-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, DgMFndJVYRwE/WBzdYpJpvNCsDkwMuHmZE3zVgmo+cUBWot8DgSLEQiPr0ixkSsl 7GQ99jiAeyjZY02JktrSEw== 0000950133-99-001638.txt : 19990505 0000950133-99-001638.hdr.sgml : 19990505 ACCESSION NUMBER: 0000950133-99-001638 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19990131 FILED AS OF DATE: 19990503 FILER: COMPANY DATA: COMPANY CONFORMED NAME: COMPUTER LEARNING CENTERS INC CENTRAL INDEX KEY: 0000943206 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-EDUCATIONAL SERVICES [8200] IRS NUMBER: 363501869 STATE OF INCORPORATION: DE FISCAL YEAR END: 0131 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 000-26040 FILM NUMBER: 99609342 BUSINESS ADDRESS: STREET 1: 11350 RANDOM HILLS RD STREET 2: STE 240 CITY: FAIRFAX STATE: VA ZIP: 22030 BUSINESS PHONE: 7033599333 MAIL ADDRESS: STREET 1: 11350 RANDOM HILLS ROAD STREET 2: SUITE 240 CITY: FAIRFAX STATE: VA ZIP: 22030 10-K405 1 COMPUTER LEARNING CENTERS FORM 10-K405 1 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- FORM 10-K UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ANNUAL REPORT (MARK ONE) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED JANUARY 31, 1999 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO COMMISSION FILE NUMBER 0-26040 COMPUTER LEARNING CENTERS, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 36-3501869 (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER) 11350 RANDOM HILLS ROAD, 22030 SUITE 240, (ZIP CODE) FAIRFAX, VIRGINIA 22030 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(703) 359-9333 (TELEPHONE NUMBER, INCLUDING AREA CODE) ------------------------ SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: COMMON STOCK, $.01 PAR VALUE ------------------------ Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports); and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference to Part III of this Form 10-K or any amendment to this Form 10-K. X --- Aggregate market value of the voting stock held by non affiliates of the Registrant based on the last sale price for such stock at April 26, 1999: $79,812,958 Number of shares of Common Stock, $.01 par value, outstanding at April 26, 1999. 17,493,251 DOCUMENTS INCORPORATED BY REFERENCE The information called for by Part III is incorporated by reference to the Company's definitive Proxy Statement for its 1999 Annual Meeting of Stockholders, which will be filed pursuant to Regulation 14A within 120 days after the end of the Company's last fiscal year. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 COMPUTER LEARNING CENTERS, INC. FORM 10-K INDEX PART I Item 1. Business.................................................... 3 Item 2. Properties.................................................. 19 Item 3. Legal Proceedings........................................... 20 Item 4. Submission of Matters to a Vote of Security Holders......... 21
PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters......................................... 22 Item 6. Selected Financial Data..................................... 23 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations............................................... 24 Item 7A. Quantitative and Qualitative Disclosures about Market Risk........................................................ 34 Item 8. Consolidated Financial Statements and Supplementary Data.... F-1 Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure........................................ I-1
PART III Item 10. Directors and Executive Officers of the Registrant.......... I-1 Item 11. Executive Compensation...................................... I-2 Item 12. Security Ownership of Certain Beneficial Owners and Management.................................................. I-2 Item 13. Certain Relationships and Related Transactions.............. I-2
PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K......................................................... I-6 Signatures............................................................ S-1
2 3 PART I ITEM 1. BUSINESS Computer Learning Centers, Inc. ("CLC" or the "Company") provides information technology and computer-related education and training. The Company designs programs and courses to meet current information technology education needs, offering instruction in rapidly growing technologies such as client/ server, databases, networking and object-oriented programming. Through its accredited career programs, the Company offers associate degrees and non-degree diplomas in six primary areas of study to adults seeking entry-level jobs in information technology including: business applications; electronics, systems and hardware; programming; networking; information technology support; and business applications with networking. The Company enrolled approximately 14,300 new students in fiscal year 1999 at its twenty-seven Learning Centers in the United States and Canada. Excluding the fiscal 1999 acquisitions of three existing campuses at Paramus, NJ, and Montreal and Laval, Quebec, the Company opened four new Learning Centers in fiscal 1999 at South Plainfield, NJ, Pittsburgh, PA, Brossard, Quebec, and Henderson, NV. The Company's Canadian Learning Centers consist of three campuses located in and around Montreal, Quebec, and collectively operate under the name of Delta College, Inc. ("CLC Delta"). Computer Learning Centers, Inc. was incorporated in Delaware in March 1987. The Company's executive offices are located at 11350 Random Hills Road, Suite 240, Fairfax, Virginia 22030, and its telephone number is 703-359-9333. THE INFORMATION TECHNOLOGY EDUCATION AND TRAINING MARKET The rapidly growing role of information technology in business and government organizations is creating a significant and increasing demand for information technology education and training. The factors driving this growth in demand include the following: - Information technology is evolving rapidly, often requiring those already skilled in the field to learn new technologies or broaden their understanding of existing applications. Examples include the widespread migration by businesses from mainframe computer systems to client/server architectures and from conventional software technologies to more contemporary approaches, such as relational databases, groupware and object-oriented programming. - As corporate and government restructuring continues and employers seek to improve productivity, an increasing number of functions are being automated. As a result, corporate and government organizations need to educate and train existing employees and displaced workers in a broader range of software applications and other information technology skills. - According to the U.S. Department of Education, the number of students graduating from high school is expected to increase by approximately 9% from 1999 to 2007. This growth will enlarge the pool of candidates for career-oriented education and training, including education and training in information technology skills. Providers of information technology education and training include vocational and technical training schools, degree-granting colleges and universities, continuing education programs and commercial training programs. Vocational and technical training schools range from relatively small local market schools focused on teaching a single or limited number of skills to larger institutions that offer information technology training as a subset of a more diversified curriculum. Colleges and universities are structured primarily to serve the needs of the full-time 18- to 24-year old student through four-year programs that are lecture-based and focused on a theoretical presentation of the subject matter rather than on teaching specific career-oriented skills. Continuing education programs tend to cover a broad range of technical and non-technical topics, and such programs generally do not focus on providing career placement for their students. Commercial training providers generally offer fast-paced, one- to five-day courses that are based on the assumption that individuals have a basic familiarity with information technology concepts. 3 4 THE CLC APPROACH The Company has designed a series of programs it believes are uniquely suited to meet the information technology education and training needs of adults pursuing information technology-related careers. The Company's traditional career programs are designed to meet the needs of adult students in a number of ways. The focused nature of each program of study enables full-time students to complete their education and training and enter the work force in as little as 8 to 17 months, while maintaining eligibility for financial aid programs. CLC's program schedules are designed to accommodate its students' need for flexibility through programs offered in modular formats with new program start dates each month and convenient morning, afternoon and evening hours. Each Learning Center is equipped with up-to-date computer hardware and software for students' in-class use, and each program requires students to spend at least 50% of their in-school time working directly on a computer. Learning Center faculty members generally have direct experience working in the information technology industry, enabling them to provide students with useful career-related insights and guidance in connection with education and training. Finally, CLC provides its students with job placement assistance, including assistance with resume writing, interview preparation and employment searches for recent graduates and alumni. BUSINESS STRATEGY The Company's objective is to strengthen and expand its position as one of the leading providers of information technology education and training programs for adults. To achieve this objective, the Company employs the following key strategies: Establish New Learning Centers. The Company continues to increase the number of its Learning Centers throughout the United States. The expansion includes opening new Learning Centers in areas of the country that the Company currently serves, establishing Learning Centers in new geographical areas, including Canada, and possibly acquiring organizations that offer attractive opportunities to further strengthen the business. The Company acquired three existing campuses and opened four Learning Centers in fiscal year 1999. The Company intends to open at least two Learning Centers in fiscal year 2000. Increase Availability of Associate Degree Programs. The Company currently offers associate degree programs at nine Learning Centers. The Company intends to increase the number of its Learning Centers that offer degree-granting programs in order to broaden available programs and increase student enrollments. Develop New Programs/Enhance Existing Programs. The Company capitalizes on new market opportunities by monitoring changes in the information technology industry and developing new education and training programs or enhancing current offerings in response to those changes. The Company is currently evaluating programs or program enhancements in Internet related technologies. The Company maintains relationships with a wide network of employers who provide the Company with data on trends related to computer and information technology skills. Improve Student Outcomes. The Company seeks to continuously improve the retention and placement rates at its Learning Centers by providing extensive academic services and placement assistance. The Company offers tutoring, academic counseling and other services to its students to help them complete their programs of study. In addition, the Company helps students prepare resumes, conduct employment searches and sharpen interviewing skills through its Graduate Placement Services Resource Centers. CAREER PROGRAMS The Learning Centers offer comprehensive career programs of study in six areas of information technology including: business applications; electronics, systems and hardware; programming; networking; information technology support; and business applications with networking. Each career program is designed to teach the comprehensive information technology skills required to obtain an entry-level job in the targeted information technology field. The Company offers career programs that allow students to receive either a diploma or a degree. Each diploma program generally follows a standard format ranging in length from 8 months for full-time students to 17 months for part-time students. Nine Learning Centers offer associate 4 5 degree programs in computer electronics, information technology and network support; computer systems and networking technology; client/server; computer applications and network administration; and computer programming. These associate degree programs combine the curricula from a diploma program with state-mandated general education requirements and additional advanced material to create 17-month (full-time) or 34-month (part-time) programs. Associate degree program curricula are generally uniform across all Learning Centers and are typically offered in morning or afternoon sessions depending on market demand. Career programs are delivered year-round in a modular format that are generally provided with monthly start dates and allows students to complete their education in less time than the Company believes is possible at many other institutions. Each program consists of 8 to 17 modules, with each module lasting approximately one month for full-time students and consisting of a single course with an intensive and focused format. Full-time students typically attend classes for approximately five hours per day, five days per week, with sessions available three evenings per week for part-time students. In CLC's career programs, students spend at least 50% of their time in computer labs performing hands-on workplace simulations and their remaining time in classrooms attending lectures and participating in group discussions. Each module is delivered according to an outline and instructor's guide that links appropriate textbooks together with visual aids and lab activities to achieve a specific set of student performance outcomes and proficiencies. To foster a professional work environment, the Company requires that students attend classes wearing business attire. The Company designs and updates curricula to meet current information technology industry standards, offering instruction in widely-used computer applications and information technologies to provide students with marketable skills. In addition, the Company regularly evaluates its curricula and eliminates those elements relating to technologies that have become obsolete or offer significantly fewer or less attractive job opportunities for graduates. The primary focus of each career program is to prepare students for employment in their fields of study upon graduation. Graduates of the business applications and networking programs have obtained employment as PC specialists, help desk administrators and executive, technical and accounting support personnel. Graduates of the electronics, systems and hardware program, have obtained employment as technicians in computer support and network installation and as specialists in the repair of commercial and industrial data processing equipment. The Company's programming curriculum prepares graduates for employment as computer programmers, database administrators and systems analysts. The networking program is designed to prepare students to obtain employment as network administrators, engineers and systems analysts. Graduates of the information technology support program have obtained employment as computer support specialists, help desk operators, and user support analysts. Tuition is fixed at the time of a student's initial enrollment, and varies among U.S. Learning Centers based on local market conditions. At January 31, 1999, tuition ranged from $8,820 to $16,795 for diploma programs and from $17,250 to $22,995 for associate degree programs. CURRICULUM CRITERIA, REVIEW AND DEVELOPMENT The Company has established specific criteria for its programs. Each career program is designed to prepare students for information technology-related entry-level jobs. Career programs are designed to engage adult students by employing hands-on teaching methods; train students in computer technology widely used in the work place; respond to market requirements and train students to satisfy those requirements; and optimize use of the Company's resources. The Company uses several means to ensure that its programs meet these criteria. The Company regularly solicits input directly from employers through a system of Employer Advisory Groups in each of its geographic market areas. These advisory groups meet regularly to discuss the skills required in the information technology field as well as to identify industry trends. In addition, an independent marketing research firm conducts monthly student surveys to help the Company monitor faculty, course and school effectiveness and to gather student input. Historically, student surveys have identified opportunities for improvement, which have been implemented where appropriate, and have provided a means of setting quantitative benchmarks. The 5 6 Company maintains an internal Strategic Product Planning Group that includes senior managers, faculty and other employees. This group meets regularly to analyze input from market research, the Employer Advisory Groups, students, faculty, consultants and management. The Strategic Product Planning Group uses the input to guide the Company's strategic direction and to make recommendations regarding the Company's curricula. Curriculum recommendations are referred to faculty subject matter experts and academic managers for review prior to formal development by curriculum project leaders. STUDENT CHARACTERISTICS The Company's programs are targeted at adults seeking to expand their career opportunities through the acquisition of technical skills and knowledge. At January 31, 1999, 50% of CLC's students (excluding CLC Delta) were college graduates or had some college experience, including 10% who had four-year college degrees or higher levels of educational attainment and 10% who had two-year degrees. At that time, 28% of CLC's students (excluding CLC Delta) were between 18 and 22 years of age, 48% were between 23 and 34, and 24% were over 35. Approximately 64% of the student population of U.S. Learning Centers was male and 36% was female. STUDENT RECRUITMENT The Company engages in a broad range of activities to make prospective students aware of the programs of study available at the Learning Centers. These activities include television, radio and newspaper advertising, direct mail campaigns and listings in the yellow pages. Currently, all advertising is directed at local markets where Learning Centers are located. The Company monitors the effectiveness of its various marketing efforts by measuring the number of resulting student enrollments. The Company estimates that for its U.S. Learning Centers for fiscal 1999, 35% of its new enrollments resulted from referrals by current students and graduates, 31% of its new enrollments resulted from television advertising, newspaper advertising accounted for 12%, yellow pages listings accounted for 7% and the remaining 15% were classified as resulting from miscellaneous sources and other media. The television advertising for each Learning Center is developed and coordinated by CLC's senior management. All advertising includes a toll-free telephone number for direct responses and information about the Learning Center. These responses are received by the admissions department of each Learning Center, where the direct responses are recorded and tracked and then forwarded to an admissions representative who responds to student inquiries. All prospective student inquiries are handled at the local level, where an admissions representative is assigned to each student from initial contact to graduation. STUDENT ADMISSIONS AND RETENTION The Company maintains admissions standards that require each career program student to have proof of a high school diploma or a recognized equivalent such as a General Education Development ("GED") certificate. In addition, all career program students must achieve a qualifying score on an independently developed aptitude examination recognized and approved by the U.S. Department of Education. The Company believes admission requirements are important in ensuring that incoming career program students have the necessary academic background and abilities to complete their selected program of study. Each Learning Center employs a director of admissions who oversees a staff of admissions representatives. Admissions policies and procedures, along with marketing materials, are established centrally and are monitored both centrally and locally. Admissions representatives are responsible for scheduling an initial appointment with an interested candidate, interviewing the candidate to determine whether he or she meets admissions qualifications and has the necessary motivation and ability to complete the Learning Center's intensive programs of study, arranging for the testing of the candidate to determine his or her aptitude for different programs and counseling qualified candidates about available career paths. The Company uses both a third party and its regulatory compliance department to review the admissions processes and practices of the individual admissions representatives to monitor compliance with the Company's policies and applicable state, federal and accrediting agency requirements. 6 7 Once a student enrolls, the Company focuses significant staff resources on assisting students to overcome the academic, financial and personal obstacles that can interfere with a student's ability to complete their career program. Student withdrawals prior to program completion have negative regulatory, financial and marketing effects on an educational institution. To minimize withdrawals, each Learning Center employs a student services manager/counselor who is available to advise students encountering problems that interfere with their education. To help students overcome financial obstacles, the Company assists students in finding part-time employment when their resources in combination with available financial aid are not adequate to meet their financial needs. Learning Centers' management, faculty and staff performance are measured in part by their ability to ensure that students successfully complete their programs of study. Curricula are designed to include frequent progress reviews and performance measurements of both students and faculty. Tutoring is available and encouraged for students who need additional academic assistance. The weighted average Learning Center retention rates, as calculated under standards of the Accrediting Council for Independent Colleges and Schools ("ACICS"), the accrediting agency that accredits the U.S. Learning Centers, were 76% and 75%, respectively, for the twelve-month periods ended June 30, 1998 and 1997. GRADUATE PLACEMENT SERVICES The Graduate Placement Services Resource Center (the "Placement Center") is a vital component of each Learning Center's programs. The Placement Center maintains job postings, coordinates employers' recruiting efforts, provides on-line job search capabilities and maintains a library of career and job search related publications. All career program students are required to attend a 20-hour career development course, which is a series of seminars related to resume writing, interview preparation and employment searches. Utilizing ACICS standards, for the twelve-month periods ended June 30, 1998 and 1997, approximately 79% and 83%, respectively, of the Company's net placeable graduates obtained employment in a field related to their program of study. Net placeable graduates excludes graduates who were not seeking employment due to health-related reasons or continuing their education or entering military service. Students who graduated during the twelve-month period beginning July 1 and ending June 30 and obtained employment in a field related to their program of study prior to the required filing date of September 15 of each respective year are counted as graduates placed. Based on information from students and employers who have responded to inquiries, the Company estimates the average annual starting salaries for U.S. students who obtained employment in fields related to their education during the twelve-month period ended June 30, 1998 were as follows:
U.S. ESTIMATED LEARNING CENTER AVERAGE ANNUAL PROGRAM GRADUATES PLACED STARTING SALARY ------- ---------------- --------------- Business Applications (Associate Degree and Diploma).... 1,266 $21,600 Programming (Associate Degree and Diploma).............. 1,166 $28,000 Networking (Diploma).................................... 589 $33,700 Electronics, Systems and Hardware (Associate Degree and Diploma).............................................. 564 $25,800 Information Technology & Support Professional (Diploma)............................................. 226 $23,400
Average annual starting salaries for Learning Center graduates vary among Learning Centers depending on local employment conditions and other factors. Employers of CLC graduates include small technology-oriented companies as well as major corporations and agencies and their affiliates, including Bell Atlantic, Computer Associates, IBM, Lockheed Martin, Wells Fargo Bank, Media One, Cisco Systems, and Bay Networks. FACULTY The Company employs both full-time and part-time faculty who are hired in accordance with criteria established by the Company, ACICS and applicable state licensing authorities. Faculty members are carefully selected on the basis of their knowledge and experience in the information technology field and their ability to 7 8 develop each student's potential. Faculty members generally have both significant industry experience and educational and technical backgrounds. Faculty members participate in a regular and systematic program of in-house training to continuously improve instruction and curricula. Faculty members participate in educational associations, professional organizations and continuing education in their respective fields. After completing each module, students evaluate their instructors using a confidential survey prepared, distributed and processed by an independent third party firm. The survey asks students to rate the faculty in such areas as teaching effectiveness, substantive knowledge, fairness and quality of delivery as well as course content. ADMINISTRATION AND EMPLOYEES Each Learning Center is managed by a local administrative team headed by a school director who is accountable for the maintenance of educational quality and placement success of the Learning Center, regulatory compliance and profitability. Within the framework of federal and state regulations as well as the framework of the Company's own policies, the Company encourages Learning Center school directors to act autonomously in responding to local market conditions. Each school director reports to a regional manager who oversees the activities of several Learning Centers grouped by geographic region. Learning Center school directors work closely with the regional managers to implement marketing plans and curricula, expand capacity and maintain facilities. Regional managers report directly to the Vice President of Operations, who in turn reports directly to the Company's President. Each Learning Center's administrative team also includes a director of education, a director of admissions, a director of financial aid, a business office manager, and a director of placement. As of January 31, 1999, the Company employed approximately 1,337 full-time and 567 part-time employees. In addition, the Company employed 197 CLC students under the Federal Work-Study Program. None of the Company's employees are represented by a labor union or are subject to a collective bargaining agreement. The Company has never experienced a work stoppage and believes that its employee relations are satisfactory. As of January 31, 1999, the Company employed 66 people at its corporate headquarters in Fairfax, Virginia. The Company's corporate headquarters provides centralized services to all of the Learning Centers in the areas of accounting, marketing, public relations, curriculum development, purchasing, human resources, regulatory affairs and real estate. In addition, headquarters personnel develop policies and procedures and perform oversight for the Learning Centers in areas of administrative and educational activities. As of January 31, 1999, the Company employed 17 people at its student receivables division in Norristown, Pennsylvania. The student receivables division provides centralized services to all of the Learning Centers related to the collection of student loans financed directly by the Company. COMPETITION The postsecondary adult education and training market is highly fragmented, with no single institution or company holding a dominant market share. The Company competes for students with vocational and technical training schools, degree-granting colleges and universities, continuing education programs and commercial training programs. Certain public and private colleges may offer programs similar to those of the Learning Centers at a lower tuition cost due in part to government subsidies, foundation grants, tax deductible contributions or other financial resources not available to proprietary institutions. The Company believes that the Learning Centers' fast paced and intensely focused programs in information technology education and training help the Company attract students. Students may choose CLC over its competitors because of the Company's broad course offerings, relatively short programs, placement services, reputation and starting salaries after graduation. Students may choose CLC instead of a four-year college because they want to enter the work force in a shorter period of time or because a four-year institution does not provide students with the type of focused, comprehensive program that CLC offers. In addition, flexible afternoon and evening courses allow students to maintain their current jobs while attending the Company's programs. 8 9 FINANCIAL AID AND REGULATION FINANCING STUDENT EDUCATION Approximately 67% of the Company's fiscal 1999 tuition revenues were funded either directly or indirectly from the federal student financial aid programs under Title IV ("Title IV Programs" or "Title IV") of the Higher Education Act of 1965, as amended ("Higher Education Act" or "HEA"). The majority of U.S. Learning Center students receive some form of Title IV Program funding. The Title IV Programs provide financial assistance to students who are enrolled at an eligible postsecondary institution. The Title IV Programs consist of grants, subsidies for part-time work and several different types of loans. To determine financial need and eligibility for need-based Title IV Program aid, the Company uses the national standard need analysis system established by the HEA. The HEA also requires that all students who receive financial aid maintain satisfactory progress toward completion of their program. A student who does not meet the prescribed academic standards will, after a probationary period, be denied further federal aid. In addition to the Title IV Programs, the Company offers loans to certain students that meet the Company's criteria of creditworthiness. During the first quarter of fiscal 2000, the Company established a relationship with SLM Financial Corporation ("SLM"), a subsidiary of the SLM Holding Corp. or "Sallie Mae," whereby SLM will provide student loans with terms generally more favorable than the Company's loan program to students meeting SLM's standards of creditworthiness. The SLM loan program was begun on a test-basis at four Learning Centers. In addition to these non-governmental sources of student loan funding, the Company participates in several state administered financial aid programs in certain states in which it operates. Title IV Programs CLC students receive funding under the following Title IV Programs: - the Federal Family Education Loan ("FFEL") program, which includes the subsidized and unsubsidized Federal Stafford loans and PLUS (parental) loans. Tuition funded by FFEL loans accounted for approximately 28% of the Company's revenues in fiscal 1999; - the William D. Ford Federal Direct Loan ("FDL") program, which includes subsidized and unsubsidized Federal Direct Stafford loans and Federal Direct PLUS loans. Tuition funded by FDL loans accounted for approximately 26% of the Company's revenues in fiscal 1999; - the Federal Pell Grant ("Pell") program. Tuition funded by Pell grants accounted for approximately 11% of the Company's revenues in fiscal 1999; - the Federal Supplemental Educational Opportunity Grant ("FSEOG") program. Tuition funded by FSEOG grants accounted for approximately 1% of the Company's revenues in fiscal 1999; - the Federal Perkins Loan ("Perkins") program. Tuition funded by Perkins loans accounted for approximately 1% of the Company's revenues in fiscal 1999; and - the Federal Work-Study ("FWS") program, which makes available Federal funds to help subsidize the cost of part-time employment for needy students In fiscal 1999, the Learning Centers employed approximately 600 FWS students, who received a total of approximately $865,000. The Company matches every three dollars of FSEOG, Perkins and FWS federal funds with one dollar of its own funds. In fiscal 1999, the matching contribution was $334,000 for FSEOG, $118,000 for Perkins loans and $216,000 for the FWS program. Availability of Lenders and Guarantors The FFEL program provides government guaranteed loans through banks and other private lenders. Although the number of lenders willing to make federally guaranteed student loans has declined in recent 9 10 years, this decline has not affected the ability of Learning Center students to obtain federally guaranteed loans. As of January 31, 1999, CLC students use approximately 23 private lenders, one of which currently provides approximately 39% of FFEL loans. The Company believes that other lenders would be willing to make federally guaranteed loans to its students if any or all of the Company's current lenders ceased participating in the FFEL program or decided not to make loans available to CLC students. Even if no private lenders were available to provide loans to CLC students, the HEA provides for a "lender of last resort" to make such loans. However, lenders of last resort are not required to provide PLUS loans. Tuition derived from PLUS loans accounted for approximately 9% of the Company's revenues in fiscal 1999. FFEL loans made by private lenders are guaranteed by student loan guaranty agencies. As of January 31, 1999, FFEL loans to Learning Center students are guaranteed by 9 guaranty agencies, and one student loan guaranty agency currently guarantees nearly 27% of such loans. The Company believes that other guaranty agencies would be willing to guarantee loans to Learning Center students if any of its existing guaranty agencies ceased guaranteeing such loans or limited the volume of loans it would guarantee. As of January 31, 1999, all of the twenty-three U.S. Learning Centers participating in the FFEL program or direct loan program, had at least one guaranty agency. All states have a designated guaranty agency that the Company believes would guarantee most FFEL loans made to Learning Center students in that state. Based on the safeguards built into the FFEL program, the Company does not believe that any reduction in the number of agencies currently guaranteeing FFEL loans made to Learning Center students would have a material adverse effect on the Company. U.S. DEPARTMENT OF EDUCATION--REGULATION AND REVIEW To provide students with access to financial aid provided through the Title IV Programs, each Learning Center must meet specific legal standards. These standards are prescribed by the Higher Education Act and regulations issued by the U.S. Department of Education ("Department of Education" or "Department"). To be eligible to participate in the Title IV Programs, each Learning Center must: - be authorized by the state within which it operates to offer its educational programs; - be accredited by an accrediting agency recognized by the Secretary of Education as a reliable authority as to the quality of the institution's educational programs; and - enter into a Program Participation Agreement with the Department of Education. Generally, each Learning Center must individually comply with applicable regulatory standards with respect to the administration of Title IV funds on behalf of its students. For purposes of determining institutional eligibility to participate in the Title IV Programs, an "institution" is defined as a main campus and any additional locations of that campus. Of the twenty-four Learning Centers operating in the U.S. as of January 31, 1999, (including the Learning Centers acquired during the fiscal year) nine are considered to be main campuses and fifteen are additional locations of a main campus. During fiscal 1999, twenty-three of the twenty-four U.S. Learning Centers participated in the Title IV Programs. Each year every institution that participates in the Title IV Programs must submit to the Department of Education audited financial statements as well as the results of an audit by an independent accounting firm of that institution's compliance with Title IV Program requirements. Approximately every four years institutions participating in the Title IV Programs are reviewed for continued participation in the Title IV Programs. The Department of Education annually conducts its own compliance reviews of hundreds of institutions, and other reviews of the Title IV Program compliance are conducted by the Department's Inspector General, state education agencies and guaranty agencies. The HEA also requires accrediting agencies to consider an institution's compliance with Title IV Program requirements in making accrediting decisions. Each of the U.S. based Learning Centers are therefore subject to frequent and detailed oversight and must comply with a complex framework of laws and regulations. Refer to "Potential Effects of Regulatory Violations," herein. In May 1998, the Department of Education initiated a program review of the administration of the Title IV Programs by the Alexandria, VA and Manassas, VA Learning Centers for the period July 1, 1996 through June 30, 1998. By letter dated September 11, 1998, the Department issued its report containing a 10 11 number of findings alleging non-compliance with certain Title IV Program requirements. The Company has submitted written responses to all of the findings agreeing with certain of the findings and disputing others, and has conducted file reviews with respect to certain issues. Upon completion of its review of the Company's submissions, the Department will issue a final determination letter. If the Company does not agree with some of the determinations, it may appeal the determination to a Department of Education hearing officer and to the Secretary of Education. By letter dated December 15, 1998, the Department issued a preliminary audit determination respecting its review of the Company's independent audit of its compliance of certain Learning Centers with the Title IV Program requirements for the year ending January 31, 1998, alleging noncompliance with respect to timeliness of student refunds. The Department and the Company agreed on a protocol for the review of student files and student refund data at the Alexandria, VA, Houston, TX, Laurel, MD, Philadelphia, PA, and San Jose, CA Learning Centers. The results of the file reviews were submitted to the Department in March 1999. Once the results are reviewed, the Department will issue a final audit determination letter. If the Company does not agree with some of the determinations, it may appeal to a Department of Education hearing officer and the Secretary of Education. While the Company does not believe liabilities arising from either the program review or the compliance audit will have a material adverse effect on the Company's operations, certain actions by the Department of Education, if taken, could have a material adverse effect on the Company. Refer to Item 7 -- "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Potential Adverse Effects of Regulation" contained herein. In January 1999, the Department of Education initiated a program review of the Laurel, MD Learning Center for the period July 1, 1997 through the present. The Department has not yet issued a report on this program review. Reauthorization of the Higher Education Act of 1965, as amended ("HEA") In October 1998, the U.S. Congress enacted legislation reauthorizing and extending the HEA until September 30, 2004. In general, the material Title IV Program provisions and requirements remain in the same form and funding was authorized at the same or higher levels. However, the new law did make certain potentially significant changes in the Title IV Programs. Chief among these are: - an increase in the adverse effect of high student loan default rates on schools; - an increase, from 85% to 90%, in the amount of revenues an institution may derive from the Title IV Programs; and - the streamlining of the process for recertifying an institution's participation in the Title IV Programs following a change of ownership or control so that the Department of Education may allow an institution to continue uninterrupted participation in the Title IV Programs in certain circumstances. Although Congress has consistently reauthorized the HEA, and there is no present indication that Congress will fail to make annual appropriations to properly fund the Title IV Programs, there can be no assurance that government funding for the Title IV Programs will be maintained at current levels or that the current requirements for student and institutional participation in such programs will not change in ways that might be unfavorable to the Company. Student Loan Defaults Under the Higher Education Act, an educational institution may lose its eligibility to participate in some or all Title IV Programs if more than a certain proportion of its former students default on the repayment of their federal