluntarily terminated such employment prior to the second anniversary of the
date hereof (in which event the Repurchase Option will apply to such shares).
(b) The purchase price for each Unvested Share shall be Executive's
Original Cost for such share (with shares having the lowest cost subject to
repurchase prior to shares with a higher cost), and the purchase price for each
Vested Share shall be the Fair Market Value for such share.
(c) The Board may elect to purchase all or any portion of the Unvested
Shares and the Vested Shares by delivering written notice (the "Repurchase
Notice") to the holder or holders of the Executive Stock within 30 days after
the Termination. The Repurchase Notice shall set forth the number of Unvested
Shares and Vested Shares to be acquired from each holder of Executive Stock, the
aggregate consideration to be paid for such shares and the time and place for
the closing of the transaction. If the number of shares of Executive Stock then
held by Executive is less than the total number of shares of Executive Stock the
Company has elected to purchase, the Company shall purchase the remaining shares
elected to be purchased from the other holder(s) of Executive Stock under this
Agreement, pro rata according to the number of shares of Executive Stock held by
such other holder(s) at the time of delivery of such Repurchase Notice
(determined as close as practicable to the nearest whole shares). The number of
shares to be repurchased by the Company shall first be satisfied to the extent
possible from the shares of Executive Stock held by Executive at the time of
delivery of the Repurchase Notice.
(d) If for any reason the Company does not elect to purchase all of
the Executive Stock pursuant to the Repurchase Option, the Investors and the
other Executives who are then employed by the Company or one of its Subsidiaries
(the "Continuing Executives") shall be entitled to exercise the Repurchase
Option for the shares of Executive Stock the Company has not elected to purchase
(the "Available Shares"). As soon as practicable after the Company has
determined that there will be Available Shares, but in any event within 45 days
after the Termination, the Company shall give written notice (the "Option
Notice") to the Investors and the Continuing Executives setting forth the number
of Available Shares and the purchase price for the Available Shares. The
Investors and the Continuing Executives may elect to purchase any or all of the
Available Shares by giving written notice to the Company within 30 days after
the Option Notice has been given by the Company. If the Investors and the
Continuing Executives elect to purchase an aggregate number of shares greater
than the number of Available Shares, the Available Shares shall be allocated
among the Investors and the Continuing Executives based upon the number of
shares of Common Stock owned by each Investor and the Continuing Executive on a
fully-diluted basis (provided, however, that no Class B Common which is not yet
vested under the Executive Stock Agreements will be counted for this purpose).
As soon as practicable, and in any event within ten days after the expiration of
the 15-day period set forth above, the Company shall notify each holder of
Executive Stock as to the number of shares being purchased from such holder by
the Investors and the Continuing Executives (the "Supplemental Repurchase
Notice"). At the time the Company delivers the Supplemental Repurchase Notice
to the holder(s) of Executive Stock, the Company shall also deliver written
-5-
<PAGE>
notice to each Investor and Continuing Executive setting forth the number of
shares such Person is entitled to purchase, the aggregate purchase price and the
time and place of the closing of the transaction. The number of shares to be
repurchased by the Investors and the Continuing Executives shall first be
satisfied to the extent possible from the shares of Executive Stock held by
Executive at the time of delivery of the Repurchase Notice.
(e) The closing of the purchase of the Executive Stock pursuant to the
Repurchase Option shall take place on the date designated by the Company in the
Repurchase Notice or Supplemental Repurchase Notice, which date shall not be
more than 30 days nor less than five days after the delivery of the later of
either such notice to be delivered. The Company and/or the Investors and
Continuing Executives shall pay for the Executive Stock to be purchased pursuant
to the Repurchase Option by delivery of, a check or wire transfer of funds. In
addition, the Company may pay the purchase price for such shares by offsetting
amounts outstanding under the Executive Note issued to the Company hereunder and
any other bona fide debts owed by Executive to the Company. The sellers of
Executive Stock hereunder shall be deemed to make customary representations and
warranties to the purchasers regarding such sale of shares (including
representations and warranties regarding good title to such shares, free and
clear of any liens or encumbrances). The purchasers may require written
confirmation of such representations and require all sellers' signatures be
guaranteed by a national bank or reputable securities broker.
(f) The right of the Company and the Investors and the Continuing
Executives to repurchase Vested Shares pursuant to this paragraph 3 shall
terminate upon the first to occur of the Sale of the Company or a Qualified
Public Offering.
(g) If Executive's employment by the Company and its Subsidiaries, if
any, is terminated by the Company other than for Cause, the Company shall pay
Executive as severance an amount equal to his cash base salary compensation
(i.e., excluding any bonuses) during the preceding 12 months in equal monthly
installments on the first business day of each of the next 12 months.
4. Restrictions on Transfer.
------------------------
(a) Retention of Executive Stock. Until the expiration of 54 months
----------------------------
after the date of this Agreement, Executive shall not sell, transfer, assign,
pledge or otherwise dispose of any interest in any shares of Executive Stock,
except for Exempt Transfers (as defined in paragraph 4(b) below) and sales to
the public pursuant to Rule 144 promulgated under the 1933 Act or any similar
rule then in force.
(b) Transfer of Executive Stock. Executive shall not sell, transfer,
---------------------------
assign, pledge or otherwise dispose of (whether with or without consideration
and whether voluntarily or involuntarily or by operation of law) any interest in
any shares of Executive Stock (a "Transfer"), except pursuant to (i) the
provisions of paragraph 3 hereof, a Sale of the Company or a Public Sale
("Exempt Transfers") or (ii) the provisions of this paragraph 4; provided that
in no event shall any Transfer of Executive Stock pursuant to this paragraph 4
be made for any consideration other than cash payable upon consummation of such
Transfer or in installments over time. Prior to making any Transfer other than
an Exempt Transfer, Executive shall deliver written notice (the "Sale Notice")
to the Company and the Investors. The Sale Notice shall disclose in
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<PAGE>
reasonable detail the identity of the prospective transferee(s), the number of
shares to be transferred and the terms and conditions of the proposed transfer.
Executive shall not consummate any Transfer until 30 days after the Sale Notice
has been given to the Company and to the Investors, unless the parties to the
Transfer have been finally determined pursuant to this paragraph 4 prior to the
expiration of such 30-day period. (The date of the first to occur of such events
is referred to herein as the "Authorization Date".)
(c) First Refusal Rights. The Company may elect to purchase all (but
--------------------
not less than all) of the shares of Executive Stock to be transferred upon the
same terms and conditions as those set forth in the Sale Notice by delivering a
written notice of such election to Executive and the Investors within 10 days
after the Sale Notice has been delivered to the Company. If the Company has not
elected to purchase all of the Executive Stock to be transferred, the Investors
may elect to purchase all (but not less than all) of the Executive Stock to be
transferred upon the same terms and conditions as those set forth in the Sale
Notice by delivering written notice of such election to Executive within 10 days
after the Sale Notice has been given to the Investors. If more than one
Investor elects to purchase the Executive Stock, the shares of Executive Stock
to be sold shall be allocated among the Investors pro rata according to the
number of shares of Common Stock owned by each Investor on a fully-diluted
basis. If neither the Company nor the Investors elect to purchase all of the
shares of Executive Stock specified in the Sale Notice, Executive may transfer
the shares of Executive Stock specified in the Sale Notice at a price and on
terms no more favorable to the transferee(s) thereof than specified in the Sale
Notice during the 60-day period immediately following the Authorization Date.
Any shares of Executive Stock not transferred within such 60-day period shall be
subject to the provisions of this paragraph 4(c) upon subsequent transfer. If
the Company or any of the Investors have elected to purchase shares of Executive
Stock hereunder, the transfer of such shares shall be consummated as soon as
practical after the delivery of the election notice(s) to Executive, but in any
event within 15 days after the expiration of the Election Period. The Company
may pay the purchase price for such shares by offsetting amounts outstanding
under the Executive Note issued to the Company hereunder and any other bona fide
debts owed by Executive to the Company.
(d) Certain Permitted Transfers. The restrictions contained in this
---------------------------
paragraph 4 shall not apply with respect to transfers of shares of Executive
Stock (i) pursuant to applicable laws of descent and distribution or (ii) among
Executive's family group; provided that such restrictions shall continue to be
applicable to the Executive Stock after any such transfer and the transferees of
such Executive Stock shall have agreed in writing to be bound by the provisions
of this Agreement. Executive's "family group" means Executive's spouse and
descendants (whether natural or adopted) and any trust solely for the benefit of
Executive and/or Executive's spouse and/or descendants.
(e) Pledges. Notwithstanding the provisions of this paragraph 4,
-------
Executive may pledge any shares of Executive Stock to the Company to secure
payment of the Executive Note.
(f) Termination of Restrictions. The restrictions on the transfer of
---------------------------
shares of Executive Stock set forth in this paragraph 4 shall continue with
respect to each share of Executive Stock following any Transfer thereof (other
than a Public Sale); provided that in any event such restrictions shall
terminate on the first to occur of a Sale of the Company or a Qualified Public
Offering.
-7-
<PAGE>
5. Additional Restrictions on Transfer.
-----------------------------------
(a) The certificates representing the Executive Stock shall bear the
following legend:
"THE SECURITIES REPRESENTED BY THIS CERTIFICATE WERE ORIGINALLY ISSUED ON
JUNE 30, 1995, HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933,
AS AMENDED OR ANY APPLICABLE STATE SECURITIES LAW, AND MAY NOT BE SOLD OR
TRANSFERRED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT OR AN
EXEMPTION FROM REGISTRATION THEREUNDER. THE SECURITIES REPRESENTED BY THIS
CERTIFICATE ARE ALSO SUBJECT TO ADDITIONAL RESTRICTIONS ON TRANSFER,
CERTAIN REPURCHASE OPTIONS AND CERTAIN OTHER AGREEMENTS SET FORTH IN AN
EXECUTIVE STOCK AGREEMENT BETWEEN THE COMPANY AND DENNIS L. DEVEREUX DATED
AS OF JUNE 30, 1995, AS AMENDED AND MODIFIED FROM TIME TO TIME. A COPY OF
SUCH AGREEMENT MAY BE OBTAINED BY THE HOLDER HEREOF AT THE COMPANY'S
PRINCIPAL PLACE OF BUSINESS WITHOUT CHARGE."
(b) No holder of Executive Stock may sell, transfer or dispose of any
Executive Stock (except pursuant to an effective registration statement under
the 1933 Act) without first delivering to the Company an opinion of counsel
(reasonably acceptable in form and substance to the Company) that neither
registration nor qualification under the 1933 Act and applicable state
securities laws is required in connection with such transfer.
(c) Each holder of Executive Stock agrees not to effect any public
sale or distribution of any Executive Stock or other equity securities of the
Company, or any securities convertible into or exchangeable or exercisable for
any of the Company's equity securities, during the seven days prior to and the
180 days after the effectiveness of any underwritten public offering, except as
part of such underwritten public offering or if otherwise permitted by the
Company.
6. Sale of the Company.
-------------------
(a) If the Board and the holders of a majority of the Company's
Preferred Stock and Common Stock approve a Sale of the Company (the "Approved
Sale"), the holders of Executive Stock shall consent to and raise no objections
against the Approved Sale of the Company, and if the Approved Sale of the
Company is structured as a sale of stock, the holders of Executive Stock shall
agree to sell their shares of Executive Stock and surrender their stock options
on the terms and conditions approved by the Board and the holders of a majority
of the Company's Preferred Stock and Common Stock. The holders of Executive
Stock shall take all necessary and desirable actions in connection with the
consummation of the Approved Sale of the Company.
-8-
<PAGE>
(b) The obligations of the holders of Executive Stock with respect to
the Approved Sale of the Company are subject to the satisfaction of the
following conditions: (i) upon the consummation of the Approved Sale, all of the
holders of Common Stock shall receive the same form and amount of consideration
per share of Common Stock, or if any holders of Common Stock are given an option
as to the form and amount of consideration to be received, all holders shall be
given the same option; and (ii) all holders of then currently exercisable rights
to acquire shares of Common Stock shall be given an opportunity to either (A)
exercise such rights prior to the consummation of the Approved Sale and
participate in such sale as holders of Common Stock or (B) upon the consummation
of the Approved Sale, receive in exchange for such rights consideration equal to
the amount determined by multiplying (1) the same amount of consideration per
share of Common Stock received by the holders of Common Stock in connection with
the Approved Sale less the exercise price per share of Common Stock of such
rights to acquire Common Stock by (2) the number of shares of Common Stock
represented by such rights.
(c) If the Company or the holders of the Company's securities enter
into any negotiation or transaction for which Rule 506 (or any similar rule then
in effect) promulgated by the Securities Exchange Commission may be available
with respect to such negotiation or transaction (including a merger,
consolidation or other reorganization), the holders of Executive Stock shall at
the request of the Company, appoint a "purchaser representative" (as such term
is defined in Rule 501) reasonably acceptable to the Company. If any holder of
Executive Stock appoints a purchaser representative designated by the Company,
the Company shall pay the fees of such purchaser representative. However, if
any holder of Executive Stock declines to appoint the purchaser representative
designated by the Company, such holder shall appoint another purchaser
representative (reasonably acceptable to the Company), and such holder shall be
responsible for the fees of the purchaser representative so appointed.
(d) Executive and the other holders of Executive Stock (if any) shall
bear their pro-rata share (based upon the number of all shares sold by each
seller including the Investors and each other Executive) of the costs of any
sale of Executive Stock pursuant to an Approved Sale to the extent such costs
are incurred for the benefit of all holders of Common Stock and are not
otherwise paid by the Company or the acquiring party. Costs incurred by
Executive and the other holders of Executive Stock on their own behalf shall not
be considered costs of the transaction hereunder.
(e) The provisions of this paragraph 6 shall terminate upon the
completion of a Qualified Public Offering.
7. Voting Agreement and Tag-Along.
------------------------------
(a) So long as the Investors hold any shares of Common Stock, each
Investor and Executive shall vote all of their shares of Common Stock (and, in
the event such holder is entitled to vote any of the Company's other securities
for the election of directors, such holder shall vote all such securities) and
take all other reasonably necessary actions in such holder's capacity as a
stockholder of the Company, and the Company shall take all necessary or
desirable actions as are requested by the Investors and Executive, in order to
cause two of the executive officers of the Company (one of which should be the
Company's Chief Executive Officer) representatives designated by Executives
holding a majority of the Common Stock held by all
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<PAGE>
Executives to be elected as members of the Board and to cause two
representatives designated by Investors holding a majority of the Common Stock
held by the Investors to be elected to the Board. The provisions of this
paragraph 7 shall terminate upon the first to occur of a Qualified Public
Offering and the tenth anniversary of this Agreement.
(b) If either Investor desires to sell any of its Common Stock or if
holders of Executive Stock, after complying with the other provisions of this
Agreement, including paragraph 3, desire to sell any of their shares of Common
Stock, the proposed seller shall give written notice thereof (a "Sale Notice")
to the Company, the Investors and each holder of Common Stock issued under this
Agreement and the other Executive Stock Agreements at least 10 days prior to the
proposed sale and each such Person other than the seller may elect to
participate in the sale by written notice to the Company and the seller given
within 10 days after receipt of the Sale Notice. The electing Persons shall be
entitled to sell in the contemplated sale, at the same price and on the same
terms, a number of shares of the Company's Common Stock equal to the product of
(i) the quotient determined by dividing the percentage of the Company's Common
Stock (on a fully-diluted basis) held by such electing Person, by the aggregate
percentage of the Company's Common Stock (on a fully-diluted basis) owned by the
Seller and all electing Persons and (ii) the number of shares of Common Stock to
be sold in the contemplated sale.
For example, if the Executive delivered a Sale Notice contemplated a sale
of 100 shares of Common Stock, and if Executive was at such time the owner
of 5% of the Company's Common Stock (on a fully-diluted basis) and if one
Investor elected to participate and the Investor owned 20% of the Company's
Common Stock (on a fully-diluted basis), Executive would be entitled to
sell 20 shares (5% / 25% x 100 shares) and the Investor would be entitled
to sell 80 shares (20% x 25% x 100 shares).
The provisions of this paragraph (b) shall terminate upon a Qualified Public
Offering.
8. Nondisclosure and Nonuse of Confidential Information.
----------------------------------------------------
(a) Executive shall not disclose or use at any time, either during his
employment with the Company or thereafter, any Confidential Information (as
defined below) of which Executive is or becomes aware, whether or not such
information is developed by him, except to the extent that such disclosure or
use is directly related to and required by Executive's performance of duties
assigned to Executive by the Company. Executive shall take all appropriate
steps to safeguard Confidential Information and to protect it against
disclosure, misuse, espionage, loss and theft.
(b) As used in this Agreement, the term "Confidential Information"
means information that is not generally known to the public and that is used,
developed or obtained by the Company in connection with its business, including
but not limited to (i) products or services, (ii) fees, costs and pricing
structures, (iii) designs, (iv) analysis, (v) drawings, photographs and reports,
(vi) computer software, including operating systems, applications and program
listings, (vii) flow charts, manuals and documentation, (viii) data bases, (ix)
accounting and business methods, (x) inventions, devices, new developments,
methods and processes,
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<PAGE>
whether patentable or unpatentable and whether or not reduced to practice, (xi)
customers and clients and customer or client lists, (xii) copyrightable works,
(xiii) all information comprising the Transferred Property, (xiv) all technology
and trade secrets, and (xv) all similar and related information in whatever
form. Confidential Information shall not include any information that has been
published in the form generally available to the public prior to the date
Executive purposes to disclose or use such information. Information shall not be
deemed to have been published merely because individual portions of the
information have been separately published, but only if all material features
comprising such information have been published in combination.
9. Consulting and Noncompetition. Executive acknowledges and agrees
-----------------------------
with the Company that Executive's services to the Company are unique in nature
and that the Company would be irreparably damaged if Executive were to provide
similar services to any person or entity competing with the Company or engaged
in a similar business. Executive accordingly covenants and agrees with the
Company that during the period commencing with the date of this Agreement and,
as long as the Company compensates Executive as a consultant at an amount
payable monthly equal to 10% of Executive's cash compensation in the 12 months
preceding his termination of employment, thereafter until the third anniversary
of the date of the termination of Executive's employment with the Company (the
"Noncompetition Period"), Executive shall not, directly or indirectly, either
for himself or for any other individual, corporation, partnership, joint venture
or other entity, participate in any business (including, without limitation, any
division, group or franchise of a larger organization) which (i) engages or
which proposes to engage in the acquisition, disposition, operation or
management of allied health schools anywhere in the U.S. or (ii) which operates
or plans to operate schools of any type in the same geographic areas as Company
at the time of such termination. For purposes of this Agreement, the term
"participate in" shall include, without limitation, having any director or
indirect interest in any corporation, partnership, joint venture or other
entity, whether as a sole proprietor, owner, stockholder, partner, joint
venturer, creditor or otherwise, or rendering any direct or indirect service or
assistance to any individual, corporation, partnership, joint venture and other
business entity (whether as a director, officer, manager, supervisor, employee,
agent, consultant or otherwise).
10. Nonsolicitation. During the Noncompetition Period, Executive
---------------
shall not (i) induce or attempt to induce any employee of the Company to leave
the employ of the Company, or in any way interfere with the relationship between
the Company and any employee thereof, (ii) hire directly or through another
entity any person who was an employee of the Company at any time during the
Noncompetition Period, or (iii) induce or attempt to induce any customer,
supplier, licensee or other business relation of the Company to cease doing
business with the Company, or in any way interfere with the relationship between
such customer, supplier, licensee or business relation and the Company
(including, without limitation, making any negative statements or communications
concerning the Company).
11. Definitions.
-----------
"Cause" means (i) the commission of a felony or a crime involving
-----
moral turpitude or the commission of any other act or omission involving
dishonesty, disloyalty or fraud with respect to the Company or any of its
Subsidiaries or any of their customers or suppliers, (ii) conduct tending to
bring the Company or any of its Subsidiaries into substantial
-11-
<PAGE>
public disgrace or disrepute, (iii) substantial and repeated failure to perform
duties as reasonably directed by the Board, (iv) gross negligence or willful
misconduct with respect to the Company or any of its Subsidiaries or (v) any
material breach of this Agreement which is not cured within 15 days after
written notice thereof to Executive.
"Executive Stock" shall continue to be Executive Stock in the hands of
---------------
any holder other than Executive (except for the Company and the Investors and
except for transferees in a Public Sale), and except as otherwise provided
herein, each such other holder of Executive Stock shall succeed to all rights
and obligations attributable to Executive as a holder of Executive Stock
hereunder. Executive Stock shall also include shares of the Company's capital
stock issued with respect to Executive Stock by way of a stock split, stock
dividend or other recapitalization. Notwithstanding the foregoing, all Unvested
Shares shall remain Executive Stock after any Transfer thereof.
"Fair Market Value" of each share of Executive Stock means the average
-----------------
of the closing prices of the sales of the Company's Common Stock on all
securities exchanges on which the Common Stock may at the time be listed, or, if
there have been no sales on any such exchange on any day, the average of the
highest bid and lowest asked prices on all such exchanges at the end of such
day, or, if on any day the Common Stock is not so listed, the average of the
representative bid and asked prices quoted in the Nasdaq National Market as of
4:00 P.M., New York time, or, if on any day the Common Stock is not quoted in
the Nasdaq National Market, the average of the highest bid and lowest asked
prices on such day in the domestic over-the-counter market as reported by the
National Quotation Bureau Incorporated, or any similar successor organization,
in each such case averaged over a period of 21 days consisting of the day as of
which the Fair Market Value is being determined and the 20 consecutive business
days prior to such day. If at any time the Common Stock is not listed on any
securities exchange or quoted in the Nasdaq National Market or the over-the-
counter market, the Fair Market Value shall be the fair value of the Common
Stock determined in good faith by the Board or, if the Executive disagrees with
such value, the fair market value determined by an independent appraiser
mutually acceptable to the Board and Executive(in each case without taking into
account the effect of any contemporaneous repurchase of Unvested Shares under
paragraph 3 hereof); provided that if such appraised value is higher than that
established by the Board the purchasers of the shares involved shall not be
required to consummate the related purchase.
"Independent Third Party" means any person who, immediately prior to
-----------------------
the contemplated transaction, does not own in excess of 5% of the Company's
Common Stock on a fully-diluted basis, who is not controlling, controlled by or
under common control with any such 5% owner of the Company's Common Stock and
who is not the spouse or descendent (by birth or adoption) of any such 5% owner
of the Company's Common Stock.
"Investors" means Primus Capital Partners III Limited Partnership and
---------
BOCPII, Limited Liability Company, successor by merger to Bank One Capital
Partners II, Limited Partnership.
"1933 Act" means the Securities Act of 1933, as amended from time to
--------
time.
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<PAGE>
"Original Cost" of each share of Common Stock purchased hereunder
-------------
shall be equal to $10.00 (as proportionately adjusted for all subsequent stock
splits, stock dividends and other recapitalizations).
"Qualified Public Offering" means the sale by the Company, in an
-------------------------
underwritten public offering registered under the 1933 Act, of shares of the
Company's Common Stock having an aggregate offering value of at least $10
million and where the per share price to the public multiplied by the number of
shares of Common Stock issued under the Purchase Agreement and this and the
other Executive Stock Agreements (adjusted for stock splits and other
recapitalizations) is at least $30,000,000.
"Permitted Transferee" means any holder of Executive Stock who
--------------------
acquired such stock pursuant to a transfer permitted by paragraph 4(d).
"Public Sale" means any sale pursuant to a registered public offering
-----------
under the 1933 Act or any sale to the public pursuant to Rule 144 promulgated
under the 1933 Act effected through a broker, dealer or market maker.
"Sale of the Company" means the sale of the Company to an Independent
-------------------
Third Party or affiliated group of Independent Third Parties pursuant to which
such party or parties acquire (i) capital stock of the Company possessing the
voting power to elect a majority of the Company's board of directors (whether by
merger, consolidation or sale or transfer of the Company's capital stock) or
(ii) all or substantially all of the Company's assets determined on a
consolidated basis.
"Subsidiary" means any corporation of which the Company owns
----------
securities having a majority of the ordinary voting power in electing the board
of directors directly or through one or more subsidiaries.
"Total Company Value" means the product of (i) as to an IPO, the price
-------------------
per share to the public in such IPO, and as to a Sale of the Company, the price
per share received by holders of common stock and (ii) 134,408.60 (adjusted for
any stock splits, stock dividends, combinations of shares or the like after the
date hereof).
12. Notices. Any notice provided for in this Agreement must be in
-------
writing and must be either personally delivered, mailed by first class mail
(postage prepaid and return receipt requested) or sent by reputable overnight
courier service (charges prepaid) to the recipient at the address below
indicated:
To the Company:
6 Hutton Centre Drive
Suite 400
Santa Ana, CA 92707-5164
Attention: President
With copies to:
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<PAGE>
David A. Krinsky, Esq.
O'Melveny & Myers
610 Newport Center Drive, Suite 1700
Newport Beach, CA 92660-6429
To Executive:
Dennis L. Devereux
24795 San Pedro Avenue
Laguna Hills, CA 92653
To the Investors: As specified in the Purchase Agreement
or such other address or to the attention of such other person as the recipient
party shall have specified by prior written notice to the sending party. Any
notice under this Agreement shall be deemed to have been given when so delivered
or sent or, if mailed, five days after deposit in the U.S. mail.