student loans. Each year the Department of Education calculates a rate of student defaults (known as the "cohort default rate") for each institution whose students participate in the FFEL or FDL loan programs. If an institution's cohort default rate is at least 25% for three consecutive years, the school loses its 11 12 eligibility to participate in the FFEL and FDL programs as well as the Pell program for the remainder of the year in which the Department makes that determination and the subsequent two years. An institution whose cohort default rate exceeds 40% for one year may lose its eligibility to participate in all of the Title IV Programs. An institution has the right to appeal the Department of Education's calculation of its cohort default rates. An institution would remain eligible to participate in FFEL, FDL and Pell programs while its appeal is being considered. The official FY 1996 cohort default rates published in October 1998 for the nine Learning Centers that are institutions as defined by the Department, and which were then participating in the FFEL or FDL programs, averaged 15.5% and ranged from a low of 2.6% to a high of 21.7% for that period. The average rate for all proprietary institutions in the United States for the same period was 18.2%. All of the Learning Centers have well-established default management programs consisting of student counseling and post-enrollment follow up to minimize the risk of excessive loan defaults. If an institution has an FFEL or FDL cohort default rate of 25% or more in any one of the three most recent years or a default rate on Perkins loans of more than 15% in a year, the Department of Education can place the school on "Provisional Certification" for up to four years. Provisional certification allows an institution to continue to participate in the Title IV Programs subject to conditions imposed by the Department. However, if the school violates a Department requirement, it can lose its eligibility with less procedural protection than is afforded a standard certified institution. Four of the Company's Learning Centers are provisionally certified through dates extending to July 2000 through September 2001 due to either cohort default rate issues arising in prior years or due to change of control following the Company's acquisition of these campuses. The Company administers the Perkins loan program on a combined basis for seven of the Company's nine main U.S. based institutions, and in the past these seven combined institutions have shared one Perkins loan default rate. For the remaining two U.S. based institutions, the Perkins loan programs are administered individually. For the year ending June 30, 1998, the most recent year for which such rates have been calculated, the Company had a default rate for Perkins loans of 19.7% for the seven institutions combined. For the same period, the Company had Perkins default rates of 9.1% and 0% for the remaining two institutions. Tuition funded by the Perkins program accounted for less than 1% of the Company's revenues in fiscal 1999. Financial Responsibility The Higher Education Act and the Department of Education regulations require institutions participating in the Title IV Programs to demonstrate that they have sufficient resources to properly administer Title IV funds on behalf of their students and provide appropriate educational services to their students. The regulations allow the Department to evaluate an institution based on its own financial condition or that of the consolidated corporation. Historically, the Department has evaluated the financial condition of the Learning Centers on a consolidated basis. Under regulations that took effect on July 1, 1998, the Department evaluates an institution's financial responsibility based on three ratios: an equity ratio, a primary reserve ratio and a net income ratio. - the equity ratio measures an institution's capital resources, ability to borrow and financial viability; - the primary reserve ratio measures an institution's ability to support current operations from expendable resources; and - the net income ratio measures the ability of an institution to operate at a profit. The ratios are calculated each year based on an institution's annual audited financial statements. The results of each ratio are assigned a strength factor and then combined under a weighted formula to arrive at a composite score for the institution ranging from minus one to three, the latter being the highest possible score. An institution that achieves a composite score of at least 1.5 is considered to be financially responsible. If an institution achieves a composite score of more than 1.0 but less than 1.5, it may continue to participate in the Title IV Programs under additional reporting and monitoring procedures, including the receipt of its Title IV Program funds on the "reimbursement" basis, under which an institution must disburse its own funds to students before receiving Title IV Program funds. In addition, regardless of its composite score, an institution may establish its financial responsibility by posting an irrevocable letter of credit in favor of the Secretary of 12 13 Education in an amount equal to not less than one-half the Title IV Program funds received by the institution during its most recent fiscal year. Based on its audited financial statements for fiscal 1999, the Company has calculated a composite score of 1.8 for CLC; thus, the Company as a whole satisfies the Department's standards of financial responsibility. The Department has the right to apply the financial responsibility measures on an individual institution basis. The Company has calculated the composite scores for its U.S. based Learning Centers that are institutions as defined by the Department range from a low of 0.1 to a high of 3.0. As of January 31, 1999, two of the Company's institutions have a composite score below 1.0, and the remaining seven institutions have composite scores which exceed the 1.5 minimum requirement. However, the Department has issued a transition year rule, which allows for an institution to have its financial responsibility minimum measured under the standards in effect prior to July 1, 1998. Under this transition year rule, the Company has determined that each of its institutions satisfies the Department's standards of financial responsibility. In conjunction with the Company's request for recertification of an institution acquired in December 1997, the Department found that the institution lacked financial responsibility at the time it was acquired. As a result, the Department required the Company to post a letter of credit in the amount of $2,850,000. Under a separate standard of financial responsibility, an institution that has made late student refunds in more than 5% of cases in either of its last two fiscal years must post a letter of credit in favor of the Secretary of Education in an amount equal to 25% of the total Title IV Program refunds paid by the institution in its prior fiscal year. Based on this standard, the Company has posted a letter of credit in the amount of $1.5 million with respect to all U.S. Learning Centers except the Learning Centers in Somerville and Methuen, MA for which separate letters of credit were required and the Learning Center in Paramus, NJ, for which a letter of credit was not required. Incentive Compensation The Higher Education Act 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. Although the Department's regulations do not establish clear criteria for compliance, the Company believes that its compensation plans for employees engaged in student recruitment, admission or financial aid awarding activities comply with the requirements of the HEA. The 90/10 Rule Under a provision of the HEA now known as the "90/10 Rule," a proprietary institution loses its eligibility to participate in the Title IV Programs for at least one fiscal year if, under a modified cash basis of accounting, more than 90% of the institution's applicable revenues for the prior fiscal year was derived from Title IV Programs. Approximately 67% of the Company's revenues in fiscal 1999 (ranging from a low of 58% and a high of 80% on an individual institution basis) consisted of tuition funded by the Title IV Programs. To reduce the risk that any Learning Center could lose its eligibility to participate in the Title IV Programs under the 90/10 Rule, the Company closely monitors the sources of revenue funding for each Learning Center. The Company also continuously pursues alternative sources of revenue and student financial assistance. If any Learning Center were to lose its eligibility to participate in the Title IV Programs under this rule, such loss would have a material adverse effect on the Company. Restrictions on Adding Locations The HEA requires a proprietary institution to be in full operation for two years before such institution can qualify to participate in the Title IV Programs. However, the HEA and applicable regulations permit an institution that is already certified to participate in the Title IV Programs to establish an additional location 13 14 that may immediately qualify for such participation without satisfying the two-year requirement so long as such location satisfies all other applicable requirements for institutional eligibility, including approval of the additional location by the institution's accrediting agency and the relevant state authorizing agency. Excluding acquisitions, the Company opened three new U.S. Learning Centers in fiscal 1999. The Company's expansion plans assume its continued ability to establish new Learning Centers as additional locations of existing Learning Center main campuses without incurring the two-year waiting period for Title IV Program participation that is applied to new institutions. Although state requirements and accrediting agency standards may in certain instances limit the ability of the Company to establish additional locations in certain areas and certain situations, the Company does not believe, based on its current understanding of how these standards will be applied, that these standards will have a material adverse effect on the Company or its expansion plans. Potential Effects of Regulatory Violations The violation of regulatory standards governing the Title IV Programs by the Company or any Learning Center could be the basis for the Department of Education to initiate a proceeding to take one or more of the following actions: (a) seek repayment of previously disbursed Title IV Program funds, (b) seek repayment of interest or special allowance subsidies the Department paid to lenders with respect to student loans, (c) impose a fine, or (d) limit, suspend or terminate the participation of the Company or the particular Learning Center in the Title IV Programs. The Department also may take emergency action temporarily to suspend an institution's participation in the Title IV Programs without advance notice if it determines that a regulatory violation creates an imminent risk of the material loss of public funds. Although there are no limitation, suspension, termination or emergency proceedings pending, and the Company does not believe any such proceeding is contemplated, if such a proceeding were initiated against the Company, or any Learning Center, and resulted in a substantial curtailment of the Company's participation in the Title IV Programs, the Company would be materially and adversely affected. The Department also has discretion to alter the way it provides Title IV Program funds to participating institutions. It may transfer an institution from the "advance" system of payment of Title IV Program funds, under which an institution receives funding from the Department in advance based on anticipated need, to the "reimbursement" system of payment, under which an institution must disburse funds to students and document their eligibility for Title IV Program funds before receiving funds from the Department. The transfer of all or a substantial proportion of the Learning Centers to the reimbursement system of payment could, depending on the extent of such action and the specific nature of the reimbursement system imposed by the Department, have a material adverse effect on the Company. The Department may also impose a modified requirement known as "heightened cash monitoring." Based on its monitoring of litigation then pending against the Company (refer to Item 3 -- "Legal Proceedings" herein) and certain student complaints lodged against the Company or individual Learning Centers, on April 6, 1998, the Department placed all Learning Centers on heightened cash monitoring status. Under this status, the Learning Centers continue to receive all of the Title IV Program funds to which their students are entitled, but the funds are drawn after they have been credited to student accounts and CLC is required subsequently to provide supporting documentation to the Department. The Department does not consider heightened cash monitoring status to represent either an adverse or punitive action. This action by the Department has not had any effect on the availability of Title IV funding to the Company's students, or had a material effect on the Company's cash flow or operating results. This requirement has led to delays (estimated by the Company as generally two to three days) in timing of the Company's cash receipts, but has not significantly impaired its business operations. In addition, if as a result of a compliance review, a Learning Center were required to repay more than 5% of the Title IV funds the Learning Center received during the year under review, the Learning Center could be required to post a letter of credit equal to not less than 10% of the Title IV Program funds received by the Center during its most recent fiscal year and take additional steps, including receipt of its funds on the 14 15 reimbursement basis, to establish its financial responsibility to maintain its participation in the Title IV Programs. During fiscal 1999, two of the Company's institutions received regular certification for continued participation in the Title IV Programs. If a Learning Center lost its eligibility to participate in certain of the Title IV Programs, or if the amount of Title IV funding was reduced, the Company would seek to arrange alternative sources of funding for that Learning Center's students. There are a number of private organizations that provide loans to students. Although the Company believes that one or more private organizations would be willing to provide loans to Learning Center students, there is no assurance that this would be the case, and the interest rate and other terms of such student loans might not be as favorable as for Title IV Program funds. Accordingly, the loss of eligibility of a Learning Center to participate in the Title IV Programs would be expected to have a material adverse effect on the Company even if the Company could arrange alternative sources of funding for the Learning Center's students. STATE AUTHORIZATION AND ACCREDITATION The Company is dependent on the authorization of the applicable agency or agencies of each state within which a Learning Center is located to allow it to operate and to grant degrees or diplomas to students. State authorization is also required in order for an institution to become and remain eligible to participate in the Title IV Programs. The Company is subject to extensive and varying regulation in each of the states in which the Learning Centers currently operate. State laws and regulations affect the Company's operations and may limit the ability of the Company to introduce degree programs or to initiate new programs of study, or to obtain authorization to operate in certain additional states. State regulatory requirements may overlap or exceed federal requirements. By letter dated April 3, 1998, from the State Superintendent of Education of the State of Illinois, to the Schaumburg Learning Center (the "Letter"), the Illinois State Board of Education ("ISBE"), the agency of the State of Illinois that authorizes the Schaumburg Learning Center, notified the Learning Center that they had determined that certain activities and procedures of the Schaumburg Learning Center were not in compliance with the Illinois Private Business and Vocational Schools Act ("Schools Act"). The Letter directed the Schaumburg Learning Center to cease and desist from all marketing and student enrollment activities until May 6, 1998. After reviewing the Company's initial response, the ISBE lifted the cease and desist order as of May 7, 1998. By letter dated December 18, 1998, the ISBE issued a report on its review of documentation submitted by the Schaumburg Learning Center regarding student refunds and placement statistics and issued a new order directing the Learning Center to cease and desist from all marketing and student enrollment activities. On February 26, 1999, in response to documentation submitted by the Learning Center, the ISBE lifted the cease and desist order, effective March 1, 1999, and announced that it would approve the extension of the Learning Center's license upon confirmation of the Learning Center's compliance with Illinois requirements. During March 3-5, 1999, the ISBE conducted a site visit at the Schaumburg Learning Center to establish such confirmation and, the Company believes that if the ISBE is satisfied, it will extend the Learning Center's license through June 30, 1999. In June 1999, if the Learning Center demonstrates continued compliance with the requirements of Illinois law, the ISBE will, in due course, process the renewal of the Learning Center's license for the year 2000. If the ISBE determines that the Schaumburg Learning Center is not in compliance, the ISBE may designate a hearing officer to decide whether the Schaumburg Learning Center's license to operate should be suspended or terminated. On October 21, 1998, the Maryland Higher Education Commission ("MHEC") issued a Notice of Deficiencies respecting the Laurel Learning Center. The Notice questioned certain practices of the Learning Center, notably in the area of admissions testing, and proposed certain corrective actions regarding record keeping, student refunds and other policies and procedures. The Company has made the refunds proposed by MHEC and has changed its admissions testing, record keeping and other policies and procedures in accordance with the MHEC proposals. In conjunction with a settlement agreement with the MHEC dated 15 16 April 29, 1999, the Company was assessed a $60,000 fine and assured MHEC that the Laurel Learning Center would continue to implement the revised policies and procedures in accordance with MHEC proposals. On October 29, 1998, the Texas Workforce Commission ("TWC") issued three separate Complaint Investigation Reports (the "Reports") respecting complaints submitted to the TWC by seven former students of the Houston Learning Center. The Reports concluded that certain of the complaints were substantiated and certain were not. With regard to the complaints that the TWC staff reported as substantiated, the Reports proposed that various corrective actions be taken and that various refunds be made to certain students, including but not limited to the named complainants. The TWC also informed the Houston Learning Center that it would not act on new program approval requests until the issues raised in the Reports are resolved. The Company has entered into discussions with TWC staff aimed at resolving the issues raised in the Reports, and has taken corrective actions and initiated changes in policies and procedures, made certain of the refunds proposed by the TWC, and has agreed to protocols for the remaining proposed refunds. If the Company and TWC staff do not reach agreement on any or all of the issues cited in the Report, the TWC may initiate action against the Houston Learning Center respecting its authority to operate or seek to impose restrictions on its operations, and may impose a monetary fine. Any such action would be subject to administrative and judicial review in accordance with the provisions of Texas law. The Company believes the matter will be resolved without resort to formal proceedings and will not have a material adverse effect on its operations or on the operations of the Houston Learning Center. The loss of state authorization by an existing Learning Center or the failure of a new or newly acquired Learning Center to obtain state authorization would render the affected Learning Center ineligible to participate in the Title IV Programs, would adversely affect its accreditation and would have a material adverse effect on the Company. Accreditation by an accrediting agency recognized by the Department of Education is required in order for an institution to become and remain eligible to participate in the Title IV Programs. In addition, most states require institutions operating within their borders to become and continue to be accredited as a condition of continuing state authorization. All of the Company's U.S.-based Learning Centers are accredited by ACICS, which is an accrediting agency recognized by the Department of Education. Three of the Company's institutions operating in the United States are due for renewal of accreditation during fiscal 2000. The loss of accreditation by an existing Learning Center or the failure of a new or newly acquired Learning Center to obtain accreditation would render the affected Learning Center ineligible to participate in the Title IV Programs and could affect its state authorization and would have a material adverse effect on the Company. CHANGE OF CONTROL Upon a change of ownership resulting in a change of control as that term is defined in the HEA and Department of Education regulations, an institution participating in the Title IV Programs must be recertified to continue its participation. A change of control could also trigger similar reapproval requirements at the state level and with an institution's accrediting agency. For a publicly traded corporation like the Company, Department of Education regulations specify that a change of control occurs when there is an event that would obligate the corporation to file a current report on Form 8-K with the Securities and Exchange Commission disclosing a change of control. Each state and accrediting agency has its own requirements with respect to what constitutes a change of control and the consequences of such a change. A change of control could, depending on the nature of such change, have a material adverse effect on the Company. When the Company acquires an institution that participates in the Title IV Programs, that institution undergoes a change of control and must demonstrate that it meets the standards of institutional eligibility to be recertified by the Department for such participation under its new ownership. Under recently announced Department procedures implementing the 1998 reauthorization of the HEA, the Department may temporarily and provisionally certify an institution undergoing a change of control while the Department reviews the institution's application. To obtain such temporary certification, the institution must submit an application for recertification within 10 business days of the closing date of the sale. A "materially complete" application 16 17 normally would include all state and accrediting agency approvals that those agencies require to be obtained before the closing date. If the Department finds the application to be "materially complete," it would then issue a Temporary Program Participation Agreement, and afford the institution a further period to submit additional required materials. If all the remaining documentation is timely submitted, the Department will continue the Temporary Program Participation Agreement until it issues a new certification, which, in the case of changes of ownership, is always provisional for at least one year. If an institution fails to file a "materially complete" application or the additional required materials within the prescribed times, it will become ineligible to participate in the Title IV Programs until the Department completes its review and recertifies the institution under its new ownership. The standards and practices of ACICS, the accrediting agency that accredits all of the Learning Centers, generally provide that, after an institution obtains confirmation of continued authorization by the appropriate states following a change of control, and submits a complete application, ACICS will determine whether to temporarily reinstate the institution's accreditation, during which period the institution must apply for permanent reinstatement of its accreditation. The states with jurisdiction over the Learning Centers have widely varying requirements for an institution to confirm its reauthorization following a change of control as defined by each state. A material adverse effect on the Company's financial position, results of operations and cash flows could result if, in connection with a change in control, the Company experienced significant delay in obtaining or failed to obtain the accreditation of any Learning Center, experienced significant delay in obtaining or failed to obtain authorization from any state in which the Company has a Learning Center or experienced significant delay in reestablishing or failed to reestablish the eligibility of any Learning Center to participate in Title IV Programs. A change of control may also delay the ability of the Company to establish new institutions and may have other adverse regulatory effects. CANADIAN REGULATION Students who are residents of the province of Quebec are eligible to receive loans and bursaries ("grants") from the Quebec Loans and Bursaries Program ("QLBP"). Under the QLBP, student financial assistance is initially provided in the form of a loan. CLC Delta is subject to the Act Respecting Private Education ("ARPE") in Quebec. In accordance with ARPE, in order to operate a private educational institution, the Company must hold a permit issued by the Quebec Minister of Education (the "QME") for the institution itself and for the educational services to be provided. The QME will issue the permit after consulting with the Commission Consultative de l'Enseignement Prive (the "Commission") concerning the particular institution and the educational services to determine if such institution and services meet certain qualifying conditions. Permits cannot be transferred without the written authorization of the QME, and any entity holding a permit must advise the QME of any consolidation, sale or transfer affecting such entity. Prior to any action, the QME, after consultation with the Commission, has the authority to modify or revoke a permit where the holder of the permit, among other things: does not comply with the conditions, restrictions or prohibitions relating to the institution or, is about to become insolvent. Prior to any action, the QME must provide the institution with an opportunity to present its views before revoking a permit. Given that the QME periodically revises its regulations and other requirements and changes its interpretations of existing laws and regulations, there can be no assurance that the QME will agree with the Company's understanding of each requirement of the QME. The Company does not believe that the QME's requirements will create significant obstacles to its plans to acquire additional institutions, or open new branches in Quebec or that the QME's requirements will create significant obstacles to its plans to add new educational programs at CLC Delta. In addition, the Company does not believe that there will be any impediment to renewal of the permit issued to CLC Delta under the ARPE. The legislative and regulatory requirements that relate to student financial assistance programs in Quebec have recently changed. Effective May 1, 1999, the amount of financial assistance a student is eligible for will be less than the amount of financial assistance historically available. For students that have a remaining tuition 17 18 balance not funded by Quebec's financial assistance programs, CLC Delta may make available to qualifying students alternative financing arrangements to help fund their education. This change in regulation may affect the eligibility for student financial assistance of the students attending CLC Delta, which in turn could materially adversely affect the Company's business, results of operations and financial condition. FEDERAL INCOME TAX RELIEF Federal income tax relief in the form of tax credits, tax deductions and income exclusions is available to eligible students and their families beginning in 1998 under the Taxpayer Relief Act of 1997, as amended by the Internal Revenue Service ("IRS") Restructuring and Reform Act of 1998 ("TRA-97"). The TRA-97: - provides an annual Hope Scholarship tax credit of up to $1,500 for tuition and related expenses incurred on or after January 1, 1998, for each of a student's first two years of postsecondary education. - provides an annual Lifetime Learning tax credit of up to $1,000 in 1998 through 2002 and up to $2,000 in subsequent years for tuition and related expenses incurred on or after July 1, 1998. The Lifetime Learning tax credit is not available in any tax year in which the taxpayer is claiming the Hope Scholarship tax credit. - provides an annual tax deduction, ranging from $1,000 in 1998 to up to $2,500 in 2001 and thereafter, for interest paid during the first 60 months in which interest payments are required on any student loans incurred solely to pay qualified higher education expenses. - provides an annual income exclusion of up to $5,250 for undergraduate educational expenses incurred on or after January 1, 1998, and before June 1, 2000, that are paid by the student's employer. - allows taxpayers to establish Education IRAs, for taxable years beginning on or after January 1, 1998, that can be funded with non-deductible contributions of up to $500 annually for any child up to the age of 18 years. The tax benefits provided by the TRA-97 may reduce the effective cost of postsecondary education to the student and his or her family, which may decrease student dependence on Title IV Program funds and may decrease Title IV Program loan defaults. Educational institutions are required to submit certain information about the student and the student's family to the IRS in order for the student and the student's family to qualify for some of the tax benefits under the TRA. The Company's existing systems will need to be modified during fiscal year 2000, in order to facilitate compliance with these requirements. Although these IRS reporting requirements will increase the administrative burden on the Company, such compliance is not expected to have a material adverse effect on the Company's financial condition, results of operations or cash flows. 18 19 ITEM 2. PROPERTIES All CLC facilities are leased by the Company. The table below sets forth certain information regarding these facilities as of January 31, 1999.
APPROXIMATE SQUARE LOCATION FOOTAGE -------- ----------- Alexandria, VA.............................................. 62,500 Alexandria, VA (1).......................................... 7,300 Anaheim, CA................................................. 22,000 Brossard, Quebec............................................ 5,400 Cherry Hill, NJ............................................. 21,000 Chicago, IL................................................. 24,100 Fairfax, VA (2)............................................. 16,300 Garland, TX................................................. 16,600 Henderson, NV............................................... 20,000 Hurst, TX................................................... 25,500 Houston, TX................................................. 28,400 Laval, Quebec............................................... 13,100 Laurel, MD.................................................. 34,500 Los Angeles, CA............................................. 45,000 Lowell, MA (3).............................................. 20,300 Madison Heights, MI......................................... 28,400 Manassas, VA................................................ 20,200 Marietta, GA................................................ 16,100 Methuen, MA (3)............................................. 2,000 Montreal, Quebec............................................ 44,900 Norcross, GA (4)............................................ 26,900 Norristown, PA (2).......................................... 3,200 Paramus, NJ................................................. 26,500 Philadelphia, PA............................................ 32,000 Pittsburgh, PA.............................................. 28,900 Plymouth Meeting, PA........................................ 29,600 San Francisco, CA........................................... 22,000 San Jose, CA................................................ 20,000 Schaumburg, IL.............................................. 30,000 Somerville, MA.............................................. 18,700 South Plainfield, NJ........................................ 20,000 Tysons Corner, VA........................................... 5,600 Woodhaven, PA............................................... 21,500 ------- Total............................................. 758,500 =======
- --------------- (1) Training facility for the Company's instructors. (2) Corporate headquarters and support. (3) The Company is relocating its Methuen, MA Learning Center to Lowell, MA and expects to complete this relocation in July 1999. (4) The Company expects to open a new Learning Center in Norcross, GA during fiscal year 2000. Learning Center site selection is based upon a number of factors, including population density, incomes, occupations, education levels, projected demand for CLC's programs, concentration of technology-oriented employers and applicable state and accrediting agency requirements. The Company believes its facilities are suitable, adequate and well-utilized. 19 20 ITEM 3. LEGAL PROCEEDINGS Active Litigation On May 5, 1998, a class action lawsuit was filed against the Company in the Superior Court of New Jersey in Bergen County, New Jersey, on behalf of all students who attended a Learning Center in New Jersey within six years of May 5, 1998. The complaint alleges, among other things, that the Company, at its Learning Centers located in the State of New Jersey, failed to provide certain educational services and resources, misrepresented certain information respecting services, resources, occupational opportunities and student outcomes and violated the New Jersey Consumer Fraud Act. The Company is unable to estimate the outcome of the matter or any potential liability. On May 19, 1998, a lawsuit was filed against the Company in the District Court of Harris County, Texas, by six former students of the Houston Learning Center. Subsequently, the petition was amended to seek certification as a class action lawsuit on behalf of all students who attended a Learning Center in Texas within four years of May 19, 1998, and removed to the U.S. District Court for the Southern District of Texas, Houston Division. The complaint alleges, among other things, that the Company, at its Learning Centers located in the state of Texas, failed to provide certain educational services and resources, misrepresented certain information respecting services, resources, occupational opportunities and student outcomes, and violated the Texas Deceptive Trade Practices Act. The Company is unable to estimate the outcome of the matter or any potential liability. Between June 1, 1998 and December 31, 1998, the Company was named as defendant in five other lawsuits in California, Texas and Virginia by individual students or groups of students who formerly attended one of its Learning Centers. The complaints allege, among other things, that the Company, at the affected Learning Centers, failed to provide plaintiffs with certain educational services and resources and misrepresented certain information respecting services, resources, student outcomes and violated the applicable state consumer laws. The Company is unable to estimate the outcome of these matters or any potential liability. In addition to the lawsuits discussed above, the Company is a defendant in a number of civil lawsuits involving current and former employees, which the Company considers incidental to its business and unlikely to have a material effect on the Company's future operations. However, there can be no assurance that these matters will not have a material adverse effect on the results of operations of the Company in a future period, depending in part on the results for such period. The Company intends to defend itself vigorously in the lawsuits referred to above; however, there can be no assurance that the Company will be successful in defending itself in any of these proceedings. Even if the Company prevails on the merits in such litigation, the Company expects to incur legal and other defense costs as a result of such proceedings. These proceedings could involve substantial diversion of the time of some members of management, and an adverse determination in, or settlement of, such litigation could involve the payment of significant amounts, or could include terms in addition to such payments, which could have a severe impact on the Company's business, financial condition and results of operations. There can be no assurance that additional legal proceedings will not be filed or that adverse actions will not be initiated against the Company, either by federal or state regulators, or other parties. Any such legal proceedings or adverse action could have a severe impact on the Company's business, financial condition and results of operations. Settled Litigation Several lawsuits filed against the Company during the fiscal year have been settled. These matters and the disposition of the cases are discussed below. On March 13, 1998, a class action lawsuit was filed against the Company in the United States District Court for the Central District of California on behalf of all purchasers of Company Common Stock from April 30, 1997 through March 10, 1998. Over the following two months, eight additional similar cases were filed in United States District Courts: two in the Central District of California; five in the Northern District of 20 21 Illinois; and one in the Eastern District of Virginia. The complaints alleged violations of the Securities Exchange Act of 1934, including allegations that the Company was experiencing "operations difficulties" and failed to disclose the alleged difficulties. The complaints also alleged that Company insiders realized profits by trading their shares of Company stock while in possession of material adverse information. All of the complaints were filed on behalf of classes of shareholders of Company Common Stock beginning as early as March 11, 1997 and ending as late as April 7, 1998. All of these shareholder lawsuits were consolidated and transferred to the United States District Court for the Eastern District of Virginia. The Company entered into a settlement agreement with the plaintiffs in February 1999, whereby the Company settled these allegations and agreed to compensation to members of the plaintiffs' class. The terms of the settlement call for the payment of $3.0 million in cash ($2.35 million is covered by the Company's insurance) and the issuance of 550,000 shares of CLC Common Stock, subject to certain price protection features, to guarantee a total settlement of $7.5 million. The price protection features include a provision that nullifies the settlement agreement at the option of the plaintiffs if the market price of the Company's Common Stock is less than or equal to $2.00 per share, during the time period specified in the agreement. On March 10, 1998, the Attorney General of Illinois filed a complaint against the Company in Circuit Court in Cook County, Illinois, asserting that the Company had violated the Illinois Private Business and Vocational Schools Act and the Illinois Consumer Fraud and Deceptive Business Practices Act (the "Acts") at its Schaumburg, Illinois Learning Center. The complaint alleged that the Company, at the Schaumburg Learning Center, failed to provide certain educational services and resources and misrepresented certain information respecting services, resources, occupational opportunities and student outcomes. On June 8, 1998, the Company and the Attorney General reached an agreement settling the litigation in the form of a final judgement and Consent Decree approved by the court ("Consent Decree"). The settlement includes payment of a voluntary contribution of $90,000 to the Attorney General's consumer education fund, the provision by the Company on an annual basis for a four year period of $95,000 worth of computer hardware and software to schools, programs, community sites and other non-profit and public institutions in the Chicago area designated by the Attorney General, and $10,000 worth of training in computer skills annually at the Company's Schaumburg or Chicago Learning Centers for teachers and other community based personnel to enable them to make effective use of the computer equipment. The Company also agreed to take certain measures to assure compliance with state regulatory requirements, and to establish an ombudsman program and binding arbitration for the resolution of certain student complaints. The Company has implemented the measures called for under the first year of the Consent Decree. Failure of the Company to continue to comply with the terms of the Consent Decree could result in adverse action against the Learning Centers located in Illinois, including suspension or termination of the Company's licenses to operate within Illinois and other sanctions. The loss of operating authority in Illinois could have a material adverse effect on the Company. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of the stockholders of the Company during the fourth quarter of fiscal 1999. 21 22 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS PRICE RANGE OF COMMON STOCK The Company's Common Stock is traded on the NASDAQ National Market under the symbol "CLCX." The following table sets forth the high and low sales prices for the Common Stock reported by NASDAQ for the periods indicated.
HIGH LOW ------ ------ FISCAL YEAR 1998*: First Quarter............................................... $14.38 $ 9.25 Second Quarter.............................................. 24.63 13.50 Third Quarter............................................... 27.50 19.13 Fourth Quarter.............................................. 36.50 20.56 FISCAL YEAR 1999: First Quarter............................................... $39.38 $ 8.63 Second Quarter.............................................. 30.63 11.13 Third Quarter............................................... 28.25 4.50 Fourth Quarter.............................................. 12.75 4.69
- --------------- * Restated for stock splits. On December 8, 1997 the Company's Board of Directors declared a two for one stock split, in the form of a stock dividend of one share of common stock for every share owned. Distribution was made on January 8, 1998 to stockholders of record as of the close of business on December 29, 1997. On March 24, 1997 the Company's Board of Directors declared a three for two stock split, in the form of a stock dividend of one share of common stock for every two shares owned. Distribution was made on April 14, 1997 to stockholders of record as of the close of business on April 8, 1997. As a result of the foregoing, the prices set forth in the above table and all other share and per share amounts referenced in this document have been restated for all prior periods. These over-the-counter market quotations may reflect inter-dealer prices without retail mark-up, mark-down or commission and may not necessarily represent actual transactions. At April 19, 1999, there were approximately 95 holders of record of the Company's Common Stock. The Company estimates that, including shareholders whose shares are held in nominee accounts by brokers, there are approximately 9,250 total holders of its Common Stock. The Company has never paid cash dividends on its Common Stock and does not anticipate paying cash dividends in the foreseeable future. It is the current policy of the Company's Board of Directors to retain earnings to finance the operations and expansion of the Company's business. 22 23 ITEM 6. SELECTED FINANCIAL DATA The following selected financial and operating data is qualified by reference to, and should be read in conjunction with, the consolidated financial statements and notes thereto and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included in Items 7 and 8 of this Form 10-K. The Consolidated Statements of Operations for each of the three years in the period ended January 31, 1999 and the Consolidated Balance Sheets as of January 31, 1999 and 1998, and the independent accountant's report thereon are included in Item 8 of this Form 10-K. The share and per share amounts in the table below have been restated to reflect the stock splits (Refer to Item 8 "Notes to Financial Statements and Supplementary Data" -- Note 3.)
YEAR ENDED JANUARY 31, --------------------------------------------------- 1999 1998 1997 1996 1995 -------- ------- ------- ------- ------- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) CONSOLIDATED STATEMENT OF OPERATIONS DATA: Revenues..................................... $144,351 $96,989 $64,025 $46,081 $39,297 -------- ------- ------- ------- ------- Costs and expenses: Costs of instruction and services.......... 93,989 54,041 35,475 26,076 22,227 Selling and promotional.................... 21,729 15,289 11,407 7,884 6,371 General and administrative................. 15,614 7,657 5,584 4,052 3,727 Provision for doubtful accounts............ 8,388 4,794 3,084 2,613 3,313 Amortization of intangible assets.......... 558 362 362 363 393 -------- ------- ------- ------- ------- 140,278 82,143 55,912 40,988 36,031 -------- ------- ------- ------- ------- Income from operations....................... 4,073 14,846 8,113 5,093 3,266 Litigation settlement expense................ (5,599) -- -- -- -- Interest income, net......................... 513 1,391 721 (96) (948) Gain on sale of investment securities........ 279 -- 332 -- -- -------- ------- ------- ------- ------- (Loss) income before income taxes and cumulative effect of accounting change..... (734) 16,237 9,166 4,997 2,318 Provision for (benefit from) income taxes.... (393) 6,657 3,565 2,078 1,131 -------- ------- ------- ------- ------- (Loss) income from operations before cumulative effect of accounting change..... (341) 9,580 5,601 2,919 1,187 Cumulative effect of accounting change....... (245) -- -- -- -- -------- ------- ------- ------- ------- Net (loss) income............................ $ (586) $ 9,580 $ 5,601 $ 2,919 $ 1,187 ======== ======= ======= ======= ======= Earnings (loss) per share Basic...................................... $ (0.03) $ 0.60 $ 0.41 (a) (a) ======== ======= ======= ======= ======= Diluted.................................... $ (0.03) $ 0.56 $ 0.37 $ 0.25 $ 0.14 ======== ======= ======= ======= ======= Weighted average number of shares outstanding -- Basic...................................... 17,318 15,893 13,719 (a) (a) ======== ======= ======= ======= ======= Diluted.................................... 17,318 17,189 15,018 11,393 8,211 ======== ======= ======= ======= =======
JANUARY 31, ------------------------------------------------- 1999 1998 1997 1996 1995 -------- -------- ------- ------- ------- CONSOLIDATED BALANCE SHEET DATA: Cash and cash equivalents.................... $ 7,691 $ 24,377 $26,950 $ 8,260 $ 4,753 Total current assets......................... 77,972 78,210 58,805 29,635 29,968 Total assets................................. 130,736 115,271 75,727 39,808 39,922 Total current liabilities.................... 67,551 59,349 33,811 21,093 18,460 Long term liabilities........................ 8,649 5,167 2,124 1,559 12,342 Total stockholders' equity................... 54,536 50,755 39,792 17,156 9,120
- --------------- (a) Basic earnings per share is not presented for years prior to fiscal 1997 as such amounts do not present a meaningful comparison to fiscal 1999, 1998, and 1997 amounts due to the differing capital structures as a result of the 1997 and 1996 public offerings (Refer to Item 8 "Financial Statements and Supplementary Data' -- Note 4). 23 24 ITEM 7.MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS BACKGROUND AND OVERVIEW The Company provided information technology education and training to over 14,300 students in fiscal year 1999. The Company designs programs and courses to meet current information technology education needs, offering instruction in rapidly growing technologies such as client/server, database, networking and object-oriented programming through its twenty-seven locations throughout the United States and Canada. On February 17, 1998 the company acquired Markerdowne Corporation d/b/a Computer Learning Centers Paramus ("CLC Paramus"), a privately-held provider of information technology education and training based in Paramus, New Jersey. CLC Paramus had approximately 800 students enrolled at the date of acquisition. On February 20, 1998 the Company acquired Delta College ("CLC Delta"), a Montreal, Quebec-based, privately-held provider of information technology education and training. Delta College had approximately 800 students enrolled at the date of acquisition at two locations: Montreal and Laval. The business acquisitions were accounted for as a pooling of interests in accordance with Accounting Principles Board Opinion No. 16, "Business Combinations." Current and prior years' financial statements were not restated to include these acquisitions on the basis of immateriality to the Company. The Company's results of operations incorporate each acquired Learning Center's activity from its respective date of acquisition. During fiscal 1999, the Company derived approximately 96% of its revenues from Learning Centers course tuition, approximately 2% from the Advantec Institutes (discontinued during fiscal year 1999) course fees, with the remaining revenues derived from sales of books and fees charged directly to students. The Company enrolls students on a monthly basis and delivers its curricula over an 8- to 17-month period for full-time students and over a 16-to 34-month period for part-time students. The Company's revenues in any period are directly related to the number of enrolled students (or student population), the number of new enrollments and the student retention rate. The majority of the Company's students qualify for financial assistance under various government-supported student financial aid programs, especially the Title IV Programs, and the Company is highly dependent on the continued availability of government-supported student financial aid. The Company manages the collection risks associated with student accounts receivable for withdrawn and graduate students by utilizing an in house centralized credit and collection function staffed with personnel whose primary responsibility is the collection effort. The collection effort includes reviewing management reports detailing student accounts receivable balances, following up on student delinquencies via telephone and letters as well as employing other activities related to collection. The Company makes available to qualifying students alternative financing arrangements ("CLC financing") which help fund their education. Dependent upon the credit worthiness of the individual, CLC financing may be offered to assist students with meeting their financial obligations related to attending CLC. The Company requires students receiving CLC financing to make regular monthly payments. Depending on the level of financing extended to students, payment plans offered generally range from six months to three years. All amounts due to the Company in periods beyond one year are classified as long-term receivables. Additionally, Company personnel help students overcome financial obstacles to completing their educational programs by assisting students in finding part-time employment when their own resources, CLC financing and Title IV financial aid are not adequate to meet their financial needs. Costs of instruction and services consist primarily of costs related to the delivery and administration of the Company's programs, including faculty compensation, salaries for administrative personnel who provide services directly to students, the costs of educational materials sold, facility leases and related occupancy costs, equipment rental and depreciation and amortization of educational property and equipment. Selling and promotional costs consist primarily of advertising, admission representative salaries and benefits and other costs related to the selling and promotional functions. General and administrative costs consist primarily of 24 25 salaries for administrative personnel, occupancy costs, depreciation and amortization of property and equipment, legal expenses and other related costs for functions such as executive management, corporate accounting, human resources, regulatory compliance, product strategy and curricula development, new business development and other functions that do not provide direct services to the Company's students. Provision for doubtful accounts represents the Company's provision for doubtful student accounts receivable Amortization of intangibles consists primarily of amortization of intangible assets related to capitalized costs of original U.S. Department of Education certifications. This Annual Report on Form 10-K contains forward-looking statements. Additional written or oral forward-looking statements may be made by the Company from time to time in filings with the Securities and Exchange Commission or otherwise. The words "believe," "expect," "anticipate," and "project," and similar expressions identify forward-looking statements, which speak only as of the date the statement was made. Such forward looking statements are within the meaning of that term in Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Such statements may include, but not be limited to, projections of revenues, income or loss, expenses, capital expenditures, the effect of inflation, government regulation and plans relating to programs of the Company, as well as assumptions relating to the foregoing. The Company undertakes no obligation to publicly update or revise any forward looking statements, whether as a result of new information, future events, or otherwise. Forward looking statements are inherently subject to risks and uncertainties, some of which cannot be predicted or quantified. Future events and actual results could differ materially from those set forth in, contemplated by, or underlying the forward-looking statements. Statements in this Annual Report on Form 10-K, including the notes to the financial statements and "Management's Discussion and Analysis of Financial Condition and Results of Operations," describe factors, among others, that could contribute to, or cause such differences. Additional factors that could cause actual results to differ materially from those expressed in such forward-looking statements are set forth in "Business," "Financial Aid and Regulation" and "Certain Factors That May Affect Future Results" in this Annual Report on Form 10-K for the year ended January 31, 1999. RESULTS OF OPERATIONS The following table sets forth certain items from the Company's consolidated statements of operations as a percentage of revenues for the periods indicated.
FOR THE YEARS ENDED JANUARY 31, ------------------------ 1999 1998 1997 ----- ----- ----- Revenues.................................................... 100.0% 100.0% 100.0% ----- ----- ----- Costs and expenses: Costs of instruction and services........................... 65.1 55.7 55.4 Selling and promotional..................................... 15.1 15.8 17.8 General and administrative.................................. 10.8 7.9 8.7 Provision for doubtful accounts............................. 5.8 4.9 4.8 Amortization of intangible assets........................... 0.4 0.4 0.6 ----- ----- ----- 97.2 84.7 87.3 ----- ----- ----- Income from operations...................................... 2.8 15.3 12.7 Litigation settlement expense............................... (3.9) -- -- Interest income, net........................................ 0.4 1.4 1.1 Gain on sale of investment securities....................... 0.2 -- 0.5 ----- ----- ----- Income before income taxes and cumulative effect of accounting change......................................... (0.5)% 16.7% 14.3% ===== ===== =====
25 26 Fiscal 1999 Compared with Fiscal 1998 Revenues increased 49% to $144.4 million for fiscal 1999 from $97.0 million for fiscal 1998 primarily due to an increase in enrollments at the Company's new Learning Centers including the opening of four new Learning Centers in fiscal 1999. In addition to the opening of the four new Learning Centers, the Company acquired five Learning Centers since December 1997, two in Quebec, Canada and the others in Paramus, NJ and Somerville and Methuen, MA. The number of students attending Learning Center programs as of the end of the year increased 10% to 11,095 in fiscal 1999 from 10,112 in fiscal 1998, which was the result of student enrollment growth of 11%. In fiscal 1999, enrollments at the fourteen Learning Centers opened for more than two fiscal years ("same centers") declined 20% to 9,618 from 12,031 students in fiscal year 1998. Enrollments at Learning Centers opened or acquired during the last two fiscal years ("new centers") increased by 3,800 to 4,719 from 919 students in fiscal year 1998. Learning Centers acquired during the last two fiscal years accounted for 57% of enrollment growth at new centers. When evaluating the sources of growth, the Company views all Learning Centers opened during the last two fiscal years as "new" in order to account for the start up period inherent in new Learning Center openings. Accounts receivable, (both long and short-term), increased 21% as compared to the revenues increase of 49%. The larger percentage increase in revenue as compared to accounts receivable can be attributed to the following: When students enroll in CLC, accounts receivables are established for the balance of course tuition (however, only for year one of two-year programs) with a corresponding amount recorded as deferred revenue. While the accounts receivable balance may be paid at any time during the course, deferred revenue is recognized ratably as tuition revenue over the period of instruction, regardless of when accounts receivable are paid. Since accounts receivable increases immediately by the full tuition when students enroll, while tuition revenues are earned ratably over the period of instruction, there will not be a direct correlation between the percentage increases in tuition revenues (and correspondingly deferred revenues) and in accounts receivable balances. This "lag" effect of revenues to receivables, is further pronounced during the initial operations of a new Learning Center since tuition revenues will be minimal when compared to the corresponding accounts receivables. Additionally, Learning Centers in their second year of operations (those opened in fiscal 1998) contribute significantly to the lag effect due to the large levels of growth occurring in year two versus year one of operations. Conversely, in periods of declining enrollments of the larger and more established Learning Centers (as experienced in fiscal 1999), the relative percentage of accounts receivable growth will decline faster than the relative percentage of revenue growth The following summarizes the actual Learning Center openings and acquisitions for the last three fiscal years.
FISCAL FISCAL FISCAL SCHOOL OPENINGS/ ACQUISITIONS 1999 1998 1997 ----------------------------- ------ ------ ------ First Quarter........................................... 5 -- 1 Second Quarter.......................................... 1 2 -- Third Quarter........................................... -- 1 1 Fourth Quarter.......................................... 1 3 2 -- -- -- Total......................................... 7 6 4 == == ==
Costs of instruction and services increased 74% to $94.0 million in fiscal 1999 from $54.0 million in fiscal 1998 due primarily to the direct costs necessary to support the increase in student population. These direct costs consist primarily of compensation and related benefits, and depreciation. Instruction costs and services as a percentage of revenues increased significantly to 65.1% in fiscal 1999 from 55.7% in fiscal 1998. This increase is primarily attributable to the start up of four Learning Centers since January 1998, lower enrollments during the fiscal year 1999 at several of the Company's more established Learning Centers, the elimination of new enrollments at Advantec Institutes as retail operations of their programs were phased-out, and increased 26 27 expense profiles of acquisitions with respect to revenues generated at those Centers Due to the start up period inherent in Learning Centers open less than one year. The ratio of cost of instruction and services to revenues generated typically is very high as fixed costs typically exceed revenues during a Learning Center's first year of operations. Lower enrollments at some of the Company's more established Learning Centers resulted in a higher ratio of cost of instruction due to decreased revenues without a corresponding decrease in fixed costs. Selling and promotional expenses increased 42% to $21.7 million in fiscal 1999 from $15.3 million in fiscal 1998 due primarily to increased marketing and advertising necessary to support the growth in student enrollments and the increase in the number of Learning Center locations. Selling and promotional expenses as a percentage of revenues decreased to 15.1% in fiscal 1999 from 15.8% in fiscal 1998 primarily due to increased efficiencies associated with the Company's marketing. General and administrative expenses increased 104% to $15.6 million in fiscal 1999 from $7.7 million in fiscal 1998, primarily as a result of increasing the level of infrastructure needed to support the growth of the business. Also impacting the relative increase was increased legal fees associated with regulatory reviews coupled with the payment of student refunds and related costs of $2.2 million associated with the various regulatory matters. General and administrative expenses as a percentage of revenues increased to 10.8% in fiscal 1999 from 7.9% in fiscal 1998. Provision for doubtful accounts increased 75% to $8.4 million in fiscal 1999 from $4.8 million in fiscal 1998, primarily due to the increase in revenues of 49% and related accounts receivable balances. Provision for doubtful accounts as a percentage of revenues increased to 5.8% in fiscal 1999 from 4.9% in fiscal 1998. The Company attributes this increase to a shift in student enrollments to higher priced tuition programs, which typically have higher amounts of self-pay accounts receivable after application of available financial aid. The self-pay receivables have historically had lower collection rates than loans from traditional third-party lenders. The Company provided $5.1 million for its obligations related to a shareholder litigation settlement agreed to in February 1999. In addition to the settlement obligation, the Company incurred $0.5 million of legal defense costs during fiscal year 1999 in excess of reimbursements from its insurance carrier. The Company realized net interest income of $0.5 million for fiscal 1999, compared to net interest income of $1.4 million for fiscal 1998, primarily as a result of the reduction of cash balances. The interest income in fiscal year 1998 was generated by larger average invested cash balances from the 1997 public offering, completed in October 1996. The Company's effective income tax rate increased to 53.5% in fiscal 1999 from 41.0% in fiscal 1998. This is a result of relative higher tax rates applied to losses sustained in the Company's U.S. operations principally offset by income from operations of the Company's Canadian subsidiary. The statutory rates in Quebec, Canada, are lower than those of the Company's U.S. operations on a weighted average basis. Fiscal 1998 Compared with Fiscal 1997 Revenues increased 52% to $97.0 million for fiscal 1998 from $64.0 million for fiscal 1997 primarily due to an increase in enrollments at the Company's existing Learning Centers, the opening of four new Learning Centers in fiscal 1998 and the growing popularity of the Company's longer programs including associated degree programs. In addition to the opening of the four new Learning Centers, the Company acquired BEC on December 23, 1997, which added two Learning Centers, one in Somerville, MA and the other in Methuen, MA. The number of students attending Learning Center programs as of the end of the year increased 56% to 10,112 in fiscal 1998 from 6,485 in fiscal 1997, which was the result of student enrollment growth of 43%. In fiscal 1998, the Company's new centers collectively contributed 79% of the total enrollment growth and 81% of the total student population growth. BEC accounted for approximately 18% of the population growth, however, did not significantly impact the percentage growth in enrollments (3%) due to the acquisition occurring in late December 1997. 27 28 Accounts receivable, (both long and short-term), increased 76% as compared to revenues increase of 52%. The larger percentage increase in accounts receivable as compared to revenues can be attributed to the lag effect previously described. Costs of instruction and services increased 52% to $54.0 million in fiscal 1998 from $35.5 million in fiscal 1997 due primarily to the direct costs necessary to support the increase in student population. These direct costs consist primarily of compensation and related benefits, and depreciation. Instruction costs and services as a percentage of revenues increased slightly to 55.7% in fiscal 1998 from 55.4% in fiscal 1997. Selling and promotional expenses increased 34% to $15.3 million in fiscal 1998 from $11.4 million in fiscal 1997 due primarily to increased marketing and advertising necessary to support the growth in student enrollments. Selling and promotional expenses as a percentage of revenues decreased to 15.8% in fiscal 1998 from 17.8% in fiscal 1997 primarily due to increased efficiencies associated with the Company's marketing, particularly those realized by the opening of new Learning Centers within established Learning Center markets. General and administrative expenses increased 37% to $7.7 million in fiscal 1998 from $5.6 million in fiscal 1997, primarily as a result of increasing the level of infrastructure needed to support the growth of the business, which includes credit and treasury administration, information systems, and other related personnel costs. General and administrative expenses as a percentage of revenues decreased to 7.9% in fiscal 1998 from 8.7% in fiscal 1997. Provision for doubtful accounts increased 55% to $4.8 million in fiscal 1998 from $3.1 million in fiscal 1997, primarily due to the increase in revenues of 52% and related accounts receivable balances. Provision for doubtful accounts as a percentage of revenues increased slightly to 4.9% in fiscal 1998 from 4.8% in fiscal 1997. The Company realized net interest income of $1.4 million for fiscal 1998, compared to net interest income of $721,000 for fiscal 1997, primarily as a result of the interest generated by larger average invested cash balances. The income tax rate increased to 41.0% in fiscal 1998 from 38.9% in fiscal 1997 primarily due to the fiscal 1997 utilization of a capital loss carry forward offsetting the tax effect of the sale of investment securities. CYCLICAL PATTERN OF ENROLLMENTS New enrollments in Learning Center programs tend to be higher in the third and fourth fiscal quarters than in the first and second fiscal quarters because the third and fourth quarters include the times of year traditionally associated with the beginning of school semesters. The Company believes it is less affected by this seasonal pattern than many other educational institutions because it permits students to enroll in and begin Learning Center programs in any month of the year. In addition, the impact of seasonality in new enrollments on results of operations has been moderated to some extent by growth in the number of students attending Learning Center programs, the varying lengths of such programs, and new Learning Centers opened. LIQUIDITY AND CAPITAL RESOURCES During the last three fiscal years, the Company has financed its operating and capital expenditure requirements principally through cash provided by operating activities and cash on hand. Cash (used in) provided by operating activities for fiscal 1999, 1998 and 1997 was $(2.3) million, $16.2 million, and $10.8 million, respectively. The Company's principal sources of funds at January 31, 1999 were cash and cash equivalents of approximately $7.7 million and net current accounts receivable of $56.7 million. Additionally, the Company has a credit agreement with a bank that provides for a $20 million secured revolving credit facility, expiring in October 2000. The line of credit consists of a revolving credit note, inclusive of a $7.0 million convertible term loan. The interest on the facility is based either on the bank's U.S. prime rate or the London Interbank Offer Rate ("LIBOR") which were 7.75% and 4.83%, respectively at January 31, 1999. Interest rates are equal to 28 29 (i) the U.S. prime rate or LIBOR plus 1.25% for revolving credit loans and (ii) the U.S. prime rate plus 0.25% or LIBOR plus 1.5% for the convertible term loans. The Company borrowed $3.0 million on its line of credit for working capital purposes in January 1999. The Company borrowed an additional $1.4 million on its line of credit in February 1999. In addition, the Company has pledged portions of its line of credit to the Department of Education, to its insurance carrier and to certain of its landlords on behalf of certain Learning Centers. The Company has pledged a total of $6.0 million of its line of credit for these obligations to the Department, its insurance carrier and certain of its landlords. As of January 31, 1999, the Company had $11.0 million available under the line of credit agreement. Historically, the Company's investment activity has primarily consisted of capital asset purchases. Capital expenditures, including expenditures for furniture, computer software and hardware and tenant improvements related to new Learning Centers, were $18.4 million, $19.6 million, and $7.5 million, respectively, for fiscal 1999, 1998, and 1997, respectively. To date, cash generated from operations and cash on hand have been sufficient to fund capital expenditures. The Company leases substantially all of its facilities under operating lease agreements. Existing future commitments will be paid from cash provided by operating activities, cash on hand, and if necessary, the existing credit facility. The Company continues to expand current facilities, upgrade equipment and open new Learning Centers. The Company expects fiscal 2000 capital expenditures will be approximately $6 million. Estimated capital expenditures for a typical new Learning Center average approximately $1.5 million. The Company anticipates that its planned capital expenditures can be funded through cash generated from operations and its line of credit. A majority of the Company's revenues are derived from tuitions funded by the Title IV Programs. Disbursement of Title IV Program funds is dictated by federal regulations. For students enrolled in programs of one academic year or less in length, disbursements generally are made in two equal increments, one in the first 30 days following the student's enrollment in a program and the second when the student reaches the midpoint of the program. For students enrolled in programs greater than one academic year in length, disbursements are also made at the beginning and midpoint of the subsequent academic year. Although the timing of loan disbursements to the Company is subject to existing regulatory requirements, the Company typically receives student loan funds upon their disbursement by the lender. During fiscal 1999, the Company collected approximately $113.5 million, of accounts receivable. The Company believes its available cash on hand and cash provided by operating activities and existing lines of credit under the credit facility will be sufficient to meet the Company's cash requirements for at least the next 12 months. Thereafter, the Company will continue to evaluate all sources of capital available to it, including bank financing and additional equity or debt offerings, to satisfy ongoing working capital and capital expenditure requirements. HEIGHTENED CASH MONITORING Refer to Item 1 -- "Business" -- "Financial Aid and Regulation." IMPACT OF INFLATION Inflation has not had a significant impact on the Company's historical operations. YEAR 2000 COMPLIANCE The Year 2000 computer issue (commonly referred to as "Y2K") exists because many computer systems and software applications ("IT Systems") as well as non-IT Systems containing embedded technology ("Non-IT Systems") currently use two-digit date fields to designate a year. When the century date change occurs, date-sensitive systems will recognize the year 2000 as 1900, or not at all. This inability to recognize or properly treat the year 2000 may cause systems to process critical information incorrectly. 