13. General Provisions.
------------------
(a) Transfers in Violation of Agreement. Any Transfer or
-----------------------------------
attempted Transfer of any Executive Stock in violation of any provision of this
Agreement shall be void, and the Company shall not record such Transfer on its
books or treat any purported transferee of such Executive Stock as the owner of
such stock for any purpose.
(b) Severability. Whenever possible, each provision of this
------------
Agreement shall be interpreted in such manner as to be effective and valid under
applicable law, but if any provision of this Agreement is held to be invalid,
illegal or unenforceable in any respect under any applicable law or rule in any
jurisdiction, such invalidity, illegality or unenforceability shall not affect
any other provision or any other jurisdiction, but this Agreement shall be
reformed, construed and enforced in such jurisdiction as if such invalid,
illegal or unenforceable provision had never been contained herein.
(c) Complete Agreement. This Agreement, those documents expressly
------------------
referred to herein and other documents of even date herewith embody the complete
agreement and understanding among the parties and supersede and preempt any
prior understandings, agreements or representations by or among the parties,
written or oral, which may have related to the subject matter hereof in any way.
(d) Counterparts. This Agreement may be executed in separate
------------
counterparts, each of which is deemed to be an original and all of which taken
together constitute one and the same agreement.
(e) Successors and Assigns. Except as otherwise provided herein,
this Agreement shall bind and inure to the benefit of and be enforceable by
Executive, the Company,
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the Investors and their respective successors and assigns (including subsequent
holders of Executive Stock); provided that the rights and obligations of
Executive under this Agreement shall not be assignable except in connection with
a permitted transfer of Executive Stock hereunder.
(f) Choice of Law. The corporate law of the State of Delaware shall
-------------
govern all questions concerning the relative rights of the Company and its
stockholders. All other questions concerning the construction, validity,
enforcement and interpretation of this Agreement and the exhibits hereto shall
be governed by the internal law, and not the law of conflicts, of the State of
California.
(g) Remedies. Each of the parties to this Agreement (including the
--------
Investors) shall be entitled to enforce its rights under this Agreement
specifically, to recover damages and costs (including reasonable attorney's
fees) caused by any breach of any provision of this Agreement and to exercise
all other rights existing in its favor. The parties hereto agree and acknowledge
that money damages would not be an adequate remedy for any breach of the
provisions of this Agreement and that any party may in its sole discretion apply
to any court of law or equity of competent jurisdiction (without posting any
bond or deposit) for specific performance and/or other injunctive relief in
order to enforce or prevent any violations of the provisions of this Agreement.
(h) Amendment and Waiver. The provisions of this Agreement may be
--------------------
amended and waived only with the prior written consent of the Company, Executive
and Investors owning a majority of the Common Stock on a fully-diluted basis
held by all Investors.
(i) Third-Party Beneficiaries. Certain provisions of this Agreement
-------------------------
are entered into for the benefit of and shall be enforceable by the Investors
and other Executives as provided herein.
(j) Business Days. If any time period for giving notice or taking
-------------
action hereunder expires on a day which is a Saturday, Sunday or legal holiday
in the state in which the Company's chief executive office is located, the time
period shall be automatically extended to the business day immediately following
such Saturday, Sunday or holiday.
14 Initial Public Offering. In the event that the Board and the
-----------------------
holders of a majority of the shares of Common Stock (voting as a single class)
then outstanding approve an initial public offering of Common Stock (a "Public
Offering") pursuant to an effective registration statement under the Securities
Act, Executive shall take all reasonably necessary or desirable actions in
connection with the consummation of the Public Offering as requested by the
Company.
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<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement on the date
first written above.
CORINTHIAN COLLEGES, INC.
By /s/ FRANK J. McCORD
--------------------------------
Its Exec. VP & CFO
-------------------------------
/s/ DENNIS L. DEVEREUX
-----------------------------------
DENNIS L. DEVEREUX
/s/ FRANK J. McCORD
-----------------------------------
Witness
Agreed and Accepted:
PRIMUS CAPITAL FUND III
LIMITED PARTNERSHIP
By: Primus Venture Partners, Inc.
By /s/ LOYAL N. WILSON
--------------------------------
Its President
-------------------------------
BOCPII, LIMITED LIABILITY COMPANY
By /s/ EARLE J. BENSING
--------------------------------
Its Authorized Signer
-------------------------------
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<PAGE>
EXHIBIT 10.15
AMENDED AND RESTATED
EXECUTIVE STOCK AGREEMENT
-------------------------
THIS AMENDED AND RESTATED EXECUTIVE STOCK AGREEMENT (the "Agreement")
is made as of November 24, 1997, between Corinthian Colleges, Inc., a Delaware
corporation (the "Company"), and Lloyd W. Holland ("Executive").
The Company and Executive desire to amend and restate that certain
executive stock agreement by and between Executive and Corinthian Schools, Inc.
("CSI"), a wholly-owned subsidiary of the Company, dated June 30, 1995, and as
previously amended pursuant to the First Amendment to Executive Stock Agreement,
dated October 17, 1996 (as amended, the "Original Executive Stock Agreement"),
----------------------------------
pursuant to which Executive purchased, and CSI sold, 10,000 shares of CSI's
Class A Common Stock, par value $.01 per share, and 2,500 shares of CSI's Class
B Common Stock , par value $.01 per share (together with the Class A Common
Stock of CSI, the "Old Common"). Executive paid a portion of such purchase
price by delivering to CSI for cancellation shares of common stock purchased by
Executive prior to the Original Executive Stock Agreement, and with respect to
which Executive has made additional capital contributions, the total amount
previously paid being $20,000. Pursuant to the Agreement of Merger adopted by
the Company in September 1996, each share of CSI Class A Common Stock was
converted into the right to receive one share of the Company's Class A Common
Stock (the "Class A Common") and each share of CSI Class B Common Stock was
converted into the right to receive one share of the Company's Class B Common
Stock (the "Class B Common" and, together with the Class A Common, the "Common
Stock"). All of such shares of Common Stock and all shares of Common Stock
hereafter acquired by Executive are referred to herein as "Executive Stock."
Certain definitions are set forth in paragraph 11 of this Agreement.
Certain provisions of this Agreement are intended for the benefit of,
and shall be enforceable by, the Investors and the other persons who are
entering into similar agreements ("Executive Stock Agreements") with the Company
as of the date hereof (Executive and such persons are collectively referred to
as "Executives").
The parties hereto agree to amend and restate the Original Executive
Stock Agreement as follows:
1. Purchase and Sale of Executive Stock.
------------------------------------
(a) Upon execution of this Agreement, Executive shall purchase, and
the Company shall sell, 10,000 shares of Class A Common at a price of $10.00 per
share and 2,500 shares of Class B Common at a price of $10.00 per share. The
Company shall deliver to Executive a copy of the certificates representing such
shares of Common Stock, and Executive shall deliver to the Company a cashier's
or certified check or wire transfer of funds in the
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aggregate amount of $80,025.00, a promissory note in the form of Annex A
-------
attached hereto in an aggregate principal amount of $24,975 (the "Executive
Note") and the certificates for the Old Common. Executive's obligations under
the Executive Note shall be secured by a pledge of all of the shares of Class B
Common to the Company, and in connection therewith, Executive shall enter into a
pledge agreement in the form of Annex B attached hereto.
-------
(b) The Company shall hold each certificate representing Executive
Stock until such time as the Executive Stock represented by such certificate is
released from the pledge to the Company, if any, and is fully vested hereunder.
(c) Within 30 days after Executive purchases any Executive Stock from
the Company, Executive shall make an effective election with the Internal
Revenue Service under Section 83(b) of the Internal Revenue Code and the
regulations promulgated thereunder and the equivalent election with the State of
California.
(d) In connection with the purchase and sale of the Executive Stock
hereunder, Executive represents and warrants to the Company that:
(i) The Executive Stock to be acquired by Executive pursuant to
this Agreement shall be acquired for Executive's own account and not with a
view to, or intention of, distribution thereof in violation of the 1933
Act, or any applicable state securities laws, and the Executive Stock shall
not be disposed of in contravention of the 1933 Act or any applicable state
securities laws.
(ii) Executive is an executive officer of the Company, is
sophisticated in financial matters and is able to evaluate the risks and
benefits of the investment in the Executive Stock.
(iii) Executive is able to bear the economic risk of his
investment in the Executive Stock for an indefinite period of time because
the Executive Stock has not been registered under the 1933 Act and,
therefore, cannot be sold unless subsequently registered under the 1933 Act
or an exemption from such registration is available.
(iv) Executive has had an opportunity to ask questions and
receive answers concerning the terms and conditions of the offering of
Executive Stock and has had full access to such other information
concerning the Company as he has requested. Executive has also reviewed,
or has had an opportunity to review, the following documents: (A) the
Company's Certificate of Incorporation and Bylaws; and (B) the agreements,
notes and related documents with the Company's lenders and equity
investors.
(v) This Agreement constitutes the legal, valid and binding
obligation of Executive, enforceable in accordance with its terms, and the
execution, delivery and
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<PAGE>
performance of this Agreement by Executive does not and shall not conflict
with, violate or cause a breach of any agreement, contract or instrument to
which Executive is a party or any judgment, order or decree to which
Executive is subject.
(vi) Executive has obtained advice from persons other than the
Investors and their counsel regarding the tax effects of the transaction
contemplated hereby.
(e) Executive acknowledges and agrees that neither the issuance of
the Executive Stock to Executive nor any provision contained herein shall
entitle Executive to remain in the employment of the Company and its
Subsidiaries.
(f) The Company and Executive acknowledge and agree that this
Agreement has been executed and delivered, and the Executive Stock has been
issued hereunder, in connection with and as a part of the compensation and
incentive arrangements between the Company and Executive.
(g) The Company acknowledges that Executive is given certain
contractual preemptive rights, together with the Investors, in the Purchase
Agreement (paragraph 3J) with respect to future issuances of equity securities
of the Company notwithstanding the fact that Executive is not a named party
thereto.
(h) Executive represents and warrants to the Company and the
Investors that he has not entered and will not during the term of this Agreement
enter into any agreement with any of the other Executives with respect to the
voting of his or their shares or the sharing of the economic benefits thereof.
2. Vesting of Executive Stock.
--------------------------
(a) (i) Except as otherwise provided in paragraph 2(b) below, the
Executive Stock which is Class A Common shall become vested in accordance with
the following schedule, if as of each such date Executive is employed by the
Company or any of its Subsidiaries:
Cumulative
Percentage of Class A Executive
Date Stock Vested
---------- -------------------------------
the date hereof 75.0%
June 30, 1998 87.5%
June 30, 1999 100.0%
(ii) Except as otherwise provided in paragraph 2(b) below, the
Executive Stock which is Class B Common (the "Performance Vesting Shares") shall
become vested if:
(A) The Executive is employed by the Company and any of its
Subsidiaries on June 30, 2005 and there has been no Sale of the Company (as
defined herein); or
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<PAGE>
(B) (1) on or before December 31, 1999, a Trigger Event, as defined
below, has occurred, (2) Executive is employed by the Company or any of its
Subsidiaries on the date of closing of such Trigger Event and (3):
(I) as to one-third of the Performance Vesting Shares (the "2.5%
Shares") the Total Company Value shall equal or exceed $50,000,000, and
(II) as to the remaining Performance Vesting Shares (the "5% Shares")
to the extent that the Total Company Value exceeds $50,000,000, the number
of 5% Shares which shall vest is equal to the product of (I) the quotient
determined by dividing the amount that the Total Company Value exceeds
$50,000,000 by $20,000,000 and (II) the maximum number of 5% Shares.
For example, if the Total Company Value at the time of the
Trigger Event is $58,000,000 and the maximum number of 5% Shares
is 3,333 (assuming, for purposes of this example only, a maximum
of 5,000 Performance Vesting Shares) then the number of 5% Shares
which shall become vested is 1333 (8,000,000 / 20,000,000 x
3,333 = 1333).
The determination of the Total Company Value, shall be made upon occurrence of
and as of the date of closing of either of the following "Trigger Events":
(A) the Company has closed an underwritten initial public offering
("IPO") of Common Stock registered under the 1933 Act in which the net proceeds
to the Company is at least $20,000,000, provided however, that prior to or as a
result of the IPO all outstanding shares of the Company's Series A Preferred
Stock (the "Preferred Stock") are redeemed by the Company, or;
(B) a "Sale of the Company" as defined herein.
(b) Upon the occurrence of a Sale of the Company, a Qualified Public
Offering or the death or permanent disability of Executive, all shares of
Executive Stock which are Class A Common which have not yet become vested shall
become vested at the time of such event. For purposes of this paragraph 2(b),
the determination of permanent disability shall be made in good faith by the
Company's board of directors (the "Board"). Shares of Executive Stock which
have become vested are referred to herein as "Vested Shares," and all other
shares of Executive Stock are referred to herein as "Unvested Shares."
(c) The Company shall upon the written request of a holder of
Executive Stock which is Class B Common Stock issue and exchange therefor shares
of Class A Common on a share-for-share basis at any time on or after a Sale of
the Company or a Qualified Public Offering.
3. Repurchase Option.
-----------------
(a) In the event (i) Executive ceases to be employed by the Company
and its Subsidiaries for any reason (the "Termination"), the Executive Stock
(whether held by Executive
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<PAGE>
or one or more of Executive's transferees) or (ii) there is a Sale of the
Company after December 31, 1999, the Unvested Shares of the Performance Vesting
Shares (whether held by Executive or one or more of Executive's transferees)
shall be subject to repurchase by the Company and the Investors pursuant to the
terms and conditions set forth in this paragraph 3 (the "Repurchase Option");
provided that the Repurchase Option shall not apply to the shares which vest on
the date hereof unless Executive voluntarily terminated such employment prior to
the second anniversary of the date hereof (in which event the Repurchase Option
will apply to such shares).
(b) The purchase price for each Unvested Share shall be Executive's
Original Cost for such share (with shares having the lowest cost subject to
repurchase prior to shares with a higher cost), and the purchase price for each
Vested Share shall be the Fair Market Value for such share.
(c) The Board may elect to purchase all or any portion of the Unvested
Shares and the Vested Shares by delivering written notice (the "Repurchase
Notice") to the holder or holders of the Executive Stock within 30 days after
the Termination. The Repurchase Notice shall set forth the number of Unvested
Shares and Vested Shares to be acquired from each holder of Executive Stock, the
aggregate consideration to be paid for such shares and the time and place for
the closing of the transaction. If the number of shares of Executive Stock then
held by Executive is less than the total number of shares of Executive Stock the
Company has elected to purchase, the Company shall purchase the remaining shares
elected to be purchased from the other holder(s) of Executive Stock under this
Agreement, pro rata according to the number of shares of Executive Stock held by
such other holder(s) at the time of delivery of such Repurchase Notice
(determined as close as practicable to the nearest whole shares). The number of
shares to be repurchased by the Company shall first be satisfied to the extent
possible from the shares of Executive Stock held by Executive at the time of
delivery of the Repurchase Notice.
(d) If for any reason the Company does not elect to purchase all of
the Executive Stock pursuant to the Repurchase Option, the Investors and the
other Executives who are then employed by the Company or one of its Subsidiaries
(the "Continuing Executives") shall be entitled to exercise the Repurchase
Option for the shares of Executive Stock the Company has not elected to purchase
(the "Available Shares"). As soon as practicable after the Company has
determined that there will be Available Shares, but in any event within 45 days
after the Termination, the Company shall give written notice (the "Option
Notice") to the Investors and the Continuing Executives setting forth the number
of Available Shares and the purchase price for the Available Shares. The
Investors and the Continuing Executives may elect to purchase any or all of the
Available Shares by giving written notice to the Company within 30 days after
the Option Notice has been given by the Company. If the Investors and the
Continuing Executives elect to purchase an aggregate number of shares greater
than the number of Available Shares, the Available Shares shall be allocated
among the Investors and the Continuing Executives based upon the number of
shares of Common Stock owned by each Investor and the Continuing Executive on a
fully-diluted basis (provided, however, that no Class B Common which is not yet
vested under the Executive Stock Agreements will be counted for this purpose).
As soon as practicable, and in any event within ten days after the expiration of
the 15-day period set forth above, the Company shall notify each holder of
Executive Stock as to the number of shares being purchased from such holder by
the Investors and the Continuing Executives (the "Supplemental Repurchase
Notice"). At the time the Company delivers the Supplemental Repurchase Notice
to the holder(s) of Executive Stock, the Company shall also deliver written
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<PAGE>
notice to each Investor and Continuing Executive setting forth the number of
shares such Person is entitled to purchase, the aggregate purchase price and the
time and place of the closing of the transaction. The number of shares to be
repurchased by the Investors and the Continuing Executives shall first be
satisfied to the extent possible from the shares of Executive Stock held by
Executive at the time of delivery of the Repurchase Notice.
(e) The closing of the purchase of the Executive Stock pursuant to the
Repurchase Option shall take place on the date designated by the Company in the
Repurchase Notice or Supplemental Repurchase Notice, which date shall not be
more than 30 days nor less than five days after the delivery of the later of
either such notice to be delivered. The Company and/or the Investors and
Continuing Executives shall pay for the Executive Stock to be purchased pursuant
to the Repurchase Option by delivery of, a check or wire transfer of funds. In
addition, the Company may pay the purchase price for such shares by offsetting
amounts outstanding under the Executive Note issued to the Company hereunder and
any other bona fide debts owed by Executive to the Company. The sellers of
Executive Stock hereunder shall be deemed to make customary representations and
warranties to the purchasers regarding such sale of shares (including
representations and warranties regarding good title to such shares, free and
clear of any liens or encumbrances). The purchasers may require written
confirmation of such representations and require all sellers' signatures be
guaranteed by a national bank or reputable securities broker.
(f) The right of the Company and the Investors and the Continuing
Executives to repurchase Vested Shares pursuant to this paragraph 3 shall
terminate upon the first to occur of the Sale of the Company or a Qualified
Public Offering.
(g) If Executive's employment by the Company and its Subsidiaries, if
any, is terminated by the Company other than for Cause, the Company shall pay
Executive as severance an amount equal to his cash base salary compensation
(i.e., excluding any bonuses) during the preceding 12 months in equal monthly
installments on the first business day of each of the next 12 months.
4. Restrictions on Transfer.
------------------------
(a) Retention of Executive Stock. Until the expiration of 54 months
----------------------------
after the date of this Agreement, Executive shall not sell, transfer, assign,
pledge or otherwise dispose of any interest in any shares of Executive Stock,
except for Exempt Transfers (as defined in paragraph 4(b) below) and sales to
the public pursuant to Rule 144 promulgated under the 1933 Act or any similar
rule then in force.
(b) Transfer of Executive Stock. Executive shall not sell, transfer,
---------------------------
assign, pledge or otherwise dispose of (whether with or without consideration
and whether voluntarily or involuntarily or by operation of law) any interest in
any shares of Executive Stock (a "Transfer"), except pursuant to (i) the
provisions of paragraph 3 hereof, a Sale of the Company or a Public Sale
("Exempt Transfers") or (ii) the provisions of this paragraph 4; provided that
in no event shall any Transfer of Executive Stock pursuant to this paragraph 4
be made for any consideration other than cash payable upon consummation of such
Transfer or in installments over time. Prior to making any Transfer other than
an Exempt Transfer, Executive shall deliver written notice (the "Sale Notice")
to the Company and the Investors. The Sale Notice shall disclose in
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reasonable detail the identity of the prospective transferee(s), the number of
shares to be transferred and the terms and conditions of the proposed transfer.
Executive shall not consummate any Transfer until 30 days after the Sale Notice
has been given to the Company and to the Investors, unless the parties to the
Transfer have been finally determined pursuant to this paragraph 4 prior to the
expiration of such 30-day period. (The date of the first to occur of such events
is referred to herein as the "Authorization Date".)
(c) First Refusal Rights. The Company may elect to purchase all (but
--------------------
not less than all) of the shares of Executive Stock to be transferred upon the
same terms and conditions as those set forth in the Sale Notice by delivering a
written notice of such election to Executive and the Investors within 10 days
after the Sale Notice has been delivered to the Company. If the Company has not
elected to purchase all of the Executive Stock to be transferred, the Investors
may elect to purchase all (but not less than all) of the Executive Stock to be
transferred upon the same terms and conditions as those set forth in the Sale
Notice by delivering written notice of such election to Executive within 10 days
after the Sale Notice has been given to the Investors. If more than one
Investor elects to purchase the Executive Stock, the shares of Executive Stock
to be sold shall be allocated among the Investors pro rata according to the
number of shares of Common Stock owned by each Investor on a fully-diluted
basis. If neither the Company nor the Investors elect to purchase all of the
shares of Executive Stock specified in the Sale Notice, Executive may transfer
the shares of Executive Stock specified in the Sale Notice at a price and on
terms no more favorable to the transferee(s) thereof than specified in the Sale
Notice during the 60-day period immediately following the Authorization Date.
Any shares of Executive Stock not transferred within such 60-day period shall be
subject to the provisions of this paragraph 4(c) upon subsequent transfer. If
the Company or any of the Investors have elected to purchase shares of Executive
Stock hereunder, the transfer of such shares shall be consummated as soon as
practical after the delivery of the election notice(s) to Executive, but in any
event within 15 days after the expiration of the Election Period. The Company
may pay the purchase price for such shares by offsetting amounts outstanding
under the Executive Note issued to the Company hereunder and any other bona fide
debts owed by Executive to the Company.
(d) Certain Permitted Transfers. The restrictions contained in this
---------------------------
paragraph 4 shall not apply with respect to transfers of shares of Executive
Stock (i) pursuant to applicable laws of descent and distribution or (ii) among
Executive's family group; provided that such restrictions shall continue to be
applicable to the Executive Stock after any such transfer and the transferees of
such Executive Stock shall have agreed in writing to be bound by the provisions
of this Agreement. Executive's "family group" means Executive's spouse and
descendants (whether natural or adopted) and any trust solely for the benefit of
Executive and/or Executive's spouse and/or descendants.
(e) Pledges. Notwithstanding the provisions of this paragraph 4,
-------
Executive may pledge any shares of Executive Stock to the Company to secure
payment of the Executive Note.
(f) Termination of Restrictions. The restrictions on the transfer of
---------------------------
shares of Executive Stock set forth in this paragraph 4 shall continue with
respect to each share of Executive Stock following any Transfer thereof (other
than a Public Sale); provided that in any event such restrictions shall
terminate on the first to occur of a Sale of the Company or a Qualified Public
Offering.
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5. Additional Restrictions on Transfer.
-----------------------------------
(a) The certificates representing the Executive Stock shall bear the
following legend:
"THE SECURITIES REPRESENTED BY THIS CERTIFICATE WERE ORIGINALLY ISSUED ON
JUNE 30, 1995, HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933,
AS AMENDED OR ANY APPLICABLE STATE SECURITIES LAW, AND MAY NOT BE SOLD OR
TRANSFERRED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT OR AN
EXEMPTION FROM REGISTRATION THEREUNDER. THE SECURITIES REPRESENTED BY THIS
CERTIFICATE ARE ALSO SUBJECT TO ADDITIONAL RESTRICTIONS ON TRANSFER,
CERTAIN REPURCHASE OPTIONS AND CERTAIN OTHER AGREEMENTS SET FORTH IN AN
EXECUTIVE STOCK AGREEMENT BETWEEN THE COMPANY AND LLOYD W. HOLLAND DATED AS
OF JUNE 30, 1995, AS AMENDED AND MODIFIED FROM TIME TO TIME. A COPY OF SUCH
AGREEMENT MAY BE OBTAINED BY THE HOLDER HEREOF AT THE COMPANY'S PRINCIPAL
PLACE OF BUSINESS WITHOUT CHARGE."
(b) No holder of Executive Stock may sell, transfer or dispose of any
Executive Stock (except pursuant to an effective registration statement under
the 1933 Act) without first delivering to the Company an opinion of counsel
(reasonably acceptable in form and substance to the Company) that neither
registration nor qualification under the 1933 Act and applicable state
securities laws is required in connection with such transfer.
(c) Each holder of Executive Stock agrees not to effect any public
sale or distribution of any Executive Stock or other equity securities of the
Company, or any securities convertible into or exchangeable or exercisable for
any of the Company's equity securities, during the seven days prior to and the
180 days after the effectiveness of any underwritten public offering, except as
part of such underwritten public offering or if otherwise permitted by the
Company.
6. Sale of the Company.
-------------------
(a) If the Board and the holders of a majority of the Company's
Preferred Stock and Common Stock approve a Sale of the Company (the "Approved
Sale"), the holders of Executive Stock shall consent to and raise no objections
against the Approved Sale of the Company, and if the Approved Sale of the
Company is structured as a sale of stock, the holders of Executive Stock shall
agree to sell their shares of Executive Stock and surrender their stock options
on the terms and conditions approved by the Board and the holders of a majority
of the Company's Preferred Stock and Common Stock. The holders of Executive
Stock shall take all necessary and desirable actions in connection with the
consummation of the Approved Sale of the Company.