29 30 State of Readiness The Company has completed its initial assessment of potential exposure of its own IT-Systems. The Company has identified certain software for which it has engaged third-party consultants to complete remediation as well as routine upgrades to the system, which were completed in April 1999. In addition, an active project is underway to replace the Company's payroll and human resources systems to be Y2K ready as well as provide significant improvements over the current systems. The payroll and human resource IT-System conversion is scheduled to be completed by May 1999. Most of the Company's computer hardware was acquired during the last few years and these newer systems do not possess a Y2K problem. The Company has computer hardware at certain Learning Centers that is not Y2K compliant, and it plans to replace or repair these systems prior to December 1999. Most of this noncompliant computer hardware equipment is scheduled for replacement in the ordinary course of business and not part of a Y2K remediation effort The Company is in the process of formulating a plan relating to testing its IT-Systems, however the Company has no plans to conduct formal testing on Learning Center facilities readiness. Although the Company does not anticipate it will be significantly affected by Y2K problems in its own IT-Systems, it may be adversely affected by Y2K problems of its vendors, banking and governmental relationships, as well as with the Company's leased facilities. The Company has completed the assessment phase of evaluating the readiness of its significant suppliers, business partners, banks, and government agencies to determine the extent to which the Company may be vulnerable in the event that those parties fail to properly remediate their own Y2K issues. The Company's operations and liquidity largely depend upon the federal student funding provided by Title IV Programs for its students. Processing of applications for this funding is handled by the U.S. Department of Education's ("Department of Education" or "Department") computer systems. The U.S. General Accounting Office reported in September 1998 that the Department of Education's delay in addressing the Y2K problems in its IT Systems and the limited progress in making contingency plans, should its IT systems fail, could result in serious disruptions in the administration of, and disbursement of funds under Title IV programs. On April 1, 1999, the Department of Education reported that the Department's data systems are Y2K compliant, although the Department has not tested the entire Title IV Programs delivery system which could reveal problems that did not show up in tests of the individual systems. Any prolonged interruption would have a material adverse impact on the education industry and, accordingly, upon the Company's business, results of operations, liquidity and financial condition. Costs to address the Company's Year 2000 issues The Company estimates that it has expended approximately $175,000 in direct costs through January 31, 1999 to identify and remediate the Company's Y2K issues. The Company estimates that it will expend an additional $125,000 during fiscal year 2000 These amounts do not include: - the salaries of the Company's employees involved in the remediation process; - the cost of the enhancement and replacements to the Company's IT-Systems, occurring in the normal course of operations; and - the cost of replacing or acquiring any Non IT-Systems in the normal course of operations. There can be no assurance that the cost estimates associated with the Company's Y2K issues will prove to be accurate or that those actual costs will not have a material adverse effect on the Company's results of operations and financial condition. Risks Associated with Y2K Issues Remediation of the Company's Y2K problems may increasingly cause the Company to divert management and employees time and attention. The Company is unable to estimate these potential internal indirect costs expended on Y2K efforts; however, it is not expected to have a material adverse effect on the Company's financial condition, results of operations or cash flows. The Company does not have a plan to utilize any 30 31 independent verification or validation process to assure the reliability of the Company's risk or cost estimates associated with Y2K efforts. The Company has contemplated several possible worst case scenarios that could arise from Y2K problems. At this time, there is insufficient information to assess the likelihood of any of these scenarios. However, the most reasonably likely worst case scenario for the Y2K issue would be that the third parties with whom it has relationships would cease or not successfully complete their Y2K remediation efforts. If this were to occur, the Company would encounter disruptions to its business that could have a severe impact on its results of operations, such as: - - the Company could experience significant delays in receipt of federal, state or third-party student financial aid in payment of students' education costs of attending the Company's Learning Centers due to IT-System failures at the Department of Education, any of the Company's lending institutions or its electronic payment processing agent. Contingency Plan The Company intends to develop a contingency plan during the first half of fiscal 2000 to prepare for the possibility that it may experience Y2K problems in its own IT-Systems or Non IT-Systems. If Y2K problems occur with Non IT-Systems, the Company expects to be able to isolate such systems so that they do not affect other systems, and adjust the clocks on such Non IT-Systems that are not date sensitive. The Company does not intend to create a formal contingency plan for IT-System and Non IT-System that are not controlled by the Company, including third party systems of the Department of Education, the Company's accrediting agency, third-party student loan institutions, or the financial institution on which the Company relies. The Company believes that with the exception of the Department of Education, there are alternative service providers with which the Company can contract in order to recover from any temporary service interruptions due to Y2K problems. CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS The following factors, among others, could cause actual results to differ materially from those contained in forward looking statements made in this Annual Report on Form 10-K and presented elsewhere by management from time to time. LITIGATION The Company has been named as defendant in numerous lawsuits filed by former students, employees, and its stockholders. The Company intends to defend itself vigorously in these lawsuits; however, there can be no assurance that the Company will be successful in defending itself in any of these proceedings. Even if the Company prevails on the merits in such litigation, the Company expects to incur significant legal and other defense costs as a result of such proceedings. These proceedings could involve substantial diversion of the time of some members of management, and an adverse determination in, or settlement of, such litigation could involve the payment of significant amounts, or could include terms in addition to such payments, which could have a severe impact on the Company's business, financial condition and results of operations. Refer to Item 3 -- "Legal Proceedings" contained herein. There can be no assurance that additional legal proceedings will not be filed or that adverse actions will not be initiated against the Company, either by federal or state regulators or other parties. Any such legal proceedings or adverse action could have a severe impact on the Company's business, financial condition and results of operations. POTENTIAL ADVERSE EFFECTS OF REGULATION The Company is dependent on the authorization of the applicable agency or agencies of each state within which a Learning Center is located to allow it to operate and to grant degrees or diplomas to students. State authorization is also required in order for an institution to become and remain eligible to participate in the 31 32 Title IV Programs. The Company is subject to extensive and varying regulation in each of the states in which the Learning Centers currently operate. The loss of state authorization by an existing Learning Center or the failure of a new or newly acquired Learning Center to obtain state authorization would render the affected Learning Center ineligible to participate in the Title IV Programs, could affect its accreditation and would have a material adverse effect on the Company. (Refer to Item 1 -- "Business -- Financial Aid and Regulation" contained herein.) As educational institutions that participate in various federal and state financial aid programs, the Company and the Learning Centers are subject to extensive governmental regulation. In particular, the Higher Education Act of 1965, as amended, and the regulations promulgated thereunder, subject the Company, the Learning Centers and all other higher education institutions eligible to participate in the various Title IV Programs to significant regulatory scrutiny. The termination or material limitation of the ability of the Company or any of the Learning Centers to participate in the Title IV Programs would have a material adverse effect on the Company. Because certain statutory and regulatory provisions impose significant requirements on the Company and the Learning Centers and because the agency administering these regulations, the Department of Education, has not fully developed administrative interpretations of certain of the statutory and regulatory provisions, it is not clear how the requirements imposed by statute and regulations or other applicable laws, rules or regulations affect the accreditation and authorization to operate in various states, permissible activities or costs of doing business of the Company or one or more of the Learning Centers. The failure to maintain or renew any required regulatory approvals, accreditations and or authorizations by the Company or any of the Learning Centers would have a material adverse effect on the Company. The violation of federal requirements governing participation in the Title IV Programs or of state or accrediting agency requirements governing the provision of educational services by the Company or any Learning Center could result in the restriction or loss by the Company or a Learning Center of its ability to participate in government funding programs or to offer education and training programs. For a description and current status of the Company's regulatory matters refer to Item 1 -- "Business -- U.S. Department of Education -- Regulation and Review," "Business -- State Authorization and Accreditation" and "Business -- Potential Adverse Effects of Regulatory Violations," contained herein. Any unfavorable outcomes or adverse actions resulting from these regulatory reviews would have a material adverse effect on the Company. CONTROL BY GENERAL ATLANTIC ENTITIES; POTENTIAL ADVERSE REGULATORY EFFECTS OF CHANGE OF CONTROL General Atlantic Corporation ("GAC"), General Atlantic Partners II, L.P. ("GAP") and GAP-CLC Partners, L.P. ("GAP-CLC") (collectively, the "General Atlantic Entities") beneficially own approximately 17.0% of the outstanding shares of Common Stock. Consequently, the General Atlantic Entities, and GAC in particular, will continue to have significant influence over the policies and affairs of the Company and may be in a position to determine the outcome of corporate actions requiring stockholder approval, including the election of directors, the adoption of amendments to the Company's Certificate of Incorporation and the approval of mergers and sales of the Company's assets. Because of the control position of the General Atlantic Entities, any disposition of CLC's common stock by the General Atlantic Entities or issuance of stock by the Company that results in a loss of control by the General Atlantic Entities may give rise to a change of ownership resulting in a change of control of the Company under applicable federal and state regulations and accrediting agency requirements, resulting in potential interruption of the eligibility of Learning Centers to participate in the Title IV Programs. Upon a change of ownership resulting in a change of control of the Company, as defined in the HEA and the Department of Education's regulations, each Learning Center would lose its eligibility to participate in the Title IV Programs for an indeterminate period of time while it applies to regain eligibility, with the likely loss of a portion, or all, of its Title IV funding during the reapproval period. Refer to Item 1 -- "Business -- Financial Aid and Regulation -- Change of Control," contained herein. 32 33 COMPETITION The postsecondary adult education and training market is highly fragmented, with no single institution or company holding a dominant market share. The Company competes for students with vocational and technical training schools, degree-granting colleges and universities, continuing education programs and commercial training programs. Certain public and private colleges may offer programs similar to those of the Learning Centers at a lower tuition cost due in part to government subsidies, foundation grants, tax-deductible contributions or other financial resources not available to proprietary institutions. DEPENDENCE ON NEW PROGRAMS AND LOCATIONS; RISKS ASSOCIATED WITH CHANGES IN TECHNOLOGY AND GROWTH The market for the Company's programs and services is characterized by rapidly changing requirements and characteristics. The Company's ability to develop and offer new programs and services and to open new locations is subject to extensive state and federal regulation and accrediting agency requirements. If the Company is unable, for financial, regulatory or other reasons, to develop and offer new programs and services in a timely manner in response to changes in the industry, or if programs and services offered by the Company fail to gain or maintain widespread commercial acceptance, the Company's business may be materially and adversely affected. The Company offers training programs and services for rapidly changing information technology. The introduction of information products embodying new technologies and the emergence of new information system standards or services may adversely affect the Company's ability to market its programs and services. This may require the Company to make substantial expenditures to develop new programs and services and to acquire new faculty, equipment and facilities. If the Company is unable, for financial, regulatory or other reasons, to make those expenditures or acquisitions, the Company's business may be materially and adversely affected. The Company's ability to meet its future operating and financial goals will depend upon the Company's ability to successfully implement its growth strategy, which will include the introduction of new locations as well as the potential acquisition of assets and programs complementary to the Company's operations. The Company's success in this area will depend on its ability to integrate successfully such new locations, assets and businesses There can be no assurance that the Company will be able to implement or manage expansion effectively. DEPENDENCE UPON KEY EMPLOYEES The Company's success depends to a significant extent upon the continued service of its executive officers and other key personnel. None of the Company's executive officers or key employees, other than the Chief Executive Officer, Chief Financial Officer, President and Vice President of Operations, are subject to an employment or non-competition agreement. The loss of the services of any of its executive officers or other key employees could have a material adverse effect on the Company. The Company's future success will depend in part upon its continuing ability to attract and retain highly qualified personnel. There can be no assurance that the Company will be successful in attracting and retaining such personnel. GENERAL Because of these and other factors, past financial performance should not be considered an indicator of future performance. Investors should not use historical trends to anticipate future results and should be aware that the trading price of the Company's common stock may be subject to wide fluctuations in response to quarter-to-quarter variations in operating results, general conditions in the education and training industry, changes in earnings estimates and recommendations by analysts or other events. 33 34 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company has minimal exposure to market risks as it relates to effects of changes in interest rates and foreign currency exchange rates. The Company does not hold or issue derivative financial instruments. Interest Rate Risk The Company principally invests its available cash balances in U.S. government securities with maturity dates less than 90 days as well as overnight repurchase agreements with its primary banking institution. These investments are classified as cash and cash equivalents in the Company's financial statements. The fair value of these instruments would not be significantly impacted by either a 100 basis point increase or decrease in interest rates due primarily to the short-term nature of the investments. The Company's credit facility is directly impacted by changing interest rates in either the Commercial Prime Rate of its lender or by a change in the London Inter-Bank Offered Rate ("Key Borrowing Rates"). Assuming the Company maintained a $3 million outstanding loan balance, and an instantaneous increase or decrease of one percentage point in its Key Borrowing Rates, the Company's after-tax earnings would change by $18,000 over a twelve month period. The Company believes that any material changes to interest rates on sources of loans for the Company's students may have a material effect on enrollments and the Company's financial condition and results of operation; however, such change would be deemed extraordinary and is not expected to occur in the foreseeable future. Foreign Currency Exchange Risk The Company began transacting business in Quebec, Canada upon acquisition of its subsidiary, CLC Delta, in February 1998. The Company does not currently hedge its exposure to the effects of changes in the exchange rate of the Canadian to U.S. dollar. The Company experienced an unrealized loss due to foreign currency translation of approximately $48,000 in fiscal year 1999 recorded as other comprehensive loss in the consolidated statement of stockholders' equity. The Company had revenues of approximately $7.5 million from its Canadian operations during fiscal year 1999. Assuming the same level of activity for fiscal year 2000, and an instantaneous increase or decrease of ten percent in the Canadian exchange rate, the Company's comprehensive income could change by approximately $86,000 during fiscal year 2000. 34 35 ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA COMPUTER LEARNING CENTERS, INC. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE ---- Report of Independent Accountants........................... F-2 Consolidated Statement of Operations for the Year Ended January 31, 1999; Statements of Operations for the Years Ended January 31, 1998 and 1997........................... F-3 Consolidated Balance Sheet at January 31, 1999; Balance Sheet at January 31, 1998................................. F-4 Consolidated Statement of Stockholders' Equity at January 31, 1999; Statements of Stockholders' Equity at January 31, 1998 and 1997......................................... F-5 Consolidated Statement of Cash Flows for the Year Ended January 31, 1999; Statements of Cash Flows for the Year Ended January 31, 1998 and 1997........................... F-6 Notes to Consolidated Financial Statements.................. F-7 Consolidated Financial Statement Schedules for the Year Ended January 31, 1999; Financial Statement Schedules for the Years Ended January 31, 1998 and 1997 Schedule II -- Valuation and Qualifying Accounts............ I-7
All other schedules are omitted because they are not applicable or the required information is shown in the financial statements or notes thereto. F-1 36 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Stockholders of Computer Learning Centers, Inc. In our opinion, the financial statements listed in the accompanying index present fairly, in all material respects, the consolidated financial position of Computer Learning Centers, Inc. and its subsidiaries at January 31, 1999 and 1998, and the consolidated results of its operations and its cash flows for each of the three years in the period ended January 31, 1999, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. /s/ PRICEWATERHOUSECOOPERS LLP New York, New York March 17, 1999, except as to Note 16, which is as of April 29, 1999. F-2 37 COMPUTER LEARNING CENTERS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
FOR THE YEARS ENDED JANUARY 31, ------------------------------- 1999 1998 1997 --------- -------- -------- Revenues.................................................... $144,351 $96,989 $64,025 -------- ------- ------- Costs and expenses: Costs of instruction and services......................... 93,989 54,041 35,475 Selling and promotional................................... 21,729 15,289 11,407 General and administrative................................ 15,614 7,657 5,584 Provision for doubtful accounts........................... 8,388 4,794 3,084 Amortization of intangible assets......................... 558 362 362 -------- ------- ------- 140,278 82,143 55,912 -------- ------- ------- Income from operations...................................... 4,073 14,846 8,113 Litigation settlement expense............................... (5,599) -- -- Interest income, net........................................ 513 1,391 721 Gain on sale of investment securities....................... 279 -- 332 -------- ------- ------- Income before income taxes and cumulative effect of accounting change......................................... (734) 16,237 9,166 Provision for (benefit from) income taxes................... (393) 6,657 3,565 -------- ------- ------- Net (loss) income before cumulative effect of accounting change.................................................... (341) 9,580 5,601 Cumulative effect of accounting change (Note 6)............. (245) -- -- -------- ------- ------- Net (loss) income........................................... $ (586) $ 9,580 $ 5,601 ======== ======= ======= Earnings per share (Notes 3 and 5): Basic -- Net (loss) income before cumulative effect of accounting change.................................... $ (0.02) $ 0.60 $ 0.41 Cumulative effect of accounting change................. (0.01) -- -- -------- ------- ------- Net (loss) income...................................... $ (0.03) $ 0.60 $ 0.41 ======== ======= ======= Diluted -- Net (loss) income before cumulative effect of accounting change.................................... $ (0.02) $ 0.56 $ 0.37 Cumulative effect of accounting change................. (0.01) -- -- -------- ------- ------- Net (loss) income...................................... $ (0.03) $ 0.56 $ 0.37 ======== ======= =======
The accompanying notes are an integral part of these consolidated financial statements. F-3 38 COMPUTER LEARNING CENTERS, INC. CONSOLIDATED BALANCE SHEETS (DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) ASSETS
JANUARY 31, ------------------- 1999 1998 -------- -------- Current assets: Cash and cash equivalents................................. $ 7,691 $ 24,377 Accounts receivable, net.................................. 56,697 48,114 Prepaid expenses and other current assets................. 8,913 4,137 Deferred tax asset........................................ 4,671 1,582 -------- -------- Total current assets.............................. 77,972 78,210 Fixed assets, net........................................... 37,604 25,199 Long-term accounts receivable, net.......................... 10,660 7,330 Other long-term assets...................................... 4,500 4,532 -------- -------- Total assets...................................... $130,736 $115,271 ======== ======== LIABILITIES AND STOCKHOLDER'S EQUITY Current liabilities: Trade accounts payable.................................... $ 6,503 $ 1,574 Accrued employee expenses................................. 1,775 3,025 Accrued other expenses.................................... 8,341 6,519 Deferred revenues......................................... 50,932 48,231 -------- -------- Total current liabilities......................... 67,551 59,349 Long-term deferred revenues................................. 3,073 3,713 Long-term debt.............................................. 3,000 -- Other long-term liabilities................................. 2,576 1,454 -------- -------- Total liabilities................................. 76,200 64,516 -------- -------- Stockholders' equity: Preferred stock $.01 par value, 1,000,000 authorized shares, no shares issued or outstanding................ -- -- Common stock, $.01 par value, 35,000,000 authorized shares, 17,493,251 shares issued and outstanding -- 1999; 16,239,236 issued and outstanding shares -- 1998 (Note 3)................................ 175 162 Additional paid-in capital................................ 40,682 34,525 Accumulated other comprehensive (loss) income............. (48) 160 Retained earnings......................................... 13,727 15,908 -------- -------- Total stockholders' equity........................ 54,536 50,755 -------- -------- Commitments and contingencies (Note 13) Total liabilities and stockholders' equity........ $130,736 $115,271 ======== ========
The accompanying notes are an integral part of these consolidated financial statements. F-4 39 COMPUTER LEARNING CENTERS, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DOLLAR AMOUNTS IN THOUSANDS)
ACCUMULATED OTHER PREFERRED COMMON SUBSCRIPTION PAID-IN COMPREHENSIVE RETAINED STOCK STOCK NOTES CAPITAL INCOME EARNINGS --------- ------ ------------ ------- ------------- -------- BALANCE AT FEBRUARY 1, 1996............................... -- 129 (666) 15,663 211 1,819 Public offering (Note 4).................................. -- 21 666 13,911 -- -- Exercise of stock options................................. -- 6 -- 865 -- -- Tax benefit of non-qualified option exercises............. -- -- -- 1,665 -- -- Unrealized loss, net of realized gain on investment securities.............................................. -- -- -- -- (99) -- 1997 net income........................................... -- -- -- -- -- 5,601 Comprehensive income for fiscal 1997.................... ------ ---- ----- ------- ----- ------- BALANCE AT JANUARY 31, 1997............................... $ -- $156 $ -- $32,104 $ 112 $ 7,420 ------ ---- ----- ------- ----- ------- Exercise of stock options................................. -- 4 -- 807 -- -- Tax benefit of non-qualified option exercises............. -- -- -- 1,365 -- -- BEC acquisition (Note 2).................................. -- 2 -- 128 -- (1,092) Employee stock purchase plan.............................. -- -- -- 121 -- -- Unrealized gain on investment securities.................. -- -- -- -- 48 -- 1998 net income........................................... -- -- -- -- -- 9,580 Comprehensive income for fiscal 1998.................... ------ ---- ----- ------- ----- ------- BALANCE AT JANUARY 31, 1998............................... $ -- $162 $ -- $34,525 $ 160 $15,908 ------ ---- ----- ------- ----- ------- Exercise of stock options................................. -- 2 -- 472 -- -- CLC Paramus acquisition (Note 2).......................... -- 5 -- 32 -- 350 CLC Delta acquisition (Note 2)............................ -- 5 -- 680 -- (1,945) Tax benefit of non-qualified option exercises............. -- -- -- 250 -- -- Litigation settlement (Note 13)........................... -- -- -- 4,500 -- -- Employee stock purchase plan.............................. -- 1 -- 223 -- -- 1999 net loss............................................. -- -- -- -- -- (586) Unrealized gain, net of realized gain on investment securities.............................................. -- -- -- -- (160) -- Foreign currency translation adjustments.................. -- -- -- -- (48) -- Comprehensive loss for fiscal 1999...................... ------ ---- ----- ------- ----- ------- BALANCE AT JANUARY 31, 1999............................... $ -- $175 $ -- $40,682 $ (48) $13,727 ------ ---- ----- ------- ----- ------- TOTAL COMPREHENSIVE STOCKHOLDERS' INCOME EQUITY (LOSS) ------------- ------------- BALANCE AT FEBRUARY 1, 1996............................... 17,156 Public offering (Note 4).................................. 14,598 Exercise of stock options................................. 871 Tax benefit of non-qualified option exercises............. 1,665 Unrealized loss, net of realized gain on investment securities.............................................. (99) $ (99) 1997 net income........................................... 5,601 5,601 ------ Comprehensive income for fiscal 1997.................... $5,502 ------- ------ BALANCE AT JANUARY 31, 1997............................... $39,792 ------- Exercise of stock options................................. 811 Tax benefit of non-qualified option exercises............. 1,365 BEC acquisition (Note 2).................................. (962) Employee stock purchase plan.............................. 121 Unrealized gain on investment securities.................. 48 48 1998 net income........................................... 9,580 9,580 ------ Comprehensive income for fiscal 1998.................... $9,628 ------ ------- BALANCE AT JANUARY 31, 1998............................... $50,755 ------- Exercise of stock options................................. 474 CLC Paramus acquisition (Note 2).......................... 387 CLC Delta acquisition (Note 2)............................ (1,260) Tax benefit of non-qualified option exercises............. 250 Litigation settlement (Note 13)........................... 4,500 Employee stock purchase plan.............................. 224 1999 net loss............................................. (586) (586) Unrealized gain, net of realized gain on investment securities.............................................. (160) (160) Foreign currency translation adjustments.................. (48) (48) ------ Comprehensive loss for fiscal 1999...................... $ (794) ------ ------- BALANCE AT JANUARY 31, 1999............................... $54,536 -------
The accompanying notes are an integral part of these consolidated financial statements. F-5 40 COMPUTER LEARNING CENTERS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (DOLLAR AMOUNTS IN THOUSANDS)
FOR THE YEARS ENDED JANUARY 31, --------------------------------- 1999 1998 1997 --------- --------- --------- Cash flows from operating activities: Net (loss) income........................................... $ (586) $ 9,580 $ 5,601 Adjustments to reconcile net income to cash from operating activities: Provision for doubtful accounts........................ 8,388 4,794 3,084 Depreciation........................................... 7,521 4,020 2,318 Litigation settlement expense.......................... 4,500 -- -- Amortization of intangible assets...................... 558 362 362 Deferred tax benefit................................... (3,126) (955) (150) Changes in net assets and liabilities: Accounts receivable.................................... (13,850) (22,405) (11,875) Prepaid expenses and other current assets.............. (4,607) (962) (1,285) Long-term accounts receivable.......................... (4,275) (4,888) (2,065) Other long-term assets................................. (230) (203) (213) Trade accounts payable................................. 4,140 (795) 821 Accrued employee expenses.............................. (1,343) 654 801 Accrued other expenses................................. 824 5,464 2,168 Deferred revenues...................................... (1,047) 18,617 10,455 Long-term deferred revenues............................ (640) 2,371 790 Other long-term liabilities............................ 1,455 581 (28) -------- -------- -------- Cash (used for) provided by operating activities...................................... (2,318) 16,235 10,784 -------- -------- -------- Cash flows from investing activities: Capital expenditures...................................... (18,367) (19,548) (7,455) Other..................................................... (113) (215) (108) Cash from acquired companies.............................. 932 324 -- -------- -------- -------- Cash used for investing activities................ (17,548) (19,439) (7,563) -------- -------- -------- Cash flows from financing activities: Proceeds from issuance of common stock.................... -- -- 11,530 Exercise of stock options................................. 474 811 3,273 Proceeds from sales of common stock through employee stock purchase plan.......................................... 224 121 -- Redemption of subscription note receivable................ -- -- 666 Borrowing from long-term debt............................. 3,000 -- -- Repayments of long-term debt.............................. (518) (301) -- -------- -------- -------- Cash provided by financing activities............. 3,180 631 15,469 -------- -------- -------- Net (decrease) increase in cash and cash equivalents........ (16,686) (2,573) 18,690 Cash and cash equivalents, beginning of year................ 24,377 26,950 8,260 -------- -------- -------- Cash and cash equivalents, end of year...................... $ 7,691 $ 24,377 $ 26,950 ======== ======== ========
The accompanying notes are an integral part of these consolidated financial statements. F-6 41 COMPUTER LEARNING CENTERS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JANUARY 31, 1999, 1998 AND 1997 (DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS, UNLESS OTHERWISE STATED) NOTE 1 -- NATURE OF THE BUSINESS Computer Learning Centers, Inc. (the "Company" or "CLC"), is a public company traded on the NASDAQ National Market. As of January 31, 1999, the Company had twenty-seven operating Learning Centers in the U.S. and Canada and was headquartered in Fairfax, Virginia. As used herein, the fiscal years ended January 31, 1999, 1998, and 1997 are referred to as "1999", "1998", and "1997", respectively. The Company is involved in litigation incident to its business -- (See note 13). Geographic Information Effective upon the acquisition of Delta College, Inc. (see Note 2) in February 1999, the Company adopted Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information" ("SFAS 131"). SFAS 131 establishes standards for reporting information about operating segments and related disclosures about geographic areas in annual financial statements. The Company operated exclusively in the U.S. prior to 1999. The following table illustrates financial information for the Company's U.S. and Canadian operations in 1999.