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(b) The obligations of the holders of Executive Stock with respect to
the Approved Sale of the Company are subject to the satisfaction of the
following conditions: (i) upon the consummation of the Approved Sale, all of the
holders of Common Stock shall receive the same form and amount of consideration
per share of Common Stock, or if any holders of Common Stock are given an option
as to the form and amount of consideration to be received, all holders shall be
given the same option; and (ii) all holders of then currently exercisable rights
to acquire shares of Common Stock shall be given an opportunity to either (A)
exercise such rights prior to the consummation of the Approved Sale and
participate in such sale as holders of Common Stock or (B) upon the consummation
of the Approved Sale, receive in exchange for such rights consideration equal to
the amount determined by multiplying (1) the same amount of consideration per
share of Common Stock received by the holders of Common Stock in connection with
the Approved Sale less the exercise price per share of Common Stock of such
rights to acquire Common Stock by (2) the number of shares of Common Stock
represented by such rights.
(c) If the Company or the holders of the Company's securities enter
into any negotiation or transaction for which Rule 506 (or any similar rule then
in effect) promulgated by the Securities Exchange Commission may be available
with respect to such negotiation or transaction (including a merger,
consolidation or other reorganization), the holders of Executive Stock shall at
the request of the Company, appoint a "purchaser representative" (as such term
is defined in Rule 501) reasonably acceptable to the Company. If any holder of
Executive Stock appoints a purchaser representative designated by the Company,
the Company shall pay the fees of such purchaser representative. However, if
any holder of Executive Stock declines to appoint the purchaser representative
designated by the Company, such holder shall appoint another purchaser
representative (reasonably acceptable to the Company), and such holder shall be
responsible for the fees of the purchaser representative so appointed.
(d) Executive and the other holders of Executive Stock (if any) shall
bear their pro-rata share (based upon the number of all shares sold by each
seller including the Investors and each other Executive) of the costs of any
sale of Executive Stock pursuant to an Approved Sale to the extent such costs
are incurred for the benefit of all holders of Common Stock and are not
otherwise paid by the Company or the acquiring party. Costs incurred by
Executive and the other holders of Executive Stock on their own behalf shall not
be considered costs of the transaction hereunder.
(e) The provisions of this paragraph 6 shall terminate upon the
completion of a Qualified Public Offering.
7. Voting Agreement and Tag-Along.
------------------------------
(a) So long as the Investors hold any shares of Common Stock, each
Investor and Executive shall vote all of their shares of Common Stock (and, in
the event such holder is entitled to vote any of the Company's other securities
for the election of directors, such holder shall vote all such securities) and
take all other reasonably necessary actions in such holder's capacity as a
stockholder of the Company, and the Company shall take all necessary or
desirable actions as are requested by the Investors and Executive, in order to
cause two of the executive officers of the Company (one of which should be the
Company's Chief Executive Officer) representatives designated by Executives
holding a majority of the Common Stock held by all
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Executives to be elected as members of the Board and to cause two
representatives designated by Investors holding a majority of the Common Stock
held by the Investors to be elected to the Board. The provisions of this
paragraph 7 shall terminate upon the first to occur of a Qualified Public
Offering and the tenth anniversary of this Agreement.
(b) If either Investor desires to sell any of its Common Stock or if
holders of Executive Stock, after complying with the other provisions of this
Agreement, including paragraph 3, desire to sell any of their shares of Common
Stock, the proposed seller shall give written notice thereof (a "Sale Notice")
to the Company, the Investors and each holder of Common Stock issued under this
Agreement and the other Executive Stock Agreements at least 10 days prior to the
proposed sale and each such Person other than the seller may elect to
participate in the sale by written notice to the Company and the seller given
within 10 days after receipt of the Sale Notice. The electing Persons shall be
entitled to sell in the contemplated sale, at the same price and on the same
terms, a number of shares of the Company's Common Stock equal to the product of
(i) the quotient determined by dividing the percentage of the Company's Common
Stock (on a fully-diluted basis) held by such electing Person, by the aggregate
percentage of the Company's Common Stock (on a fully-diluted basis) owned by the
Seller and all electing Persons and (ii) the number of shares of Common Stock to
be sold in the contemplated sale.
For example, if the Executive delivered a Sale Notice
contemplated a sale of 100 shares of Common Stock, and if
Executive was at such time the owner of 5% of the Company's
Common Stock (on a fully-diluted basis) and if one Investor
elected to participate and the Investor owned 20% of the
Company's Common Stock (on a fully-diluted basis), Executive
would be entitled to sell 20 shares (5% / 25% x 100 shares) and
the Investor would be entitled to sell 80 shares (20% / 25% x 100
shares).
The provisions of this paragraph (b) shall terminate upon a Qualified Public
Offering.
8. Nondisclosure and Nonuse of Confidential Information.
----------------------------------------------------
(a) Executive shall not disclose or use at any time, either during his
employment with the Company or thereafter, any Confidential Information (as
defined below) of which Executive is or becomes aware, whether or not such
information is developed by him, except to the extent that such disclosure or
use is directly related to and required by Executive's performance of duties
assigned to Executive by the Company. Executive shall take all appropriate
steps to safeguard Confidential Information and to protect it against
disclosure, misuse, espionage, loss and theft.
(b) As used in this Agreement, the term "Confidential Information"
means information that is not generally known to the public and that is used,
developed or obtained by the Company in connection with its business, including
but not limited to (i) products or services, (ii) fees, costs and pricing
structures, (iii) designs, (iv) analysis, (v) drawings, photographs and reports,
(vi) computer software, including operating systems, applications and program
listings, (vii) flow charts, manuals and documentation, (viii) data bases, (ix)
accounting and business methods, (x) inventions, devices, new developments,
methods and processes,
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whether patentable or unpatentable and whether or not reduced to practice, (xi)
customers and clients and customer or client lists, (xii) copyrightable works,
(xiii) all information comprising the Transferred Property, (xiv) all technology
and trade secrets, and (xv) all similar and related information in whatever
form. Confidential Information shall not include any information that has been
published in the form generally available to the public prior to the date
Executive purposes to disclose or use such information. Information shall not be
deemed to have been published merely because individual portions of the
information have been separately published, but only if all material features
comprising such information have been published in combination.
9. Consulting and Noncompetition. Executive acknowledges and agrees
-----------------------------
with the Company that Executive's services to the Company are unique in nature
and that the Company would be irreparably damaged if Executive were to provide
similar services to any person or entity competing with the Company or engaged
in a similar business. Executive accordingly covenants and agrees with the
Company that during the period commencing with the date of this Agreement and,
as long as the Company compensates Executive as a consultant at an amount
payable monthly equal to 10% of Executive's cash compensation in the 12 months
preceding his termination of employment, thereafter until the third anniversary
of the date of the termination of Executive's employment with the Company (the
"Noncompetition Period"), Executive shall not, directly or indirectly, either
for himself or for any other individual, corporation, partnership, joint venture
or other entity, participate in any business (including, without limitation, any
division, group or franchise of a larger organization) which (i) engages or
which proposes to engage in the acquisition, disposition, operation or
management of allied health schools anywhere in the U.S. or (ii) which operates
or plans to operate schools of any type in the same geographic areas as Company
at the time of such termination. For purposes of this Agreement, the term
"participate in" shall include, without limitation, having any director or
indirect interest in any corporation, partnership, joint venture or other
entity, whether as a sole proprietor, owner, stockholder, partner, joint
venturer, creditor or otherwise, or rendering any direct or indirect service or
assistance to any individual, corporation, partnership, joint venture and other
business entity (whether as a director, officer, manager, supervisor, employee,
agent, consultant or otherwise).
10. Nonsolicitation. During the Noncompetition Period, Executive
---------------
shall not (i) induce or attempt to induce any employee of the Company to leave
the employ of the Company, or in any way interfere with the relationship between
the Company and any employee thereof, (ii) hire directly or through another
entity any person who was an employee of the Company at any time during the
Noncompetition Period, or (iii) induce or attempt to induce any customer,
supplier, licensee or other business relation of the Company to cease doing
business with the Company, or in any way interfere with the relationship between
such customer, supplier, licensee or business relation and the Company
(including, without limitation, making any negative statements or communications
concerning the Company).
11. Definitions.
-----------
"Cause" means (i) the commission of a felony or a crime involving
-----
moral turpitude or the commission of any other act or omission involving
dishonesty, disloyalty or fraud with respect to the Company or any of its
Subsidiaries or any of their customers or suppliers, (ii) conduct tending to
bring the Company or any of its Subsidiaries into substantial
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public disgrace or disrepute, (iii) substantial and repeated failure to perform
duties as reasonably directed by the Board, (iv) gross negligence or willful
misconduct with respect to the Company or any of its Subsidiaries or (v) any
material breach of this Agreement which is not cured within 15 days after
written notice thereof to Executive.
"Executive Stock" shall continue to be Executive Stock in the hands of
---------------
any holder other than Executive (except for the Company and the Investors and
except for transferees in a Public Sale), and except as otherwise provided
herein, each such other holder of Executive Stock shall succeed to all rights
and obligations attributable to Executive as a holder of Executive Stock
hereunder. Executive Stock shall also include shares of the Company's capital
stock issued with respect to Executive Stock by way of a stock split, stock
dividend or other recapitalization. Notwithstanding the foregoing, all Unvested
Shares shall remain Executive Stock after any Transfer thereof.
"Fair Market Value" of each share of Executive Stock means the average
-----------------
of the closing prices of the sales of the Company's Common Stock on all
securities exchanges on which the Common Stock may at the time be listed, or, if
there have been no sales on any such exchange on any day, the average of the
highest bid and lowest asked prices on all such exchanges at the end of such
day, or, if on any day the Common Stock is not so listed, the average of the
representative bid and asked prices quoted in the Nasdaq National Market as of
4:00 P.M., New York time, or, if on any day the Common Stock is not quoted in
the Nasdaq National Market, the average of the highest bid and lowest asked
prices on such day in the domestic over-the-counter market as reported by the
National Quotation Bureau Incorporated, or any similar successor organization,
in each such case averaged over a period of 21 days consisting of the day as of
which the Fair Market Value is being determined and the 20 consecutive business
days prior to such day. If at any time the Common Stock is not listed on any
securities exchange or quoted in the Nasdaq National Market or the over-the-
counter market, the Fair Market Value shall be the fair value of the Common
Stock determined in good faith by the Board or, if the Executive disagrees with
such value, the fair market value determined by an independent appraiser
mutually acceptable to the Board and Executive(in each case without taking into
account the effect of any contemporaneous repurchase of Unvested Shares under
paragraph 3 hereof); provided that if such appraised value is higher than that
established by the Board the purchasers of the shares involved shall not be
required to consummate the related purchase.
"Independent Third Party" means any person who, immediately prior to
-----------------------
the contemplated transaction, does not own in excess of 5% of the Company's
Common Stock on a fully-diluted basis, who is not controlling, controlled by or
under common control with any such 5% owner of the Company's Common Stock and
who is not the spouse or descendent (by birth or adoption) of any such 5% owner
of the Company's Common Stock.
"Investors" means Primus Capital Partners III Limited Partnership and
---------
BOCPII, Limited Liability Company, successor by merger to Bank One Capital
Partners II, Limited Partnership.
"1933 Act" means the Securities Act of 1933, as amended from time to
--------
time.
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"Original Cost" of each share of Common Stock purchased hereunder
-------------
shall be equal to $10.00 (as proportionately adjusted for all subsequent stock
splits, stock dividends and other recapitalizations).
"Qualified Public Offering" means the sale by the Company, in an
-------------------------
underwritten public offering registered under the 1933 Act, of shares of the
Company's Common Stock having an aggregate offering value of at least $10
million and where the per share price to the public multiplied by the number of
shares of Common Stock issued under the Purchase Agreement and this and the
other Executive Stock Agreements (adjusted for stock splits and other
recapitalizations) is at least $30,000,000.
"Permitted Transferee" means any holder of Executive Stock who
--------------------
acquired such stock pursuant to a transfer permitted by paragraph 4(d).
"Public Sale" means any sale pursuant to a registered public offering
-----------
under the 1933 Act or any sale to the public pursuant to Rule 144 promulgated
under the 1933 Act effected through a broker, dealer or market maker.
"Sale of the Company" means the sale of the Company to an Independent
-------------------
Third Party or affiliated group of Independent Third Parties pursuant to which
such party or parties acquire (i) capital stock of the Company possessing the
voting power to elect a majority of the Company's board of directors (whether by
merger, consolidation or sale or transfer of the Company's capital stock) or
(ii) all or substantially all of the Company's assets determined on a
consolidated basis.
"Subsidiary" means any corporation of which the Company owns
----------
securities having a majority of the ordinary voting power in electing the board
of directors directly or through one or more subsidiaries.
"Total Company Value" means the product of (i) as to an IPO, the price
-------------------
per share to the public in such IPO, and as to a Sale of the Company, the price
per share received by holders of common stock and (ii) 134,408.60 (adjusted for
any stock splits, stock dividends, combinations of shares or the like after the
date hereof).
12. Notices. Any notice provided for in this Agreement must be in
-------
writing and must be either personally delivered, mailed by first class mail
(postage prepaid and return receipt requested) or sent by reputable overnight
courier service (charges prepaid) to the recipient at the address below
indicated:
To the Company:
6 Hutton Centre Drive
Suite 400
Santa Ana, CA 92707-5164
Attention: President
With copies to:
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David A. Krinsky, Esq.
O'Melveny & Myers
610 Newport Center Drive, Suite 1700
Newport Beach, CA 92660-6429
To Executive:
Lloyd W. Holland
25661 Hazelnut Lane
Lake Forest, CA 92630
To the Investors: As specified in the Purchase Agreement
or such other address or to the attention of such other person as the recipient
party shall have specified by prior written notice to the sending party. Any
notice under this Agreement shall be deemed to have been given when so delivered
or sent or, if mailed, five days after deposit in the U.S. mail.
13. General Provisions.
------------------
(a) Transfers in Violation of Agreement. Any Transfer or attempted
-----------------------------------
Transfer of any Executive Stock in violation of any provision of this Agreement
shall be void, and the Company shall not record such Transfer on its books or
treat any purported transferee of such Executive Stock as the owner of such
stock for any purpose.
(b) Severability. Whenever possible, each provision of this Agreement
------------
shall be interpreted in such manner as to be effective and valid under
applicable law, but if any provision of this Agreement is held to be invalid,
illegal or unenforceable in any respect under any applicable law or rule in any
jurisdiction, such invalidity, illegality or unenforceability shall not affect
any other provision or any other jurisdiction, but this Agreement shall be
reformed, construed and enforced in such jurisdiction as if such invalid,
illegal or unenforceable provision had never been contained herein.
(c) Complete Agreement. This Agreement, those documents expressly
------------------
referred to herein and other documents of even date herewith embody the complete
agreement and understanding among the parties and supersede and preempt any
prior understandings, agreements or representations by or among the parties,
written or oral, which may have related to the subject matter hereof in any way.
(d) Counterparts. This Agreement may be executed in separate
------------
counterparts, each of which is deemed to be an original and all of which taken
together constitute one and the same agreement.
(e) Successors and Assigns. Except as otherwise provided herein, this
----------------------
Agreement shall bind and inure to the benefit of and be enforceable by
Executive, the Company,
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<PAGE>
the Investors and their respective successors and assigns (including subsequent
holders of Executive Stock); provided that the rights and obligations of
Executive under this Agreement shall not be assignable except in connection with
a permitted transfer of Executive Stock hereunder.
(f) Choice of Law. The corporate law of the State of Delaware shall
-------------
govern all questions concerning the relative rights of the Company and its
stockholders. All other questions concerning the construction, validity,
enforcement and interpretation of this Agreement and the exhibits hereto shall
be governed by the internal law, and not the law of conflicts, of the State of
California.
(g) Remedies. Each of the parties to this Agreement (including the
--------
Investors) shall be entitled to enforce its rights under this Agreement
specifically, to recover damages and costs (including reasonable attorney's
fees) caused by any breach of any provision of this Agreement and to exercise
all other rights existing in its favor. The parties hereto agree and
acknowledge that money damages would not be an adequate remedy for any breach of
the provisions of this Agreement and that any party may in its sole discretion
apply to any court of law or equity of competent jurisdiction (without posting
any bond or deposit) for specific performance and/or other injunctive relief in
order to enforce or prevent any violations of the provisions of this Agreement.
(h) Amendment and Waiver. The provisions of this Agreement may be
--------------------
amended and waived only with the prior written consent of the Company, Executive
and Investors owning a majority of the Common Stock on a fully-diluted basis
held by all Investors.
(i) Third-Party Beneficiaries. Certain provisions of this Agreement
-------------------------
are entered into for the benefit of and shall be enforceable by the Investors
and other Executives as provided herein.
(j) Business Days. If any time period for giving notice or taking
-------------
action hereunder expires on a day which is a Saturday, Sunday or legal holiday
in the state in which the Company's chief executive office is located, the time
period shall be automatically extended to the business day immediately following
such Saturday, Sunday or holiday.
14 Initial Public Offering. In the event that the Board and the
-----------------------
holders of a majority of the shares of Common Stock (voting as a single class)
then outstanding approve an initial public offering of Common Stock (a "Public
Offering") pursuant to an effective registration statement under the Securities
Act, Executive shall take all reasonably necessary or desirable actions in
connection with the consummation of the Public Offering as requested by the
Company.
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<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement on
the date first written above.
CORINTHIAN COLLEGES, INC.
By /s/ FRANK J. MCCORD
------------------------------
Its Exec. VP & CFO
------------------------------
/s/ LLOYD W. HOLLAND
-----------------------------------
LLOYD W. HOLLAND
/s/ FRANK J. MCCORD
-----------------------------------
Witness
Agreed and Accepted:
PRIMUS CAPITAL FUND III
LIMITED PARTNERSHIP
By: Primus Venture Partners, Inc.
By /s/ LOYAL W. WILSON
------------------------------
Its President
------------------------------
BOCPII, LIMITED LIABILITY COMPANY
By /s/ EARLE J. BENSING
------------------------------
Its Authorized Signer
------------------------------
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<PAGE>
EXHIBIT 10.16
AMENDED AND RESTATED
EXECUTIVE STOCK AGREEMENT
-------------------------
THIS AMENDED AND RESTATED EXECUTIVE STOCK AGREEMENT (the "Agreement")
is made as of November 24, 1997 between Corinthian Colleges, Inc., a Delaware
corporation (the "Company"), and Frank J. McCord ("Executive").
The Company and Executive desire to amend and restate that certain
executive stock agreement by and between Executive and Corinthian Schools, Inc.
("CSI"), a wholly-owned subsidiary of the Company, dated June 30, 1995, and as
previously amended pursuant to the First Amendment to Executive Stock Agreement,
dated October 17, 1996 (as amended, the "Original Executive Stock Agreement"),
----------------------------------
pursuant to which Executive purchased, and CSI sold, 10,000 shares of CSI's
Class A Common Stock, par value $.01 per share, and 2,500 shares of CSI Class B
Common Stock , par value $.01 per share (together with the Class A Common Stock
of CSI, the "Old Common"). Executive paid a portion of such purchase price by
delivering to CSI for cancellation shares of common stock purchased by Executive
prior to the Original Executive Stock Agreement, and with respect to which
Executive has made additional capital contributions, the total amount previously
paid being $20,000. Pursuant to the Agreement of Merger adopted by the Company
in September 1996, each share of CSI Class A Common Stock was converted into the
right to receive one share of the Company's Class A Common Stock (the "Class A
Common") and each share of CSI Class B Common Stock was converted into the right
to receive one share of the Company's Class B Common Stock (the "Class B Common"
and, together with the Class A Common, the "Common Stock"). All of such shares
of Common Stock and all shares of Common Stock hereafter acquired by Executive
are referred to herein as "Executive Stock." Certain definitions are set forth
in paragraph 11 of this Agreement.
Certain provisions of this Agreement are intended for the benefit of,
and shall be enforceable by, the Investors and the other persons who are
entering into similar agreements ("Executive Stock Agreements") with the Company
as of the date hereof (Executive and such persons are collectively referred to
as "Executives").
The parties hereto agree to amend and restate the Original Executive
Stock Agreement as follows:
1. Purchase and Sale of Executive Stock.
------------------------------------
(a) Upon execution of this Agreement, Executive shall purchase, and
the Company shall sell, 10,000 shares of Class A Common at a price of $10.00 per
share and 2,500 shares of Class B Common at a price of $10.00 per share. The
Company shall deliver to Executive a copy of the certificates representing such
shares of Common Stock, and Executive shall deliver to the Company a cashier's
or certified check or wire transfer of funds in the
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aggregate amount of $80,025.00, a promissory note in the form of Annex A
-------
attached hereto in an aggregate principal amount of $24,975 (the "Executive
Note") and the certificates for the Old Common. Executive's obligations under
the Executive Note shall be secured by a pledge of all of the shares of Class B
Common to the Company, and in connection therewith, Executive shall enter into a
pledge agreement in the form of Annex B attached hereto.
-------
(b) The Company shall hold each certificate representing Executive
Stock until such time as the Executive Stock represented by such certificate is
released from the pledge to the Company, if any, and is fully vested hereunder.
(c) Within 30 days after Executive purchases any Executive Stock from
the Company, Executive shall make an effective election with the Internal
Revenue Service under Section 83(b) of the Internal Revenue Code and the
regulations promulgated thereunder and the equivalent election with the State of
California.
(d) In connection with the purchase and sale of the Executive Stock
hereunder, Executive represents and warrants to the Company that:
(i) The Executive Stock to be acquired by Executive pursuant
to this Agreement shall be acquired for Executive's own account and not
with a view to, or intention of, distribution thereof in violation of the
1933 Act, or any applicable state securities laws, and the Executive Stock
shall not be disposed of in contravention of the 1933 Act or any applicable
state securities laws.
(ii) Executive is an executive officer of the Company, is
sophisticated in financial matters and is able to evaluate the risks and
benefits of the investment in the Executive Stock.
(iii) Executive is able to bear the economic risk of his
investment in the Executive Stock for an indefinite period of time because
the Executive Stock has not been registered under the 1933 Act and,
therefore, cannot be sold unless subsequently registered under the 1933 Act
or an exemption from such registration is available.
(iv) Executive has had an opportunity to ask questions and
receive answers concerning the terms and conditions of the offering of
Executive Stock and has had full access to such other information
concerning the Company as he has requested. Executive has also reviewed,
or has had an opportunity to review, the following documents: (A) the
Company's Certificate of Incorporation and Bylaws; and (B) the agreements,
notes and related documents with the Company's lenders and equity
investors.
(v) This Agreement constitutes the legal, valid and binding
obligation of Executive, enforceable in accordance with its terms, and the
execution, delivery and
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<PAGE>
performance of this Agreement by Executive does not and shall not conflict
with, violate or cause a breach of any agreement, contract or instrument to
which Executive is a party or any judgment, order or decree to which
Executive is subject.
(vi) Executive has obtained advice from persons other than the
Investors and their counsel regarding the tax effects of the transaction
contemplated hereby.
(e) Executive acknowledges and agrees that neither the issuance of
the Executive Stock to Executive nor any provision contained herein shall
entitle Executive to remain in the employment of the Company and its
Subsidiaries.
(f) The Company and Executive acknowledge and agree that this
Agreement has been executed and delivered, and the Executive Stock has been
issued hereunder, in connection with and as a part of the compensation and
incentive arrangements between the Company and Executive.
(g) The Company acknowledges that Executive is given certain
contractual preemptive rights, together with the Investors, in the Purchase
Agreement (paragraph 3J) with respect to future issuances of equity securities
of the Company notwithstanding the fact that Executive is not a named party
thereto.
(h) Executive represents and warrants to the Company and the
Investors that he has not entered and will not during the term of this Agreement
enter into any agreement with any of the other Executives with respect to the
voting of his or their shares or the sharing of the economic benefits thereof.
2. Vesting of Executive Stock.
--------------------------
(a) (i) Except as otherwise provided in paragraph 2(b) below, the
Executive Stock which is Class A Common shall become vested in accordance with
the following schedule, if as of each such date Executive is employed by the
Company or any of its Subsidiaries:
Cumulative
Percentage of Class A Executive
Date Stock Vested
---------- -------------------------------
the date hereof 75.0%
June 30, 1998 87.5%
June 30, 1999 100.0%
(ii) Except as otherwise provided in paragraph 2(b) below, the
Executive Stock which is Class B Common (the "Performance Vesting Shares") shall
become vested if:
(A) The Executive is employed by the Company and any of its
Subsidiaries on June 30, 2005 and there has been no Sale of the Company (as
defined herein); or
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(B) (1) on or before December 31, 1999, a Trigger Event, as defined
below, has occurred, (2) Executive is employed by the Company or any of its
Subsidiaries on the date of closing of such Trigger Event and (3):
(I) as to one-third of the Performance Vesting Shares (the "2.5%
Shares") the Total Company Value shall equal or exceed $50,000,000, and
(II) as to the remaining Performance Vesting Shares (the "5% Shares")
to the extent that the Total Company Value exceeds $50,000,000, the number
of 5% Shares which shall vest is equal to the product of (I) the quotient
determined by dividing the amount that the Total Company Value exceeds
$50,000,000 by $20,000,000 and (II) the maximum number of 5% Shares.
For example, if the Total Company Value at the time of the
Trigger Event is $58,000,000 and the maximum number of 5% Shares
is 3,333 (assuming, for purposes of this example only, a maximum
of 5,000 Performance Vesting Shares) then the number of 5% Shares
which shall become vested is 1333 (8,000,000 / 20,000,000 x
3,333 = 1333).