UNITED STATES CANADA CONSOLIDATED TOTALS ------------- ------ ------------------- Total revenues.................................. $136,870 $7,481 $144,351 Long-lived assets............................... 36,564 1,040 37,604
NOTE 2 -- ACQUISITIONS On December 23, 1997, the Company completed the acquisition of Boston Education Corp. ("BEC"), a privately held provider of information technology education and training. The acquisition, which qualified as a tax free organization, was accounted for as a pooling of interests in accordance with Accounting Principles Bulletin No. 16, "Business Combinations" ("APB No. 16") and was completed by issuing 200,148 shares of CLC common stock in exchange for substantially all of the rights, title and interest in the assets and substantially all of the liabilities of BEC. BEC had calendar 1997 revenues of $5.2 million and had approximately 650 students enrolled at the date of acquisition at its two campuses: a main campus located in Somerville, MA and a branch in Methuen, MA. In connection with this acquisition, the Company incurred $400 of pooling expenses related to certain legal and accounting fees, which are reflected in the 1998 results of operations. On February 17, 1998 the Company acquired Markerdowne Corporation or Computer Learning Centers Paramus ("CLC Paramus"), a privately-held provider of information technology education and training based in Paramus, New Jersey. The acquisition, which qualified as a tax free reorganization, was accounted for as a pooling of interests in accordance with APB No. 16. The acquisition was completed by issuing 510,287 shares of CLC Common Stock in exchange for substantially all of the rights, title and interest in the assets and substantially all of the liabilities of CLC Paramus. CLC Paramus had calendar 1997 annual revenues of $6.7 million and had approximately 800 students enrolled at the date of acquisition. In connection with this acquisition, the Company incurred $385 of pooling expenses related to certain legal and accounting fees, which are reflected in 1999 results of operations. On February 20, 1998 the Company acquired Delta College, Inc. ("Delta College"), a Montreal, Quebec-based, privately-held provider of information technology education and training. The acquisition, which was accounted for as a pooling of interests in accordance with APB No. 16 and was completed by means of an exchange of all outstanding shares of Delta College for 548,408 shares of CLC Common Stock. Delta College reported revenues of $6.7 million for its fiscal year ended June 30, 1997 and had enrollment of approximately 800 students at the date of acquisition at two locations: Montreal and Laval, Quebec. In F-7 42 COMPUTER LEARNING CENTERS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JANUARY 31, 1999, 1998 AND 1997 (CONTINUED) (DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS, UNLESS OTHERWISE STATED) NOTE 2 -- ACQUISITIONS (CONTINUED) connection with this acquisition, the Company incurred $467 of pooling expenses related to certain legal and accounting fees, which are reflected in 1999 results of operations. The prior years' financial statements were not restated to include the operations of BEC, CLC Paramus and Delta College on the basis of the immateriality of these acquisitions to the Company. NOTE 3 -- STOCK SPLITS On December 8, 1997, the Board of Directors declared a two-for-one stock split payable on January 8, 1998 in the form of a 100% stock dividend on the Company's common stock, to stockholders of record at the close of business on December 29, 1997. On March 24, 1997 the Board of Directors declared a three for two stock split, in the form of a 50% stock dividend on the Company's common stock, payable April 14, 1997 to stockholders of record at the close of business on April 8, 1997. Share and per share amounts for all prior periods have been restated to reflect these stock splits. NOTE 4 -- PUBLIC OFFERING On November 1, 1996, the Company completed a public offering (with an effective date of October 3, 1996), filing a registration statement on Form S-1 with the Securities and Exchange Commission ("SEC") for the sale of 3,915,000 shares of the Company's common stock at a price of $8.59 per share. The Company received total net proceeds of approximately $11.5 million from the sale of 1,500,000 shares. In connection with the offering, the Company also received approximately $2.4 million from the exercise of options to purchase 703,056 shares of common stock and approximately $666 for 211,944 shares of common stock issued upon payment of subscription notes receivable of certain stockholders. The remaining 1,500,000 shares were sold by certain selling stockholders, and the Company did not receive any proceeds from the sale of those shares. The total net proceeds of $14.6 million were used for the expansion of the Company's programs through additional locations as well as for working capital and general corporate purposes. NOTE 5 -- EARNINGS PER SHARE The following table sets forth the basic and diluted earnings per share calculations for the years 1999, 1998 and 1997:
NET (LOSS) PER SHARE INCOME SHARES AMOUNT ---------- ---------- --------- 1999 Earnings per share of common stock -- basic................. $ (586) 17,318,049 $(0.03) Dilutive securities: Stock options............................................. -- ------ ---------- ------ Earnings per share of common stock -- diluted............... $ (586) 17,318,049 $(0.03) ------ ---------- ------ 1998 Earnings per share of common stock -- basic................. $9,580 15,892,943 $ 0.60 Dilutive securities: Stock options............................................. 1,295,921 ------ ---------- ------ Earnings per share of common stock -- diluted............... $9,580 17,188,864 $ 0.56 ------ ---------- ------
F-8 43 COMPUTER LEARNING CENTERS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JANUARY 31, 1999, 1998 AND 1997 (CONTINUED) (DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS, UNLESS OTHERWISE STATED) NOTE 5 -- PER SHARE (CONTINUED)
NET (LOSS) PER SHARE INCOME SHARES AMOUNT ---------- ---------- --------- 1997 Earnings per share of common stock -- basic................. $5,601 13,718,912 $ 0.41 Dilutive securities: Stock options............................................. -- 1,199,706 Subscription note......................................... 99,226 ------ ---------- ------ Earnings per share of common stock -- diluted............... $5,601 15,017,844 $ 0.37 ------ ---------- ------
The Company had 1,664,831 options outstanding as of January 31, 1999 however, these options are not included in the calculation of the number of dilutive securities outstanding as their impact is antidulitive due to the net loss in 1999 and since certain options exercise prices were below the average market price of the common shares during the period. All options of the Company's stock had a dilutive effect for the years ended January 31, 1998 and 1997. NOTE 6 -- SIGNIFICANT ACCOUNTING POLICIES Basis of presentation and principles of consolidation The financial statements include the Company and its wholly owned subsidiaries, Computer Learning Centers of Quebec, Inc. and Delta College, Inc. All significant intercompany balances and transactions have been eliminated. Earnings per share Earnings per share are calculated in accordance with the provisions of Statement of Financial Accounting Standards No. 128 -- "Earnings per Share" (SFAS No. 128), effective for 1998. SFAS No. 128 requires the Company to report both basic earnings per share, which is based on the weighted-average number of common shares outstanding and diluted earnings per share, which is based on the weighted-average number of common shares outstanding and all potentially dilutive common shares outstanding. 1997 earnings per share data have been recalculated to reflect the provisions of SFAS No. 128. Revenue recognition The Company records accounts receivable and related deferred revenues when students are billed tuition for the programs they are attending. The deferred revenues are then recognized as tuition revenues on a pro rata basis over the term of instruction, which varies from eight to thirty- four-month programs. Reclassifications Certain reclassifications have been made to prior years' amounts to conform with the current year's presentation. Learning Center start-up costs Learning Center start-up costs consist of all direct costs incurred at a new Learning Center (excluding advertising costs) from the date a lease for a facility is entered into until the start of the first class. Prior to 1999, such capitalized costs were amortized on a straight-line basis over a one-year period commencing with the date of the start of the first class. In the fourth quarter of 1999, the Company adopted AICPA Statement F-9 44 COMPUTER LEARNING CENTERS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JANUARY 31, 1999, 1998 AND 1997 (CONTINUED) (DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS, UNLESS OTHERWISE STATED) NOTE 6 -- SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) of Position 98-5 "Reporting on the Costs of Start-Up Activities", which requires the Company to expense these start-up costs as they are incurred. Accordingly, the Company has recorded a charge of $245 (net of income tax benefit of $169) in 1999 representing the cumulative effect of this change in accounting principal. Net deferred start-up costs included in prepaid expenses and other current assets in the balance sheet as of January 31, 1998 was $414 (net of accumulated amortization of $458). Fair value of financial instruments The carrying amount reported in the balance sheets for cash and cash equivalents, accounts receivable, trade accounts payable, accrued other expenses and deferred revenues approximate fair value because of the immediate or short term maturity of these financial instruments. Advertising costs The Company expenses all advertising costs as incurred. Total advertising expense was $9,389, $6,212, and $4,739 for 1999, 1998 and 1997, respectively. Statement of cash flows For purposes of reporting cash flows, the Company considers investments having an original maturity of three months or less to be cash equivalents. Cash paid for income taxes in 1999, 1998 and 1997 aggregated $7,188, $4,580, and $2,429, respectively. Inventories Inventories consisting principally of program materials, books and supplies are stated at the lower of cost, determined on a first-in, first-out basis, or market. Total inventories, included in prepaid and other current assets in the consolidated balance sheets, were $1,224 and $851 at January 31, 1999 and 1998, respectively. Fixed assets Furniture, equipment and leasehold improvements are recorded at cost. Furniture and equipment are depreciated using the straight-line method over the estimated useful lives of the assets for financial reporting purposes (three to eight years) and accelerated methods over statutory lives for income tax purposes. Leasehold improvements are amortized using the straight-line method over the term of the lease for financial reporting purposes and over the statutory lives for income tax purposes. Intangible assets Identifiable intangible net assets of $2,324 and $2,686 at January 31, 1999 and 1998, included in other long-term assets, consist primarily of U.S. Department of Education ("Department of Education" or the "Department") certifications of Title IV Program eligibility. These assets are being amortized through 2007, using a straight-line method. Accumulated amortization for these assets aggregated $4,195 and $3,833 at January 31, 1999 and 1998, respectively. Securities available for sale In November 1995, the Company's health insurance carrier, pursuant to a demutualization, issued to the Company 13,649 shares of common stock representing the Company's pro rata share of the carrier's policy F-10 45 COMPUTER LEARNING CENTERS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JANUARY 31, 1999, 1998 AND 1997 (CONTINUED) (DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS, UNLESS OTHERWISE STATED) NOTE 6 -- SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) holder surplus at the demutualization date. In January 1997, the Company sold 9,300 shares of the common stock and realized a gain of $332. In March of 1998, the Company sold the remaining 4,349 shares of stock and realized a gain of $279. Income taxes The Company accounts for income taxes in accordance with Statement of Financial Accounting Standards No. 109 "Accounting for Income Taxes" which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the book and tax bases of assets and liabilities. Other Comprehensive (Loss) Income Effective February 1, 1998 the Company adopted Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS No. 130"), which establishes new rules for the reporting and display of changes in equity from non-owner sources in the financial statements. Comprehensive income includes reported net income as adjusted for other non-owner changes in equity. Such changes consist of foreign currency translation adjustments and unrealized holding gains and losses on marketable securities. As permitted under the provisions of SFAS No. 130, these amounts are presented in the Consolidated Statements of Stockholders' Equity. Prior year financial statements have been reclassified to conform to SFAS No. 130 requirements. Use of estimates The preparation of financial statements in accordance with generally accepted accounting principles requires the use of estimates by management that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period, primarily in the areas of allowance for doubtful accounts, useful lives of intangible assets, regulatory provisions and deferred income taxes. Actual results could differ from these estimates. NOTE 7 -- ACCOUNTS RECEIVABLE Student accounts receivables are initially established for the balance of course tuition (however, only for year one of two-year programs) at the time a student enrolls in the Learning Center and consist of financial aid, third party and self-pay receivable balances. Financial aid receivables are student receivable balances expected to be paid through Title IV program funds. Third party student receivable balances are those expected to be paid by employer companies or various non-Title IV federal and state agencies. Self-pay student receivables consist of those amounts to be paid by the student. The Company makes available to qualifying students alternative financing arrangements ("CLC financing") which help fund their education. Dependent upon the credit worthiness of the individual, CLC financing may be offered to assist students with meeting their financial obligations related to attending CLC. The Company requires students receiving CLC financing to make regular monthly payments. Depending on the level of financing extended to students, payment plans offered generally range from six months to three years. All amounts due to the Company in periods beyond one year are classified as long-term receivables. F-11 46 COMPUTER LEARNING CENTERS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JANUARY 31, 1999, 1998 AND 1997 (CONTINUED) (DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS, UNLESS OTHERWISE STATED) NOTE 7 -- ACCOUNTS RECEIVABLE (CONTINUED) When a student withdraws, tuition paid in excess of earned tuition revenues is refunded based on the applicable refund policy and tuition revenues earned in excess of tuition paid remains as an accounts receivable. Based on comparison to historical levels, the Company provides for estimated student withdrawals, as reductions to accounts receivable and related deferred revenue balances, thus stating these amounts at estimated net realizable value. Accounts receivable balances are reviewed no less than quarterly for the purposes of determining appropriate levels of the allowance for doubtful accounts. The Company establishes the allowance for doubtful accounts using an objective model, which applies various expected loss percentages to aging categories based on historical bad debt experience. The Company charges-off accounts receivable balances deemed to be uncollectible usually after they are delinquent 120 days. All charge offs are recorded as reductions in the allowance for doubtful accounts, with any recoveries of previously written off accounts receivables recorded as increases to the allowance for doubtful accounts. As of January 31, 1999 and 1998, net accounts receivable consisted of the following:
JANUARY 31, 1999 ----------------------------- CURRENT LONG TERM TOTAL ------- --------- ------- Accounts receivable..................................... $75,360 $14,780 $90,140 Student withdrawal allowance............................ (12,664) (1,986) (14,650) Allowance for doubtful accounts......................... (5,999) (2,134) (8,133) ------- ------- ------- $56,697 $10,660 $67,357 ======= ======= =======
JANUARY 31, 1998 ----------------------------- CURRENT LONG TERM TOTAL ------- --------- ------- Accounts receivable..................................... $61,582 $10,464 $72,046 Student withdrawal allowance............................ (11,086) (1,603) (12,689) Allowance for doubtful accounts......................... (2,382) (1,531) (3,913) ------- ------- ------- $48,114 $ 7,330 $55,444 ======= ======= =======
NOTE 8 -- FINANCIAL AID PROGRAMS AND REGULATORY MATTERS U.S. Department of Education -- Regulation and Review The Company is subject to extensive regulation as a participant in various federal and state government supported financial aid programs. These regulations require, among other things, that the Company and its Learning Centers comply with certain financial responsibility and administrative capability requirements. Failure to comply with these requirements could result in restriction or loss by the Company or its Learning Centers of their ability to participate in federal or other financial aid programs or to provide educational and training services. Such restrictions could have a severe impact on the Company's business, financial condition and results of operations. For 1999, approximately 67% of the Company's revenues were derived from tuitions that are funded by various federal student financial aid programs. Under the Department of Education's regulations, an FFEL cohort default rate equal to or exceeding 25% in any one of the three most recent federal fiscal years can be a basis for the Department to place that institution on provisional certification for up to four years for lack of administrative capability. As of F-12 47 COMPUTER LEARNING CENTERS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JANUARY 31, 1999, 1998 AND 1997 (CONTINUED) (DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS, UNLESS OTHERWISE STATED) NOTE 8 -- FINANCIAL AID PROGRAMS AND REGULATORY MATTERS (CONTINUED) January 31, 1999 four of the Company's Learning Centers are provisionally certified for participation in FFEL, due to either cohort default rate issues arising in prior years or due to a change of control following the Company's acquisition of these campuses. The provisional certifications of these four Learning Centers extend through July 2000 to September 2001. Under the standards of financial responsibility of the Department of Education, if an institution's annual financial aid compliance audit or a review by another regulatory agency finds that the institution made refunds late (as defined by Department regulation) to 5% or more of its students in either of the two most recent fiscal years, the institution is required to post a letter of credit in favor of the Department in an amount equal to 25% of the total Title IV Program refunds paid by the institution in its prior fiscal year. Based on this standard, on August 31, 1998, the Company posted a $1.5 million letter of credit with respect to all U.S. Learning Centers except the Somerville and Methuen, MA Learning Centers, for which separate letters of credit were required and the Paramus, NJ Learning Center, for which no letter of credit was required. During fiscal 1999, the Department of Education reviewed the Company's administration of federal student financial aid programs at its Alexandria and Manassas Learning Centers, respectively. The Department's report, issued in September 1998, contained numerous findings of noncompliance with Department regulations. The Company has responded to each of the findings raised in the report and negotiations aimed at their resolution are continuing. The findings raised in this report do not affect the current eligibility of these Learning Centers to participate in federal student aid programs or the manner in which such funds are disbursed. The Company does not believe that the resolution of this review will have a severe impact on the Company's business, financial condition and results of operations. Heightened Cash Monitoring On April 6, 1998, the Company was notified by the Department of Education that, based upon Department's monitoring of recent litigation involving the Company and certain student complaints lodged against the Company, it placed all Learning Centers on a "heightened cash monitoring status." This status allows all Learning Centers to continue to receive federal student financial assistance funds so long as the funds requested are drawn after they have been credited to student accounts and CLC subsequently provides evidence of such credit and other supporting information to Department. The Department does not consider "heightened cash monitoring status" to represent either an adverse or punitive action. This action by Department should not have any effect on the availability or timing of financial assistance to the Company's students, nor should it have a material affect on the Company's cash flow or operating results. State Authorization and Accreditation The Maryland Higher Education Commission ("MHEC") and Texas Workforce Commission ("TWC") reviewed programs at the Company's Laurel, Maryland and Houston, Texas Learning Centers, respectively. In October 1998, the MHEC issued its report citing several findings of regulatory noncompliance. The TWC's reports, issued in October 1998, contain findings related to their investigation of student complaints at the Houston Learning Center. The TWC and MHEC have directed the Company to make refunds to certain students affected by the noncompliance. In both of these states the Company has taken steps toward concluding the reviews with the respective state agency and does not anticipate that the actions taken by either state will jeopardize the licenses of either Learning Center. During 1999, the Company recorded expenses of $2,226 representing the total expenditures for agreed-upon student refunds as well as an accrual for estimated costs associated with resolving the findings included in these open regulatory matters. F-13 48 COMPUTER LEARNING CENTERS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JANUARY 31, 1999, 1998 AND 1997 (CONTINUED) (DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS, UNLESS OTHERWISE STATED) NOTE 8 -- FINANCIAL AID PROGRAMS AND REGULATORY MATTERS (CONTINUED) By letter dated April 3, 1998, from the State Superintendent of Education of the State of Illinois, to the Schaumburg Learning Center (the "Letter"), the Illinois State Board of Education ("ISBE"), the agency of the State of Illinois that authorizes the Schaumburg Learning Center, notified the Schaumburg Learning Center that they had determined that certain activities and procedures of the Schaumburg Learning Center were not in compliance with the Illinois Private Business and Vocational Schools Act ("Schools Act"). The Letter directed the Schaumburg Learning Center to cease and desist from all marketing and student enrollment activities until May 6, 1998. After reviewing the Company's initial response, the ISBE lifted the cease and desist order as of May 7, 1998. By letter dated December 18, 1998, the ISBE issued a report on its review of documentation submitted by the Schaumburg Learning Center regarding student refunds and placement statistics and issued a new order directing the Learning Center to cease and desist from all marketing and student enrollment activities. On February 26, 1999, in response to documentation submitted by the Learning Center, the ISBE lifted the cease and desist order, effective March 1, 1999, and announced that it would approve the extension of the Learning Center's license upon confirmation of the Learning Center's compliance with Illinois requirements. During March 3-5, 1999, the ISBE conducted a site visit at the Schaumburg Learning Center to establish such confirmation and, the Company believes that if the ISBE is satisfied, it will extend the Learning Center's license through June 30, 1999. In June 1999, if the Learning Center demonstrates continued compliance with the requirements of Illinois law, the ISBE will, in due course, process the renewal of the Learning Center's license for the year 2000. If the ISBE determines that the Schaumburg Learning Center is not in compliance, the ISBE may designate a hearing officer to decide whether the Schaumburg Learning Center's license to operate should be suspended or terminated. NOTE 9 -- FIXED ASSETS Fixed assets consisted of the following:
JANUARY 31, ------------------- 1999 1998 -------- -------- Furniture and equipment..................................... $ 36,829 $ 25,958 Leasehold improvements...................................... 20,567 9,968 -------- -------- 57,396 35,926 Less: Accumulated depreciation and amortization............. (19,792) (10,727) -------- -------- $ 37,604 $ 25,199 ======== ========
NOTE 10 -- LONG-TERM DEBT The Company has a credit agreement with a bank, which provides for a $20.0 million secured revolving credit facility (increased from $8.5 million in October 1998), expiring on October 30, 2000. At January 31, 1999, there was a $3,000 outstanding balance under the revolving facility. The line of credit consists of a revolving credit note, inclusive of a $7.0 million convertible term loan. The interest on the facility is based either on the bank's United States ("U.S.") prime rate or the London Inter-Bank Offer Rate ("LIBOR") which was 7.75% and 5.60%, respectively, at January 31, 1999. Interest rates are equal to (i) the U.S. prime rate or LIBOR plus 1.25% for revolving credit loans and (ii) the U.S. prime rate plus 0.25% or LIBOR plus 1.50% for convertible term loans. All interest payments are payable quarterly on the outstanding balance. The revolving loan balances are payable in a balloon payment on October 30, 2000 and the principal of the term F-14 49 COMPUTER LEARNING CENTERS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JANUARY 31, 1999, 1998 AND 1997 (CONTINUED) (DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS, UNLESS OTHERWISE STATED) NOTE 10 -- LONG-TERM DEBT (CONTINUED) loan component is payable in equal quarterly installments. The Company pays a commitment fee of 0.20% based on the unused portion of the credit facility. The Company has granted the bank a security interest in accounts receivable. The agreement requires maintenance of certain financial ratios (current, leverage, and fixed charge ratios) and contains other restrictive covenants including limitations on purchases and sales of assets. At January 31, 1999, the Company was in compliance with all financial ratio requirements and all covenants. The Company had outstanding letters of credit of $5,991 and $432 at January 31, 1999 and 1998, respectively, primarily to the Department of Education for recertification for the Title IV Programs of its Learning Centers, an insurance company for surety bonds required by various states in which the Company operates and with certain of its landlords securing future rental payments of its facilities. In connection with the acquisitions described in Note 2, the Company repaid $518 and $301 of debt in 1999 and 1998, respectively. NOTE 11 -- INCOME TAXES The components of pre-tax income (loss) from continuing operations are as follows:
FOR THE YEARS ENDED JANUARY 31, -------------------------------- 1999 1998 1997 --------- --------- -------- United States............................................. $(2,132) $16,237 $9,166 Canadian.................................................. 1,398 -- -- ------- ------- ------ Total........................................... $ (734) $16,237 $9,166 ======= ======= ======
The components of the provisions for (benefits from) income taxes are as follows:
FOR THE YEARS ENDED JANUARY 31, ------------------------------- 1999 1998 1997 ------- ------ ------ Current: Federal................................................. $ 1,631 $6,140 $2,813 State................................................... 559 1,472 902 Canadian................................................ 543 -- -- Deferred: Federal and state....................................... (3,126) (955) (150) ------- ------ ------ Net provision for (benefit from) income taxes............. $ (393) $6,657 $3,565 ======= ====== ======
Deferred tax assets (liabilities) arise due to the recognition of income and expense items for tax purposes in periods which differ from those used for financial statement purposes. F-15 50 COMPUTER LEARNING CENTERS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JANUARY 31, 1999, 1998 AND 1997 (CONTINUED) (DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS, UNLESS OTHERWISE STATED) NOTE 11 -- INCOME TAXES (CONTINUED) At January 31, 1999 and 1998, the net deferred tax asset was comprised of the following:
JANUARY 31, --------------- 1999 1998 ------ ------ Allowance for doubtful accounts............................. $2,517 $1,525 Shareholder litigation settlement obligation................ 2,112 -- Deferred rent accrual....................................... 1,153 632 Vacation pay accrual........................................ 341 203 Employee benefits........................................... 156 105 Lease terminations.......................................... -- 111 Other accruals.............................................. -- 17 ------ ------ Total deferred tax assets......................... 6,279 2,593 ------ ------ Depreciation and amortization............................... (499) (116) Deferred start-up costs..................................... -- (139) Other deferred tax liabilities.............................. (401) (85) ------ ------ Total deferred tax liabilities.................... (900) (340) ------ ------ Net deferred tax assets........................... $5,379 $2,253 ====== ======
Management believes, based on the Company's history of earnings, that future income from operations will more likely than not be sufficient to fully recognize this net deferred tax asset. The components of the net deferred tax asset include a current and long-term portion. The long-term deferred tax assets are included in other long-term assets in the 1999 and 1998 consolidated balance sheets. Differences between effective income tax rates and the statutory U.S. federal income tax rates are as follows:
FOR THE YEARS ENDED JANUARY 31, ------------------------ 1999 1998 1997 ---- ---- ---- Statutory U.S. federal income tax rate...................... 35.0% 35.0% 35.0% State income taxes, net of federal benefit.................. 6.6 6.4 6.8 Weighted average Canadian tax rates below U.S. and state tax rates..................................................... (2.0) -- -- Permanent differences and other............................. 13.9 (0.4) (2.9) ---- ---- ---- Effective income tax rate................................... 53.5% 41.0% 38.9% ==== ==== ====
The Company's effective income tax rate increased to 53.5% in 1999 from 41.0% in 1998. This is a result of relative higher tax rates applied to losses sustained in the Company's U.S. operations principally offset by income from operations of the Company's Canadian subsidiary. The statutory rates in Quebec, Canada, are lower than those of the Company's U.S. operations on a weighted average basis. On an individual country basis, effective income tax rates for the U.S. and Canada were 43.9% and 38.9%, respectively. NOTE 12 -- SAVINGS AND EMPLOYEE STOCK PURCHASE PLANS The Company maintains a 401(k) plan covering substantially all employees. Under the terms of the plan, the Company will match 25% of employee contributions up to a maximum of 6% of annual employee F-16 51 COMPUTER LEARNING CENTERS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JANUARY 31, 1999, 1998 AND 1997 (CONTINUED) (DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS, UNLESS OTHERWISE STATED) NOTE 12 -- SAVINGS AND EMPLOYEE STOCK PURCHASE PLANS (CONTINUED) compensation. Company contributions under the plan aggregated $260, $99 and $76 for 1999, 1998, and 1997, respectively. On March 13, 1997, the Board of Directors ("Board") adopted, and on July 10, 1997, the Company's stockholders approved the 1997 Employee Stock Purchase Plan ("ESPP"). With certain limited exceptions, all full time employees, including executive officers, employed by the Company for at least one year, are eligible to participate in the ESPP. The Company maintains payroll deduction accounts for all participating employees and an employee may authorize a payroll deduction in any whole percentage from 1% to 10% of the employee's eligible compensation, not to exceed $25. Under the terms of the ESPP, the Company's Common Stock may be acquired for an amount equal to 85% of the fair market value per share of Common stock on either the first day or the last day of the offering period, whichever is lower. The first offering period commenced on August 1, 1997 and terminated on January 31, 1998. Thereafter, the offering period commences on February 1 and terminates on January 31, unless otherwise determined by the Board. A total of 400,000 shares are authorized and available for purchase under the plan. There were 51,064 and 5,392 shares of Common Stock issued under the ESPP to eligible employees during fiscal year 1999 and 1998, respectively. NOTE 13 -- COMMITMENTS AND CONTINGENCIES Settled Litigation On March 10, 1998, the Attorney General of Illinois ("AG") filed a complaint against the Company in Circuit Court in Cook County, Illinois, asserting that the Company had violated the Illinois Private Business and Vocational Schools Act and the Illinois Consumer Fraud and Deceptive Business Practices Act (the "Acts") at its Schaumburg Learning Center. The complaint alleged that the Company, at the Schaumburg Learning Center, failed to provide certain educational services and resources and misrepresented certain information respecting services, resources, occupational opportunities and student outcomes. The complaint sought suspension of the Schaumburg Center's charter to operate within Illinois, restitution to persons alleged to have been injured by the conduct of the Schaumburg Learning Center, costs, civil penalties totaling $100 for violations of the Acts and an additional civil penalty of $50 for each alleged violation of each of the Acts, committed with intent to defraud. On June 4, 1998, the Company timely filed an answer denying all of the material allegations set forth in the complaint. On June 8, 1998, the Company and the AG reached an agreement settling the litigation filed on March 10, 1998. As a result of the settlement, which was approved by the Circuit Court in Cook County, Illinois, the Company agreed to make a voluntary contribution of $90 to the AG's consumer education fund, establish a four-year program to annually provide $95 worth of computer hardware and software to schools, programs, community sites and other non-profit or public institutions in the Chicago area and $10 worth of training in computer skills annually at the Company's Schaumburg and Chicago Learning Centers for teachers and other community-based personnel to enable them to make the most effective use of the computer equipment. The Company has fulfilled the first year of its agreement with the AG. The Company has also taken various measures required of it to comply with the agreement with the AG, including implementation of an ombudsman program and binding arbitration to resolve student complaints. Failure of the Company to continue to comply with the terms of the agreement with the AG may give rise to a violation of the consent decree settling the lawsuit, which in turn may result in adverse action against the Company including suspension or termination of the Company's licenses to operate within Illinois and other sanctions. The loss of operating authority in Illinois could have a severe impact on the Company. F-17 52 COMPUTER LEARNING CENTERS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JANUARY 31, 1999, 1998 AND 1997 (CONTINUED) (DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS, UNLESS OTHERWISE STATED) NOTE 13 -- COMMITMENTS AND CONTINGENCIES (CONTINUED) On March 13, 1998, a class action lawsuit was filed against the Company in the United States District Court for the Central District of California on behalf of all purchasers of Company Common Stock from April 30, 1997 through March 10, 1998. Over the following two months, eight similar cases were filed in United States District Courts: two in the Central District of California; five in the Northern District of Illinois; and one in the Eastern District of Virginia. The complaints alleged violations of the Securities Exchange Act of 1934, including allegations that the Company was experiencing "operations difficulties" and failed to disclose the alleged difficulties. The complaints also alleged that Company insiders realized profits by trading their shares of Company stock while in possession of material adverse information. All of the complaints were filed on behalf of classes of shareholders of Company Common Stock beginning as early as March 11, 1997 and ending as late as April 7, 1998. All of these shareholder lawsuits were consolidated and transferred to the United States District Court for the Eastern District of Virginia. The Company entered into a settlement agreement to resolve the class action lawsuit in January 1999. Terms of the settlement, which are subject to final judicial approval and shareholder vote, call for the payment of $3.0 million in cash (of which $2.35 million is covered by the Company's insurance policy) and the issuance of 550,000 shares of the Company's common stock, $.01 par value, subject to price protection features, which may result in additional payment of cash or issuance of stock at the Company's option, to guarantee a total settlement of $7.5 million. The price protection feature provides that the Company will issue additional stock or pay additional cash equal to the difference between the average stock price of the Company's common stock at certain dates and $8.18 per share. The settlement agreement contains a floor of $2.00 per share, at which the settlement agreement may be terminated at the plaintiffs' option. In addition to the stock and cash components of the settlement agreement, the total settlement expense also includes $449 of legal expenses (in excess of insurance reimbursements) specifically related to the class action litigation settlement. Active Litigation On May 5, 1998, a class action lawsuit was filed against the Company in the Superior Court of New Jersey in Bergen County, New Jersey, on behalf of all students who attended a Learning Center in New Jersey within six years of May 5, 1998. The complaint alleges, among other things, that the Company, at its Learning Centers located in the state of New Jersey, failed to provide certain educational services and resources, misrepresented certain information respecting services, resources, occupational opportunities and student outcomes and violated the New Jersey Consumer Fraud Act. The Company is unable to estimate the outcome of the matter or any potential liability, however, an unfavorable outcome may result in adverse action against the Company including suspension or termination of the Company's licenses to operate within New Jersey and other sanctions. The loss of operating authority in New Jersey would have a severe impact on the Company. On May 19, 1998, a lawsuit was filed against the Company in the District Court of Harris County, Texas, on behalf of six former students of the Houston Learning Center. Subsequently, the petition was amended to seek certification as a class action lawsuit and removed to the U.S. District Court for the Southern District of Texas, Houston Division. The complaint alleges, among other things, that the Company, at its Learning Centers located in the state of Texas, failed to provide certain educational services and resources, misrepresented certain information respecting services, resources, occupational opportunities and student outcomes, and violated the Texas Deceptive Trade Practices Act. The Company is unable to estimate the outcome of the matter or any potential liability however, an unfavorable outcome may result in adverse action against the Company including suspension or termination of the Company's licenses to operate within Texas and other sanctions. The loss of operating authority in Texas would have a severe impact on the Company. F-18 53 COMPUTER LEARNING CENTERS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JANUARY 31, 1999, 1998 AND 1997 (CONTINUED) (DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS, UNLESS OTHERWISE STATED) NOTE 13 -- COMMITMENTS AND CONTINGENCIES (CONTINUED) Between June 1, 1998 and December 31, 1998, the Company was named as defendant in five other lawsuits in California, Texas and Virginia by individual students or groups of students who formerly attended one of its Learning Centers. The complaints allege, among other things, that the Company failed to provide plaintiffs with certain educational services and resources, misrepresented certain information respecting services, resources, occupational opportunities and student outcomes and violated applicable state consumer laws. The Company is unable to estimate the outcome of these matters or any potential liabilities connected with any of these lawsuits. In addition to the legal proceedings described above, the Company may from time to time be involved in routine litigation incident to its business. The Company intends to defend itself vigorously in the above lawsuits; however, there can be no assurance that the Company will be successful in defending itself in any of these proceedings. Even if the Company prevails on the merits in such litigation, the Company expects to incur significant legal and other defense costs as a result of such proceedings. These proceedings could involve substantial diversion of the time of some members of management, and an adverse determination in, or settlement of, such litigation could involve the payment of significant amounts, or could include terms in addition to such payments, which could have a severe impact on the Company's business, financial condition and results of operations. Lease Commitments The Company leases substantially all of its facilities under operating lease agreements. A majority of the operating leases contain renewal options that can be exercised after the initial lease term. Renewal options are generally for periods of one to five years. All operating leases will expire over the next ten years, and management expects that leases will be renewed or replaced by other leases in the normal course of business. There are no material restrictions imposed by the lease agreements. The Company has not entered into any significant guarantees related to the leases. The Company is required to make additional payments under certain operating lease terms for taxes, insurance and other operating expenses incurred during the operating lease period. Future minimum rental payments required under operating leases that have initial or remaining non-cancelable lease terms in excess of one year as of January 31, 1999 are as follows: 2000........................................................ $9,368 2001........................................................ 8,217 2002........................................................ 8,329 2003........................................................ 7,173 2004........................................................ 6,323 Thereafter.................................................. 20,000 ------- $59,410 =======
Rent expense under these lease agreements aggregated $9,710, $6,299, and $5,176 for 1999, 1998, and 1997, respectively. Employee Agreements On February 1, 1997, the Company entered into an employment agreement with the Chief Executive Officer of the Company, pursuant to which he is entitled to 24 months of salary and benefits and a guaranteed F-19 54 COMPUTER LEARNING CENTERS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JANUARY 31, 1999, 1998 AND 1997 (CONTINUED) (DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS, UNLESS OTHERWISE STATED) NOTE 13 -- COMMITMENTS AND CONTINGENCIES (CONTINUED) bonus which would be payable with respect to the year in which any breach of such agreement occurred, as specified. In addition, if he were terminated as the result of a change of control as defined in the agreement, he will receive an amount equal to three times the greater of the average annual total compensation paid to him over the Company's last three fiscal years or the total compensation paid during the Company's most recent fiscal year end. On January 15, 1998, the Company entered into a severance agreement with the Chief Financial Officer of the Company, pursuant to which he is entitled to a lump sum of 12 months of salary for termination without cause or resignation for good reason. In addition, if he were terminated as a result of a change in control as defined in the agreement, he will receive a lump sum amount equal to one and one half times his base salary and one and one half times his prior fiscal year bonus or current year target bonus, whichever is larger. On June 15, 1998, the Company entered into a severance agreement with the Vice President of Operations of the Company, pursuant to which she is entitled to a lump sum of 12 months of salary for termination without cause or resignation for good reason. In addition, if she were terminated as a result of a change in control as defined in the agreement, she will receive a lump sum amount equal to one and one half times her base salary. On November 3, 1998, the Company entered into a severance agreement with the President of the Company, pursuant to which he is entitled to a lump sum of one and one half times his annual salary for termination without cause or resignation for good reason. In addition, if he were terminated as a result of a change in control as defined in the agreement, he will receive a lump sum amount equal to two times his current base salary and two times his annual bonus of the prior fiscal year. NOTE 14 -- STOCK INCENTIVE PLANS The Company has a Long-Term Incentive Plan that provides for award of incentive and nonqualified common stock options and common stock appreciation rights to certain directors, officers and key employees. The Company has provided that no further grants may be made under the plan. As of January 31, 1999, options to purchase 95,771 shares of common stock were outstanding under this plan. The 1995 Stock Incentive Plan ("1995 Stock Plan"), provides a variety of awards, including stock options, stock appreciation rights and restricted and unrestricted stock grants to the Company's employees, officers, consultants and advisors. Stock options may be granted either in the form of incentive stock options or non-qualified stock options. The option exercise price of incentive stock options may not be less than the fair market value of the common stock on the date of grant. The Company has reserved 1,460,460 shares of common stock for grant under the plan. As of January 31, 1999 options to purchase 1,317,000 shares of common stock were outstanding under this plan, and 11,460 options were available for grant. Due to declines in the market value of the Company's Common Stock, as of December 14, 1998, some outstanding options under the Company's 1995 Stock Plan were exercisable at prices which substantially exceeded the market value of the Common Stock. In view of such declines in market value and in keeping with the Company's philosophy of utilizing equity incentives to motivate and retain qualified employees, the Board of Directors adopted amendments to regain the incentive intended to be provided by options to purchase shares of the Company's Common Stock. Under these amendments, stock options held on December 14, 1998, by optionees other than directors and executive officers which had an exercise price greater than $6.50 per share were amended to reduce their exercise price to the closing price of CLC Common Stock on that date, or $5.0625 per share. The amended options have the same vesting provisions as the original options to which they relate except they will not be exercisable during the six-month period beginning F-20 55 COMPUTER LEARNING CENTERS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JANUARY 31, 1999, 1998 AND 1997 (CONTINUED) (DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS, UNLESS OTHERWISE STATED) NOTE 14 -- STOCK INCENTIVE PLANS (CONTINUED) December 14, 1998. Options covering an aggregate of 212,800 shares of Common Stock were amended by this action. In August 1998 the stockholders' approved the Company's 1998 Stock Incentive Plan, which provides for the same types of awards as under the 1995 Stock Plan. The Company has reserved 1,000,000 shares of common stock for grant under this plan. As of January 31, 1999 options to purchase 100,000 shares of common stock were outstanding under this plan, and 900,000 options were available for grant. The 1995 Non-Employee Directors Stock Option Plan, provides for the grant to each of the current non-employee directors of an option exercisable for shares of common stock. All options granted under the plan will have an exercise price equal to the fair market value of the common stock on the date of grant. The Company has reserved 210,534 shares for issuance under this plan. As of January 31, 1999, options to purchase 148,060 shares of common stock were outstanding under this plan, and 48,434 options were available for grant. Incentive and nonqualified options are exercisable at a price not less than 100% and 50%, respectively, of the fair market value of the common stock at the date of grant, as determined by the administration committee. Stock appreciation rights provide for payments equal to the base amount of the right, as determined by the administration committee. No stock appreciation rights are outstanding. Options may be granted in tandem with stock appreciation rights; however, holders of such tandem awards are subject to restrictions on the matter of exercise as defined in the plan. Generally, stock options and rights vest ratably over five years. All options and rights must be exercised within ten years from date of grant. The Company accounts for stock compensation costs in accordance with the provisions of Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees." Accordingly, no compensation costs have been recognized for its option plans. The following table sets forth pro forma information as if compensation cost for its stock option plans had been determined based on the fair value at the grant date for awards consistent with the requirements of SFAS No. 123, "Accounting for Stock-Based Compensation."