The determination of the Total Company Value, shall be made upon occurrence of
and as of the date of closing of either of the following "Trigger Events":
(A) the Company has closed an underwritten initial public offering
("IPO") of Common Stock registered under the 1933 Act in which the net proceeds
to the Company is at least $20,000,000, provided however, that prior to or as a
result of the IPO all outstanding shares of the Company's Series A Preferred
Stock (the "Preferred Stock") are redeemed by the Company, or;
(B) a "Sale of the Company" as defined herein.
(b) Upon the occurrence of a Sale of the Company, a Qualified Public
Offering or the death or permanent disability of Executive, all shares of
Executive Stock which are Class A Common which have not yet become vested shall
become vested at the time of such event. For purposes of this paragraph 2(b),
the determination of permanent disability shall be made in good faith by the
Company's board of directors (the "Board"). Shares of Executive Stock which
have become vested are referred to herein as "Vested Shares," and all other
shares of Executive Stock are referred to herein as "Unvested Shares."
(c) The Company shall upon the written request of a holder of
Executive Stock which is Class B Common Stock issue and exchange therefor shares
of Class A Common on a share-for-share basis at any time on or after a Sale of
the Company or a Qualified Public Offering.
3. Repurchase Option.
-----------------
(a) In the event (i) Executive ceases to be employed by the Company
and its Subsidiaries for any reason (the "Termination"), the Executive Stock
(whether held by Executive
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or one or more of Executive's transferees) or (ii) there is a Sale of the
Company after December 31, 1999, the Unvested Shares of the Performance Vesting
Shares (whether held by Executive or one or more of Executive's transferees)
shall be subject to repurchase by the Company and the Investors pursuant to the
terms and conditions set forth in this paragraph 3 (the "Repurchase Option");
provided that the Repurchase Option shall not apply to the shares which vest on
the date hereof unless Executive voluntarily terminated such employment prior to
the second anniversary of the date hereof (in which event the Repurchase Option
will apply to such shares).
(b) The purchase price for each Unvested Share shall be Executive's
Original Cost for such share (with shares having the lowest cost subject to
repurchase prior to shares with a higher cost), and the purchase price for each
Vested Share shall be the Fair Market Value for such share.
(c) The Board may elect to purchase all or any portion of the Unvested
Shares and the Vested Shares by delivering written notice (the "Repurchase
Notice") to the holder or holders of the Executive Stock within 30 days after
the Termination. The Repurchase Notice shall set forth the number of Unvested
Shares and Vested Shares to be acquired from each holder of Executive Stock, the
aggregate consideration to be paid for such shares and the time and place for
the closing of the transaction. If the number of shares of Executive Stock then
held by Executive is less than the total number of shares of Executive Stock the
Company has elected to purchase, the Company shall purchase the remaining shares
elected to be purchased from the other holder(s) of Executive Stock under this
Agreement, pro rata according to the number of shares of Executive Stock held by
such other holder(s) at the time of delivery of such Repurchase Notice
(determined as close as practicable to the nearest whole shares). The number of
shares to be repurchased by the Company shall first be satisfied to the extent
possible from the shares of Executive Stock held by Executive at the time of
delivery of the Repurchase Notice.
(d) If for any reason the Company does not elect to purchase all of
the Executive Stock pursuant to the Repurchase Option, the Investors and the
other Executives who are then employed by the Company or one of its Subsidiaries
(the "Continuing Executives") shall be entitled to exercise the Repurchase
Option for the shares of Executive Stock the Company has not elected to purchase
(the "Available Shares"). As soon as practicable after the Company has
determined that there will be Available Shares, but in any event within 45 days
after the Termination, the Company shall give written notice (the "Option
Notice") to the Investors and the Continuing Executives setting forth the number
of Available Shares and the purchase price for the Available Shares. The
Investors and the Continuing Executives may elect to purchase any or all of the
Available Shares by giving written notice to the Company within 30 days after
the Option Notice has been given by the Company. If the Investors and the
Continuing Executives elect to purchase an aggregate number of shares greater
than the number of Available Shares, the Available Shares shall be allocated
among the Investors and the Continuing Executives based upon the number of
shares of Common Stock owned by each Investor and the Continuing Executive on a
fully-diluted basis (provided, however, that no Class B Common which is not yet
vested under the Executive Stock Agreements will be counted for this purpose).
As soon as practicable, and in any event within ten days after the expiration of
the 15-day period set forth above, the Company shall notify each holder of
Executive Stock as to the number of shares being purchased from such holder by
the Investors and the Continuing Executives (the "Supplemental Repurchase
Notice"). At the time the Company delivers the Supplemental Repurchase Notice
to the holder(s) of Executive Stock, the Company shall also deliver written
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notice to each Investor and Continuing Executive setting forth the number of
shares such Person is entitled to purchase, the aggregate purchase price and the
time and place of the closing of the transaction. The number of shares to be
repurchased by the Investors and the Continuing Executives shall first be
satisfied to the extent possible from the shares of Executive Stock held by
Executive at the time of delivery of the Repurchase Notice.
(e) The closing of the purchase of the Executive Stock pursuant to the
Repurchase Option shall take place on the date designated by the Company in the
Repurchase Notice or Supplemental Repurchase Notice, which date shall not be
more than 30 days nor less than five days after the delivery of the later of
either such notice to be delivered. The Company and/or the Investors and
Continuing Executives shall pay for the Executive Stock to be purchased pursuant
to the Repurchase Option by delivery of, a check or wire transfer of funds. In
addition, the Company may pay the purchase price for such shares by offsetting
amounts outstanding under the Executive Note issued to the Company hereunder and
any other bona fide debts owed by Executive to the Company. The sellers of
Executive Stock hereunder shall be deemed to make customary representations and
warranties to the purchasers regarding such sale of shares (including
representations and warranties regarding good title to such shares, free and
clear of any liens or encumbrances). The purchasers may require written
confirmation of such representations and require all sellers' signatures be
guaranteed by a national bank or reputable securities broker.
(f) The right of the Company and the Investors and the Continuing
Executives to repurchase Vested Shares pursuant to this paragraph 3 shall
terminate upon the first to occur of the Sale of the Company or a Qualified
Public Offering.
(g) If Executive's employment by the Company and its Subsidiaries, if
any, is terminated by the Company other than for Cause, the Company shall pay
Executive as severance an amount equal to his cash base salary compensation
(i.e., excluding any bonuses) during the preceding 12 months in equal monthly
installments on the first business day of each of the next 12 months.
4. Restrictions on Transfer.
------------------------
(a) Retention of Executive Stock. Until the expiration of 54 months
----------------------------
after the date of this Agreement, Executive shall not sell, transfer, assign,
pledge or otherwise dispose of any interest in any shares of Executive Stock,
except for Exempt Transfers (as defined in paragraph 4(b) below) and sales to
the public pursuant to Rule 144 promulgated under the 1933 Act or any similar
rule then in force.
(b) Transfer of Executive Stock. Executive shall not sell, transfer,
---------------------------
assign, pledge or otherwise dispose of (whether with or without consideration
and whether voluntarily or involuntarily or by operation of law) any interest in
any shares of Executive Stock (a "Transfer"), except pursuant to (i) the
provisions of paragraph 3 hereof, a Sale of the Company or a Public Sale
("Exempt Transfers") or (ii) the provisions of this paragraph 4; provided that
in no event shall any Transfer of Executive Stock pursuant to this paragraph 4
be made for any consideration other than cash payable upon consummation of such
Transfer or in installments over time. Prior to making any Transfer other than
an Exempt Transfer, Executive shall deliver written notice (the "Sale Notice")
to the Company and the Investors. The Sale Notice shall disclose in
-6-
<PAGE>
reasonable detail the identity of the prospective transferee(s), the number of
shares to be transferred and the terms and conditions of the proposed transfer.
Executive shall not consummate any Transfer until 30 days after the Sale Notice
has been given to the Company and to the Investors, unless the parties to the
Transfer have been finally determined pursuant to this paragraph 4 prior to the
expiration of such 30-day period. (The date of the first to occur of such events
is referred to herein as the "Authorization Date".)
(c) First Refusal Rights. The Company may elect to purchase all (but
--------------------
not less than all) of the shares of Executive Stock to be transferred upon the
same terms and conditions as those set forth in the Sale Notice by delivering a
written notice of such election to Executive and the Investors within 10 days
after the Sale Notice has been delivered to the Company. If the Company has not
elected to purchase all of the Executive Stock to be transferred, the Investors
may elect to purchase all (but not less than all) of the Executive Stock to be
transferred upon the same terms and conditions as those set forth in the Sale
Notice by delivering written notice of such election to Executive within 10 days
after the Sale Notice has been given to the Investors. If more than one
Investor elects to purchase the Executive Stock, the shares of Executive Stock
to be sold shall be allocated among the Investors pro rata according to the
number of shares of Common Stock owned by each Investor on a fully-diluted
basis. If neither the Company nor the Investors elect to purchase all of the
shares of Executive Stock specified in the Sale Notice, Executive may transfer
the shares of Executive Stock specified in the Sale Notice at a price and on
terms no more favorable to the transferee(s) thereof than specified in the Sale
Notice during the 60-day period immediately following the Authorization Date.
Any shares of Executive Stock not transferred within such 60-day period shall be
subject to the provisions of this paragraph 4(c) upon subsequent transfer. If
the Company or any of the Investors have elected to purchase shares of Executive
Stock hereunder, the transfer of such shares shall be consummated as soon as
practical after the delivery of the election notice(s) to Executive, but in any
event within 15 days after the expiration of the Election Period. The Company
may pay the purchase price for such shares by offsetting amounts outstanding
under the Executive Note issued to the Company hereunder and any other bona fide
debts owed by Executive to the Company.
(d) Certain Permitted Transfers. The restrictions contained in this
---------------------------
paragraph 4 shall not apply with respect to transfers of shares of Executive
Stock (i) pursuant to applicable laws of descent and distribution or (ii) among
Executive's family group; provided that such restrictions shall continue to be
applicable to the Executive Stock after any such transfer and the transferees of
such Executive Stock shall have agreed in writing to be bound by the provisions
of this Agreement. Executive's "family group" means Executive's spouse and
descendants (whether natural or adopted) and any trust solely for the benefit of
Executive and/or Executive's spouse and/or descendants.
(e) Pledges. Notwithstanding the provisions of this paragraph 4,
-------
Executive may pledge any shares of Executive Stock to the Company to secure
payment of the Executive Note.
(f) Termination of Restrictions. The restrictions on the transfer of
---------------------------
shares of Executive Stock set forth in this paragraph 4 shall continue with
respect to each share of Executive Stock following any Transfer thereof (other
than a Public Sale); provided that in any event such restrictions shall
terminate on the first to occur of a Sale of the Company or a Qualified Public
Offering.
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<PAGE>
5. Additional Restrictions on Transfer.
-----------------------------------
(a) The certificates representing the Executive Stock shall bear the
following legend:
"THE SECURITIES REPRESENTED BY THIS CERTIFICATE WERE ORIGINALLY ISSUED ON
JUNE 30, 1995, HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933,
AS AMENDED OR ANY APPLICABLE STATE SECURITIES LAW, AND MAY NOT BE SOLD OR
TRANSFERRED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT OR AN
EXEMPTION FROM REGISTRATION THEREUNDER. THE SECURITIES REPRESENTED BY THIS
CERTIFICATE ARE ALSO SUBJECT TO ADDITIONAL RESTRICTIONS ON TRANSFER,
CERTAIN REPURCHASE OPTIONS AND CERTAIN OTHER AGREEMENTS SET FORTH IN AN
EXECUTIVE STOCK AGREEMENT BETWEEN THE COMPANY AND FRANK J. MCCORD DATED AS
OF JUNE 30, 1995, AS AMENDED AND MODIFIED FROM TIME TO TIME. A COPY OF SUCH
AGREEMENT MAY BE OBTAINED BY THE HOLDER HEREOF AT THE COMPANY'S PRINCIPAL
PLACE OF BUSINESS WITHOUT CHARGE."
(b) No holder of Executive Stock may sell, transfer or dispose of any
Executive Stock (except pursuant to an effective registration statement under
the 1933 Act) without first delivering to the Company an opinion of counsel
(reasonably acceptable in form and substance to the Company) that neither
registration nor qualification under the 1933 Act and applicable state
securities laws is required in connection with such transfer.
(c) Each holder of Executive Stock agrees not to effect any public
sale or distribution of any Executive Stock or other equity securities of the
Company, or any securities convertible into or exchangeable or exercisable for
any of the Company's equity securities, during the seven days prior to and the
180 days after the effectiveness of any underwritten public offering, except as
part of such underwritten public offering or if otherwise permitted by the
Company.
6. Sale of the Company.
-------------------
(a) If the Board and the holders of a majority of the Company's
Preferred Stock and Common Stock approve a Sale of the Company (the "Approved
Sale"), the holders of Executive Stock shall consent to and raise no objections
against the Approved Sale of the Company, and if the Approved Sale of the
Company is structured as a sale of stock, the holders of Executive Stock shall
agree to sell their shares of Executive Stock and surrender their stock options
on the terms and conditions approved by the Board and the holders of a majority
of the Company's Preferred Stock and Common Stock. The holders of Executive
Stock shall take all necessary and desirable actions in connection with the
consummation of the Approved Sale of the Company.
-8-
<PAGE>
(b) The obligations of the holders of Executive Stock with respect to
the Approved Sale of the Company are subject to the satisfaction of the
following conditions: (i) upon the consummation of the Approved Sale, all of the
holders of Common Stock shall receive the same form and amount of consideration
per share of Common Stock, or if any holders of Common Stock are given an option
as to the form and amount of consideration to be received, all holders shall be
given the same option; and (ii) all holders of then currently exercisable rights
to acquire shares of Common Stock shall be given an opportunity to either (A)
exercise such rights prior to the consummation of the Approved Sale and
participate in such sale as holders of Common Stock or (B) upon the consummation
of the Approved Sale, receive in exchange for such rights consideration equal to
the amount determined by multiplying (1) the same amount of consideration per
share of Common Stock received by the holders of Common Stock in connection with
the Approved Sale less the exercise price per share of Common Stock of such
rights to acquire Common Stock by (2) the number of shares of Common Stock
represented by such rights.
(c) If the Company or the holders of the Company's securities enter
into any negotiation or transaction for which Rule 506 (or any similar rule then
in effect) promulgated by the Securities Exchange Commission may be available
with respect to such negotiation or transaction (including a merger,
consolidation or other reorganization), the holders of Executive Stock shall at
the request of the Company, appoint a "purchaser representative" (as such term
is defined in Rule 501) reasonably acceptable to the Company. If any holder of
Executive Stock appoints a purchaser representative designated by the Company,
the Company shall pay the fees of such purchaser representative. However, if
any holder of Executive Stock declines to appoint the purchaser representative
designated by the Company, such holder shall appoint another purchaser
representative (reasonably acceptable to the Company), and such holder shall be
responsible for the fees of the purchaser representative so appointed.
(d) Executive and the other holders of Executive Stock (if any) shall
bear their pro-rata share (based upon the number of all shares sold by each
seller including the Investors and each other Executive) of the costs of any
sale of Executive Stock pursuant to an Approved Sale to the extent such costs
are incurred for the benefit of all holders of Common Stock and are not
otherwise paid by the Company or the acquiring party. Costs incurred by
Executive and the other holders of Executive Stock on their own behalf shall not
be considered costs of the transaction hereunder.
(e) The provisions of this paragraph 6 shall terminate upon the
completion of a Qualified Public Offering.
7. Voting Agreement and Tag-Along.
------------------------------
(a) So long as the Investors hold any shares of Common Stock, each
Investor and Executive shall vote all of their shares of Common Stock (and, in
the event such holder is entitled to vote any of the Company's other securities
for the election of directors, such holder shall vote all such securities) and
take all other reasonably necessary actions in such holder's capacity as a
stockholder of the Company, and the Company shall take all necessary or
desirable actions as are requested by the Investors and Executive, in order to
cause two of the executive officers of the Company (one of which should be the
Company's Chief Executive Officer) representatives designated by Executives
holding a majority of the Common Stock held by all
-9-
<PAGE>
Executives to be elected as members of the Board and to cause two
representatives designated by Investors holding a majority of the Common Stock
held by the Investors to be elected to the Board. The provisions of this
paragraph 7 shall terminate upon the first to occur of a Qualified Public
Offering and the tenth anniversary of this Agreement.
(b) If either Investor desires to sell any of its Common Stock or if
holders of Executive Stock, after complying with the other provisions of this
Agreement, including paragraph 3, desire to sell any of their shares of Common
Stock, the proposed seller shall give written notice thereof (a "Sale Notice")
to the Company, the Investors and each holder of Common Stock issued under this
Agreement and the other Executive Stock Agreements at least 10 days prior to the
proposed sale and each such Person other than the seller may elect to
participate in the sale by written notice to the Company and the seller given
within 10 days after receipt of the Sale Notice. The electing Persons shall be
entitled to sell in the contemplated sale, at the same price and on the same
terms, a number of shares of the Company's Common Stock equal to the product of
(i) the quotient determined by dividing the percentage of the Company's Common
Stock (on a fully-diluted basis) held by such electing Person, by the aggregate
percentage of the Company's Common Stock (on a fully-diluted basis) owned by the
Seller and all electing Persons and (ii) the number of shares of Common Stock to
be sold in the contemplated sale.
For example, if the Executive delivered a Sale Notice contemplated a sale
of 100 shares of Common Stock, and if Executive was at such time the owner
of 5% of the Company's Common Stock (on a fully-diluted basis) and if one
Investor elected to participate and the Investor owned 20% of the Company's
Common Stock (on a fully-diluted basis), Executive would be entitled to
sell 20 shares (5% / 25% x 100 shares) and the Investor would be entitled
to sell 80 shares (20% / 25% x 100 shares).
The provisions of this paragraph (b) shall terminate upon a Qualified Public
Offering.
8. Nondisclosure and Nonuse of Confidential Information.
----------------------------------------------------
(a) Executive shall not disclose or use at any time, either during his
employment with the Company or thereafter, any Confidential Information (as
defined below) of which Executive is or becomes aware, whether or not such
information is developed by him, except to the extent that such disclosure or
use is directly related to and required by Executive's performance of duties
assigned to Executive by the Company. Executive shall take all appropriate
steps to safeguard Confidential Information and to protect it against
disclosure, misuse, espionage, loss and theft.
(b) As used in this Agreement, the term "Confidential Information"
means information that is not generally known to the public and that is used,
developed or obtained by the Company in connection with its business, including
but not limited to (i) products or services, (ii) fees, costs and pricing
structures, (iii) designs, (iv) analysis, (v) drawings, photographs and reports,
(vi) computer software, including operating systems, applications and program
listings, (vii) flow charts, manuals and documentation, (viii) data bases, (ix)
accounting and business methods, (x) inventions, devices, new developments,
methods and processes,
-10-
<PAGE>
whether patentable or unpatentable and whether or not reduced to practice, (xi)
customers and clients and customer or client lists, (xii) copyrightable works,
(xiii) all information comprising the Transferred Property, (xiv) all technology
and trade secrets, and (xv) all similar and related information in whatever
form. Confidential Information shall not include any information that has been
published in the form generally available to the public prior to the date
Executive purposes to disclose or use such information. Information shall not be
deemed to have been published merely because individual portions of the
information have been separately published, but only if all material features
comprising such information have been published in combination.
9. Consulting and Noncompetition. Executive acknowledges and agrees
-----------------------------
with the Company that Executive's services to the Company are unique in nature
and that the Company would be irreparably damaged if Executive were to provide
similar services to any person or entity competing with the Company or engaged
in a similar business. Executive accordingly covenants and agrees with the
Company that during the period commencing with the date of this Agreement and,
as long as the Company compensates Executive as a consultant at an amount
payable monthly equal to 10% of Executive's cash compensation in the 12 months
preceding his termination of employment, thereafter until the third anniversary
of the date of the termination of Executive's employment with the Company (the
"Noncompetition Period"), Executive shall not, directly or indirectly, either
for himself or for any other individual, corporation, partnership, joint venture
or other entity, participate in any business (including, without limitation, any
division, group or franchise of a larger organization) which (i) engages or
which proposes to engage in the acquisition, disposition, operation or
management of allied health schools anywhere in the U.S. or (ii) which operates
or plans to operate schools of any type in the same geographic areas as Company
at the time of such termination. For purposes of this Agreement, the term
"participate in" shall include, without limitation, having any director or
indirect interest in any corporation, partnership, joint venture or other
entity, whether as a sole proprietor, owner, stockholder, partner, joint
venturer, creditor or otherwise, or rendering any direct or indirect service or
assistance to any individual, corporation, partnership, joint venture and other
business entity (whether as a director, officer, manager, supervisor, employee,
agent, consultant or otherwise).
10. Nonsolicitation. During the Noncompetition Period, Executive
---------------
shall not (i) induce or attempt to induce any employee of the Company to leave
the employ of the Company, or in any way interfere with the relationship between
the Company and any employee thereof, (ii) hire directly or through another
entity any person who was an employee of the Company at any time during the
Noncompetition Period, or (iii) induce or attempt to induce any customer,
supplier, licensee or other business relation of the Company to cease doing
business with the Company, or in any way interfere with the relationship between
such customer, supplier, licensee or business relation and the Company
(including, without limitation, making any negative statements or communications
concerning the Company).
11. Definitions.
-----------
"Cause" means (i) the commission of a felony or a crime involving
-----
moral turpitude or the commission of any other act or omission involving
dishonesty, disloyalty or fraud with respect to the Company or any of its
Subsidiaries or any of their customers or suppliers, (ii) conduct tending to
bring the Company or any of its Subsidiaries into substantial
-11-
<PAGE>
public disgrace or disrepute, (iii) substantial and repeated failure to perform
duties as reasonably directed by the Board, (iv) gross negligence or willful
misconduct with respect to the Company or any of its Subsidiaries or (v) any
material breach of this Agreement which is not cured within 15 days after
written notice thereof to Executive.
"Executive Stock" shall continue to be Executive Stock in the hands of
---------------
any holder other than Executive (except for the Company and the Investors and
except for transferees in a Public Sale), and except as otherwise provided
herein, each such other holder of Executive Stock shall succeed to all rights
and obligations attributable to Executive as a holder of Executive Stock
hereunder. Executive Stock shall also include shares of the Company's capital
stock issued with respect to Executive Stock by way of a stock split, stock
dividend or other recapitalization. Notwithstanding the foregoing, all Unvested
Shares shall remain Executive Stock after any Transfer thereof.
"Fair Market Value" of each share of Executive Stock means the average
-----------------
of the closing prices of the sales of the Company's Common Stock on all
securities exchanges on which the Common Stock may at the time be listed, or, if
there have been no sales on any such exchange on any day, the average of the
highest bid and lowest asked prices on all such exchanges at the end of such
day, or, if on any day the Common Stock is not so listed, the average of the
representative bid and asked prices quoted in the Nasdaq National Market as of
4:00 P.M., New York time, or, if on any day the Common Stock is not quoted in
the Nasdaq National Market, the average of the highest bid and lowest asked
prices on such day in the domestic over-the-counter market as reported by the
National Quotation Bureau Incorporated, or any similar successor organization,
in each such case averaged over a period of 21 days consisting of the day as of
which the Fair Market Value is being determined and the 20 consecutive business
days prior to such day. If at any time the Common Stock is not listed on any
securities exchange or quoted in the Nasdaq National Market or the over-the-
counter market, the Fair Market Value shall be the fair value of the Common
Stock determined in good faith by the Board or, if the Executive disagrees with
such value, the fair market value determined by an independent appraiser
mutually acceptable to the Board and Executive(in each case without taking into
account the effect of any contemporaneous repurchase of Unvested Shares under
paragraph 3 hereof); provided that if such appraised value is higher than that
established by the Board the purchasers of the shares involved shall not be
required to consummate the related purchase.
"Independent Third Party" means any person who, immediately prior to
-----------------------
the contemplated transaction, does not own in excess of 5% of the Company's
Common Stock on a fully-diluted basis, who is not controlling, controlled by or
under common control with any such 5% owner of the Company's Common Stock and
who is not the spouse or descendent (by birth or adoption) of any such 5% owner
of the Company's Common Stock.
"Investors" means Primus Capital Partners III Limited Partnership and
---------
BOCPII, Limited Liability Company, successor by merger to Bank One Capital
Partners II, Limited Partnership.
"1933 Act" means the Securities Act of 1933, as amended from time to
--------
time.
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<PAGE>
"Original Cost" of each share of Common Stock purchased hereunder
-------------
shall be equal to $10.00 (as proportionately adjusted for all subsequent stock
splits, stock dividends and other recapitalizations).
"Qualified Public Offering" means the sale by the Company, in an
-------------------------
underwritten public offering registered under the 1933 Act, of shares of the
Company's Common Stock having an aggregate offering value of at least $10
million and where the per share price to the public multiplied by the number of
shares of Common Stock issued under the Purchase Agreement and this and the
other Executive Stock Agreements (adjusted for stock splits and other
recapitalizations) is at least $30,000,000.
"Permitted Transferee" means any holder of Executive Stock who
--------------------
acquired such stock pursuant to a transfer permitted by paragraph 4(d).
"Public Sale" means any sale pursuant to a registered public offering
-----------
under the 1933 Act or any sale to the public pursuant to Rule 144 promulgated
under the 1933 Act effected through a broker, dealer or market maker.
"Sale of the Company" means the sale of the Company to an Independent
-------------------
Third Party or affiliated group of Independent Third Parties pursuant to which
such party or parties acquire (i) capital stock of the Company possessing the
voting power to elect a majority of the Company's board of directors (whether by
merger, consolidation or sale or transfer of the Company's capital stock) or
(ii) all or substantially all of the Company's assets determined on a
consolidated basis.
"Subsidiary" means any corporation of which the Company owns
----------
securities having a majority of the ordinary voting power in electing the board
of directors directly or through one or more subsidiaries.
"Total Company Value" means the product of (i) as to an IPO, the price
-------------------
per share to the public in such IPO, and as to a Sale of the Company, the price
per share received by holders of common stock and (ii) 134,408.60 (adjusted for
any stock splits, stock dividends, combinations of shares or the like after the
date hereof).
12. Notices. Any notice provided for in this Agreement must be in
-------
writing and must be either personally delivered, mailed by first class mail
(postage prepaid and return receipt requested) or sent by reputable overnight
courier service (charges prepaid) to the recipient at the address below
indicated:
To the Company:
6 Hutton Centre Drive
Suite 400
Santa Ana, CA 92707-5164
Attention: President
With copies to:
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<PAGE>
David A. Krinsky, Esq.
O'Melveny & Myers
610 Newport Center Drive, Suite 1700
Newport Beach, CA 92660-6429
To Executive:
Frank J. McCord
6213 Seville Court
Long Beach, CA 90803
To the Investors: As specified in the Purchase Agreement
or such other address or to the attention of such other person as the recipient
party shall have specified by prior written notice to the sending party. Any
notice under this Agreement shall be deemed to have been given when so delivered
or sent or, if mailed, five days after deposit in the U.S. mail.
13. General Provisions.
------------------
(a) Transfers in Violation of Agreement. Any Transfer or attempted
-----------------------------------
Transfer of any Executive Stock in violation of any provision of this Agreement
shall be void, and the Company shall not record such Transfer on its books or
treat any purported transferee of such Executive Stock as the owner of such
stock for any purpose.
(b) Severability. Whenever possible, each provision of this Agreement
------------
shall be interpreted in such manner as to be effective and valid under
applicable law, but if any provision of this Agreement is held to be invalid,
illegal or unenforceable in any respect under any applicable law or rule in any
jurisdiction, such invalidity, illegality or unenforceability shall not affect
any other provision or any other jurisdiction, but this Agreement shall be
reformed, construed and enforced in such jurisdiction as if such invalid,
illegal or unenforceable provision had never been contained herein.
(c) Complete Agreement. This Agreement, those documents expressly
------------------
referred to herein and other documents of even date herewith embody the complete
agreement and understanding among the parties and supersede and preempt any
prior understandings, agreements or representations by or among the parties,
written or oral, which may have related to the subject matter hereof in any way.
(d) Counterparts. This Agreement may be executed in separate
------------
counterparts, each of which is deemed to be an original and all of which taken
together constitute one and the same agreement.
(e) Successors and Assigns. Except as otherwise provided herein, this
----------------------
Agreement shall bind and inure to the benefit of and be enforceable by
Executive, the Company,
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<PAGE>
the Investors and their respective successors and assigns (including subsequent
holders of Executive Stock); provided that the rights and obligations of
Executive under this Agreement shall not be assignable except in connection with
a permitted transfer of Executive Stock hereunder.
(f) Choice of Law. The corporate law of the State of Delaware shall
-------------
govern all questions concerning the relative rights of the Company and its
stockholders. All other questions concerning the construction, validity,
enforcement and interpretation of this Agreement and the exhibits hereto shall
be governed by the internal law, and not the law of conflicts, of the State of
California.
(g) Remedies. Each of the parties to this Agreement (including the
--------
Investors) shall be entitled to enforce its rights under this Agreement
specifically, to recover damages and costs (including reasonable attorney's
fees) caused by any breach of any provision of this Agreement and to exercise
all other rights existing in its favor. The parties hereto agree and
acknowledge that money damages would not be an adequate remedy for any breach of
the provisions of this Agreement and that any party may in its sole discretion
apply to any court of law or equity of competent jurisdiction (without posting
any bond or deposit) for specific performance and/or other injunctive relief in
order to enforce or prevent any violations of the provisions of this Agreement.
(h) Amendment and Waiver. The provisions of this Agreement may be
--------------------
amended and waived only with the prior written consent of the Company, Executive
and Investors owning a majority of the Common Stock on a fully-diluted basis
held by all Investors.
(i) Third-Party Beneficiaries. Certain provisions of this Agreement
-------------------------
are entered into for the benefit of and shall be enforceable by the Investors
and other Executives as provided herein.
(j) Business Days. If any time period for giving notice or taking
-------------
action hereunder expires on a day which is a Saturday, Sunday or legal holiday
in the state in which the Company's chief executive office is located, the time
period shall be automatically extended to the business day immediately following
such Saturday, Sunday or holiday.
14 Initial Public Offering. In the event that the Board and the
-----------------------
holders of a majority of the shares of Common Stock (voting as a single class)
then outstanding approve an initial public offering of Common Stock (a "Public
Offering") pursuant to an effective registration statement under the Securities
Act, Executive shall take all reasonably necessary or desirable actions in
connection with the consummation of the Public Offering as requested by the
Company.
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<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement on the date
first written above.
CORINTHIAN COLLEGES, INC.
By /s/ FRANK J. MCCORD
---------------------------------
Its Exec. VP & CFO
---------------------------------
/s/ FRANK J. MCCORD
-------------------------------------
FRANK J. MCCORD
/s/ LLOYD HOLLAND
-------------------------------------
Witness
Agreed and Accepted:
PRIMUS CAPITAL FUND III
LIMITED PARTNERSHIP
By: Primus Venture Partners, Inc.
By /s/ LOYAL W. WILSON
-----------------------------
Its President
-----------------------------
BOCPII, LIMITED LIABILITY COMPANY
By /s/ EARLE J. BENSING
-----------------------------
Its Authorized Signer
-----------------------------
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<PAGE>
EXHIBIT 10.17
AMENDED AND RESTATED
EXECUTIVE STOCK AGREEMENT
-------------------------
THIS AMENDED AND RESTATED EXECUTIVE STOCK AGREEMENT (the "Agreement")
is made as of November 24, 1997, between Corinthian Colleges, Inc., a Delaware
corporation (the "Company"), and David G. Moore ("Executive").
The Company and Executive desire to amend and restate that certain
executive stock agreement by and between Executive and Corinthian Schools, Inc.
("CSI"), a wholly-owned subsidiary of the Company, dated June 30, 1995, and as
previously amended pursuant to the First Amendment to Executive Stock Agreement,
dated October 17, 1996 (as amended, the "Original Executive Stock Agreement"),
----------------------------------
pursuant to which Executive purchased, and CSI sold, 10,000 shares of CSI's
Class A Common Stock, par value $.01 per share, and 6,250 shares of CSI's Class
B Common Stock , par value $.01 per share (together with the Class A Common
Stock of CSI, the "Old Common"). Executive paid a portion of such purchase
price by delivering to the CSI for cancellation shares of common stock purchased
by Executive prior to the Original Executive Stock Agreement, and with respect
to which Executive has made additional capital contributions, the total amount
previously paid being $20,000. Pursuant to the Agreement of Merger adopted by
the Company in September 1996, each share of CSI Class A Common Stock was
converted into the right to receive one share of the Company's Class A Common
Stock (the "Class A Common") and each share of CSI Class B Common Stock was
converted into the right to receive one share of the Company's Class B Common
Stock (the "Class B Common" and, together with the Class A Common, the "Common
Stock"). All of such shares of Common Stock and all shares of Common Stock
hereafter acquired by Executive are referred to herein as "Executive Stock."
Certain definitions are set forth in paragraph 11 of this Agreement.
Certain provisions of this Agreement are intended for the benefit of,
and shall be enforceable by, the Investors and the other persons who are
entering into similar agreements ("Executive Stock Agreements") with the Company
as of the date hereof (Executive and such persons are collectively referred to
as "Executives").
The parties hereto agree to amend and restate the Original Executive
Stock Agreement as follows:
1. Purchase and Sale of Executive Stock.
------------------------------------
(a) Upon execution of this Agreement, Executive shall purchase, and
the Company shall sell, 10,000 shares of Class A Common at a price of $10.00 per
share and 6,250 shares of Class B Common at a price of $10.00 per share. The
Company shall deliver to Executive a copy of the certificates representing such
shares of Common Stock, and Executive shall deliver to the Company a cashier's
or certified check or wire transfer of funds in the aggregate amount of
$80,062.50, a promissory note in the form of Annex A attached hereto in an
-------
aggregate principal amount of $62,437.50 (the "Executive Note") and the
certificates for the Old Common. Executive's obligations under the Executive
Note shall be secured by a pledge of all of the shares of Class B Common to the
Company,
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<PAGE>
and in connection therewith, Executive shall enter into a pledge agreement in
the form of Annex B attached hereto.
-------
(b) The Company shall hold each certificate representing Executive
Stock until such time as the Executive Stock represented by such certificate is
released from the pledge to the Company, if any, and is fully vested hereunder.
(c) Within 30 days after Executive purchases any Executive Stock from
the Company, Executive shall make an effective election with the Internal
Revenue Service under Section 83(b) of the Internal Revenue Code and the
regulations promulgated thereunder and the equivalent election with the State of
California.
(d) In connection with the purchase and sale of the Executive Stock
hereunder, Executive represents and warrants to the Company that:
(i) The Executive Stock to be acquired by Executive pursuant to
this Agreement shall be acquired for Executive's own account and not with a
view to, or intention of, distribution thereof in violation of the 1933
Act, or any applicable state securities laws, and the Executive Stock shall
not be disposed of in contravention of the 1933 Act or any applicable state
securities laws.
(ii) Executive is an executive officer of the Company, is
sophisticated in financial matters and is able to evaluate the risks and
benefits of the investment in the Executive Stock.
(iii) Executive is able to bear the economic risk of his
investment in the Executive Stock for an indefinite period of time because
the Executive Stock has not been registered under the 1933 Act and,
therefore, cannot be sold unless subsequently registered under the 1933 Act
or an exemption from such registration is available.
(iv) Executive has had an opportunity to ask questions and
receive answers concerning the terms and conditions of the offering of
Executive Stock and has had full access to such other information
concerning the Company as he has requested. Executive has also reviewed, or
has had an opportunity to review, the following documents: (A) the
Company's Certificate of Incorporation and Bylaws; and (B) the agreements,
notes and related documents with the Company's lenders and equity
investors.
(v) This Agreement constitutes the legal, valid and binding
obligation of Executive, enforceable in accordance with its terms, and the
execution, delivery and performance of this Agreement by Executive does not
and shall not conflict with, violate or cause a breach of any agreement,
contract or instrument to which Executive is a party or any judgment, order
or decree to which Executive is subject.
(vi) Executive has obtained advice from persons other than the
Investors and their counsel regarding the tax effects of the transaction
contemplated hereby.
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<PAGE>
(e) Executive acknowledges and agrees that neither the issuance of the
Executive Stock to Executive nor any provision contained herein shall entitle
Executive to remain in the employment of the Company and its Subsidiaries.
(f) The Company and Executive acknowledge and agree that this
Agreement has been executed and delivered, and the Executive Stock has been
issued hereunder, in connection with and as a part of the compensation and
incentive arrangements between the Company and Executive.
(g) The Company acknowledges that Executive is given certain
contractual preemptive rights, together with the Investors, in the Purchase
Agreement (paragraph 3J) with respect to future issuances of equity securities
of the Company notwithstanding the fact that Executive is not a named party
thereto.
(h) Executive represents and warrants to the Company and the Investors
that he has not entered and will not during the term of this Agreement enter
into any agreement with any of the other Executives with respect to the voting
of his or their shares or the sharing of the economic benefits thereof.
2. Vesting of Executive Stock.
--------------------------
(a) (i) Except as otherwise provided in paragraph 2(b) below, the
Executive Stock which is Class A Common shall become vested in accordance with
the following schedule, if as of each such date Executive is employed by the
Company or any of its Subsidiaries:
<TABLE>
<CAPTION>
Cumulative
Percentage of Class A Executive
Date Stock Vested
------ -------------------------------
<S> <C>
the date hereof 75.0%
June 30, 1998 87.5%
June 30, 1999 100.0%
</TABLE>
(ii) Except as otherwise provided in paragraph 2(b) below, the
Executive Stock which is Class B Common (the "Performance Vesting Shares") shall
become vested if:
(A) The Executive is employed by the Company and any of its
Subsidiaries on June 30, 2005 and there has been no Sale of the Company (as
defined herein); or
(B) (1) on or before December 31, 1999, a Trigger Event, as defined
below, has occurred, (2) Executive is employed by the Company or any of its
Subsidiaries on the date of closing of such Trigger Event and (3):
(I) as to one-third of the Performance Vesting Shares (the "2.5%
Shares") the Total Company Value shall equal or exceed $50,000,000, and
(II) as to the remaining Performance Vesting Shares (the "5% Shares")
to the extent that the Total Company Value exceeds $50,000,000, the number
of 5% Shares which shall vest is equal to the product of (I) the quotient
determined by dividing the amount that the Total
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<PAGE>
Company Value exceeds $50,000,000 by $20,000,000 and (II) the maximum
number of 5% Shares.
For example, if the Total Company Value at the time of the
Trigger Event is $58,000,000 and the maximum number of 5% Shares
is 3,333 (assuming, for purposes of this example only, a maximum
of 5,000 Performance Vesting Shares) then the number of 5% Shares
which shall become vested is 1333 (8,000,000/20,000,000 x
3,333 = 1333).
The determination of the Total Company Value, shall be made upon occurrence of
and as of the date of closing of either of the following "Trigger Events":
(A) the Company has closed an underwritten initial public offering
("IPO") of Common Stock registered under the 1933 Act in which the net proceeds
to the Company is at least $20,000,000, provided however, that prior to or as a
result of the IPO all outstanding shares of the Company's Series A Preferred
Stock (the "Preferred Stock") are redeemed by the Company, or;
(B) a "Sale of the Company" as defined herein.
(b) Upon the occurrence of a Sale of the Company, a Qualified Public
Offering or the death or permanent disability of Executive, all shares of
Executive Stock which are Class A Common which have not yet become vested shall
become vested at the time of such event. For purposes of this paragraph 2(b),
the determination of permanent disability shall be made in good faith by the
Company's board of directors (the "Board"). Shares of Executive Stock which
have become vested are referred to herein as "Vested Shares," and all other
shares of Executive Stock are referred to herein as "Unvested Shares."
(c) The Company shall upon the written request of a holder of
Executive Stock which is Class B Common Stock issue and exchange therefor shares
of Class A Common on a share-for-share basis at any time on or after a Sale of
the Company or a Qualified Public Offering.
3. Repurchase Option.
-----------------
(a) In the event (i) Executive ceases to be employed by the Company
and its Subsidiaries for any reason (the "Termination"), the Executive Stock
(whether held by Executive or one or more of Executive's transferees) or (ii)
there is a Sale of the Company after December 31, 1999, the Unvested Shares of
the Performance Vesting Shares (whether held by Executive or one or more of
Executive's transferees) shall be subject to repurchase by the Company and the
Investors pursuant to the terms and conditions set forth in this paragraph 3
(the "Repurchase Option"); provided that the Repurchase Option shall not apply
to the shares which vest on the date hereof unless Executive voluntarily
terminated such employment prior to the second anniversary of the date hereof
(in which event the Repurchase Option will apply to such shares).
(b) The purchase price for each Unvested Share shall be Executive's
Original Cost for such share (with shares having the lowest cost subject to
repurchase prior to shares with a higher cost), and the purchase price for each
Vested Share shall be the Fair Market Value for such share.
(c) The Board may elect to purchase all or any portion of the Unvested
Shares and the Vested Shares by delivering written notice (the "Repurchase
Notice") to the holder or holders of the Executive Stock within 30 days after
the Termination. The Repurchase Notice shall set forth the
-4-
<PAGE>
number of Unvested Shares and Vested Shares to be acquired from each holder of
Executive Stock, the aggregate consideration to be paid for such shares and the
time and place for the closing of the transaction. If the number of shares of
Executive Stock then held by Executive is less than the total number of shares
of Executive Stock the Company has elected to purchase, the Company shall
purchase the remaining shares elected to be purchased from the other holder(s)
of Executive Stock under this Agreement, pro rata according to the number of
shares of Executive Stock held by such other holder(s) at the time of delivery
of such Repurchase Notice (determined as close as practicable to the nearest
whole shares). The number of shares to be repurchased by the Company shall first
be satisfied to the extent possible from the shares of Executive Stock held by
Executive at the time of delivery of the Repurchase Notice.
(d) If for any reason the Company does not elect to purchase all of
the Executive Stock pursuant to the Repurchase Option, the Investors and the
other Executives who are then employed by the Company or one of its Subsidiaries
(the "Continuing Executives") shall be entitled to exercise the Repurchase
Option for the shares of Executive Stock the Company has not elected to purchase
(the "Available Shares"). As soon as practicable after the Company has
determined that there will be Available Shares, but in any event within 45 days
after the Termination, the Company shall give written notice (the "Option
Notice") to the Investors and the Continuing Executives setting forth the number
of Available Shares and the purchase price for the Available Shares. The
Investors and the Continuing Executives may elect to purchase any or all of the
Available Shares by giving written notice to the Company within 30 days after
the Option Notice has been given by the Company. If the Investors and the
Continuing Executives elect to purchase an aggregate number of shares greater
than the number of Available Shares, the Available Shares shall be allocated
among the Investors and the Continuing Executives based upon the number of
shares of Common Stock owned by each Investor and the Continuing Executive on a
fully-diluted basis (provided, however, that no Class B Common which is not yet
vested under the Executive Stock Agreements will be counted for this purpose).
As soon as practicable, and in any event within ten days after the expiration of
the 15-day period set forth above, the Company shall notify each holder of
Executive Stock as to the number of shares being purchased from such holder by
the Investors and the Continuing Executives (the "Supplemental Repurchase
Notice"). At the time the Company delivers the Supplemental Repurchase Notice
to the holder(s) of Executive Stock, the Company shall also deliver written
notice to each Investor and Continuing Executive setting forth the number of
shares such Person is entitled to purchase, the aggregate purchase price and the
time and place of the closing of the transaction. The number of shares to be
repurchased by the Investors and the Continuing Executives shall first be
satisfied to the extent possible from the shares of Executive Stock held by
Executive at the time of delivery of the Repurchase Notice.
(e) The closing of the purchase of the Executive Stock pursuant to the
Repurchase Option shall take place on the date designated by the Company in the
Repurchase Notice or Supplemental Repurchase Notice, which date shall not be
more than 30 days nor less than five days after the delivery of the later of
either such notice to be delivered. The Company and/or the Investors and
Continuing Executives shall pay for the Executive Stock to be purchased pursuant
to the Repurchase Option by delivery of, a check or wire transfer of funds. In
addition, the Company may pay the purchase price for such shares by offsetting
amounts outstanding under the Executive Note issued to the Company hereunder and
any other bona fide debts owed by Executive to the Company. The sellers of
Executive Stock hereunder shall be deemed to make customary representations and
warranties to the purchasers regarding such sale of shares (including
representations and warranties regarding good title to such shares, free and
clear of any liens or encumbrances). The purchasers may require written
confirmation of such representations and require all sellers' signatures be
guaranteed by a national bank or reputable securities broker.
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<PAGE>
(f) The right of the Company and the Investors and the Continuing
Executives to repurchase Vested Shares pursuant to this paragraph 3 shall
terminate upon the first to occur of the Sale of the Company or a Qualified
Public Offering.
(g) If Executive's employment by the Company and its Subsidiaries, if
any, is terminated by the Company other than for Cause, the Company shall pay
Executive as severance an amount equal to his cash base salary compensation
(i.e., excluding any bonuses) during the preceding 12 months in equal monthly
installments on the first business day of each of the next 12 months.
4. Restrictions on Transfer.
------------------------
(a) Retention of Executive Stock. Until the expiration of 54 months
----------------------------
after the date of this Agreement, Executive shall not sell, transfer, assign,
pledge or otherwise dispose of any interest in any shares of Executive Stock,
except for Exempt Transfers (as defined in paragraph 4(b) below) and sales to
the public pursuant to Rule 144 promulgated under the 1933 Act or any similar
rule then in force.
(b) Transfer of Executive Stock. Executive shall not sell, transfer,
---------------------------
assign, pledge or otherwise dispose of (whether with or without consideration
and whether voluntarily or involuntarily or by operation of law) any interest in
any shares of Executive Stock (a "Transfer"), except pursuant to (i) the
provisions of paragraph 3 hereof, a Sale of the Company or a Public Sale
("Exempt Transfers") or (ii) the provisions of this paragraph 4; provided that
in no event shall any Transfer of Executive Stock pursuant to this paragraph 4
be made for any consideration other than cash payable upon consummation of such
Transfer or in installments over time. Prior to making any Transfer other than
an Exempt Transfer, Executive shall deliver written notice (the "Sale Notice")
to the Company and the Investors. The Sale Notice shall disclose in reasonable
detail the identity of the prospective transferee(s), the number of shares to be
transferred and the terms and conditions of the proposed transfer. Executive
shall not consummate any Transfer until 30 days after the Sale Notice has been
given to the Company and to the Investors, unless the parties to the Transfer
have been finally determined pursuant to this paragraph 4 prior to the
expiration of such 30-day period. (The date of the first to occur of such
events is referred to herein as the "Authorization Date".)
(c) First Refusal Rights. The Company may elect to purchase all (but
--------------------
not less than all) of the shares of Executive Stock to be transferred upon the
same terms and conditions as those set forth in the Sale Notice by delivering a
written notice of such election to Executive and the Investors within 10 days
after the Sale Notice has been delivered to the Company. If the Company has not
elected to purchase all of the Executive Stock to be transferred, the Investors
may elect to purchase all (but not less than all) of the Executive Stock to be
transferred upon the same terms and conditions as those set forth in the Sale
Notice by delivering written notice of such election to Executive within 10 days
after the Sale Notice has been given to the Investors. If more than one
Investor elects to purchase the Executive Stock, the shares of Executive Stock
to be sold shall be allocated among the Investors pro rata according to the
number of shares of Common Stock owned by each Investor on a fully-diluted
basis. If neither the Company nor the Investors elect to purchase all of the
shares of Executive Stock specified in the Sale Notice, Executive may transfer
the shares of Executive Stock specified in the Sale Notice at a price and on
terms no more favorable to the transferee(s) thereof than specified in the Sale
Notice during the 60-day period immediately following the Authorization Date.
Any shares of Executive Stock not transferred within such 60-day period shall be
subject to the provisions of this paragraph 4(c) upon subsequent transfer. If
the Company or any of the Investors have elected to purchase shares of Executive
Stock hereunder, the transfer of such shares shall be consummated as soon as
practical after the delivery of the election notice(s) to Executive, but in any
event within 15 days after the expiration of
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<PAGE>
the Election Period. The Company may pay the purchase price for such shares by
offsetting amounts outstanding under the Executive Note issued to the Company
hereunder and any other bona fide debts owed by Executive to the Company.
(d) Certain Permitted Transfers. The restrictions contained in this
---------------------------
paragraph 4 shall not apply with respect to transfers of shares of Executive
Stock (i) pursuant to applicable laws of descent and distribution or (ii) among
Executive's family group; provided that such restrictions shall continue to be
applicable to the Executive Stock after any such transfer and the transferees of
such Executive Stock shall have agreed in writing to be bound by the provisions
of this Agreement. Executive's "family group" means Executive's spouse and
descendants (whether natural or adopted) and any trust solely for the benefit of
Executive and/or Executive's spouse and/or descendants.
(e) Pledges. Notwithstanding the provisions of this paragraph 4,
-------
Executive may pledge any shares of Executive Stock to the Company to secure
payment of the Executive Note.
(f) Termination of Restrictions. The restrictions on the transfer of
---------------------------
shares of Executive Stock set forth in this paragraph 4 shall continue with
respect to each share of Executive Stock following any Transfer thereof (other
than a Public Sale); provided that in any event such restrictions shall
terminate on the first to occur of a Sale of the Company or a Qualified Public
Offering.
5. Additional Restrictions on Transfer.
-----------------------------------
(a) The certificates representing the Executive Stock shall bear the
following legend:
"THE SECURITIES REPRESENTED BY THIS CERTIFICATE WERE ORIGINALLY ISSUED ON
JUNE 30, 1995, HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933,
AS AMENDED OR ANY APPLICABLE STATE SECURITIES LAW, AND MAY NOT BE SOLD OR
TRANSFERRED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT OR AN
EXEMPTION FROM REGISTRATION THEREUNDER. THE SECURITIES REPRESENTED BY THIS
CERTIFICATE ARE ALSO SUBJECT TO ADDITIONAL RESTRICTIONS ON TRANSFER,
CERTAIN REPURCHASE OPTIONS AND CERTAIN OTHER AGREEMENTS SET FORTH IN AN
EXECUTIVE STOCK AGREEMENT BETWEEN THE COMPANY AND DAVID G. MOORE DATED AS
OF JUNE 30, 1995, AS AMENDED AND MODIFIED FROM TIME TO TIME. A COPY OF SUCH
AGREEMENT MAY BE OBTAINED BY THE HOLDER HEREOF AT THE COMPANY'S PRINCIPAL
PLACE OF BUSINESS WITHOUT CHARGE."