FOR THE YEARS ENDED JANUARY 31, ------------------------- 1999 1998 1997 ------- ------ ------ Net (loss) income -- as reported........................... $ (586) $9,580 $5,601 Net (loss) income -- pro forma............................. (1,530) 7,879 4,585 Earnings per share -- as reported: Basic.................................................... $ (0.03) $ 0.60 $ 0.41 Diluted.................................................. (0.03) 0.56 0.37 Earnings per share -- pro forma: Basic.................................................... $ (0.09) $ 0.50 $ 0.33 Diluted.................................................. (0.09) 0.46 0.31
F-21 56 COMPUTER LEARNING CENTERS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JANUARY 31, 1999, 1998 AND 1997 (CONTINUED) (DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS, UNLESS OTHERWISE STATED) NOTE 14 -- STOCK INCENTIVE PLANS (CONTINUED) The fair value of options at date of grant was estimated using the Black-Scholes model with the following weighted average assumptions:
FOR THE YEARS ENDED JANUARY 31, --------------------- 1999 1998 1997 ----- ----- ----- Expected life (years)....................................... 5 5 5 Interest rate............................................... 4.8% 5.6% 6.7% Volatility.................................................. 64.3% 43.3% 42.5%
The calculated weighted average fair values of stock options granted during 1999, 1998 and 1997, using the Black-Scholes model, were $3.20, $7.61 and $3.53 per option, respectively.
INCENTIVE NON QUALIFIED WEIGHTED AVERAGE STOCK STOCK EXERCISE OPTIONS OPTIONS PRICES --------- ------------- ---------------- Outstanding at February 1, 1996....................... 1,540,194 353,244 $ 2.61 --------- -------- ------ Options granted..................................... 968,648 -- 7.45 Options exercised................................... (829,680) (329,694) 2.82 --------- -------- ------ Outstanding at January 31, 1997....................... 1,679,162 23,550 $ 5.22 --------- -------- ------ Options granted..................................... 160,050 -- $16.43 Options exercised................................... (399,196) -- 2.03 --------- -------- ------ Outstanding at January 31, 1998....................... 1,440,016 23,550 $ 7.31 --------- -------- ------ Options granted..................................... 311,505 1,245 $ 5.54 Options exercised................................... (84,935) (23,550) 3.91 Options cancelled................................... (3,000) -- 10.16 --------- -------- ------ Outstanding at January 31, 1999....................... 1,663,586 1,245 $ 6.77 --------- -------- ------
The weighted average exercise prices for the nonqualified stock options outstanding, included above, as of January 31, 1999 and 1998 was $5.06 and $4.84, respectively. Incentive stock options and nonqualified stock options exercisable were 747,313 and none at January 31, 1999 and 535,615 and 23,550 at January 31, 1998 and 377,280 and 23,550 at January 31, 1997, respectively. The following table summarizes information about options outstanding at January 31, 1999:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE ------------------------------ ------------------------- WEIGHTED WEIGHTED AVERAGE WEIGHTED AVERAGE RANGE OF NUMBER REMAINING AVERAGE NUMBER EXERCISABLE EXERCISE PRICES OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE EXERCISABLE PRICE --------------- ----------- ---------------- -------------- ----------- ----------- $1.83 to $6.67...................... 846,891 7.7 years $4.04 288,031 $ 2.99 $6.68 to $12.00...................... 744,640 7.9 years 8.31 422,644 8.27 $12.01 to $22.25...................... 73,300 8.4 years 22.25 36,638 22.25 --------- --------- ----- ------- ------ 1,664,831 8.2 years $6.77 747,313 $ 6.92 ========= ========= ===== ======= ======
F-22 57 COMPUTER LEARNING CENTERS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JANUARY 31, 1999, 1998 AND 1997 (CONTINUED) (DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS, UNLESS OTHERWISE STATED) NOTE 15 -- QUARTERLY FINANCIAL DATA (UNAUDITED)
FISCAL YEAR 1999 THREE MONTHS ENDED ------------------------------------------------ APRIL 30, JULY 31, OCTOBER 31, JANUARY 31, 1998 1998 1998 1999 --------- -------- ----------- ----------- Revenues............................................. $36,056 $35,273 $37,076 $35,946 Costs and expenses................................... 31,133 34,025 36,322 38,798 Income (loss) from operations........................ 4,923 1,248 754 (2,852) Interest income, net................................. 284 135 36 58 Gain on sale of investment securities................ 279 -- -- -- Litigation settlement expense........................ (210) -- -- (5,389) Cumulative effect of accounting change............... -- -- -- (245) Net income (loss).................................... $ 3,143 $ 862 $ 473 $(5,064) Earnings per share: Basic.............................................. $ 0.18 $ 0.05 $ 0.03 $ (0.29) Diluted............................................ $ 0.17 $ 0.05 $ 0.03 $ (0.29)
FISCAL YEAR 1998 THREE MONTHS ENDED ------------------------------------------------ APRIL 30, JULY 31, OCTOBER 31, JANUARY 31, 1997 1997 1997 1998 --------- -------- ----------- ----------- Revenues............................................. $20,830 $22,138 $25,682 $28,339 Costs and expenses................................... 17,309 18,917 21,740 24,177 Income from operations............................... 3,521 3,221 3,942 4,162 Interest income, net................................. 346 367 341 337 Net income........................................... $ 2,243 $ 2,078 $ 2,595 $ 2,664 Earnings per share: Basic.............................................. $ 0.14 $ 0.13 $ 0.16 $ 0.17 Diluted............................................ 0.14 0.12 0.15 0.15
NOTE 16 -- SUBSEQUENT EVENTS On April 29, 1999, the Company entered into a settlement agreement with the MHEC (see Note 8 "State Authorization and Accreditation") regarding regulatory matters at its Laurel, Maryland Learning Center. The settlement agreement requires the Company pay a fine of $60, proceed with implementing administrative procedures proposed and to continue providing documents requested to substantiate the Company's compliance with MHEC demands made in its October 1998 letter. The Company has provided for the fine imposed by MHEC and this amount is included in accrued other expenses in the consolidated balance sheet as of January 31, 1999. F-23 58 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS Information regarding directors of the Company will be set forth in the Company's definitive Proxy Statement for its 1999 Annual Meeting of the Stockholders which will be filed pursuant to Regulation 14A within 120 days after the end of the Company's last fiscal year, and is incorporated herein by reference. The following sets forth information as of January 31, 1999 concerning the Company's executive officers:
NAME AGE POSITION ---- --- -------- Reid R. Bechtle 46 Chief Executive Officer and Director John L. Corse 57 President, Chief Operating Officer and Director Charles L. Cosgrove 44 Vice President and Chief Financial Officer Susan L. Luster 47 Vice President of Operations Christine M. Strachota 52 Vice President Harry H. Gaines 61 Chairman of the Board of Directors
Mr. Bechtle joined the Company in 1991 as President of what was then its Computer Learning Center division and has been Chief Executive Officer and a director of the Company since October 1994. Mr. Bechtle also served as President of the Company from October 1994 until November 1998. From 1982 to 1991, he served as President of Multi-List, Inc., a software services subsidiary of PRC/Litton, Inc. ("PRC"). Mr. Corse joined the Company in November 1998 as President and Chief Operating Officer and has served as a Director of the Company since October 1994. Since September 1997, Mr. Corse had been a self-employed business consultant. From February 1995 to August 1997, he served as President of Hughes Advanced Systems, a subsidiary of Hughes Aircraft Corporation and a provider of information systems and services to businesses. From 1993 to 1995, Mr. Corse was a self-employed business consultant. From 1992 to 1993, he served as President and Chief Executive Officer of Security Software America, Inc., a software publisher serving government contractors and government agencies. From 1990 to 1992, Mr. Corse was a self-employed business consultant. Mr. Cosgrove joined the Company in 1992 as Vice President and Chief Financial Officer of what was then its Computer Learning Center division and has been Vice President and Chief Financial Officer of the Company since October 1994. From March 1990 to 1992, he served as Vice President, Controller of the government operations division of PRC. Ms. Luster joined the Company in November 1995 as Vice President. She served as Chief Operating Officer of the Company from November 1995 until November 1998. From April 1994 to November 1995, she was a partner of Tower Technologies, Inc., an information technology consulting company. From January 1992 to April 1994, she was Senior Vice President of Infodata Systems, Inc., a document management software company, and from May 1986 to January 1992, she served as Senior Vice President of Operations with AGS Information Services, a systems development company. Ms. Strachota joined the Company in February 1998 as Vice President. From January 1982 to February 1998, she was Senior Vice President and Chief Operating Officer of Interealty Corporation, a professional services firm serving the real estate industry. Mr. Gaines has been Chairman of the Board of Directors since October 1994 and has served as a director since 1987. From 1987 to October 1994 and from 1988 to October 1994, he served as President and Chief Executive Officer of the Company and of Mohr Development Incorporated, respectively. From 1989 through September 1995, Mr. Gaines served as President of Blessing/White. I-1 59 ITEM 11. EXECUTIVE COMPENSATION This information required by this Item 11 concerning remuneration of the Company's officers and directors and information concerning material transactions involving such officers and Directors is incorporated herein by reference to the company's definitive Proxy Statement for its 1999 Annual Meeting of Stockholders which will be filed pursuant to Regulation 14A within 120 days after the end of the Company's last fiscal year. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this Item 12 concerning the stock ownership of management and five percent beneficial owners is incorporated herein by reference to the Company's definitive Proxy Statement for its 1999 Annual Meeting of Stockholders which will be filed pursuant to Regulation 14A within 120 days after the end of the Company's last fiscal year. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS EMPLOYMENT AGREEMENTS On February 1, 1997, the Company entered into an employment agreement with the President and Chief Executive Officer of the Company, Reid Bechtle. The Agreement has a term of one year but shall be automatically renewed for successive one-year periods unless the Company notifies Mr. Bechtle of non- renewal at least 90 days prior to the end of the initial term or any renewal term. The agreement provides for an annual salary of $265,000, which may be increased from time to time by the Compensation Committee of the Company's Board of Directors, a guaranteed annual bonus equal to 25% of Mr. Bechtle's salary and an additional annual bonus payable based on achievement by the Company of certain revenue and income targets. In the event Mr. Bechtle's employment is terminated other than for cause, as defined in the agreement, or due to his voluntary resignation, he is entitled to receive an amount equal to two times his then effective base salary and guaranteed bonus. In addition, if Mr. Bechtle's employment is terminated as the result of a change of control as defined in the agreement, he is entitled to receive an amount equal to three times the greater of (i) the average annual total compensation paid to him over the Company's last three fiscal years or (ii) total compensation paid during the Company's most recent fiscal year ended. On January 15, 1998, the Company entered into a severance agreement with the Chief Financial Officer of the Company, Charles Cosgrove. The agreement will expire upon the termination of Mr. Cosgrove's employment with the Company for any reason whatsoever. The agreement provides for an annual salary of not less than $165,000, which may be increased from time to time by the Compensation Committee of the Company's Board of Directors. In addition, the agreement specifies that Mr. Cosgrove shall be eligible to receive an annual bonus payable under the Company's bonus plan in accordance with the bonus criteria established by the Company's Board of Directors. In the event Mr. Cosgrove's employment is terminated without cause or he resigns for reasons defined in the agreement, he is entitled to receive a lump sum payment in an amount equal to one times his base salary in effect as of the date of termination. In addition, if Mr. Cosgrove's employment is terminated as a result of a change in control as defined in the agreement, he will receive a lump sum amount equal to one and one half times his base salary plus one and one half times his prior fiscal year bonus or current year target bonus, whichever is larger. On June 15, 1998, the Company entered into a severance agreement with the Vice President of Operations of the Company, Susan L. Luster. The agreement will expire upon the termination of Ms. Luster's employment with the Company for any reason whatsoever. The agreement provides for an annual salary of not less than $157,500, which may be increased from time to time by the Compensation Committee. In the event Ms. Luster's employment is terminated without cause or resignation for reasons defined in the agreement, she is entitled to a lump sum of 12 months of salary for termination. In addition, if she were terminated as a result of a change in control as defined in the agreement, she will receive a lump sum amount equal to one and one half times her base salary. I-2 60 On November 3, 1998, the Company entered into a severance agreement with the President of the Company, John L. Corse. The agreement will expire upon the termination of Mr. Corse's employment with the Company for any reason whatsoever. The agreement provides for an annual salary of not less than $215,000, which may be increased from time to time by the Compensation Committee. In the event Mr. Corse's employment is terminated without cause or resignation for reasons defined in the agreement, he is entitled to a lump sum of one and one half times his annual salary for termination. In addition, if he were terminated as a result of a change in control as defined in the agreement, he will receive a lump sum amount equal to two times is current base salary and two times his annual bonus of the prior fiscal year. OTHER RELATED PARTY TRANSACTIONS The Company has adopted a policy that all transactions between the Company and its officers, directors and other affiliates must be approved by a majority of the members of the Company's Board of Directors and by a majority of the disinterested members of the Company's Board of Directors and on terms no less favorable to the Company than could be obtained from unaffiliated third parties. In addition, this policy requires that any loans by the Company to its officers, directors or other affiliates be for bona fide business purposes only. ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K The following documents are filed as part of this report: A. Consolidated Financial Statements, see index in Item 8 on page F-1 (1) Report of Independent Accountants (2) Consolidated Financial Statements (a) Consolidated Statements of Operations for the years ended January 31, 1999; Statements of Operations for the years ended January 31, 1998 and 1997; (b) Consolidated Balance Sheet as of January 31, 1999; Balance Sheet as of January 31, 1998; (c) Consolidated Statement of Stockholders' Equity as of January 31, 1999; Statements of Stockholders' Equity as of January 31, 1998 and 1997; (d) Consolidated Statement of Cash Flows for the years ended January 31, 1999; Statements of Cash Flows for the years ended January 31, 1998 and 1997; (e) Notes to Consolidated Financial Statements B. Consolidated Financial Statement Schedule, see index in Item 8 on page F-1 C. Exhibits
EXHIBIT NUMBER DESCRIPTION OF EXHIBIT SEQUENTIALLY NUMBERED PAGE - ------- ---------------------- -------------------------- 2.1 Asset Purchase Agreement dated November Incorporated by reference to Exhibit 2 of 7, 1997, by and among the Company, BEC, the Registrant's Form S-3 Registration CTG, David F. Carney and Sandra E. Carney Statement filed January 22, 1998 (No. 333-44729) 2.2 Asset Purchase Agreement dated December Incorporated by reference to Exhibit 99.1 31, 1997 by and among the Company, of the Company's Current Report on Form Markerdowne Corporation, Graeme Dorras, 8-K filed March 10, 1998 (the "Form 8-K") Randy Proto and Chris Coutts
I-3 61
EXHIBIT NUMBER DESCRIPTION OF EXHIBIT SEQUENTIALLY NUMBERED PAGE - ------- ---------------------- -------------------------- 2.3 Amended and Restated Share Purchase Incorporated by reference to Exhibit 99.2 Agreement dated February 20, 1998 by and of the Form 8-K) among Computer Learning Centers, Inc., Computer Learning Centers of Quebec, Inc., Delta College, Inc., Roger Matte, Marie Josee-Matte, Dominique Matte, Johanne Matte, Suzanne Matte and Dolmen (1994) Inc. 3.1 Second Amended and Restated Certificate Incorporated by reference to Exhibit 3.1 of Incorporation, as amended of the Registrant's report on Form 10-Q for the quarter ended July 31, 1997 filed September 9, 1997 3.2 Second Amended and Restated Certificate Incorporated by reference to Exhibit 3.3 of Incorporation of the Registrant of the Registrant's Report on Form 10-Q filed July 14, 1995 (the "1995 Form 10-Q") 3.3 Amended and Restated Bylaws of the Incorporated by reference to Exhibit 3.4 Registrant of the Registrant's Form S-1 Registration Statement, as amended, filed March 29, 1995 (No. 33-90716) (the "Form S-1") 4.1 Form of Certificate for Shares of Incorporated by reference to Exhibit 4.1 Registrant's Common Stock of Form S-1 10.1 Severance Agreement, dated January 15, Incorporated by reference to Exhibit 10 1998, by and between Charles L. Cosgrove of the Registrant's S-3 Registration and the Registrant Statement filed January 22, 1998 10.2* Long-Term Incentive Plan, as amended Incorporated by reference to Exhibit 10.1 of the Form S-1 10.3* 1995 Stock Incentive Plan, as amended by Incorporated by reference to Exhibit 10.1 the Board of Directors on March 23, 1996. of the Registrant's Report on Form 10-Q filed June 13, 1996 10.4* 1995 Non-Employee Directors Stock Option Incorporated by reference to Exhibit 10.3 Plan of the Form S-1 10.5 Second Amended and Restated Shareholders' Incorporated by reference to Exhibit 10.1 Agreement of the 1995 Form 10-Q 10.6 Assignment Agreement, dated as of Incorporated by reference to Exhibit 10.6 February 27, 1995, by and among Blessing/ of the Form S-1 White Inc., Harry H. Gaines and the Registrant. 10.7 Voting Agreement dated May 5, 1995 by and Incorporated by reference to Exhibit among General Atlantic Corporation, 10.16 of the Form S-1 General Atlantic Partners II, L.P. and GAP-CLC Partners, L.P. 10.8 Stock Repurchase Agreement, dated May 5, Incorporated by reference to Exhibit 1995, by and between Bankers Trust 10.17 of the Form S-1 (Delaware) and the Registrant. 10.9 Stock Repurchase Agreement, dated May 5, Incorporated by reference to Exhibit 1995 by and between BancBoston Capital, 10.18 of the Form S-1 Inc. and the Registrant.
I-4 62
EXHIBIT NUMBER DESCRIPTION OF EXHIBIT SEQUENTIALLY NUMBERED PAGE - ------- ---------------------- -------------------------- 10.10 Stock Repurchase Agreement, dated May 5, Incorporated by reference to Exhibit 1995 by and between GAP-CLC Partners, 10.19 of the Form S-1 L.P. and the Registrant. 10.11 Tax Sharing and Indemnification Agreement Incorporated by reference to Exhibit by and between the Registrant and 10.26 of the Form 1996 10-K Blessing/ White, Inc. 10.13 Employment Agreement, dated February 1, Incorporated by reference to Exhibit 1997, by and between Reid Bechtle and the 10.33 of the Registrant's Form 10-K filed Registrant. April 30, 1997 10.14 Credit Agreement, dated December 23, 1996 Incorporated by reference to Exhibit by and between CoreStates Bank, N.A. and 10.34 of the Registrant's Form 10-K filed the Registrant. April 30, 1997 10.15 Severance Agreement, dated June 15, 1998, Incorporated by reference to Exhibit 10.1 by and between Susan L. Luster and the of the Form 10-Q filed September 14, 1998 Registrant. 10.16 Severance Agreement, dated November 3, Filed herewith 1998, by and between John L. Corse and the Registrant. 10.17* 1998 Stock Incentive Plan Incorporated by reference to Exhibit 99.1 of the Registrant's Form S-8 filed December 23, 1998 10.20 Stipulation and Agreement of Settlement, Filed herewith dated February 17, 1999, by and between Ganesh, L.L.C., et al., On Behalf of themselves and All Others Similarly Situated and the Registrant (Civil Action No. 98-859-A filed in the U.S. District Court-Eastern District of Virginia). 11.1 Computation of historical and Filed herewith supplemental pro forma earnings per share. 21.1 List of subsidiaries. Incorporated by reference to Exhibit 21.1 of the Form S-1 23.1 Consent of PricewaterhouseCoopers LLP Filed herewith 23.2 Consent of PricewaterhouseCoopers LLP Filed herewith 27 Financial Data Schedule Filed herewith 99.1 Computer Learning Centers, Inc. Employee Incorporated by reference to Exhibit 99.1 Stock Purchase Plan dated July 10, 1998 of the Registrant's Form S-8 Registration Statement filed December 31, 1997
- --------------- * This exhibit is a compensatory plan or arrangement in which executive officers or directors of the Registrant participate. I-5 63 PART IV D. Reports on Form 8-K
REPORT DATE EVENT REPORTED ----------- -------------- February 17, 1998 The Company announced that it had completed the separate acquisitions of Markerdowne Corporation and Delta College, Inc. in February 1998. March 10, 1998 The Company announced that it was served with a complaint by the Attorney General of Illinois alleging that the Company violated the state's private Business and Vocational School Act and Consumer Fraud and Deceptive Business Practices Act. June 8, 1998 The Company announced that it had reached a settlement with the previously announced complaint by the Attorney General of Illinois alleging violation of the Acts. January 11, 1999 The Company announced that it had entered into a memorandum of understanding to settle a previously disclosed class-action shareholder lawsuit filed against the Company in early 1998.