(b) No holder of Executive Stock may sell, transfer or dispose of any
Executive Stock (except pursuant to an effective registration statement under
the 1933 Act) without first delivering to the Company an opinion of counsel
(reasonably acceptable in form and substance to the Company) that neither
registration nor qualification under the 1933 Act and applicable state
securities laws is required in connection with such transfer.
(c) Each holder of Executive Stock agrees not to effect any public
sale or distribution of any Executive Stock or other equity securities of the
Company, or any securities convertible into or exchangeable or exercisable for
any of the Company's equity securities, during the seven days prior to and the
180 days after the effectiveness of any underwritten public offering, except as
part of such underwritten public offering or if otherwise permitted by the
Company.
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<PAGE>
6. Sale of the Company.
-------------------
(a) If the Board and the holders of a majority of the Company's
Preferred Stock and Common Stock approve a Sale of the Company (the "Approved
Sale"), the holders of Executive Stock shall consent to and raise no objections
against the Approved Sale of the Company, and if the Approved Sale of the
Company is structured as a sale of stock, the holders of Executive Stock shall
agree to sell their shares of Executive Stock and surrender their stock options
on the terms and conditions approved by the Board and the holders of a majority
of the Company's Preferred Stock and Common Stock. The holders of Executive
Stock shall take all necessary and desirable actions in connection with the
consummation of the Approved Sale of the Company.
(b) The obligations of the holders of Executive Stock with respect to
the Approved Sale of the Company are subject to the satisfaction of the
following conditions: (i) upon the consummation of the Approved Sale, all of the
holders of Common Stock shall receive the same form and amount of consideration
per share of Common Stock, or if any holders of Common Stock are given an option
as to the form and amount of consideration to be received, all holders shall be
given the same option; and (ii) all holders of then currently exercisable rights
to acquire shares of Common Stock shall be given an opportunity to either (A)
exercise such rights prior to the consummation of the Approved Sale and
participate in such sale as holders of Common Stock or (B) upon the consummation
of the Approved Sale, receive in exchange for such rights consideration equal to
the amount determined by multiplying (1) the same amount of consideration per
share of Common Stock received by the holders of Common Stock in connection with
the Approved Sale less the exercise price per share of Common Stock of such
rights to acquire Common Stock by (2) the number of shares of Common Stock
represented by such rights.
(c) If the Company or the holders of the Company's securities enter
into any negotiation or transaction for which Rule 506 (or any similar rule then
in effect) promulgated by the Securities Exchange Commission may be available
with respect to such negotiation or transaction (including a merger,
consolidation or other reorganization), the holders of Executive Stock shall at
the request of the Company, appoint a "purchaser representative" (as such term
is defined in Rule 501) reasonably acceptable to the Company. If any holder of
Executive Stock appoints a purchaser representative designated by the Company,
the Company shall pay the fees of such purchaser representative. However, if
any holder of Executive Stock declines to appoint the purchaser representative
designated by the Company, such holder shall appoint another purchaser
representative (reasonably acceptable to the Company), and such holder shall be
responsible for the fees of the purchaser representative so appointed.
(d) Executive and the other holders of Executive Stock (if any) shall
bear their pro-rata share (based upon the number of all shares sold by each
seller including the Investors and each other Executive) of the costs of any
sale of Executive Stock pursuant to an Approved Sale to the extent such costs
are incurred for the benefit of all holders of Common Stock and are not
otherwise paid by the Company or the acquiring party. Costs incurred by
Executive and the other holders of Executive Stock on their own behalf shall not
be considered costs of the transaction hereunder.
(e) The provisions of this paragraph 6 shall terminate upon the
completion of a Qualified Public Offering.
7. Voting Agreement and Tag-Along.
------------------------------
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<PAGE>
(a) So long as the Investors hold any shares of Common Stock, each
Investor and Executive shall vote all of their shares of Common Stock (and, in
the event such holder is entitled to vote any of the Company's other securities
for the election of directors, such holder shall vote all such securities) and
take all other reasonably necessary actions in such holder's capacity as a
stockholder of the Company, and the Company shall take all necessary or
desirable actions as are requested by the Investors and Executive, in order to
cause two of the executive officers of the Company (one of which should be the
Company's Chief Executive Officer) representatives designated by Executives
holding a majority of the Common Stock held by all Executives to be elected as
members of the Board and to cause two representatives designated by Investors
holding a majority of the Common Stock held by the Investors to be elected to
the Board. The provisions of this paragraph 7 shall terminate upon the first to
occur of a Qualified Public Offering and the tenth anniversary of this
Agreement.
(b) If either Investor desires to sell any of its Common Stock or if
holders of Executive Stock, after complying with the other provisions of this
Agreement, including paragraph 3, desire to sell any of their shares of Common
Stock, the proposed seller shall give written notice thereof (a "Sale Notice")
to the Company, the Investors and each holder of Common Stock issued under this
Agreement and the other Executive Stock Agreements at least 10 days prior to the
proposed sale and each such Person other than the seller may elect to
participate in the sale by written notice to the Company and the seller given
within 10 days after receipt of the Sale Notice. The electing Persons shall be
entitled to sell in the contemplated sale, at the same price and on the same
terms, a number of shares of the Company's Common Stock equal to the product of
(i) the quotient determined by dividing the percentage of the Company's Common
Stock (on a fully-diluted basis) held by such electing Person, by the aggregate
percentage of the Company's Common Stock (on a fully-diluted basis) owned by the
Seller and all electing Persons and (ii) the number of shares of Common Stock to
be sold in the contemplated sale.
For example, if the Executive delivered a Sale Notice contemplated a sale
of 100 shares of Common Stock, and if Executive was at such time the owner
of 5% of the Company's Common Stock (on a fully-diluted basis) and if one
Investor elected to participate and the Investor owned 20% of the Company's
Common Stock (on a fully-diluted basis), Executive would be entitled to
sell 20 shares (5%/25% x 100 shares) and the Investor would be
entitled to sell 80 shares (20%/25% x 100 shares).
The provisions of this paragraph (b) shall terminate upon a Qualified Public
Offering.
8. Nondisclosure and Nonuse of Confidential Information.
----------------------------------------------------
(a) Executive shall not disclose or use at any time, either during his
employment with the Company or thereafter, any Confidential Information (as
defined below) of which Executive is or becomes aware, whether or not such
information is developed by him, except to the extent that such disclosure or
use is directly related to and required by Executive's performance of duties
assigned to Executive by the Company. Executive shall take all appropriate
steps to safeguard Confidential Information and to protect it against
disclosure, misuse, espionage, loss and theft.
(b) As used in this Agreement, the term "Confidential Information"
means information that is not generally known to the public and that is used,
developed or obtained by the Company in connection with its business, including
but not limited to (i) products or services, (ii) fees, costs and pricing
structures, (iii) designs, (iv) analysis, (v) drawings, photographs and reports,
(vi) computer software, including operating systems, applications and program
listings, (vii) flow charts, manuals and documentation, (viii) data bases, (ix)
accounting and business methods, (x) inventions,
-9-
<PAGE>
devices, new developments, methods and processes, whether patentable or
unpatentable and whether or not reduced to practice, (xi) customers and clients
and customer or client lists, (xii) copyrightable works, (xiii) all information
comprising the Transferred Property, (xiv) all technology and trade secrets, and
(xv) all similar and related information in whatever form. Confidential
Information shall not include any information that has been published in the
form generally available to the public prior to the date Executive purposes to
disclose or use such information. Information shall not be deemed to have been
published merely because individual portions of the information have been
separately published, but only if all material features comprising such
information have been published in combination.
9. Consulting and Noncompetition. Executive acknowledges and agrees
-----------------------------
with the Company that Executive's services to the Company are unique in nature
and that the Company would be irreparably damaged if Executive were to provide
similar services to any person or entity competing with the Company or engaged
in a similar business. Executive accordingly covenants and agrees with the
Company that during the period commencing with the date of this Agreement and,
as long as the Company compensates Executive as a consultant at an amount
payable monthly equal to 10% of Executive's cash compensation in the 12 months
preceding his termination of employment, thereafter until the third anniversary
of the date of the termination of Executive's employment with the Company (the
"Noncompetition Period"), Executive shall not, directly or indirectly, either
for himself or for any other individual, corporation, partnership, joint venture
or other entity, participate in any business (including, without limitation, any
division, group or franchise of a larger organization) which (i) engages or
which proposes to engage in the acquisition, disposition, operation or
management of allied health schools anywhere in the U.S. or (ii) which operates
or plans to operate schools of any type in the same geographic areas as Company
at the time of such termination. For purposes of this Agreement, the term
"participate in" shall include, without limitation, having any director or
indirect interest in any corporation, partnership, joint venture or other
entity, whether as a sole proprietor, owner, stockholder, partner, joint
venturer, creditor or otherwise, or rendering any direct or indirect service or
assistance to any individual, corporation, partnership, joint venture and other
business entity (whether as a director, officer, manager, supervisor, employee,
agent, consultant or otherwise).
10. Nonsolicitation. During the Noncompetition Period, Executive
---------------
shall not (i) induce or attempt to induce any employee of the Company to leave
the employ of the Company, or in any way interfere with the relationship between
the Company and any employee thereof, (ii) hire directly or through another
entity any person who was an employee of the Company at any time during the
Noncompetition Period, or (iii) induce or attempt to induce any customer,
supplier, licensee or other business relation of the Company to cease doing
business with the Company, or in any way interfere with the relationship between
such customer, supplier, licensee or business relation and the Company
(including, without limitation, making any negative statements or communications
concerning the Company).
11. Definitions.
-----------
"Cause" means (i) the commission of a felony or a crime involving
-----
moral turpitude or the commission of any other act or omission involving
dishonesty, disloyalty or fraud with respect to the Company or any of its
Subsidiaries or any of their customers or suppliers, (ii) conduct tending to
bring the Company or any of its Subsidiaries into substantial public disgrace or
disrepute, (iii) substantial and repeated failure to perform duties as
reasonably directed by the Board, (iv) gross negligence or willful misconduct
with respect to the Company or any of its Subsidiaries or (v) any material
breach of this Agreement which is not cured within 15 days after written notice
thereof to Executive.
-10-
<PAGE>
"Executive Stock" shall continue to be Executive Stock in the hands of
---------------
any holder other than Executive (except for the Company and the Investors and
except for transferees in a Public Sale), and except as otherwise provided
herein, each such other holder of Executive Stock shall succeed to all rights
and obligations attributable to Executive as a holder of Executive Stock
hereunder. Executive Stock shall also include shares of the Company's capital
stock issued with respect to Executive Stock by way of a stock split, stock
dividend or other recapitalization. Notwithstanding the foregoing, all Unvested
Shares shall remain Executive Stock after any Transfer thereof.
"Fair Market Value" of each share of Executive Stock means the average
-----------------
of the closing prices of the sales of the Company's Common Stock on all
securities exchanges on which the Common Stock may at the time be listed, or, if
there have been no sales on any such exchange on any day, the average of the
highest bid and lowest asked prices on all such exchanges at the end of such
day, or, if on any day the Common Stock is not so listed, the average of the
representative bid and asked prices quoted in the Nasdaq National Market as of
4:00 P.M., New York time, or, if on any day the Common Stock is not quoted in
the Nasdaq National Market, the average of the highest bid and lowest asked
prices on such day in the domestic over-the-counter market as reported by the
National Quotation Bureau Incorporated, or any similar successor organization,
in each such case averaged over a period of 21 days consisting of the day as of
which the Fair Market Value is being determined and the 20 consecutive business
days prior to such day. If at any time the Common Stock is not listed on any
securities exchange or quoted in the Nasdaq National Market or the over-the-
counter market, the Fair Market Value shall be the fair value of the Common
Stock determined in good faith by the Board or, if the Executive disagrees with
such value, the fair market value determined by an independent appraiser
mutually acceptable to the Board and Executive(in each case without taking into
account the effect of any contemporaneous repurchase of Unvested Shares under
paragraph 3 hereof); provided that if such appraised value is higher than that
established by the Board the purchasers of the shares involved shall not be
required to consummate the related purchase.
"Independent Third Party" means any person who, immediately prior to
-----------------------
the contemplated transaction, does not own in excess of 5% of the Company's
Common Stock on a fully-diluted basis, who is not controlling, controlled by or
under common control with any such 5% owner of the Company's Common Stock and
who is not the spouse or descendent (by birth or adoption) of any such 5% owner
of the Company's Common Stock.
"Investors" means Primus Capital Partners III Limited Partnership and
---------
BOCPII, Limited Liability Company, successor by merger to Bank One Capital
Partners II, Limited Partnership.
"1933 Act" means the Securities Act of 1933, as amended from time to
--------
time.
"Original Cost" of each share of Common Stock purchased hereunder
-------------
shall be equal to $10.00 (as proportionately adjusted for all subsequent stock
splits, stock dividends and other recapitalizations).
"Qualified Public Offering" means the sale by the Company, in an
-------------------------
underwritten public offering registered under the 1933 Act, of shares of the
Company's Common Stock having an aggregate offering value of at least $10
million and where the per share price to the public multiplied by the number of
shares of Common Stock issued under the Purchase Agreement and this and the
other Executive Stock Agreements (adjusted for stock splits and other
recapitalizations) is at least $30,000,000.
-11-
<PAGE>
"Permitted Transferee" means any holder of Executive Stock who
--------------------
acquired such stock pursuant to a transfer permitted by paragraph 4(d).
"Public Sale" means any sale pursuant to a registered public offering
-----------
under the 1933 Act or any sale to the public pursuant to Rule 144 promulgated
under the 1933 Act effected through a broker, dealer or market maker.
"Sale of the Company" means the sale of the Company to an Independent
-------------------
Third Party or affiliated group of Independent Third Parties pursuant to which
such party or parties acquire (i) capital stock of the Company possessing the
voting power to elect a majority of the Company's board of directors (whether by
merger, consolidation or sale or transfer of the Company's capital stock) or
(ii) all or substantially all of the Company's assets determined on a
consolidated basis.
"Subsidiary" means any corporation of which the Company owns
----------
securities having a majority of the ordinary voting power in electing the board
of directors directly or through one or more subsidiaries.
"Total Company Value" means the product of (i) as to an IPO, the price
-------------------
per share to the public in such IPO, and as to a Sale of the Company, the price
per share received by holders of common stock and (ii) 134,408.60 (adjusted for
any stock splits, stock dividends, combinations of shares or the like after the
date hereof).
12. Notices. Any notice provided for in this Agreement must be in
-------
writing and must be either personally delivered, mailed by first class mail
(postage prepaid and return receipt requested) or sent by reputable overnight
courier service (charges prepaid) to the recipient at the address below
indicated:
To the Company:
6 Hutton Centre Drive
Suite 400
Santa Ana, CA 92707-5164
Attention: President
With copies to:
David A. Krinsky, Esq.
O'Melveny & Myers
610 Newport Center Drive, Suite 1700
Newport Beach, CA 92660-6429
To Executive:
David G. Moore
525 East Seaside, #1808
Long Beach, Ca 90802
To the Investors: As specified in the Purchase Agreement
-12-
<PAGE>
or such other address or to the attention of such other person as the recipient
party shall have specified by prior written notice to the sending party. Any
notice under this Agreement shall be deemed to have been given when so delivered
or sent or, if mailed, five days after deposit in the U.S. mail.
13. General Provisions.
------------------
(a) Transfers in Violation of Agreement. Any Transfer or attempted
-----------------------------------
Transfer of any Executive Stock in violation of any provision of this Agreement
shall be void, and the Company shall not record such Transfer on its books or
treat any purported transferee of such Executive Stock as the owner of such
stock for any purpose.
(b) Severability. Whenever possible, each provision of this Agreement
------------
shall be interpreted in such manner as to be effective and valid under
applicable law, but if any provision of this Agreement is held to be invalid,
illegal or unenforceable in any respect under any applicable law or rule in any
jurisdiction, such invalidity, illegality or unenforceability shall not affect
any other provision or any other jurisdiction, but this Agreement shall be
reformed, construed and enforced in such jurisdiction as if such invalid,
illegal or unenforceable provision had never been contained herein.
(c) Complete Agreement. This Agreement, those documents expressly
------------------
referred to herein and other documents of even date herewith embody the complete
agreement and understanding among the parties and supersede and preempt any
prior understandings, agreements or representations by or among the parties,
written or oral, which may have related to the subject matter hereof in any way.
(d) Counterparts. This Agreement may be executed in separate
------------
counterparts, each of which is deemed to be an original and all of which taken
together constitute one and the same agreement.
(e) Successors and Assigns. Except as otherwise provided herein, this
----------------------
Agreement shall bind and inure to the benefit of and be enforceable by
Executive, the Company, the Investors and their respective successors and
assigns (including subsequent holders of Executive Stock); provided that the
rights and obligations of Executive under this Agreement shall not be assignable
except in connection with a permitted transfer of Executive Stock hereunder.
(f) Choice of Law. The corporate law of the State of Delaware shall
-------------
govern all questions concerning the relative rights of the Company and its
stockholders. All other questions concerning the construction, validity,
enforcement and interpretation of this Agreement and the exhibits hereto shall
be governed by the internal law, and not the law of conflicts, of the State of
California.
(g) Remedies. Each of the parties to this Agreement (including the
--------
Investors) shall be entitled to enforce its rights under this Agreement
specifically, to recover damages and costs (including reasonable attorney's
fees) caused by any breach of any provision of this Agreement and to exercise
all other rights existing in its favor. The parties hereto agree and
acknowledge that money damages would not be an adequate remedy for any breach of
the provisions of this Agreement and that any party may in its sole discretion
apply to any court of law or equity of competent jurisdiction (without posting
any bond or deposit) for specific performance and/or other injunctive relief in
order to enforce or prevent any violations of the provisions of this Agreement.
-13-
<PAGE>
(h) Amendment and Waiver. The provisions of this Agreement may be
--------------------
amended and waived only with the prior written consent of the Company, Executive
and Investors owning a majority of the Common Stock on a fully-diluted basis
held by all Investors.
(i) Third-Party Beneficiaries. Certain provisions of this Agreement
-------------------------
are entered into for the benefit of and shall be enforceable by the Investors
and other Executives as provided herein.
(j) Business Days. If any time period for giving notice or taking
-------------
action hereunder expires on a day which is a Saturday, Sunday or legal holiday
in the state in which the Company's chief executive office is located, the time
period shall be automatically extended to the business day immediately following
such Saturday, Sunday or holiday.
14 Initial Public Offering. In the event that the Board and the
-----------------------
holders of a majority of the shares of Common Stock (voting as a single class)
then outstanding approve an initial public offering of Common Stock (a "Public
Offering") pursuant to an effective registration statement under the Securities
Act, Executive shall take all reasonably necessary or desirable actions in
connection with the consummation of the Public Offering as requested by the
Company.
-14-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement on
the date first written above.
CORINTHIAN COLLEGES, INC.
By /s/ FRANK J. MCCORD
----------------------------
Its Exec. VP & CFO
----------------------------
/s/ DAVID G. MOORE
--------------------------------
DAVID G. MOORE
/s/ FRANK J. MCCORD
--------------------------------
Witness
Agreed and Accepted:
PRIMUS CAPITAL FUND III
LIMITED PARTNERSHIP
By: Primus Venture Partners, Inc.
By /s/ LOYAL W. WILSON
-----------------------------
Its President
-----------------------------
BOCPII, LIMITED LIABILITY COMPANY
By /s/ EARLE J. BENSING
-----------------------------
Its Authorized Signer
-----------------------------
-15-
<PAGE>
EXHIBIT 10.18
AMENDED AND RESTATED
EXECUTIVE STOCK AGREEMENT
-------------------------
THIS AMENDED AND RESTATED EXECUTIVE STOCK AGREEMENT (the "Agreement")
is made as of November 24, 1997, between Corinthian Colleges, Inc., a Delaware
corporation (the "Company"), and Paul St. Pierre ("Executive").
The Company and Executive desire to amend and restate that certain
executive stock agreement by and between Executive and Corinthian Schools, Inc.
("CSI"), a wholly-owned subsidiary of the Company, dated June 30, 1995, and as
previously amended pursuant to the First Amendment to Executive Stock Agreement,
dated October 17, 1996 (as amended, the "Original Executive Stock Agreement"),
----------------------------------
pursuant to which Executive purchased, and CSI sold, 10,000 shares of CSI's
Class A Common Stock, par value $.01 per share, and 5,000 shares of CSI's Class
B Common Stock , par value $.01 per share (together with the Class A Common
Stock of CSI, the "Old Common"). Executive paid a portion of such purchase
price by delivering to CSI for cancellation shares of common stock purchased by
Executive prior to the Original Executive Stock Agreement, and with respect to
which Executive has made additional capital contributions, the total amount
previously paid being $20,000. Pursuant to the Agreement of Merger adopted by
the Company in September 1996, each share of CSI Class A Common Stock was
converted into the right to receive one share of the Company's Class A Common
Stock (the "Class A Common") and each share of CSI Class B Common Stock was
converted into the right to receive one share of the Company's Class B Common
Stock (the "Class B Common" and, together with the Class A Common, the "Common
Stock"). All of such shares of Common Stock and all shares of Common Stock
hereafter acquired by Executive are referred to herein as "Executive Stock."
Certain definitions are set forth in paragraph 11 of this Agreement.
Certain provisions of this Agreement are intended for the benefit of,
and shall be enforceable by, the Investors and the other persons who are
entering into similar agreements ("Executive Stock Agreements") with the Company
as of the date hereof (Executive and such persons are collectively referred to
as "Executives").
The parties hereto agree to amend and restate the Original Executive
Stock Agreement as follows:
1. Purchase and Sale of Executive Stock.
------------------------------------
(a) Upon execution of this Agreement, Executive shall purchase, and
the Company shall sell, 10,000 shares of Class A Common at a price of $10.00 per
share and 5,000 shares of Class B Common at a price of $10.00 per share. The
Company shall deliver to Executive a copy of the certificates representing such
shares of Common Stock, and Executive shall deliver to the Company a cashier's
or certified check or wire transfer of funds in the
-1-
<PAGE>
aggregate amount of $80,050.00, a promissory note in the form of Annex A
-------
attached hereto in an aggregate principal amount of $49,950.00 (the "Executive
Note") and the certificates for the Old Common. Executive's obligations under
the Executive Note shall be secured by a pledge of all of the shares of Class B
Common to the Company, and in connection therewith, Executive shall enter into a
pledge agreement in the form of Annex B attached hereto.
-------
(b) The Company shall hold each certificate representing Executive
Stock until such time as the Executive Stock represented by such certificate is
released from the pledge to the Company, if any, and is fully vested hereunder.
(c) Within 30 days after Executive purchases any Executive Stock from
the Company, Executive shall make an effective election with the Internal
Revenue Service under Section 83(b) of the Internal Revenue Code and the
regulations promulgated thereunder and the equivalent election with the State of
California.
(d) In connection with the purchase and sale of the Executive Stock
hereunder, Executive represents and warrants to the Company that:
(i) The Executive Stock to be acquired by Executive pursuant to
this Agreement shall be acquired for Executive's own account and not with a
view to, or intention of, distribution thereof in violation of the 1933
Act, or any applicable state securities laws, and the Executive Stock shall
not be disposed of in contravention of the 1933 Act or any applicable state
securities laws.
(ii) Executive is an executive officer of the Company, is
sophisticated in financial matters and is able to evaluate the risks and
benefits of the investment in the Executive Stock.
(iii) Executive is able to bear the economic risk of his
investment in the Executive Stock for an indefinite period of time because
the Executive Stock has not been registered under the 1933 Act and,
therefore, cannot be sold unless subsequently registered under the 1933 Act
or an exemption from such registration is available.
(iv) Executive has had an opportunity to ask questions and
receive answers concerning the terms and conditions of the offering of
Executive Stock and has had full access to such other information
concerning the Company as he has requested. Executive has also reviewed,
or has had an opportunity to review, the following documents: (A) the
Company's Certificate of Incorporation and Bylaws; and (B) the agreements,
notes and related documents with the Company's lenders and equity
investors.
(v) This Agreement constitutes the legal, valid and binding
obligation of Executive, enforceable in accordance with its terms, and the
execution, delivery and
-2-
<PAGE>
performance of this Agreement by Executive does not and shall not conflict
with, violate or cause a breach of any agreement, contract or instrument to
which Executive is a party or any judgment, order or decree to which
Executive is subject.
(vi) Executive has obtained advice from persons other than the
Investors and their counsel regarding the tax effects of the transaction
contemplated hereby.
(e) Executive acknowledges and agrees that neither the issuance of
the Executive Stock to Executive nor any provision contained herein shall
entitle Executive to remain in the employment of the Company and its
Subsidiaries.