I-6 64 SCHEDULE II COMPUTER LEARNING CENTERS, INC. VALUATION AND QUALIFYING ACCOUNTS (DOLLAR AMOUNTS IN THOUSANDS)
BALANCE AT CHARGED TO BEGINNING OF COSTS AND NET BALANCE AT YEAR EXPENSES WRITE-OFFS END OF YEAR ------------ ---------- ---------- ----------- January 31, 1997 Allowance for doubtful accounts................. 1,507 3,084 (2,341) 2,250 January 31, 1998 Allowance for doubtful accounts................. 2,250 4,794 (3,131) 3,913 January 31, 1999 Allowance for doubtful accounts................. 3,913 8,388 (4,168) 8,133
The Company's allowance for doubtful accounts at January 31, 1999 and 1998 includes amounts applicable to current accounts receivable ($5,999 and $2,382, respectively) and long-term accounts receivable ($2,134 and $1,531, respectively). I-7 65 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. COMPUTER LEARNING CENTERS, INC. Dated: May 3, 1999 By: /s/ REID R. BECHTLE ------------------------------------ Reid R. Bechtle, Chief Executive Officer Pursuant to the requirements of the Securities Act of 1934, this report has been signed by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE --------- ----- ---- /s/ REID R. BECHTLE Chief Executive Officer and Director May 3, 1999 - -------------------------------------- (Principal Executive Officer) Reid R. Bechtle /s/ JOHN L. CORSE President, Chief Operating Officer, May 3, 1999 - -------------------------------------- and Director John L. Corse /s/ CHARLES L. COSGROVE Vice President and Chief Financial May 3, 1999 - -------------------------------------- Officer (Principal Financial Officer) Charles L. Cosgrove /s/ MARK M. NASSER Controller (Principal Accounting May 3, 1999 - -------------------------------------- Officer) Mark M. Nasser /s/ HARRY H. GAINES Director May 3, 1999 - -------------------------------------- Harry H. Gaines /s/ RALPH W. CLARK Director May 3, 1999 - -------------------------------------- Ralph W. Clark /s/ IRA D. COHEN Director May 3, 1999 - -------------------------------------- Ira D. Cohen /s/ STEPHEN P. REYNOLDS Director May 3, 1999 - -------------------------------------- Stephen P. Reynolds
S-1 66 EXHIBIT 11.1 COMPUTATION OF EARNINGS PER SHARE JANUARY 31, 1999, 1998, AND 1997 (DOLLAR AMOUNTS IN THOUSANDS, EXPECT PER SHARE AMOUNTS) SEE NOTES 3 AND 5 TO CONSOLIDATED FINANCIAL STATEMENTS
1999 1998 1997 ----------- ----------- ----------- Net (loss) income..................................... $ (586) $ 9,580 $ 5,601 =========== =========== =========== Weighted average number of common shares outstanding -- Basic................................ 17,318,049 15,892,943 13,718,912 Dilutive securities: Employee stock options.............................. (a) 1,197,052 998,199 Non employee stock options.......................... (a) 98,869 201,507 Subscription note receivable........................ -- -- 99,226 ----------- ----------- ----------- Weighted average number of common shares outstanding -- Diluted.............................. 17,318,049 17,188,864 15,017,844 =========== =========== =========== Earnings per share: Basic............................................... $ (0.03) $ 0.60 $ 0.41 =========== =========== =========== Diluted............................................. $ (0.03) $ 0.56 $ 0.37 =========== =========== ===========
- --------------- (a) The Company had a total of 1,664,831 options outstanding as of January 31, 1999; however, these options are not included in the calculation of the number of dilutive securities outstanding as their impact is antidulitive due to the net loss in 1999 and that certain options exercise prices were below the average market price of the common shares during the period. Share amounts and earnings per share restated to reflect the January 1998 two for one stock split and the April 1997 three for two stock split. 67 EXHIBIT 23.1 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (Nos. 333-17009, 333-43633 and 333-69583) of Computer Learning Centers, Inc. of our report dated March 17, 1999, except as to Note 16, which is as of April 29, 1999, appearing on page F-2 of this Form 10-K. /s/ PRICEWATERHOUSECOOPERS LLP - --------------------------------------------------------- PricewaterhouseCoopers LLP New York, New York May 3, 1999 68 EXHIBIT 23.2 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the Prospectus constituting part of the Registration Statements on Form S-3 (Nos. 333-44729 and 333-48467) of Computer Learning Centers, Inc. of our report dated March 17, 1999, except as to Note 16, which is as of April 29, 1999, appearing on page F-2 of this Form 10-K. /s/ PRICEWATERHOUSECOOPERS LLP - --------------------------------------------------------- PricewaterhouseCoopers LLP New York, New York May 3, 1999 EX-10.16 2 SEVERANCE AGREEMENT 1 EXHIBIT 10.16 SEVERANCE AGREEMENT THIS SEVERANCE AGREEMENT (this "Agreement") made as of the 3rd day of November, 1998 by and between COMPUTER LEARNING CENTERS, INC., a Delaware corporation (the "Company"), and JOHN L. CORSE (the "Executive"). The Executive is presently employed by the Company as its President and Chief Operating Officer. The Board of Directors of the Company (the "Board") desires to set forth the nature and amount of compensation and other benefits to be provided to Executive and any of the rights of the Executive in the event of his termination of employment with the Company. The Executive is willing to commit himself to continue to serve the Company, on the terms and conditions herein provided. In order to effect the foregoing, the Company and the Executive wish to enter into this Agreement under the terms and conditions set forth below. Accordingly, in consideration of the promises and the respective covenants and agreements of the parties herein contained, and intending to be legally bound hereby, the parties hereto agree as follows: 1. Employment. The Company hereby agrees to continue to employ the Executive, and the Executive hereby agrees to continue to serve the Company, on the terms and conditions set forth herein. 2. Term. The term of Executive's employment under Section 1 will terminate upon the termination of Executive's employment with the Company for any reason whatsoever. No such termination shall affect any of the Company's other obligations under this Agreement arising at or after such termination of employment. 3. Position and Duties. The Executive shall serve as President and Chief Operating Officer of the Company and shall have such responsibilities and authority as may normally be exercised by a president and chief operating officer of a company. 4. Place of Performance. The Executive shall be based at the current principal executive offices of the Company in Northern Virginia, or in the Company's headquarters, provided that such headquarters is not more than thirty-five (35) miles from the location of the Company's principal executive offices on the date hereof. 5. Compensation and Related Matters. (a) Base Salary. During the Executive's employment with the Company, the Company shall pay to the Executive a salary at a rate of not less than Two Hundred Fifteen Thousand Dollars ($215,000) per annum in equal installments as nearly as practicable on the normal payroll periods for employees of the Company generally (the "Base Salary"). The Base Salary may be increased from time to time and, if so increased, shall not thereafter be decreased during the term of this Agreement. 1 2 (b) Bonus. The Executive shall be eligible to receive an annual bonus (the "Annual Bonus") payable under the Company's bonus plan in accordance with the bonus criteria established by the Board for the Executive on an annual basis. (c) Expenses. During the term of the Executive's employment hereunder, the Executive shall be entitled to receive prompt reimbursement for all reasonable expenses incurred by the Executive in performing services hereunder, including all expenses of travel and living expenses while away from home on business or at the request of and in the service of the Company, provided that such expenses are incurred and accounted for in accordance with the policies and procedures established by the Company. (d) Benefits. During the term of the Executive's employment hereunder, the Company shall maintain in full force and effect, and the Executive shall be entitled to continue to participate in, all of its employee benefit plans and arrangements in effect on the date hereof in which the Executive participates or receives benefits, or plans or arrangements providing the Executive with at least equivalent benefits thereunder. The Company shall not make any changes in such plans and arrangements which would adversely affect the Executive's rights or benefits thereunder, unless such change occurs pursuant to a program applicable to all officers of the Company and does not result in a proportionately greater reduction in the rights of or benefits to the Executive as compared with any other officers of the Company. The Executive shall be entitled to participate in or receive benefits under any employee benefit plan or arrangement made available by the Company in the future to its officers and key management employees subject to and on a basis consistent with the terms, conditions and overall administration of such plans and arrangements. Nothing paid to the Executive under any plan or arrangement presently in effect or made available in the future shall be deemed to be in lieu of any amounts payable to the Executive pursuant to this Section 5. 6. Termination and Definitions. (a) Cause. This Agreement shall immediately be terminated and neither party shall have any future obligation hereunder, except for the Company's obligations in Section 7 hereof, and except for the Executive's obligations in Section 8 hereof, if the Executive's employment is terminated for Cause. (b) Termination by the Executive. The Executive may terminate his employment hereunder for Good Reason. (c) Notice of Termination. Any termination of the Executive's employment by the Company or by the Executive shall be communicated by written Notice of Termination to the other party hereto. (d) Definitions. (i) For purposes of this Agreement, termination "for Cause" shall arise where termination results from theft or dishonesty in the conduct of the Company's 2 3 business, or intoxication while on duty, or conviction of a felony, in each case having a material adverse effect on the business of the Company. (ii) For purposes of this Agreement, "Good Reason" shall mean (A) a Change in Control of the Company (as defined below), (B) a decrease in the total amount of the Executive's Base Salary below its level in effect on the date hereof, (C) a reduction in the importance of the Executive's job responsibilities without the Executive's consent or (D) a geographical relocation of the Executive without his consent. (iii) For purposes of this Agreement, a "Change in Control" of the Company shall be deemed to have occurred if (A) any person (as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934 (the "Exchange Act"), is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing twenty-five percent (25%) of more of the combined voting power of the Company's then outstanding securities, (B) during any period of two (2) consecutive years during the term of this Agreement, individuals who at the beginning of such period constitute the Board cease for any reason to constitute at least a majority thereof, unless the election of each director who was not a director at the beginning of such period has been approved in advance by directors representing at least two thirds of the directors then in office who were directors at the beginning of the period, (C) the shareholders of the Company approve a merger or consolidation involving the Company resulting in a change of ownership of a majority of the outstanding shares of capital stock of the Company, or (D) the shareholders of the Company approve a plan of liquidation or dissolution of the Company or the sale or disposition by the Company of all or substantially all of the Company's assets. (iv) For purposes of this Agreement, a "Notice of Termination" shall mean a notice which shall indicate the specific termination provision in this Agreement relied upon and shall set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Executive's employment under the provision so indicated. 7. Compensation upon Termination. (a) Termination for Cause or Resignation Without Good Reason. I f (i) the Executive's employment shall be terminated for Cause, or (ii) the Executive voluntarily resigns from the employ of the Company and Good Reason shall not have occurred, then the Company shall pay the Executive his Base Salary through the date of delivery to him of a Notice of Termination at the rate then in effect at the time and date the Notice of Termination is delivered, and the Company shall have no further obligations to the Executive under this Agreement. (b) Termination Without Cause or Resignation for Good Reason. If the Company shall terminate the Executive's employment other than pursuant to Section 6(a) hereof (it being understood that a purported termination pursuant to Section 6(a) hereof, which is disputed and finally determined not to have been pursuant to Section 6(a) shall be a termination by the Company pursuant to Section 6(b)), then: 3 4 (i) the Company shall pay to the Executive (A) his Base Salary through the date of termination at the rate in effect at the time Notice of Termination is delivered, plus (B) his Annual Bonus pro-rated through the date of termination; and (ii) in lieu of any further salary or bonus payments to the Executive for periods subsequent to the date of termination, the Company shall pay on the date of termination, as severance pay to the Executive, a lump sum payment in an amount equal to one and one half (1 1/2) times the Executive's Base Salary in effect as of the date of termination. (c) Termination Upon a Change in Control. If there is a Change in Control of the Company or there has been a public announcement of a Change in Control of the Company (provided, however, that consummation of the Change in Control of the Company shall be a condition precedent to the effectiveness of this provision) and at any time thereafter the employment of the Executive under this Agreement is terminated other than pursuant to Section 6(a) hereof by the Company or a successor entity, then: (i) the Company shall pay to the Executive (A) his Base Salary through the date of termination at the rate in effect at the time Notice of Termination is given, plus (B) his Annual Bonus pro-rated through the date of termination; and (ii) in lieu of any further salary or bonus payments to the Executive for periods subsequent to the date of termination, the Company shall pay on the date of termination as severance pay to the Executive, a lump sum payment in an amount equal to (A) two (2) times the Executive's Base Salary in effect as of the date of termination plus (B) two (2) times the Annual Bonus paid to the Executive in the prior fiscal year of the Company. (d) Continuation of Benefit Plans. Upon any termination of the Executive's employment other than pursuant to Section 6(a) hereof, the Company shall maintain in full force and effect for the continued benefit of the Executive for eighteen (18) months, or twenty-four (24) months if there has previously occurred a Change in Control of the Company, all employee benefit plans and programs in which the Executive was entitled to participate. (e) Participation in Benefit Plans after Termination of Employment. The Executive shall be entitled to continue to participate in any benefit plan or program of the Company for twelve (12) months after the expiration of the period provided for in 7(d), provided, that the Executive pays the direct cost of any such benefit plan or program. 8. Covenants Not to Compete or Hire Employees. It is recognized and understood by the parties hereto that Executive, through Executive's association with the Company as an employee, shall acquire a considerable amount of knowledge and goodwill with respect to the business of the Company, which knowledge and goodwill are extremely valuable to the Company and which would be extremely detrimental to the Company if used by Executive to compete with the Company. It is, therefore, understood and agreed by the parties hereto that, because of the nature of the business of the Company, it is necessary to afford fair protection to the Company from such competition by Executive. Consequently, as a material inducement to the Company to enter into this Agreement, Executive covenants and agrees that for the 4 5 period commencing with the date hereof and ending one (1) year after Executive's termination of employment with the Company, Executive shall not engage, directly, indirectly or in concert with any other person or entity, in the information technology training industry in the geographical area of the contiguous forty-eight (48) states of the United States. Executive further covenants and agrees that for the period commencing on the date of Executive s termination of employment for any reason whatsoever and ending one (1) year after Executive's termination of employment with the Company, Executive shall not, directly or indirectly, hire or engage or attempt to hire or engage any individual who shall have been an employee of the Company at any time during the one (1)-year period prior to the date of Executive's termination of employment with the Company, whether for or on behalf of Executive or for any entity in which Executive shall have a direct or indirect interest (or any subsidiary or affiliate of any such entity), whether as a proprietor, partner, co-venturer, financier, investor or stockholder, director, officer, employer, employee, servant, agent, representative or otherwise. 9 Successors; Binding Agreement. (a) Successors. The Company will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company, by agreement in form and substance satisfactory to the Executive, to expressly assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. As used in this Agreement, "Company" shall mean the Company as hereinbefore defined and any successor to its business and/or assets as aforesaid which executes and delivers the agreement provided for in this Section 9 or which otherwise becomes bound by all the terms and provisions of this Agreement by operation of law. (b) Binding Agreement. This Agreement and all rights of the Executive hereunder shall inure to the benefit of and be enforceable by the Executive's personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. If the Executive should die while any amounts would still be payable to him hereunder if he had continued to live, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to the Executive's devisee, legatee, or other designee or, if there be no such designee, to the Executive's estate. 10. Notice. For the purposes of this Agreement, notices, demands and all other communications provided for in the Agreement shall be in writing and shall be deemed to have been duly given when delivered or (unless otherwise specified) mailed by United States registered mail, return receipt requested, postage prepaid, addressed as follows: If to the Executive: John L. Corse 13906 Whetstone Manor Court Clifton, Virginia 20124 If to the Company: 11350 Random Hills Road Suite 240 Fairfax, Virginia 22030 5 6 or to such other address as any party may have furnished to the other in writing in accordance herewith, except that notices of change of address shall be effective only upon receipt. 11. Prior Agreement. All prior agreements between the Company and the Executive with respect to the employment of the Executive are hereby superseded and terminated effective as of the date hereof and shall be without further force or effect. 12. Miscellaneous. No provisions of this Agreement may be modified, waived or discharged unless such waiver, modification or discharge is agreed to in writing signed by the Executive and duly authorized officer of the Company. No waiver by either party hereto at any time of any breach by the other hereto of, or compliance with, any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. No agreements or representations, oral or otherwise, express or implied, with respect to the subject matter hereof have been made by either party which are not set forth expressly in this Agreement. The validity, interpretation, construction and performance of this Agreement shall be governed by the laws of the Commonwealth of Virginia. 13. Validity. The invalidity or unenforceability of any provision or provisions of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement, which shall remain in full force and effect. 14. Arbitration. Any dispute or controversy arising under or in connection with this Agreement shall be settled exclusively by arbitration, conducted before a panel of three arbitrators, in Washington, D.C., in accordance with the rules of the American Arbitration Association then in effect. The expense of such arbitration shall be borne by the Company. 6 7 IN WITNESS WHEREOF, the parties have executed this Agreement effective as of the date and year first above written. COMPUTER LEARNING CENTERS, INC. Date: February 17, 1999 By: /S/ Harry H. Gaines ----------------- -------------------- Harry H. Gaines, Chairman of the Board EXECUTIVE: Date: February 21, 1999 /S/ John L. Corse ----------------- ----------------- John L. Corse 7 EX-10.20 3 STIPULATION AND AGREEMENT OF SETTLEMENT 1 EXHIBIT 10.20 IN THE UNITED STATES DISTRICT COURT FOR THE EASTERN DISTRICT OF VIRGINIA ALEXANDRIA DIVISION
GANESH, L.L.C., et al., On Behalf of ) Themselves and All Others Similarly Situated, ) ) Plaintiffs, ) ) Civil Action No. 98-859-A vs. ) CLASS ACTION ) COMPUTER LEARNING CENTERS, INC., REID R. BECHTLE, ) CHARLES L. COSGROVE, HARRY H. GAINES and ) STEPHEN P. REYNOLDS, ) ) Defendants. ) )
STIPULATION AND AGREEMENT OF SETTLEMENT This stipulation and agreement of settlement dated as of February 17, 1999 (the "Stipulation") is submitted pursuant to Rule 23 of the Federal Rules of Civil Procedure. Subject to the approval of the Court, this Stipulation is entered into among Plaintiffs Craig Anderson, Thomas J. Arnold, Khousheh Azmoudeh, Roger J. Benkovic, John E. Bentley, Donald L. Berry, Roderick Brown, Ronald T. Costello, James C. Crowdus, Christopher Dickison, James J. Dougherty, Steward Eng, Jahanguir Esfandi, Vincent Galano, Courtney G. Greeley, Terrie Vaile Hauck, Charles L. Hiltz, Dwight & Bruce Howland, Craig Imler, Michael J. Laub, Phyllis Lieblich, Frank Longsdon, S. Markpetsch, Timothy McClosky, McLean Trading Co., Jerome Menezes, Howard Merle, Hal Merritt, Sylvin & Evelyn Pickner, Wayne L. Pravitz, Mark & Michele Senda, Mark A. Sohasky, Buck Scogin, Tim Shoemaker, Alvin R. Sprintz, Teddy David Stein, George W. Temple, Robert J. Trinka, True Value Fund, L.P., Nathan Uffenheimer, Debra L. Vitoux, Jerry Wishes, Lu Zhang, Gerry A. Zimmerman, Ganesh, L.L.C., Jacob Spinner, Sybil Meisel, Chet Meyerson, Carmen Caiazzo and Scott L. Silver, and the Class as hereinafter defined(1), - -------- (1) Plaintiffs designated the following Plaintiffs as Class Representatives: Vincent Galano, Phyllis Leiblich, Frank Longsdon, Jerome Menezes, Juhanguie Esfandi, Timothy McClosky, Thomas J. Arnold, Howard Merle, Charles L. Hiltz, Robert J. Trinka, John E. Bentley and Craig Anderson. 2 and defendants Computer Learning Centers, Inc., ("CLC") Reid R. Bechtle, Charles L. Cosgrove, Harry H. Gaines and Stephen P. Reynolds, (hereinafter the "Defendants"), by and through their respective counsel. WHEREAS: A. Various actions have been consolidated under the above caption which is hereinafter referred to as the "Action". B. The Consolidated Amended Complaint (the "Consolidated Complaint") filed in this Court in this Action on or about August 7, 1998, generally alleges, among other things, that Defendants issued materially false and misleading press releases and other statements regarding CLC's financial condition during the Class Period --April 30, 1997 through April 6, 1998 -- in a scheme to artificially inflate the value of CLC's securities. C. The Consolidated Complaint further alleges that Plaintiffs and the other class members purchased the common stock of CLC during the Class Period at prices artificially inflated as a result of the Defendants' dissemination of materially false and misleading statements regarding CLC in violation of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, and Rule 10b-5 promulgated thereunder. D. The Defendants deny any wrongdoing whatsoever and this Stipulation shall in no event be construed or deemed to be evidence of or an admission or concession on the part of any Defendant with respect to any claim or of any fault or liability or wrongdoing or damage whatsoever, or any infirmity in the defenses that Defendants have asserted. Defendants recognize, however, that the litigation has been filed with adequate basis in fact under Federal Rule of Civil Procedure 11, that the litigation is being voluntarily settled after advice of counsel, and that the terms of the settlement are fair, adequate and reasonable. This Stipulation shall not be construed or deemed to be a concession by any plaintiff of any infirmity in the claims asserted in the Action. E. Plaintiffs' Counsel have conducted an investigation relating to the claims and the underlying events and transactions alleged in the complaints, including the analysis of over three hundred fifty thousand pages of documents produced by Defendants and numerous non-parties and interviews and depositions of witnesses. Plaintiffs' Counsel have analyzed the evidence adduced during pretrial discovery and have researched the applicable law with respect to the claims of Plaintiffs and the Class against the Defendants and the potential defenses thereto. - 2 - 3 F. Plaintiffs, by their counsel, have conducted discussions and arms'-length negotiations with counsel for Defendants with respect to a compromise and settlement of the Action with a view to settling the issues in dispute and achieving the best relief possible consistent with the interests of the Class; G. As part of the settlement discussions, the Defendants, while continuing to deny any liability, have stated their belief that the United States Department of Education financial responsibility regulations, and similar regulations of at least one state in which CLC does business, impose various requirements such that if a substantial Judgment (e.g. $15 million or more) were entered against CLC, CLC could be required to post a very large cash surety to enable it to continue its participation in certain federal student aid programs and could lose its right to continue in business in the state. If this occurred, CLC's ability to continue in business would be in substantial doubt, and CLC probably would be required to seek protection under the bankruptcy laws, which in turn would, as a matter of federal law, result in the immediate, complete and permanent exclusion of CLC from participation in the federal student aid programs and therefore require the liquidation of the company, in which event the ultimate recovery would likely be substantially less than is being obtained in this Settlement; H. Based upon their investigation and pretrial discovery as set forth above, counsel for Plaintiffs and the Class have concluded that the terms and conditions of this Stipulation are fair, reasonable and adequate to the Class, and in their best interests, and have agreed to settle the claims raised in the Action pursuant to the terms and provisions of this Stipulation, after considering (a) the substantial benefits that the members of the Class will receive from settlement of the Action, (b) the attendant risks of litigation, and (c) the desirability of permitting the Settlement to be consummated as provided by the terms of this Stipulation. NOW THEREFORE, without any admission or concession on the part of Plaintiffs of any lack of merit of the Action whatsoever, and without any admission or concession of any liability or wrongdoing or lack of merit in the defenses whatsoever by Defendants, it is hereby further STIPULATED AND AGREED, by and among the parties to this Stipulation, through their respective attorneys, subject to approval of the Court pursuant to Rule 23(e) of the Federal Rules of Civil Procedure, in consideration of the benefits flowing to the parties hereto from the Settlement, that all Settled Claims (as defined below) as against the Released Parties (as defined below) shall be compromised, settled, released and dismissed with prejudice, upon and subject to the following terms and conditions: - 3 - 4 CERTAIN DEFINITIONS 1. As used in this Stipulation, the following terms shall have the following meanings: a. "Class" and "Class Members" means, for the purposes of settlement and for the purposes of this Stipulation only, all persons who purchased the common stock of CLC during the period April 30, 1997 through and including April 6, 1998, excluding all purchase transactions that were made to cover short positions. Excluded from the Class are the Defendants in this action, members of the immediate families of each of the Defendants, any person, firm, trust, corporation, officer, director or other individual or entity in which any Defendant has a controlling interest or which is related to or affiliated with any of the Defendants, and the legal representatives, heirs, successors in interest or assigns of any such excluded party. Also excluded from the Class are any putative Class Members who exclude themselves by filing a request for exclusion in accordance with the requirements set forth in the Notice. b. "Authorized Claimant" means a Class Member who submits a timely and valid Proof of Claim form to the Claims Administrator. c. "Class Period" means, for the purposes of this Stipulation only, the period of time from April 30, 1997 through and including April 6, 1998. d. "Defendants' Counsel" means the law firms of Hale and Dorr LLP and Paul, Weiss, Rifkind, Wharton & Garrison. e. "Effective Date of Settlement" or "Effective Date" means the date upon which the Settlement contemplated by this Stipulation shall become effective, as set forth in paragraph 22 below. f. "Notice" means the Notice of Pendency of Class Action, Hearing On Proposed Settlement and Attorneys' Fee Petition, and Notice of Right to Share in Settlement Fund, which is to be sent to members of the Class substantially in the form attached hereto as Exhibit 1 to Exhibit A. g. "Order and Final Judgment" means the proposed order substantially in the form attached hereto as Exhibit B. h. "Order for Notice and Hearing" means the proposed order substantially in the form attached hereto as Exhibit A. - 4 - 5 i. "Plaintiffs' Co-Lead Counsel" means counsel for Plaintiffs and the Class, the law firms of Milberg Weiss Bershad Hynes & Lerach LLP, Reinhardt & Anderson and Stull, Stull & Brody. j. "Publication Notice" means the summary notice of proposed Settlement and hearing for publication substantially in the form attached as Exhibit 3 to Exhibit A. k. "Released Parties" means any and all of the Defendants, their past or present subsidiaries, parents, affiliates, successors and predecessors, officers, directors, shareholders, agents, employees, attorneys, advisors, and investment advisors, insurers, auditors, accountants and any person, firm, trust, corporation, officer, director or other individual or entity in which any Defendant has a controlling interest or which is related to or affiliated with any of the Defendants, and the legal representatives, heirs, successors in interest or assigns of the Defendants. l. "Settled Claims" means any and all claims, rights or causes of action or liabilities whatsoever, whether based on federal, state, local, statutory or common law or any other law, rule or regulation, including both known and unknown claims, that have been or could have been asserted in any forum by the Plaintiffs, Class Members or any of them or the successors and assigns of any of them, whether directly, indirectly, representatively or in any other capacity, against any of the Released Parties which arise out of or relate in any way to the allegations, transactions, facts, matters or occurrences, representations or omissions involved, set forth, referred to or that could have been asserted in the Consolidated Complaint relating to the purchase of shares of the common stock of CLC during the Class Period, and including any claims relating to the defense of this action under Rule 11 of the Federal Rules of Civil Procedure or any other claim or motion for sanctions of any nature. m. "Settled Defendants' Claims" means (a) all claims asserted by any Defendant in the Action against any of the Plaintiffs, Class Members of their counsel, and (b) all claims, rights or causes of action or liabilities whatsoever, whether based on federal, state, local, statutory or common law or any other law, rule or regulation, including both known and unknown claims, that have been or could have been asserted in any forum by the Defendants or any of them or the successors and assigns of any of them, whether directly, indirectly, representatively or in any other capacity, against any of the Plaintiffs, Class Members or their attorneys, which arise out of or relate in any way to the institution or prosecution of the Action, and including any claims relating to the - 5 - 6 institution or prosecution of the Action under Rule 11 of the Federal Rules of Civil Procedure or any other claim or motion for sanctions of any nature. n. "Settlement" means the settlement contemplated by this Stipulation. o. "Claims Administrator" means the firm designated by Plaintiffs' Co-Lead Counsel to administer the Settlement. Scope and Effect of Settlement 2. The obligations incurred pursuant to this Stipulation shall be in full and final disposition of the Action and any and all Settled Claims as against all Released Parties and any and all Settled Defendants' Claims. 3. a. Upon the Effective Date of this Settlement, Plaintiffs and members of the Class on behalf of themselves, their heirs, executors, administrators, successors and assigns, beneficiaries, and any persons they represent, shall, with respect to each and every Settled Claim release and forever discharge, and shall forever be enjoined from prosecuting any Settled Claims against any of the Released Parties. b. Upon the Effective Date of this Settlement, each Defendant, on behalf of themselves and the Released Parties, shall release and forever discharge each and every of the Settled Defendants' Claim, and shall forever be enjoined from prosecuting the Settled Defendants' Claims. The Settlement Consideration 4. a. Defendants shall pay, within fifteen business (15) days from the date hereof, into an escrow account established at Citibank, N.A., or such other financial institution as the parties may agree, on behalf of Plaintiffs and the Class $3,000,000.00 (the "Cash Settlement Amount"). b. In addition CLC shall issue, on behalf of itself and the other Defendants, 550,000 shares of freely tradeable CLC common stock ("Shares") for the benefit of the Class at a guaranteed minimum value of $8.19 per share for a minimum total value of $4.5 million subject to the following terms and conditions: (1) If during the 10 trading days ending five business days prior to the final settlement hearing, or ending on any other date to which the parties may agree, the average closing market price per share of CLC stock for that ten day period (the "Average Price") is less than $8.19, Defendants - 6 - 7 will pay to plaintiffs, in the form(2) of cash and/or additional shares of CLC stock, an amount for each of the 550,000 shares equal to the difference between $8.19 and the Average Price, but in no event shall that additional amount paid exceed $6.19 per share; or (2) If the Average Price is $2.00 or less, Plaintiffs' Co-Lead Counsel may, at their option, terminate this agreement. CLC shall either register the shares of common stock to be delivered for the benefit of the Class or shall provide its counsel's certification that the shares are exempt from registration under Section 3(a)(10) of the Securities Act of 1933 and are therefore freely tradeable. CLC agrees to issue and deliver such shares on the instructions of Plaintiffs' Co-Lead Counsel, in whole or in part and from time to time as instructed by Plaintiffs' Co-Lead Counsel. c. The Cash Settlement Amount and any interest earned thereon, and the shares of CLC common stock (or the proceeds of the sale of any or all of such shares, if sold, and the interest and any dividends thereon) shall be the Gross Settlement Fund. 5. a. The Gross Settlement Fund, net of any Taxes (as defined below) on the income thereof, shall be used to pay (i) the Notice and Administration Costs referred to in Paragraph 7 hereof, (ii) the attorneys' fee and expense award referred to in Paragraph 8 hereof, (iii) the remaining administration expenses referred to in Paragraph 9 hereof. The balance of the Gross Settlement Fund after the above payments shall be the Net Settlement Fund which shall be distributed to the Authorized Claimants as provided in Paragraph Paragraphs 10-12 hereof. Any sums required to be held in escrow hereunder prior to the effective date shall be held by Milberg Weiss Bershad Hynes & Lerach LLP, and Stull, Stull & Brody as Escrow Agents for the Settlement Fund. All funds held by the Escrow Agents shall be deemed to be in custodia legis of the Court and shall remain subject to the jurisdiction of the Court until such time as the funds shall be distributed or returned to Defendants pursuant to this Stipulation and/or further order of the Court. The Escrow Agents shall invest any funds in excess of $100,000 in United States Government obligations with a maturity of 180 days or less, and shall collect and reinvest all interest accrued thereon. Any funds held in escrow in an amount of - ------------ (2) CLC shall have discretion to choose the form of such additional payment in cash or CLC Shares or any combination thereof. If additional CLC Shares are used to make up the shortfall, they shall be valued at the Average Price. - 7 - 8 less than $100,000 may be held in an interest bearing bank account insured by the FDIC. The parties hereto agree that the Settlement Fund is intended to be a Qualified Settlement Fund within the meaning of Treasury Regulation Section 1.468B-1 and that the Escrow Agents, as administrators of the Settlement Fund within the meaning of Treasury Regulation Section 1.468B-2(k)(3), shall be responsible for filing tax returns for the Settlement Fund and paying from the Settlement Fund any Taxes owed with respect to the Settlement Fund. Counsel for CLC agrees to provide promptly to the Escrow Agent the statement described in Treasury Regulation Section 1.468B-3(e). b. All (i) taxes on the income of the Settlement Fund, and (ii) expenses and costs incurred in connection with the taxation of the Settlement Fund (including, without limitation, expenses of tax attorneys and accountants) (collectively "Taxes") shall be paid out of the Settlement Fund, shall be considered to be a cost of administration of the settlement and shall be timely paid by the Escrow Agent without prior Order of the Court. i) Administration 6. The Claims Administrator shall administer the Settlement under Plaintiffs' Co-Lead Counsel's supervision and subject to the jurisdiction of the Court. Except as stated in Paragraph 14 hereof, Defendants shall have no responsibility for the administration of the Settlement and shall have no liability to the Class in connection with such administration. Defendants' Counsel shall cooperate in the administration of the Settlement to the extent reasonably necessary to effectuate its terms, including providing all information from CLC's transfer records concerning the identity of class members and their transactions. 