(f) The Company and Executive acknowledge and agree that this
Agreement has been executed and delivered, and the Executive Stock has been
issued hereunder, in connection with and as a part of the compensation and
incentive arrangements between the Company and Executive.
(g) The Company acknowledges that Executive is given certain
contractual preemptive rights, together with the Investors, in the Purchase
Agreement (paragraph 3J) with respect to future issuances of equity securities
of the Company notwithstanding the fact that Executive is not a named party
thereto.
(h) Executive represents and warrants to the Company and the
Investors that he has not entered and will not during the term of this Agreement
enter into any agreement with any of the other Executives with respect to the
voting of his or their shares or the sharing of the economic benefits thereof.
2. Vesting of Executive Stock.
--------------------------
(a) (i) Except as otherwise provided in paragraph 2(b) below, the
Executive Stock which is Class A Common shall become vested in accordance with
the following schedule, if as of each such date Executive is employed by the
Company or any of its Subsidiaries:
<TABLE>
<CAPTION>
Cumulative
Percentage of Class A Executive
Date Stock Vested
---------- -------------------------------------
<S> <C>
the date hereof 75.0%
June 30, 1998 87.5%
June 30, 1999 100.0%
</TABLE>
(ii) Except as otherwise provided in paragraph 2(b) below, the
Executive Stock which is Class B Common (the "Performance Vesting Shares") shall
become vested if:
(A) The Executive is employed by the Company and any of its
Subsidiaries on June 30, 2005 and there has been no Sale of the Company (as
defined herein); or
-3-
<PAGE>
(B) (1) on or before December 31, 1999, a Trigger Event, as defined
below, has occurred, (2) Executive is employed by the Company or any of its
Subsidiaries on the date of closing of such Trigger Event and (3):
(I) as to one-third of the Performance Vesting Shares (the "2.5%
Shares") the Total Company Value shall equal or exceed $50,000,000, and
(II) as to the remaining Performance Vesting Shares (the "5% Shares")
to the extent that the Total Company Value exceeds $50,000,000, the number
of 5% Shares which shall vest is equal to the product of (I) the quotient
determined by dividing the amount that the Total Company Value exceeds
$50,000,000 by $20,000,000 and (II) the maximum number of 5% Shares.
For example, if the Total Company Value at the time of the
Trigger Event is $58,000,000 and the maximum number of 5% Shares
is 3,333 (assuming, for purposes of this example only, a maximum
of 5,000 Performance Vesting Shares) then the number of 5% Shares
which shall become vested is 1333 (8,000,000 / 20,000,000 x
3,333 = 1333).
The determination of the Total Company Value, shall be made upon occurrence of
and as of the date of closing of either of the following "Trigger Events":
(A) the Company has closed an underwritten initial public offering
("IPO") of Common Stock registered under the 1933 Act in which the net proceeds
to the Company is at least $20,000,000, provided however, that prior to or as a
result of the IPO all outstanding shares of the Company's Series A Preferred
Stock (the "Preferred Stock") are redeemed by the Company, or;
(B) a "Sale of the Company" as defined herein.
(b) Upon the occurrence of a Sale of the Company, a Qualified Public
Offering or the death or permanent disability of Executive, all shares of
Executive Stock which are Class A Common which have not yet become vested shall
become vested at the time of such event. For purposes of this paragraph 2(b),
the determination of permanent disability shall be made in good faith by the
Company's board of directors (the "Board"). Shares of Executive Stock which
have become vested are referred to herein as "Vested Shares," and all other
shares of Executive Stock are referred to herein as "Unvested Shares."
(c) The Company shall upon the written request of a holder of
Executive Stock which is Class B Common Stock issue and exchange therefor shares
of Class A Common on a share-for-share basis at any time on or after a Sale of
the Company or a Qualified Public Offering.
3. Repurchase Option.
-----------------
(a) In the event (i) Executive ceases to be employed by the Company
and its Subsidiaries for any reason (the "Termination"), the Executive Stock
(whether held by Executive
-4-
<PAGE>
or one or more of Executive's transferees) or (ii) there is a Sale of the
Company after December 31, 1999, the Unvested Shares of the Performance Vesting
Shares (whether held by Executive or one or more of Executive's transferees)
shall be subject to repurchase by the Company and the Investors pursuant to the
terms and conditions set forth in this paragraph 3 (the "Repurchase Option");
provided that the Repurchase Option shall not apply to the shares which vest on
the date hereof unless Executive voluntarily terminated such employment prior to
the second anniversary of the date hereof (in which event the Repurchase Option
will apply to such shares).
(b) The purchase price for each Unvested Share shall be Executive's
Original Cost for such share (with shares having the lowest cost subject to
repurchase prior to shares with a higher cost), and the purchase price for each
Vested Share shall be the Fair Market Value for such share.
(c) The Board may elect to purchase all or any portion of the Unvested
Shares and the Vested Shares by delivering written notice (the "Repurchase
Notice") to the holder or holders of the Executive Stock within 30 days after
the Termination. The Repurchase Notice shall set forth the number of Unvested
Shares and Vested Shares to be acquired from each holder of Executive Stock, the
aggregate consideration to be paid for such shares and the time and place for
the closing of the transaction. If the number of shares of Executive Stock then
held by Executive is less than the total number of shares of Executive Stock the
Company has elected to purchase, the Company shall purchase the remaining shares
elected to be purchased from the other holder(s) of Executive Stock under this
Agreement, pro rata according to the number of shares of Executive Stock held by
such other holder(s) at the time of delivery of such Repurchase Notice
(determined as close as practicable to the nearest whole shares). The number of
shares to be repurchased by the Company shall first be satisfied to the extent
possible from the shares of Executive Stock held by Executive at the time of
delivery of the Repurchase Notice.
(d) If for any reason the Company does not elect to purchase all of
the Executive Stock pursuant to the Repurchase Option, the Investors and the
other Executives who are then employed by the Company or one of its Subsidiaries
(the "Continuing Executives") shall be entitled to exercise the Repurchase
Option for the shares of Executive Stock the Company has not elected to purchase
(the "Available Shares"). As soon as practicable after the Company has
determined that there will be Available Shares, but in any event within 45 days
after the Termination, the Company shall give written notice (the "Option
Notice") to the Investors and the Continuing Executives setting forth the number
of Available Shares and the purchase price for the Available Shares. The
Investors and the Continuing Executives may elect to purchase any or all of the
Available Shares by giving written notice to the Company within 30 days after
the Option Notice has been given by the Company. If the Investors and the
Continuing Executives elect to purchase an aggregate number of shares greater
than the number of Available Shares, the Available Shares shall be allocated
among the Investors and the Continuing Executives based upon the number of
shares of Common Stock owned by each Investor and the Continuing Executive on a
fully-diluted basis (provided, however, that no Class B Common which is not yet
vested under the Executive Stock Agreements will be counted for this purpose).
As soon as practicable, and in any event within ten days after the expiration of
the 15-day period set forth above, the Company shall notify each holder of
Executive Stock as to the number of shares being purchased from such holder by
the Investors and the Continuing Executives (the "Supplemental Repurchase
Notice"). At the time the Company delivers the Supplemental Repurchase Notice
to the holder(s) of Executive Stock, the Company shall also deliver written
-5-
<PAGE>
notice to each Investor and Continuing Executive setting forth the number of
shares such Person is entitled to purchase, the aggregate purchase price and the
time and place of the closing of the transaction. The number of shares to be
repurchased by the Investors and the Continuing Executives shall first be
satisfied to the extent possible from the shares of Executive Stock held by
Executive at the time of delivery of the Repurchase Notice.
(e) The closing of the purchase of the Executive Stock pursuant to the
Repurchase Option shall take place on the date designated by the Company in the
Repurchase Notice or Supplemental Repurchase Notice, which date shall not be
more than 30 days nor less than five days after the delivery of the later of
either such notice to be delivered. The Company and/or the Investors and
Continuing Executives shall pay for the Executive Stock to be purchased pursuant
to the Repurchase Option by delivery of, a check or wire transfer of funds. In
addition, the Company may pay the purchase price for such shares by offsetting
amounts outstanding under the Executive Note issued to the Company hereunder and
any other bona fide debts owed by Executive to the Company. The sellers of
Executive Stock hereunder shall be deemed to make customary representations and
warranties to the purchasers regarding such sale of shares (including
representations and warranties regarding good title to such shares, free and
clear of any liens or encumbrances). The purchasers may require written
confirmation of such representations and require all sellers' signatures be
guaranteed by a national bank or reputable securities broker.
(f) The right of the Company and the Investors and the Continuing
Executives to repurchase Vested Shares pursuant to this paragraph 3 shall
terminate upon the first to occur of the Sale of the Company or a Qualified
Public Offering.
(g) If Executive's employment by the Company and its Subsidiaries, if
any, is terminated by the Company other than for Cause, the Company shall pay
Executive as severance an amount equal to his cash base salary compensation
(i.e., excluding any bonuses) during the preceding 12 months in equal monthly
installments on the first business day of each of the next 12 months.
4. Restrictions on Transfer.
------------------------
(a) Retention of Executive Stock. Until the expiration of 54 months
----------------------------
after the date of this Agreement, Executive shall not sell, transfer, assign,
pledge or otherwise dispose of any interest in any shares of Executive Stock,
except for Exempt Transfers (as defined in paragraph 4(b) below) and sales to
the public pursuant to Rule 144 promulgated under the 1933 Act or any similar
rule then in force.
(b) Transfer of Executive Stock. Executive shall not sell, transfer,
---------------------------
assign, pledge or otherwise dispose of (whether with or without consideration
and whether voluntarily or involuntarily or by operation of law) any interest in
any shares of Executive Stock (a "Transfer"), except pursuant to (i) the
provisions of paragraph 3 hereof, a Sale of the Company or a Public Sale
("Exempt Transfers") or (ii) the provisions of this paragraph 4; provided that
in no event shall any Transfer of Executive Stock pursuant to this paragraph 4
be made for any consideration other than cash payable upon consummation of such
Transfer or in installments over time. Prior to making any Transfer other than
an Exempt Transfer, Executive shall deliver written notice (the "Sale Notice")
to the Company and the Investors. The Sale Notice shall disclose in
-6-
<PAGE>
reasonable detail the identity of the prospective transferee(s), the number of
shares to be transferred and the terms and conditions of the proposed transfer.
Executive shall not consummate any Transfer until 30 days after the Sale Notice
has been given to the Company and to the Investors, unless the parties to the
Transfer have been finally determined pursuant to this paragraph 4 prior to the
expiration of such 30-day period. (The date of the first to occur of such events
is referred to herein as the "Authorization Date".)
(c) First Refusal Rights. The Company may elect to purchase all (but
--------------------
not less than all) of the shares of Executive Stock to be transferred upon the
same terms and conditions as those set forth in the Sale Notice by delivering a
written notice of such election to Executive and the Investors within 10 days
after the Sale Notice has been delivered to the Company. If the Company has not
elected to purchase all of the Executive Stock to be transferred, the Investors
may elect to purchase all (but not less than all) of the Executive Stock to be
transferred upon the same terms and conditions as those set forth in the Sale
Notice by delivering written notice of such election to Executive within 10 days
after the Sale Notice has been given to the Investors. If more than one
Investor elects to purchase the Executive Stock, the shares of Executive Stock
to be sold shall be allocated among the Investors pro rata according to the
number of shares of Common Stock owned by each Investor on a fully-diluted
basis. If neither the Company nor the Investors elect to purchase all of the
shares of Executive Stock specified in the Sale Notice, Executive may transfer
the shares of Executive Stock specified in the Sale Notice at a price and on
terms no more favorable to the transferee(s) thereof than specified in the Sale
Notice during the 60-day period immediately following the Authorization Date.
Any shares of Executive Stock not transferred within such 60-day period shall be
subject to the provisions of this paragraph 4(c) upon subsequent transfer. If
the Company or any of the Investors have elected to purchase shares of Executive
Stock hereunder, the transfer of such shares shall be consummated as soon as
practical after the delivery of the election notice(s) to Executive, but in any
event within 15 days after the expiration of the Election Period. The Company
may pay the purchase price for such shares by offsetting amounts outstanding
under the Executive Note issued to the Company hereunder and any other bona fide
debts owed by Executive to the Company.
(d) Certain Permitted Transfers. The restrictions contained in this
---------------------------
paragraph 4 shall not apply with respect to transfers of shares of Executive
Stock (i) pursuant to applicable laws of descent and distribution or (ii) among
Executive's family group; provided that such restrictions shall continue to be
applicable to the Executive Stock after any such transfer and the transferees of
such Executive Stock shall have agreed in writing to be bound by the provisions
of this Agreement. Executive's "family group" means Executive's spouse and
descendants (whether natural or adopted) and any trust solely for the benefit of
Executive and/or Executive's spouse and/or descendants.
(e) Pledges. Notwithstanding the provisions of this paragraph 4,
-------
Executive may pledge any shares of Executive Stock to the Company to secure
payment of the Executive Note.
(f) Termination of Restrictions. The restrictions on the transfer of
---------------------------
shares of Executive Stock set forth in this paragraph 4 shall continue with
respect to each share of Executive Stock following any Transfer thereof (other
than a Public Sale); provided that in any event such restrictions shall
terminate on the first to occur of a Sale of the Company or a Qualified Public
Offering.
-7-
<PAGE>
5. Additional Restrictions on Transfer.
-----------------------------------
(a) The certificates representing the Executive Stock shall bear the
following legend:
"THE SECURITIES REPRESENTED BY THIS CERTIFICATE WERE ORIGINALLY ISSUED ON
JUNE 30, 1995, HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933,
AS AMENDED OR ANY APPLICABLE STATE SECURITIES LAW, AND MAY NOT BE SOLD OR
TRANSFERRED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT OR AN
EXEMPTION FROM REGISTRATION THEREUNDER. THE SECURITIES REPRESENTED BY THIS
CERTIFICATE ARE ALSO SUBJECT TO ADDITIONAL RESTRICTIONS ON TRANSFER,
CERTAIN REPURCHASE OPTIONS AND CERTAIN OTHER AGREEMENTS SET FORTH IN AN
EXECUTIVE STOCK AGREEMENT BETWEEN THE COMPANY AND PAUL ST. PIERRE DATED AS
OF JUNE 30, 1995, AS AMENDED AND MODIFIED FROM TIME TO TIME. A COPY OF SUCH
AGREEMENT MAY BE OBTAINED BY THE HOLDER HEREOF AT THE COMPANY'S PRINCIPAL
PLACE OF BUSINESS WITHOUT CHARGE."
(b) No holder of Executive Stock may sell, transfer or dispose of any
Executive Stock (except pursuant to an effective registration statement under
the 1933 Act) without first delivering to the Company an opinion of counsel
(reasonably acceptable in form and substance to the Company) that neither
registration nor qualification under the 1933 Act and applicable state
securities laws is required in connection with such transfer.
(c) Each holder of Executive Stock agrees not to effect any public
sale or distribution of any Executive Stock or other equity securities of the
Company, or any securities convertible into or exchangeable or exercisable for
any of the Company's equity securities, during the seven days prior to and the
180 days after the effectiveness of any underwritten public offering, except as
part of such underwritten public offering or if otherwise permitted by the
Company.
6. Sale of the Company.
-------------------
(a) If the Board and the holders of a majority of the Company's
Preferred Stock and Common Stock approve a Sale of the Company (the "Approved
Sale"), the holders of Executive Stock shall consent to and raise no objections
against the Approved Sale of the Company, and if the Approved Sale of the
Company is structured as a sale of stock, the holders of Executive Stock shall
agree to sell their shares of Executive Stock and surrender their stock options
on the terms and conditions approved by the Board and the holders of a majority
of the Company's Preferred Stock and Common Stock. The holders of Executive
Stock shall take all necessary and desirable actions in connection with the
consummation of the Approved Sale of the Company.
-8-
<PAGE>
(b) The obligations of the holders of Executive Stock with respect to
the Approved Sale of the Company are subject to the satisfaction of the
following conditions: (i) upon the consummation of the Approved Sale, all of the
holders of Common Stock shall receive the same form and amount of consideration
per share of Common Stock, or if any holders of Common Stock are given an option
as to the form and amount of consideration to be received, all holders shall be
given the same option; and (ii) all holders of then currently exercisable rights
to acquire shares of Common Stock shall be given an opportunity to either (A)
exercise such rights prior to the consummation of the Approved Sale and
participate in such sale as holders of Common Stock or (B) upon the consummation
of the Approved Sale, receive in exchange for such rights consideration equal to
the amount determined by multiplying (1) the same amount of consideration per
share of Common Stock received by the holders of Common Stock in connection with
the Approved Sale less the exercise price per share of Common Stock of such
rights to acquire Common Stock by (2) the number of shares of Common Stock
represented by such rights.
(c) If the Company or the holders of the Company's securities enter
into any negotiation or transaction for which Rule 506 (or any similar rule then
in effect) promulgated by the Securities Exchange Commission may be available
with respect to such negotiation or transaction (including a merger,
consolidation or other reorganization), the holders of Executive Stock shall at
the request of the Company, appoint a "purchaser representative" (as such term
is defined in Rule 501) reasonably acceptable to the Company. If any holder of
Executive Stock appoints a purchaser representative designated by the Company,
the Company shall pay the fees of such purchaser representative. However, if
any holder of Executive Stock declines to appoint the purchaser representative
designated by the Company, such holder shall appoint another purchaser
representative (reasonably acceptable to the Company), and such holder shall be
responsible for the fees of the purchaser representative so appointed.
(d) Executive and the other holders of Executive Stock (if any) shall
bear their pro-rata share (based upon the number of all shares sold by each
seller including the Investors and each other Executive) of the costs of any
sale of Executive Stock pursuant to an Approved Sale to the extent such costs
are incurred for the benefit of all holders of Common Stock and are not
otherwise paid by the Company or the acquiring party. Costs incurred by
Executive and the other holders of Executive Stock on their own behalf shall not
be considered costs of the transaction hereunder.
(e) The provisions of this paragraph 6 shall terminate upon the
completion of a Qualified Public Offering.
7. Voting Agreement and Tag-Along.
------------------------------
(a) So long as the Investors hold any shares of Common Stock, each
Investor and Executive shall vote all of their shares of Common Stock (and, in
the event such holder is entitled to vote any of the Company's other securities
for the election of directors, such holder shall vote all such securities) and
take all other reasonably necessary actions in such holder's capacity as a
stockholder of the Company, and the Company shall take all necessary or
desirable actions as are requested by the Investors and Executive, in order to
cause two of the executive officers of the Company (one of which should be the
Company's Chief Executive Officer) representatives designated by Executives
holding a majority of the Common Stock held by all
-9-
<PAGE>
Executives to be elected as members of the Board and to cause two
representatives designated by Investors holding a majority of the Common Stock
held by the Investors to be elected to the Board. The provisions of this
paragraph 7 shall terminate upon the first to occur of a Qualified Public
Offering and the tenth anniversary of this Agreement.
(b) If either Investor desires to sell any of its Common Stock or if
holders of Executive Stock, after complying with the other provisions of this
Agreement, including paragraph 3, desire to sell any of their shares of Common
Stock, the proposed seller shall give written notice thereof (a "Sale Notice")
to the Company, the Investors and each holder of Common Stock issued under this
Agreement and the other Executive Stock Agreements at least 10 days prior to the
proposed sale and each such Person other than the seller may elect to
participate in the sale by written notice to the Company and the seller given
within 10 days after receipt of the Sale Notice. The electing Persons shall be
entitled to sell in the contemplated sale, at the same price and on the same
terms, a number of shares of the Company's Common Stock equal to the product of
(i) the quotient determined by dividing the percentage of the Company's Common
Stock (on a fully-diluted basis) held by such electing Person, by the aggregate
percentage of the Company's Common Stock (on a fully-diluted basis) owned by the
Seller and all electing Persons and (ii) the number of shares of Common Stock to
be sold in the contemplated sale.
For example, if the Executive delivered a Sale Notice contemplated a sale
of 100 shares of Common Stock, and if Executive was at such time the owner
of 5% of the Company's Common Stock (on a fully-diluted basis) and if one
Investor elected to participate and the Investor owned 20% of the Company's
Common Stock (on a fully-diluted basis), Executive would be entitled to
sell 20 shares (5%/25% x 100 shares) and the Investor would be entitled to
sell 80 shares (20%/25% x 100 shares).
The provisions of this paragraph (b) shall terminate upon a Qualified Public
Offering.
8. Nondisclosure and Nonuse of Confidential Information.
----------------------------------------------------
(a) Executive shall not disclose or use at any time, either during his
employment with the Company or thereafter, any Confidential Information (as
defined below) of which Executive is or becomes aware, whether or not such
information is developed by him, except to the extent that such disclosure or
use is directly related to and required by Executive's performance of duties
assigned to Executive by the Company. Executive shall take all appropriate
steps to safeguard Confidential Information and to protect it against
disclosure, misuse, espionage, loss and theft.
(b) As used in this Agreement, the term "Confidential Information"
means information that is not generally known to the public and that is used,
developed or obtained by the Company in connection with its business, including
but not limited to (i) products or services, (ii) fees, costs and pricing
structures, (iii) designs, (iv) analysis, (v) drawings, photographs and reports,
(vi) computer software, including operating systems, applications and program
listings, (vii) flow charts, manuals and documentation, (viii) data bases, (ix)
accounting and business methods, (x) inventions, devices, new developments,
methods and processes,
-10-
<PAGE>
whether patentable or unpatentable and whether or not reduced to practice, (xi)
customers and clients and customer or client lists, (xii) copyrightable works,
(xiii) all information comprising the Transferred Property, (xiv) all technology
and trade secrets, and (xv) all similar and related information in whatever
form. Confidential Information shall not include any information that has been
published in the form generally available to the public prior to the date
Executive purposes to disclose or use such information. Information shall not be
deemed to have been published merely because individual portions of the
information have been separately published, but only if all material features
comprising such information have been published in combination.
9. Consulting and Noncompetition. Executive acknowledges and agrees
-----------------------------
with the Company that Executive's services to the Company are unique in nature
and that the Company would be irreparably damaged if Executive were to provide
similar services to any person or entity competing with the Company or engaged
in a similar business. Executive accordingly covenants and agrees with the
Company that during the period commencing with the date of this Agreement and,
as long as the Company compensates Executive as a consultant at an amount
payable monthly equal to 10% of Executive's cash compensation in the 12 months
preceding his termination of employment, thereafter until the third anniversary
of the date of the termination of Executive's employment with the Company (the
"Noncompetition Period"), Executive shall not, directly or indirectly, either
for himself or for any other individual, corporation, partnership, joint venture
or other entity, participate in any business (including, without limitation, any
division, group or franchise of a larger organization) which (i) engages or
which proposes to engage in the acquisition, disposition, operation or
management of allied health schools anywhere in the U.S. or (ii) which operates
or plans to operate schools of any type in the same geographic areas as Company
at the time of such termination. For purposes of this Agreement, the term
"participate in" shall include, without limitation, having any director or
indirect interest in any corporation, partnership, joint venture or other
entity, whether as a sole proprietor, owner, stockholder, partner, joint
venturer, creditor or otherwise, or rendering any direct or indirect service or
assistance to any individual, corporation, partnership, joint venture and other
business entity (whether as a director, officer, manager, supervisor, employee,
agent, consultant or otherwise).
10. Nonsolicitation. During the Noncompetition Period, Executive
---------------
shall not (i) induce or attempt to induce any employee of the Company to leave
the employ of the Company, or in any way interfere with the relationship between
the Company and any employee thereof, (ii) hire directly or through another
entity any person who was an employee of the Company at any time during the
Noncompetition Period, or (iii) induce or attempt to induce any customer,
supplier, licensee or other business relation of the Company to cease doing
business with the Company, or in any way interfere with the relationship between
such customer, supplier, licensee or business relation and the Company
(including, without limitation, making any negative statements or communications
concerning the Company).
11. Definitions.
-----------
"Cause" means (i) the commission of a felony or a crime involving
-----
moral turpitude or the commission of any other act or omission involving
dishonesty, disloyalty or fraud with respect to the Company or any of its
Subsidiaries or any of their customers or suppliers, (ii) conduct tending to
bring the Company or any of its Subsidiaries into substantial
-11-
<PAGE>
public disgrace or disrepute, (iii) substantial and repeated failure to perform
duties as reasonably directed by the Board, (iv) gross negligence or willful
misconduct with respect to the Company or any of its Subsidiaries or (v) any
material breach of this Agreement which is not cured within 15 days after
written notice thereof to Executive.
"Executive Stock" shall continue to be Executive Stock in the hands of
---------------
any holder other than Executive (except for the Company and the Investors and
except for transferees in a Public Sale), and except as otherwise provided
herein, each such other holder of Executive Stock shall succeed to all rights
and obligations attributable to Executive as a holder of Executive Stock
hereunder. Executive Stock shall also include shares of the Company's capital
stock issued with respect to Executive Stock by way of a stock split, stock
dividend or other recapitalization. Notwithstanding the foregoing, all Unvested
Shares shall remain Executive Stock after any Transfer thereof.
"Fair Market Value" of each share of Executive Stock means the average
-----------------
of the closing prices of the sales of the Company's Common Stock on all
securities exchanges on which the Common Stock may at the time be listed, or, if
there have been no sales on any such exchange on any day, the average of the
highest bid and lowest asked prices on all such exchanges at the end of such
day, or, if on any day the Common Stock is not so listed, the average of the
representative bid and asked prices quoted in the Nasdaq National Market as of
4:00 P.M., New York time, or, if on any day the Common Stock is not quoted in
the Nasdaq National Market, the average of the highest bid and lowest asked
prices on such day in the domestic over-the-counter market as reported by the
National Quotation Bureau Incorporated, or any similar successor organization,
in each such case averaged over a period of 21 days consisting of the day as of
which the Fair Market Value is being determined and the 20 consecutive business
days prior to such day. If at any time the Common Stock is not listed on any
securities exchange or quoted in the Nasdaq National Market or the over-the-
counter market, the Fair Market Value shall be the fair value of the Common
Stock determined in good faith by the Board or, if the Executive disagrees with
such value, the fair market value determined by an independent appraiser
mutually acceptable to the Board and Executive(in each case without taking into
account the effect of any contemporaneous repurchase of Unvested Shares under
paragraph 3 hereof); provided that if such appraised value is higher than that
established by the Board the purchasers of the shares involved shall not be
required to consummate the related purchase.
"Independent Third Party" means any person who, immediately prior to
-----------------------
the contemplated transaction, does not own in excess of 5% of the Company's
Common Stock on a fully-diluted basis, who is not controlling, controlled by or
under common control with any such 5% owner of the Company's Common Stock and
who is not the spouse or descendent (by birth or adoption) of any such 5% owner
of the Company's Common Stock.
"Investors" means Primus Capital Partners III Limited Partnership and
---------
BOCPII, Limited Liability Company, successor by merger to Bank One Capital
Partners II, Limited Partnership.
"1933 Act" means the Securities Act of 1933, as amended from time to
--------
time.
-12-
<PAGE>
"Original Cost" of each share of Common Stock purchased hereunder
-------------
shall be equal to $10.00 (as proportionately adjusted for all subsequent stock
splits, stock dividends and other recapitalizations).
"Qualified Public Offering" means the sale by the Company, in an
-------------------------
underwritten public offering registered under the 1933 Act, of shares of the
Company's Common Stock having an aggregate offering value of at least $10
million and where the per share price to the public multiplied by the number of
shares of Common Stock issued under the Purchase Agreement and this and the
other Executive Stock Agreements (adjusted for stock splits and other
recapitalizations) is at least $30,000,000.
"Permitted Transferee" means any holder of Executive Stock who
--------------------
acquired such stock pursuant to a transfer permitted by paragraph 4(d).
"Public Sale" means any sale pursuant to a registered public offering
-----------
under the 1933 Act or any sale to the public pursuant to Rule 144 promulgated
under the 1933 Act effected through a broker, dealer or market maker.
"Sale of the Company" means the sale of the Company to an Independent
-------------------
Third Party or affiliated group of Independent Third Parties pursuant to which
such party or parties acquire (i) capital stock of the Company possessing the
voting power to elect a majority of the Company's board of directors (whether by
merger, consolidation or sale or transfer of the Company's capital stock) or
(ii) all or substantially all of the Company's assets determined on a
consolidated basis.
"Subsidiary" means any corporation of which the Company owns
----------
securities having a majority of the ordinary voting power in electing the board
of directors directly or through one or more subsidiaries.
"Total Company Value" means the product of (i) as to an IPO, the price
-------------------
per share to the public in such IPO, and as to a Sale of the Company, the price
per share received by holders of common stock and (ii) 134,408.60 (adjusted for
any stock splits, stock dividends, combinations of shares or the like after the
date hereof).
12. Notices. Any notice provided for in this Agreement must be in
-------
writing and must be either personally delivered, mailed by first class mail
(postage prepaid and return receipt requested) or sent by reputable overnight
courier service (charges prepaid) to the recipient at the address below
indicated:
To the Company:
6 Hutton Centre Drive
Suite 400
Santa Ana, CA 92707-5164
Attention: President
With copies to:
-13-
<PAGE>
David A. Krinsky, Esq.
O'Melveny & Myers
610 Newport Center Drive, Suite 1700
Newport Beach, CA 92660-6429
To Executive:
Paul St. Pierre
31074 Via San Vicente
San Juan Capistrano, CA 92675
To the Investors: As specified in the Purchase Agreement
or such other address or to the attention of such other person as the recipient
party shall have specified by prior written notice to the sending party. Any
notice under this Agreement shall be deemed to have been given when so delivered
or sent or, if mailed, five days after deposit in the U.S. mail.
13. General Provisions.
------------------
(a) Transfers in Violation of Agreement. Any Transfer or attempted
-----------------------------------
Transfer of any Executive Stock in violation of any provision of this Agreement
shall be void, and the Company shall not record such Transfer on its books or
treat any purported transferee of such Executive Stock as the owner of such
stock for any purpose.
(b) Severability. Whenever possible, each provision of this Agreement
------------
shall be interpreted in such manner as to be effective and valid under
applicable law, but if any provision of this Agreement is held to be invalid,
illegal or unenforceable in any respect under any applicable law or rule in any
jurisdiction, such invalidity, illegality or unenforceability shall not affect
any other provision or any other jurisdiction, but this Agreement shall be
reformed, construed and enforced in such jurisdiction as if such invalid,
illegal or unenforceable provision had never been contained herein.
(c) Complete Agreement. This Agreement, those documents expressly
------------------
referred to herein and other documents of even date herewith embody the complete
agreement and understanding among the parties and supersede and preempt any
prior understandings, agreements or representations by or among the parties,
written or oral, which may have related to the subject matter hereof in any way.
(d) Counterparts. This Agreement may be executed in separate
------------
counterparts, each of which is deemed to be an original and all of which taken
together constitute one and the same agreement.
(e) Successors and Assigns. Except as otherwise provided herein, this
----------------------
Agreement shall bind and inure to the benefit of and be enforceable by
Executive, the Company,
-14-
<PAGE>
the Investors and their respective successors and assigns (including subsequent
holders of Executive Stock); provided that the rights and obligations of
Executive under this Agreement shall not be assignable except in connection with
a permitted transfer of Executive Stock hereunder.
(f) Choice of Law. The corporate law of the State of Delaware shall
-------------
govern all questions concerning the relative rights of the Company and its
stockholders. All other questions concerning the construction, validity,
enforcement and interpretation of this Agreement and the exhibits hereto shall
be governed by the internal law, and not the law of conflicts, of the State of
California.
(g) Remedies. Each of the parties to this Agreement (including the
--------
Investors) shall be entitled to enforce its rights under this Agreement
specifically, to recover damages and costs (including reasonable attorney's
fees) caused by any breach of any provision of this Agreement and to exercise
all other rights existing in its favor. The parties hereto agree and
acknowledge that money damages would not be an adequate remedy for any breach of
the provisions of this Agreement and that any party may in its sole discretion
apply to any court of law or equity of competent jurisdiction (without posting
any bond or deposit) for specific performance and/or other injunctive relief in
order to enforce or prevent any violations of the provisions of this Agreement.
(h) Amendment and Waiver. The provisions of this Agreement may be
--------------------
amended and waived only with the prior written consent of the Company, Executive
and Investors owning a majority of the Common Stock on a fully-diluted basis
held by all Investors.
(i) Third-Party Beneficiaries. Certain provisions of this Agreement
-------------------------
are entered into for the benefit of and shall be enforceable by the Investors
and other Executives as provided herein.
(j) Business Days. If any time period for giving notice or taking
-------------
action hereunder expires on a day which is a Saturday, Sunday or legal holiday
in the state in which the Company's chief executive office is located, the time
period shall be automatically extended to the business day immediately following
such Saturday, Sunday or holiday.
14 Initial Public Offering. In the event that the Board and the
-----------------------
holders of a majority of the shares of Common Stock (voting as a single class)
then outstanding approve an initial public offering of Common Stock (a "Public
Offering") pursuant to an effective registration statement under the Securities
Act, Executive shall take all reasonably necessary or desirable actions in
connection with the consummation of the Public Offering as requested by the
Company.
-15-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement on
the date first written above.
CORINTHIAN COLLEGES, INC.
By /s/ FRANK J. MCCORD
------------------------------
Its Exec. VP & CFO
------------------------------
/s/ PAUL ST. PIERRE
-----------------------------------
PAUL ST. PIERRE
/s/ FRANK J. MCCORD
-----------------------------------
Witness
Agreed and Accepted:
PRIMUS CAPITAL FUND III
LIMITED PARTNERSHIP
By: Primus Venture Partners, Inc.
By /s/ LOYAL W. WILSON
-----------------------------
Its President
-----------------------------
BOCPII, LIMITED LIABILITY COMPANY
By /s/ EARLE J. BENSING
-----------------------------
Its Authorized Signer
-16-
<PAGE>
EXHIBIT 10.53
AGREEMENT REGARDING REGISTRATION RIGHTS
AND AMENDMENT TO WARRANT
---------------------------------------
This Agreement Regarding Registration Rights and Amendment to Warrant (this
"Agreement") is entered into as of this 7th day of January, 1999, by and among
Corinthian Colleges, Inc., a Delaware corporation (the "Company"), Primus
Capital Fund III Limited Partnership ("Primus"), Banc One Capital Partners II,
LLC and BOCP II, Limited Liability Company (together "Banc One" and collectively
with Primus, the "Investors"), The Prudential Insurance Company of America
("Prudential") and David G. Moore, Paul St. Pierre, Frank J. McCord, Dennis L.
Devereux and Lloyd W. Holland (such individuals being referred to collectively
as the "Executives" and individually as an "Executive," and each of the
Executives, Prudential and the Investors being referred to as the
"Stockholders"),
RECITALS
WHEREAS, the Company and Prudential are parties to that certain Note
Purchase and Revolving Credit Agreement dated as of October 17, 1996 (as
heretofore amended, the "Credit Agreement") pursuant to which (a) the Company's
11.02% Senior Secured Notes due October 17, 2004 in the principal amount of
$22,500,000 are now outstanding and are held by Prudential, (b) Prudential
agreed to lead to the Company from time to time sums evidenced by the Company's
Senior Secured Revolving Note in the principal face amount of $5,000,000 and (c)
the Company issued to Prudential a Stock Subscription Warrant to subscribe for
5,376.34 shares of the Company's Class A Common Stock (the "Common Stock") and a
Contingent Stock Warrant to purchase under certain circumstances additional
shares of the Common Stock.
WHEREAS, in connection with that certain amendment to the Credit Agreement
dated as of October 31, 1997 (the "Amendment"), the Company issued to Prudential
a Stock Subscription Warrant (the "1997 Warrant") to subscribe for 3,683.29
shares of the Common Stock. The 1997 Warrant is exercisable at any time after
October 17, 1999.
WHEREAS, the Company has advised Prudential that the Company's consolidated
Cash Flow From Operations for the fiscal year ended June 30, 1998 was
($3,372,712) and, consequently, (i) an Event of Default occurred under paragraph
7A(iv) of the Credit Agreement, and (ii) a Specified Event of Default occurred
under Section 5 of the 1997 Warrant since Consolidated Cash Flow From Operations
for the fiscal year ended June 30, 1998 was less than the minimum required under
paragraph 6A(6) of the Credit Agreement (the "Cash Flow Default"). Prudential
has waived the Cash Flow Default for the purposes of paragraph 7A(iv) of the
Credit Agreement, but Prudential has not waived such default for purposes of
Section 5 of the 1997 Warrant with the consequence that the 1997 Warrant, and
the rights of the holder thereof, cannot terminate pursuant to the provisions of
such Section 5.
<PAGE>
WHEREAS, the Company and each of the Stockholders are parties to that
certain Amended and Restated Registration Agreement dated as of October 17, 1996
(and together with that certain First Amendment to the Amended and Restated
Registration Agreement dated as of November 24, 1997, the "Registration
Agreement").
WHEREAS, Section 2 of the Registration Agreement provides that each of the
Stockholders are entitled to certain "piggyback" registration rights as
described therein whenever the Company proposes to register any of its
securities under the Securities Act of 1933, as amended (the "Securities Act").
WHEREAS, the Company is currently contemplating completing prior to October
17, 1999 an underwritten public offering (the "Offering") of its Common Stock
and has given notice to the Stockholders of its intention to commence the
Offering.
WHEREAS, in contemplation of the Offering, the parties desire to waive
certain provisions of the Registration Agreement and to set forth their
respective rights to participate in the Offering as set forth herein.
WHEREAS, in connection with the Offering, and upon the satisfaction of
certain conditions precedent as set forth herein, Prudential is willing to agree
to terminate the 1997 Warrant.
NOW, THEREFORE, in consideration of the foregoing premises and for other
good and valuable consideration, the adequacy and sufficiency of which is hereby
acknowledged, the parties hereby agree as follows.
AGREEMENT
1. Registration Rights in the Offering.
-----------------------------------
(a) Each of the Stockholders acknowledges that (i) the Company has
notified them of its intention to undertake the Offering, (ii) the managing
underwriter of the Offering has notified the Company, and the Company has
thereafter notified the Stockholders, that the managing underwriter deems it
inadvisable for the orderly marketing of the Offering to include any shares of
Common Stock held by the Stockholders as "primary" shares therein, and (iii) the
managing underwriter has proposed to include up to an aggregate of 405,000
shares of Company Common Stock held by the Stockholders in the Offering (or such
other number of shares as is equal to 15 percent of the number of shares of
Common Stock sold by the Company in the Offering, in either case defined as the
"Green Shoe Shares"), solely to cover overallotments, by having the underwriters
receive options to purchase shares of Common Stock held by certain of the
Stockholders (the "Green Shoe").
(b) Each of the Stockholders acknowledges that it is familiar with its
respective priority rights to participate in an underwritten public offering as
set forth in Section 2 of the
2
<PAGE>
Registration Agreement and hereby agrees to waive such priority rights held by
it and to participate in the Offering only as follows: (i) subject to all non-
price terms of the underwriting agreement being in the form of the underwriting
agreement approved in writing by Prudential and filed with an Amendment to the
Company's Registration Statement on Form S-1 (Registration No. 333-59505) filed
with the Securities and Exchange Commission (the "Approved Underwriting
Agreement"), Prudential will participate in the Green Shoe portion of the
Offering by granting to the underwriters an option to purchase up to all of the
shares of Common Stock held by it, excluding any shares issued under the 1997
Warrant (the "Prudential Option"), at a sales price per share equal to the sales
price per share received by the Company for the sale by the Company of shares of
the Common Stock in the Offering, (ii) if the total number of shares offered by
Prudential in the Green Shoe is less than all of the Green Shoe Shares, then
each of the Executives will participate in the Green Shoe on an equal basis by
granting the underwriters an option to purchase up to 24,927 shares of the
Common Stock held by each such Executive (the "Executives' Option"), up to an
aggregate maximum (including both the Prudential Option and the Executives'
Option) of all of the Green Shoe Shares, and (iii) if the aggregate number of
shares offered by Prudential and the Executives in the Green Shoe is less than
all of the Green Shoe Shares, then each of the Investors will thereafter have
the right to participate in the Green Shoe on a pro rata basis (the "Investors'
Option"), up to an aggregate maximum (including the Prudential Option, the
Executives' Option and the Investors' Option) of all of the Green Shoe Shares.
Notwithstanding the foregoing, Prudential may elect not to grant the Prudential
Option to the underwriters if the offering price of the Common Stock in the
Offering is less than (x) $14.00 per share if the Offering is consummated on or
before March 31, 1999, or (y) a price acceptable to Prudential, if the Offering
is consummated after March 31, 1999. The Company agrees that it will not conduct
the Offering without offering the Stockholders the right to participate in the
Offering in the manner specified in this Section 1(b).
(c) The waiver in Section 1(b) hereof is applicable to the Offering
only and does not constitute a waiver by any Stockholder of any registration
rights with respect to any other offering or of any other rights under the
Registration Agreement. Except to the extent specifically waived in this Section
1, all other terms of the Registration Agreement shall remain in full force and
effect. The waiver in Section 1(b) hereof shall expire and cease to be in effect
at the close of business on October 17, 1999 if the Offering has not been
consummated prior to that time.
(d) The Stockholders and the Company hereby agree that if, immediately
following the Offering, Prudential owns no shares of Common Stock of the Company
and all of its rights under the 1996 Warrant, the Contingent Warrant and the
1997 Warrant have been exercised or terminated, all rights of the holders of
Prudential Registrable Securities under the Registration Agreement shall be
allocated to the Investors on a pro rata basis. The definition of "Prudential
Registrable Securities" in the Registration Agreement shall thereupon be amended
in its entirety to mirror the definition of "Investor Registrable Securities" in
the Registration Agreement.
2. Amendment to 1997 Warrant. Subject to and effective upon the
-------------------------
satisfaction of the condition precedent in Section 3 prior to January 31, 1999,
Prudential and the Company agree that Section 5 of the 1997 Warrant be amended
in its entirety to read as follows:
3
<PAGE>
"5. Termination Prior to Expiration Date. Anything herein to the
------------------------------------
contrary notwithstanding, this Warrant, and the rights of the holders
hereof, will terminate prior to the Expiration Date if either:
(i) on or before October 17, 1999, each of the following shall
have occurred:
(a) The Company shall have consummated the Offering in
accordance with the terms described in Section 1 of the 1999
Amendment Agreement; provided, however, that the termination of
this Warrant is not contingent upon the underwriters of the
Offering exercising their overallotment option;
(b) as soon as reasonably practicable after the closing of
the sale by the Company of shares of its Common Stock to the
underwriters in connection with the Offering, the Company (1)
shall have used a portion of the proceeds from such sale to prepay
the entire outstanding principal amount of the Term Notes, plus
interest thereon to the prepayment date and the Yield-Maintenance
Amount, if any, with respect thereto, pursuant to paragraph 4B(1)
of the Note Agreement and the entire outstanding principal amount
of the Revolving Note, plus interest thereon to the prepayment
date, pursuant to paragraph 2B(2) of the Note Agreement, and to
pay any other amounts owed by the Company under the Note Agreement
and (2) shall have agreed to terminate Prudential's commitment to
make any further Revolving Loans under the Note Agreement; and
(c) at no time after June 30, 1998 and prior to the date
upon which the Company shall have consummated the Offering shall
any Event of Default under paragraph 7A(i) of the Note Agreement
have occurred; or
(ii) the Company shall not have consummated the Offering on or
before October 17, 1999 and at no time after June 30, 1998 and on or
prior to October 17, 1999 shall(1) any Event of Default under
paragraph 7A(i) of the Note Agreement have occurred
4
<PAGE>
or (2) any other Event of Default have occurred and be continuing on
October 17, 1999.
If the conditions of clause (i) are satisfied, then this Warrant shall
terminate upon the consummation of the Offering by the Company. If the
conditions of clause (ii) are satisfied, then this Warrant shall terminate
on the close of business on October 17, 1999. For purposes of this Warrant
(x), "Revolving Note", "Revolving Loans", "Event of Default" and "Yield-
Maintenance Amount" shall have the meanings given in the Note Agreement,
(y) the "1999 Amendment Agreement" shall mean that certain Agreement
Regarding Registration Rights and Amendment to Warrant dated as of January
7, 1999, by and among the Company, Primus Capital Fund III Limited
Partnership, Banc One Capital Partners 11, LLC, BOCP II, Limited Liability
Company, Prudential, David G. Moore, Paul St. Pierre, Frank J. McCord,
Dennis L. Devereux and Lloyd W. Holland, and (z) the "Offering" shall have
the meaning given in the 1999 Amendment Agreement."
Upon the effectiveness of the amendment to the 1997 Warrant under this Section
2, each reference to the 1997 Warrant in any other document, instrument or
agreement shall mean and be a reference to the 1997 Warrant as modified by this
Section 2, Except as specifically set forth in this Section 2, the 1997 Warrant
shall remain in full force and effect and is hereby ratified and confirmed in
all respects.
3. Condition Precedent. The effectiveness of the amendment to of the 1997
-------------------
Warrant pursuant to Section 2 of this Agreement is subject to the receipt by
Prudential, prior to January 31, 1999, of evidence that an amendment to Section
6B(iv) of Article IV of the Second Restated Certificate of Incorporation of the
Company changing the date therein of "October 31, 1998" to "October 31, 1999"
shall have been duly adopted and shall have become effective.
4. Miscellaneous Provisions.
------------------------
(a) Governing Law. This Agreement shall be construed and enforced in
-------------
accordance with the internal laws of the State of California without regard to
the conflict of laws principles of such state.
(b) Effectiveness; Counterparts. This Agreement shall become effective
---------------------------
upon the execution hereof by the Company and all the Stockholders. This
Agreement may be executed in any number of counterparts, each of which shall be
deemed to be an original and all of which together shall be deemed to be one and
the same instrument.
(c) Share Price and Number of Shares. The price per share of Common
--------------------------------
Stock and all numbers of shares of Common Stock expressed in Section 1 of this
Agreement are stated after giving effect to a proposed 44.094522 for 1 split of
the Company's Common Stock and shall be adjusted for any different split or
combination of shares of the Company's Common Stock.
5
<PAGE>
(d) Section Titles. The section titles contained in this Agreement are and
--------------
shall be without substance, meaning or content of any kind whatsoever and are
not part of the agreement between the parties hereto.
(e) Expenses. The Company confirms its obligations under paragraph 11B of
--------
the Credit Agreement to pay all of the reasonable fees and expenses of special
counsel to Prudential in connection with this Agreement and the transactions
contemplated hereby.
6
<PAGE>
IN WITNESS WHEREOF, the undersigned parties have caused this Agreement
Regarding Registration Rights and Amendment to Warrant to be duly executed as of
the date first above written.
"COMPANY"
CORINTHIAN COLLEGES, INC.
By: /s/ DAVID MOORE
-------------------------------------
David Moore
President and Chief Executive Officer
"STOCKHOLDERS"
PRIMUS CAPITAL FUND III
LIMITED PARTNERSHIP
By: Primus Venture Partners III
Its: General Partner
By: /s/ LOYAL W. WILSON
-------------------------------------
Loyal Wilson
President
BANC ONE CAPITAL PARTNERS II, LLC
By: BOCP Holdings Corporation, Manager
By: /s/ EARLE J. BENSING
-------------------------------------
Name: /s/ EARLE J. BENSING
-------------------------------
Its: Authorized Signer
-------------------------------
<PAGE>
BOCP II, LIMITED LIABILITY COMPANY
By: BOCP Holdings Corporation, Manager
By: /s/ Earle J. Bensing
----------------------------------
Name: Earle J. Bensing
----------------------------
Its: Authorized Signer
----------------------------
THE PRUDENTIAL INSURANCE COMPANY
OF AMERICA
By: /s/ Jeffrey L. Dickson
----------------------------------
Name: Jeffrey L. Dickson
----------------------------
Its: Vice President
----------------------------
/s/ David G. Moore
--------------------------------------
David G. Moore
/s/ Paul St. Pierre
--------------------------------------
Paul St. Pierre
/s/ Frank J. McCord
--------------------------------------
Frank J. McCord
/s/ Dennis L. Devereux
--------------------------------------
Dennis L. Devereux
/s/ Lloyd W. Holland
--------------------------------------
Lloyd W. Holland
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
reports of Corinthian Colleges, Inc. and the Eleven Career Colleges purchased
from National Education Centers, Inc. (and all references to our Firm)
included in or made a part of this registration statement.
/s/ Arthur Andersen LLP
ARTHUR ANDERSEN LLP
Orange County, California
February 1, 1999
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this registration statement on Form S-1 (File
No. 333-59505) of our report dated August 15, 1997, on our audits of the
combined financial statements of the seventeen operating companies of Phillips
Colleges, Inc. We also consent to the references to our firm under the
captions "Experts".
/s/ PricewaterhouseCoopers LLP
Jacksonville, Florida
February 1, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> 12-MOS 3-MOS
<FISCAL-YEAR-END> JUN-30-1998 JUN-30-1999
<PERIOD-START> JUL-01-1997 JUL-01-1998
<PERIOD-END> JUN-30-1998 SEP-30-1998
<CASH> 3,161,527 972,942
<SECURITIES> 0 0
<RECEIVABLES> 22,066,412 22,850,819
<ALLOWANCES> 5,805,256 5,297,899
<INVENTORY> 1,463,176 1,589,867
<CURRENT-ASSETS> 20,536,870 20,494,942
<PP&E> 13,825,287 14,541,551
<DEPRECIATION> 3,493,664 3,996,751
<TOTAL-ASSETS> 59,904,627 60,410,328
<CURRENT-LIABILITIES> 19,930,793 20,176,868
<BONDS> 3,645,880 3,617,577
6,746,360 6,746,360
0 0
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<OTHER-SE> 976,283 1,138,883
<TOTAL-LIABILITY-AND-EQUITY> 59,904,627 60,410,328
<SALES> 0 0
<TOTAL-REVENUES> 106,485,912 30,296,346
<CGS> 0 0
<TOTAL-COSTS> 100,972,258 28,903,630
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 5,962,885 1,594,741
<INTEREST-EXPENSE> 3,304,350 902,610
<INCOME-PRETAX> 2,209,304 490,106
<INCOME-TAX> 988,410 195,000
<INCOME-CONTINUING> 0 0
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 1,220,894 295,106
<EPS-PRIMARY> 0.16 0.03
<EPS-DILUTED> 0.12 0.02
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