7. Prior to the Effective Date, Plaintiffs' Co-Lead Counsel may expend from the Settlement Amount, without further approval from the Defendants or the Court, the reasonable costs and expenses associated with the administration of the Settlement, including without limitation, the costs of identifying members of the Class and effecting mail Notice and Publication Notice. Such amounts shall include, without limitation, the actual costs of publication, printing and mailing the Notice, reimbursements to nominee owners for forwarding notice to their beneficial owners, and the administrative expenses incurred and fees charged by the Claims Administrator in connection with providing notice and processing the claims filed. (ii) Attorneys' Fees And Expenses - 8 - 9 8. Plaintiffs' Counsel will apply to the Court for an award from the Gross Settlement Fund of attorneys' fees and reimbursement of expenses. Such attorneys' fee and expenses as are awarded by the Court shall be paid from the Gross Settlement Fund to Plaintiffs' Counsel immediately upon award, notwithstanding the existence of any timely filed objections thereto, or potential for appeal therefrom, or collateral attack on the settlement or any part thereof, subject to Plaintiffs' Counsel's obligation to make appropriate refunds or repayments to the settlement fund plus accrued interest, if and when, as a result of any appeal and/or further proceedings on remand, or successful collateral attack, the fee or cost award is reduced or reversed. (iii) Administration Expenses 9. Plaintiffs' Counsel will apply to the Court, on notice to Defendants' Counsel, for an order (the "Class Distribution Order") approving the Claims Administrator's administrative determinations concerning the acceptance and rejection of the claims filed herein and approving the fees and expenses of the Claims Administrator, and, if the Effective Date has occurred, directing payment of the Net Settlement Fund to Authorized Claimants. (iv) Distribution To Authorized Claimants 10. The Claims Administrator shall determine each Authorized Claimant's pro rata share of the "Net Settlement Fund" (the Gross Settlement Fund including interest net of Taxes and less all approved costs fees and expenses) based upon each Authorized Claimant's Recognized Claim (as defined in the Plan of Allocation described in the Notice annexed hereto as Exhibit 1 to Exhibit A, or in such other Plan of Allocation as the Court approves). 11. The Plan of Allocation proposed in the Notice is not a necessary term of this Stipulation and it is not a condition of this Stipulation that that Plan of Allocation be approved. 12. a. Each Authorized Claimant shall be allocated a pro rata share of the Net Settlement Fund based on his or her Recognized Claim compared to the total Recognized Claims of all accepted claimants. b. To the extent not previously distributed in accordance with instructions from Plaintiffs' Co-Lead Counsel, Defendants shall cause the shares of CLC common stock to be distributed to the members of the Class in proportion to the Authorized Claimant's Recognized Claims as determined by the Claims - 9 - 10 Administrator. No fractional shares shall be issued. No adjustment will be made in the cash distributions for fractional shares. c. Defendants will have no involvement in reviewing or challenging claims. Administration of the Settlement 13. Any member of the Class who does not file a valid Proof of Claim will not be entitled to receive any of the proceeds from the Net Settlement Fund but will otherwise be bound by all of the terms of this Stipulation and the Settlement, including the terms of the Judgment to be entered in the Action and the releases provided for herein, and will be barred from bringing any action against the Released Parties concerning the Settled Claims. 14. Plaintiffs' Co-Lead Counsel shall be responsible for supervising the administration of the Settlement and disbursement of the Net Settlement Fund by the Claims Administrator. Except for their obligation to pay the Settlement Amount and CLC shares, and to cooperate in the production of information with respect to the identification of class members from the CLC's shareholder transfer records, as provided herein, and to issue the CLC shares in accordance with the instructions to be provided by Plaintiffs' Co-Lead Counsel and/or the Claims Administrator, Defendants shall have no liability, obligation or responsibility for the administration of the Settlement or disbursement of the Net Settlement Fund. Plaintiffs' Co-Lead Counsel shall have the right, but not the obligation, to waive what they deem to be formal or technical defects in any Proofs of Claim filed in the interests of achieving substantial justice. 15. For purposes of determining the extent, if any, to which a Class Member shall be entitled to be treated as an "Authorized Claimant", the following conditions shall apply: a. Each Class Member shall be required to submit a Proof of Claim (see attached Exhibit 3 to Exhibit A), supported by such documents as are designated therein, including proof of the Claimant's loss, or such other documents or proof as Plaintiffs' Co-Lead Counsel, in their discretion, may deem acceptable; b. All Proofs of Claim must be submitted by the date specified in the Notice unless such period is extended by Order of the Court. Any Class Member who fails to file a Proof of Claim by such date shall be forever barred from receiving any payment pursuant to this Stipulation (unless, by Order of the Court, a later filed Proof of Claim by such Class Member is approved), but shall in all other respects be bound by all of the - 10 - 11 terms of this Stipulation and the Settlement including the terms of the Judgment to be entered in the Action and the releases provided for herein, and will be barred from bringing any action against the Released Parties concerning the Settled Claims. Provided that it is received before the distribution of the Net Settlement Fund, a Proof of Claim shall be deemed to have been submitted when posted, if received with a postmark indicated on the envelope and if mailed first-class postage prepaid and addressed in accordance with the instructions thereon. In all other cases, the Proof of Claim shall be deemed to have been submitted when actually received by Plaintiffs' Counsel or its designee; c. Each Proof of Claim shall be submitted to and reviewed by the Claims Administrator, under the supervision of Plaintiffs' Co-Lead Counsel, who shall determine in accordance with this Stipulation the extent, if any, to which each claim shall be allowed, subject to review by the Court pursuant to subparagraph e. below; d. Proofs of Claim that do not meet the filing requirements may be rejected. Prior to rejection of a Proof of Claim, the Claims Administrator shall communicate with the Claimant in order to remedy the curable deficiencies in the Proof of Claims submitted. The Claims Administrator, under supervision of Plaintiffs' Co-Lead Counsel, shall notify, in a timely fashion and in writing, all Claimants whose Proofs of Claim they propose to reject in whole or in part, setting forth the reasons therefor, and shall indicate in such notice that the Claimant whose claim is to be rejected has the right to a review by the Court if the Claimant so desires and complies with the requirements of subparagraph (e) below; and e. If any Claimant whose claim has been rejected in whole or in part desires to contest such rejection, the Claimant must, within twenty (20) days after the date of mailing of the notice required in subparagraph (d) above, serve upon the Claims Administrator a notice and statement of reasons indicating the Claimant's grounds for contesting the rejection along with any supporting documentation, and requesting a review thereof by the Court. If a dispute concerning a claim cannot be otherwise resolved, Plaintiffs' Co-Lead Counsel shall thereafter present the request for review to the Court. f. The administrative determinations of the Claims Administrator accepting and rejecting claims shall be presented to the Court, on notice to Defendants' Counsel, for approval by the Court in the Class Distribution Order. - 11 - 12 16. Each Claimant shall be deemed to have submitted to the jurisdiction of the Court with respect to the Claimant's claim, and the claim will be subject to investigation and discovery under the Federal Rules of Civil Procedure, provided that such investigation and discovery shall be limited to that Claimant's status as a Class Member and the validity and amount of the Claimant's claim. No discovery shall be allowed on the merits of the Action or Settlement in connection with processing of the Proofs of Claim. 17. Payment pursuant to this Stipulation shall be deemed final and conclusive against all Class Members. All Class Members whose claims are not approved by the Court shall be barred from participating in distributions from the Net Settlement Fund, but otherwise shall be bound by all of the terms of this Stipulation and the Settlement, including the terms of the Judgment to be entered in the Action and the releases provided for herein, and will be barred from bringing any action against the Released Parties concerning the Settled Claims. 18. All proceedings with respect to the administration, processing and determination of claims described by Paragraph 15 of this Stipulation and the determination of all controversies relating thereto, including disputed questions of law and fact with respect to the validity of claims, shall be subject to the jurisdiction of the Court. 19. The Net Settlement Fund shall be distributed to Authorized Claimants by the Claims Administrator only after the Effective Date and after: (i) all Claims have been processed, and all Claimants whose Claims have been rejected or disallowed, in whole or in part, have been notified and provided the opportunity to be heard concerning such rejection or disallowance; (ii) all objections with respect to all rejected or disallowed claims have been resolved by the Court, and all appeals therefrom have been resolved or the time therefor has expired; and (iii) all matters with respect to attorneys' fees, costs, and disbursements have been resolved by the Court, all appeals therefrom have been resolved or the time therefor has expired, and (iv) all costs of administration have been paid. Terms of Order for Notice and Hearing 20. Concurrently with their application for preliminary Court approval of the Settlement contemplated by this Stipulation, Plaintiffs' Counsel and Defendants' Counsel jointly shall apply to the Court for entry of an Order for Notice and Hearing, substantially in the form annexed hereto as Exhibit A. Terms of Order and Final Judgment - 12 - 13 21. If the Settlement contemplated by this Stipulation is approved by the Court, counsel for the parties shall request that the Court enter an Order and Final Judgment substantially in the form annexed hereto as Exhibit B. Effective Date of Settlement, Waiver or Termination 22. The Effective Date of Settlement shall be the date when all the following shall have occurred: (a) entry of the Order for Notice and Hearing substantially in the form annexed hereto as Exhibit A; (b) approval by the Court of the Settlement, following notice to the Class and a hearing, as prescribed by Rule 23 of the Federal Rules of Civil Procedure; and (c) entry by the Court of an Order and Final Judgment, substantially in the form set forth in Exhibit B annexed hereto, and the expiration of any time for appeal or review of such Order and Final Judgment, or, if any appeal is filed and not dismissed, after such Order and Final Judgment is upheld on appeal in all material respects and is no longer subject to review upon appeal or review by writ of certiorari, or, in the event that the Court enters an order and final judgment in form other than that provided above ("Alternative Judgment") and none of the parties hereto elect to terminate this Settlement, the date that such Alternative Judgment becomes final and no longer subject to appeal or review. 23. In the event that putative Class Members whose claims represent more than 5% of the total damages incurred3 in this Action choose to opt out of the Class, the Defendants, or any of them, may, at their option, terminate the settlement. The Order for Notice and Hearing shall provide that requests for exclusion shall be received at least ten (10) days prior to the Settlement Hearing date. Upon receiving any request(s) for exclusion pursuant to the Notice, the Claims Administrator shall promptly notify Plaintiffs' Co-Lead Counsel and counsel for Defendants of such request(s) for exclusion, and shall provide such counsel with copies of any requests for exclusion. - ---------- (3) Calculated in accordance with the Recognized Claim formula as set forth in the Notice compared to the potential average per share recovery, as set forth in the Notice at paragraph 3, for all shares which may have been damaged, as set forth in the Notice at paragraph 2. - 13 - 14 24. If the Defendants elect to exercise the option set forth in Paragraph 23 hereof, written notice of such election must be provided to Plaintiffs' Co-Lead Counsel on or before five (5) calendar days prior to the Settlement Fairness Hearing. 25. In the event that Defendants file a written notice of their intent to terminate the settlement pursuant to Paragraph 23 hereof, the Defendants may withdraw their election by providing written notice of such withdrawal to Plaintiffs' Counsel no later than 5:00 P.M. Eastern Daylight Time on the day prior to the Settlement Fairness Hearing, or by such later date as shall be agreed upon in writing as between Plaintiffs' Co-Lead Counsel and counsel for the Defendants. 26. If the Defendants elect to withdraw from the Stipulation pursuant to Paragraph 23 above, Plaintiffs' Co-Lead Counsel may, within five (5) days of receipt of such notice of intention to withdraw from the settlement (or such longer period as shall be agreed upon in writing between Plaintiffs' Co-Lead Counsel and counsel for Defendants), review the validity of any request for exclusion and may attempt to cause retraction or withdrawal of any request for exclusion. If, within the five (5) day period (or longer period agreed upon in writing), Plaintiffs' Lead Counsel succeed in causing the filing of retractions or withdrawals of a sufficient number of requests for exclusion such that the number of shares represented by the remaining requests for exclusion does not constitute grounds for withdrawal as specified in Paragraph 23 above, then any withdrawal from the Stipulation by Defendants shall automatically be deemed to be a nullity. To retract or withdraw a prior request for exclusion, a member of the Class must file a written notice with the Court stating the person's or entity's desire to retract or withdraw his, her or its request for exclusion and that person's or entity's desire to be bound by any judgment or settlement in this action; provided, however, that the filing of such written notice may be facilitated by Plaintiffs' Co-Lead Counsel. 27. If a Defendant elects to withdraw from the Stipulation in accordance with Paragraph 23 and such withdrawal is not nullified in accordance with Paragraph 26, this Stipulation shall be withdrawn and terminated and deemed null and void, and the provisions of paragraph 30 of this Stipulation shall apply. 28. Defendants' Counsel or Plaintiffs' Co-Lead Counsel shall have the right to terminate the Settlement and this Stipulation by providing written notice of their election to do so ("Termination Notice") to all other parties hereto within thirty days of (a) the Court's declining to enter the Order for Notice and Hearing in any material respect; (b) the Court's refusal to approve this Stipulation or any material part of it; (c) the Court's declining - 14 - 15 to enter the Order and Final Judgment in any material respect; (d) the date upon which the Order and Final Judgment is modified or reversed in any material respect by the Court of Appeals or the Supreme Court; or (e) the date upon which an Alternative Judgment is modified or reversed in any material respect by the Court of Appeals or the Supreme Court. In the event of any such Termination Notice is validly given this Stipulation shall be withdrawn and terminated and deemed null and void, and the provisions of paragraph 30 of this Stipulation shall apply. 29. a. Plaintiffs' Co-Lead Counsel shall have the right to terminate the Settlement and this Stipulation by providing a Termination Notice to Defendants' Counsel, if the Average Price is $2.00 or less. In the event of any such Termination Notice is validly given this Stipulation shall be withdrawn and terminated and deemed null and void, and the provisions of paragraph 30 of this Stipulation shall apply. b. In the event that there is any non-delivery by CLC of any of the shares required to be delivered hereunder within ten (10) business days after Plaintiffs' Co-Lead Counsel furnishes directions for such delivery to Defendants' counsel, then Plaintiffs' Co-Lead Counsel shall have the option to terminate this Settlement or move for specific enforcement of CLC's obligation to deliver such shares, unless such non-delivery is cured within ten (10) business days. 30. Except as otherwise provided herein, in the event the Settlement is terminated or modified in any material respect or fails to become effective for any reason, then the parties to this Stipulation shall be deemed to have reverted to their respective status in the Action as of the date and time immediately prior January 8, 1999 and, except as otherwise expressly provided, the parties shall proceed in all respects as if this Stipulation and any related orders had not been entered, and any portion of the Settlement Amount previously paid by Defendants, together with any interest earned thereon, less any Taxes due with respect to such income, and less costs of notice and administration incurred, shall be returned to the Defendants paying the same. No Admission of Wrongdoing 31. This Stipulation, whether or not consummated, and any proceedings taken pursuant to it: (a) shall not be offered or received against the Defendants as evidence of or construed as or deemed to be evidence of any presumption, concession, or admission by any of the Defendants of the truth of any fact alleged by Plaintiffs or the validity of any claim that had been or could have been asserted in the Action or in - 15 - 16 any litigation, or the deficiency of any defense that has been or could have been asserted in the Action or in any litigation, or of any liability, negligence, fault, or wrongdoing of Defendants; (b) shall not be offered or received against the Defendants as evidence of a presumption, concession or admission of any fault, misrepresentation or omission with respect to any statement or written document approved or made by any Defendant, or against the Plaintiffs and the Class as evidence of any infirmity in the claims of Plaintiffs and the Class; (c) shall not be offered or received against the Defendants as evidence of a presumption, concession or admission of any liability, negligence, fault or wrongdoing, or in any way referred to for any other reason as against any of the parties to this Stipulation, in any other civil, criminal or administrative action or proceeding, other than such proceedings as may be necessary to effectuate the provisions of this Stipulation; provided, however, that if this Stipulation is approved by the Court, Defendants may refer to it to effectuate the liability protection granted them hereunder; (d) shall not be offered or received as evidence of a presumption, concession or admission of the lack of any liability, fault or wrongdoing claimed by Plaintiffs or of any infirmity of the claims Plaintiffs asserted or intended to assert, or in any way referred to for any other reason, against the Plaintiffs or any member of the Class in this or any other civil, criminal or administrative action or proceeding other than such proceedings as may be necessary to consummate or enforce this Stipulation; and (e) shall not be construed against the Defendants or the Plaintiffs or the Class as an admission or concession that the consideration to be given hereunder represents the amount which could be or would have been recovered after trial. Miscellaneous Provisions 32. All of the exhibits attached hereto are hereby incorporated by reference as though fully set forth herein. 33. Each Defendant warrants as to himself, herself or itself that, as to the payments made by or on behalf of him, her or it, at the time of such payment that the Defendant made or caused to be made pursuant to paragraph 4 above, he, she or it was not insolvent nor did nor will the payment required to be made by or on behalf of him, her or it render such Defendant insolvent within the meaning of and/or for the purposes of the United States - 16 - 17 Bankruptcy Code, including Sections 101 and 547 thereof. This warranty is made by each such Defendant and not by such Defendant's counsel. 34. If a case is commenced in respect of any Defendant under Title 11 of the United States Code (Bankruptcy), or a trustee, receiver or conservator is appointed under any similar law, and in the event of the entry of a final order of a court of competent jurisdiction determining the transfer of money to the Escrow Account or any portion thereof by or on behalf of such Defendant to be a preference, voidable transfer, fraudulent transfer or similar transaction and any portion thereof is required to be returned, and such amount is not promptly deposited to the Cash Settlement Fund by other settling Defendants, then, at the election of Plaintiffs' Co-Lead Counsel, the parties shall jointly move the Court to vacate and set aside the releases given and Judgment entered in favor of the Defendants pursuant to this Stipulation, which releases and Judgment shall be null and void, and the Parties shall be restored to their respective positions in the litigation as of January 7, 1999 and any cash amounts in escrow shall be returned as provided in paragraph 30 above. 35. The Parties to this Stipulation intend the Settlement to be a final and complete resolution of all disputes asserted or which could be asserted by the Class Members against the Released Parties with respect to the Settled Claims. Accordingly, the Plaintiffs and the Defendants agree not to assert in any forum that the litigation was brought or defended in bad faith or without a reasonable basis. The Parties agree that the amount paid and the other terms of the Settlement were negotiated at arms'-length in good faith by the Parties, and reflect a settlement that was reached voluntarily after consultation with experienced legal counsel. 36. This Stipulation may not be modified or amended, nor may any of its provisions be waived except by a writing signed by all parties hereto or their successors-in-interest. 37. The headings herein are used for the purpose of convenience only and are not meant to have legal effect. 38. The administration and consummation of the Settlement as embodied in this Stipulation shall be under the authority of the Court and the Court shall retain jurisdiction for the purpose of entering orders providing for awards of attorneys' fees and expenses to Plaintiffs' Counsel and enforcing the terms of this Stipulation. - 17 - 18 39. The waiver by one party of any breach of this Stipulation by any other party shall not be deemed a waiver of any other prior or subsequent breach of this Stipulation. 40. This Stipulation and its exhibits constitute the entire agreement among the parties hereto concerning the Settlement of the Action, and no representations, warranties, or inducements have been made by any party hereto concerning this Stipulation and its exhibits other than those contained and memorialized in such documents. 41. This Stipulation may be executed in one or more counterparts. All executed counterparts and each of them shall be deemed to be one and the same instrument provided that counsel for the parties to this Stipulation shall exchange among themselves original signed counterparts. 42. This Stipulation shall be binding upon, and inure to the benefit of, the successors and assigns of the parties hereto. 43. The construction, interpretation, operation, effect and validity of this Stipulation, and all documents necessary to effectuate it, shall be governed by the internal laws of the State of Virginia without regard to conflicts of laws, except to the extent that federal law requires that federal law governs. 44. This Stipulation shall not be construed more strictly against one party than another merely by virtue of the fact that it, or any part of it, may have been prepared by counsel for one of the parties, it being recognized that it is the result of arms'-length negotiations between the parties and all parties have contributed substantially and materially to the preparation of this Stipulation. 45. All counsel and any other person executing this Stipulation and any of the exhibits hereto, or any related settlement documents, warrant and represent that they have the full authority to do so and that they have the authority to take appropriate action required or permitted to be taken pursuant to the Stipulation to effectuate its terms. 46. Plaintiffs' Co-Lead Counsel and Defendants' Counsel agree to cooperate fully with one another in seeking Court approval of the Order for Notice and Hearing, the Stipulation and the Settlement, and to promptly agree upon and execute all such other documentation as may be reasonably required to obtain final approval by the District Court of the Settlement. DATED: February 17, 1999 - 18 - 19 /S/ COHEN, MILSTEIN, HAUSFELD & TOLL, P.L.L.C. --------------------------------- COHEN, MILSTEIN, HAUSFELD & TOLL, P.L.L.C. 1100 New York Avenue, N.W. West Tower, Suite 500 Washington, DC 20005-3934 Plaintiffs Liaison Counsel /S/ MILBERG WEISS BERSHAD HYNES & LERACH, LLP --------------------------------- MILBERG WEISS BERSHAD HYNES & LERACH, LLP One Pennsylvania Plaza New York, NY 10019-0165 Kenneth J. Vianale 5355 Town Center Road Suite 900 Boca Raton, FL 33486 - 19 - 20 /S/ REINHARDT & ANDERSON --------------------------------- REINHARDT & ANDERSON E-1000 First National Bank Bldg. 332 Minnesota Street St. Paul, MN 55101 /S/ STULL, STULL & BRODY --------------------------------- STULL, STULL & BRODY Aaron Brody 6 East 45th Street New York, NY 10017 CO-LEAD COUNSEL FOR PLAINTIFFS /S/ GARWIN BRONZAFT GERSTEIN & FISHER, L.L.P. --------------------------------- GARWIN BRONZAFT GERSTEIN & FISHER, L.L.P. 1501 Broadway Suite 1416 New York, NY 10036 /S/ WECHSLER HARWOOD HALEBIAN & FEFFER LLP --------------------------------- WECHSLER HARWOOD HALEBIAN & FEFFER LLP 488 Madison Avenue New York, NY 10022 /S/ MORRIS AND MORRIS --------------------------------- MORRIS AND MORRIS 1605 North Market Street Wilmington, DE 19801 /S/ WEISS & YOURMAN --------------------------------- WEISS & YOURMAN 551 Fifth Avenue New York, NY 10176 /S/ BERNSTEIN LITOWITZ BERGER & GROSSMANN LLP --------------------------------- BERNSTEIN LITOWITZ BERGER & GROSSMANN LLP 1285 Avenue of the Americas New York, NY 10019 /S/ CHITWOOD & HARLEY --------------------------------- CHITWOOD & HARLEY 2900 Promenade II 1230 Peachtree Street, N.E. Atlanta, GA 30309 - 20 - 21 /S/ KIRBY MCINERNEY & --------------------------------- SQUIRE, LLP KIRBY MCINERNEY & SQUIRE, LLP 830 Third Avenue 10th Floor New York, NY 10022 /S/ ELWOOD S. SIMON & ASSOCIATES, P.C. --------------------------------- ELWOOD S. SIMON & ASSOCIATES, P.C. 355 Old South Woodward Avenue Suite 250 Birmingham, MI 48009 /S/ ROBERT D. ALLISON & ASSOCIATES --------------------------------- ROBERT D. ALLISON & ASSOCIATES 122 South Michigan Avenue Chicago, IL 60603 /S/ LAW OFFICES OF LIONEL Z. GLANCY --------------------------------- LAW OFFICES OF LIONEL Z. GLANCY 1801 Avenue of the Stars Suite 308 Los Angeles, CA 90067 /S/ FUTTERMAN & HOWARD CHTD. --------------------------------- FUTTERMAN & HOWARD CHTD. 122 South Michigan Avenue Suite 1850 Chicago, IL 60603 /S/ ROBINSON CURLEY & CLAYTON, P.C. --------------------------------- ROBINSON CURLEY & CLAYTON, P.C. 300 South Wacker Drive Chicago, IL 60606 /S/ MILLER FAUCHER CAFFERTY & WEXLER LLP --------------------------------- MILLER FAUCHER CAFFERTY & WEXLER LLP 30 North LaSalle Street Suite 3200 Chicago, IL 60602 - 21 - 22 /S/ SCHIFFRIN CRAIG & BARROWAY LLP --------------------------------- SCHIFFRIN CRAIG & BARROWAY LLP 750 West Lake Cook Road Suite 190 Buffalo Grove, IL 60089 /S/ HOFFMAN & EDELSON --------------------------------- HOFFMAN & EDELSON 45 West Court Street Doylestown, PA 18901 /S/ WOLF POPPER LLP --------------------------------- WOLF POPPER LLP 845 Third Avenue New York, NY 10022 /S/ Patricia D. Ryan --------------------------------- Patricia D. Ryan (Va. Bar No. 35495) 4350 North Fairfax Drive Suite 900 Arlington, VA 22203 /S/ FINKELSTEIN, THOMPSON & LOUGHRAN --------------------------------- FINKELSTEIN, THOMPSON & LOUGHRAN 1055 Thomas Jefferson Street, N.W., Suite 601 Washington, DC 20007 /S/ RABIN & PECKEL, LLP --------------------------------- RABIN & PECKEL, LLP 275 Madison Avenue New York, NY 10016 - 22 - 23 /S/ LAW OFFICE OF LEO W. DESMOND --------------------------------- LAW OFFICE OF LEO W. DESMOND 2161 Palm Beach Lakes Blvd. Suite 204 West Palm Beach, FL 33409 ATTORNEYS FOR PLAINTIFFS DEFENSE COUNSEL: /S/ HALE and DORR LLP S/ Gaela K. Gehring-Flores (Va.Bar No. 40428) - ----------------------------- ----------------------------------------------- HALE and DORR LLP Gaela K. Gehring-Flores (Va.Bar No. 40428) 1455 Pennsylvania Avenue, N.W. 1615 L Street, N.W. Suite 1000 Washington, D.C. 20036-5694 Washington, DC 20004 /S/ PAUL, WEISS, RIFKIND, WHARTON & GARRISON --------------------------------- PAUL, WEISS, RIFKIND, WHARTON & GARRISON 1285 Avenue of the Americas New York, New York 10019-6064 Attorneys for the Defendants
24 EXHIBIT A IN THE UNITED STATES DISTRICT COURT FOR THE EASTERN DISTRICT OF VIRGINIA ALEXANDRIA DIVISION GANESH, L.L.C., et al., On Behalf of Themselves and All )) Others Similarly Situated, )) )) Plaintiffs, )) Civil Action No. 98-859-A )) vs. ) CLASS ACTION ) ------------ ) COMPUTER LEARNING CENTERS, INC., REID R. BECHTLE, CHARLES ) L. COSGROVE, HARRY H. GAINES and STEPHEN P. REYNOLDS, Defendants.
PRELIMINARY ORDER IN CONNECTION WITH SETTLEMENT PROCEEDINGS WHEREAS, on February 17, 1999, the parties to the above-entitled litigation entered into a Stipulation and Agreement of Settlement (the "Stipulation") which is subject to review under Rule 23 of the Federal Rules of Civil Procedure ("F.R.Civ.P.") and which, together with the exhibits thereto, sets forth the terms and conditions for the proposed settlement of the claims alleged in the Consolidated Complaint on the merits and with prejudice upon the terms and conditions set forth in the Stipulation; and the Court having read and considered the Stipulation and the accompanying documents; and the Court having entered an Order dated March 12, 1999 certifying that this action may proceed as a class action pursuant to Rules 23 (a) and 23 (b) (3) of the Federal Rules of Civil Procedure for the limited purposes of settlement, pursuant to a Memorandum Opinion also dated March 12, 1999 finding that all the requirements for class certification were met for the purposes of settlement; and the parties to the Stipulation having consented to the entry of this Order; and all capitalized terms used herein having the meanings defined in the Stipulation; 25 NOW, THEREFORE, IT IS HEREBY ORDERED, this _______ day of ___________, 1999, that: 47. A hearing (the "Settlement Fairness Hearing") pursuant to F.R.Civ.P. 23(e) is hereby scheduled to be held before the Court on ____________ __, 1999, at __:__ _.m. for the following purposes: a. to finally determine whether this action satisfies the applicable prerequisites for class action treatment under F.R.Civ.P. 23(a) and (b); b. to determine whether the proposed Settlement is fair, reasonable, adequate and in the best interests of the Class and should be approved by the Court; c. to determine whether the proposed Plan of Allocation is fair and reasonable and in the best interests of the Class and should be approved by the Court; d. to determine whether the Order and Final Judgment as provided under the Stipulation should be entered, dismissing the Complaint filed herein, on the merits and with prejudice, and to determine whether the release by the Class to the Released Parties, as set forth in the Stipulation, should be provided to the Released Parties; e. to consider Plaintiffs' Counsel's application for an award of Attorneys' Fees and Expenses; and f. to rule upon such other matters as the Court may deem appropriate. 48. The Court reserves the right to approve the Settlement with or without modification and with or without further notice of any kind. The Court further reserves the right to enter its Order and Final Judgment approving the Stipulation and dismissing the Complaint on the merits and with prejudice regardless of whether it has approved the Plan of Allocation or whether it has approved or awarded attorneys' fees and expenses. - 25 - 26 49. The Court approves the form, substance and requirements of the Notice of Pendency of Class Action, Hearing On Proposed Settlement and Attorneys' Fee Petition, and Notice of Right to Share in Settlement Fund (the "Class Notice"), and the Proof of Claim form annexed hereto as Exhibits 1 and 2 respectively. 50. The Claims Administrator, under Plaintiffs' Co-Lead Counsel's supervision, shall cause the Class Notice and the Proof of Claim, substantially in the form annexed hereto, to be mailed, by first class mail, postage prepaid, on or before_______ _____ __, 1999, to all Class Members who can be identified with reasonable effort. The Defendants shall cooperate in making their books, records and information (and that of their Transfer Agent) available to the Claims Administrator for the purpose of identifying and giving notice to the Class. The Claims Administrator shall use reasonable efforts to give notice to nominee owners such as brokerage firms and other persons or entities who held or now hold CLC common stock as record owners but not as beneficial owners. Such nominee owners are directed to forward copies of the Class Notice and Proof of Claim to their beneficial owners or to provide the Claims Administrator with lists of the names and addresses of the beneficial owners, and the Claims Administrator is ordered to send the Class Notice and Proof of Claim promptly to such beneficial owners. Additional copies of the Class Notice shall be made available to any record holder requesting such for the purpose of distribution to beneficial owners, and such record holders shall be reimbursed from the Settlement Fund, upon receipt by the Claims Administrator of proper documentation, for the reasonable out-of-pocket expense of sending the Class Notices and Proof of Claim to beneficial owners. Plaintiffs' Co-Lead Counsel shall, at or before the Settlement Fairness Hearing, file with the Court proof of mailing of the Class Notice and Proof of Claim. 51. The Court approves the form of Publication Notice of the pendency of this class action and the proposed settlement in substantially the form and content annexed hereto as Exhibit 3 and directs that Plaintiffs' Co-Lead Counsel shall cause the Publication Notice to be published in the national edition of The Wall Street Journal within ten days of the mailing of the Class Notice. Plaintiffs' Co-Lead Counsel shall, at or before the Settlement Fairness Hearing, file with the Court proof of publication of the Published Notice. - 26 - 27 52. The form and method set forth herein of notifying the Class of the Settlement and its terms and conditions meet the requirements of F.R.Civ.P. 23 and due process, constitute the best notice practicable under the circumstances, and shall constitute due and sufficient notice to all persons and entities entitled thereto. 53. In order to be entitled to participate in the Net Settlement Fund, in the event the Settlement is effected in accordance with all of the terms and conditions thereof, each Class Member shall take the following actions and be subject to the following conditions: (a) A properly executed Proof of Claim (the "Proof of Claim"), substantially in the form attached hereto as Exhibit 2, must be filed with the Court, at the Post Office box indicated in the Class Notice, not later than ____________ __, 1999. Such deadline may be further extended by Court Order. Each Proof of Claim shall be deemed to have been filed when postmarked (if properly addressed and mailed by first class mail, postage prepaid) provided such Proof of Claim is actually received prior to the order of the Court approving distribution of the Net Settlement Fund. Any Proof of Claim submitted in any other manner shall be deemed to have been filed when it was actually received at the address designated in the Class Notice. (b) The Proof of Claim filed by each Class Member must satisfy the following conditions: (i) it must be properly filled out, signed and filed in a timely manner in accordance with the provisions of the preceding subparagraph; (ii) it must be accompanied by adequate supporting documentation for the transactions reported therein, in the form of broker confirmation slips, broker account statements, an authorized statement from the broker containing the transactional information found in a broker confirmation slip, or such other documentation as is deemed adequate by Plaintiffs' Co-Lead Counsel; (iii) if the person executing the Proof of Claim is acting in a representative capacity, a certification of his current authority to act on behalf of the Class Member must be included in the Proof of Claim; and (iv) the Proof of Claim must be complete and contain no material deletions or modifications of any of the printed matter contained therein and must be signed under penalty of perjury. (c) As part of the Proof of Claim, each Class Member shall submit to the jurisdiction of the Court with respect to the claim submitted, and shall (subject to effectuation of the Settlement) release all claims as provided in the Stipulation. - 27 - 28 54. Any putative Class Member who wishes to be excluded from the Class may request exclusion by submitting a written notice requesting exclusion from the Class and showing the Class Member's name, address and Social Security or Taxpayer Identification Number. In addition, the putative Class Member shall be requested to provide the date(s) price(s) and amount(s) of shares of CLC common stock purchased or sold during the Class Period. To be effective, the written request for exclusion must be signed by the beneficial owner of the stock, or his, her or its legal representative, and must be mailed, postage prepaid, to Computer Learning Centers Securities Litigation -- Exclusion Requests, C/O the Claims Administrator, at the address indicated in the Notice, so as to be received no later than __________ __, 1999. 55. Class Members requesting exclusion from the Class shall not be entitled to receive any payment out of the Net Settlement Fund as described in the Stipulation and Class Notice. - 28 - 29 56. The Court will consider comments and/or objections to the Settlement, the Plan of Allocation, and/or the award of attorneys' fees and reimbursement of expenses only if such comments or objections and any supporting papers are filed in writing with the Clerk of the Court, United States Courthouse, 401 Courthouse Square, Alexandria, Virginia 22314, and copies of all such papers are received, on or before ___________ __, 1999, by the following: for Plaintiffs, Robert P. Sugarman, Esq., MILBERG WEISS BERSHAD HYNES & LERACH, LLP, One Pennsylvania Plaza, New York, NY 10019-0165, Randall H. Steinmeyer, Esq., REINHARDT & ANDERSON, E-1000 First National Bank Bldg., 332 Minnesota Street, St. Paul, MN 55101; Jules Brody, Esq., STULL, STULL & BRODY, 6 East 45th Street, New York, NY 10017; and for Defendants, Geoffrey S. Stewart, Esq., HALE and DORR LLP, 1455 Pennsylvania Avenue, N.W., Suite 1000, Washington, DC 20004, and Steven B. Rosenfeld, Esq., PAUL, WEISS, RIFKIND, WHARTON & GARRISON, 1285 Avenue of the Americas, New York, New York 10019-6064. Attendance at the hearing is not necessary; however, persons wishing to be heard orally in opposition to the approval of the Settlement are required to indicate in their written objection their intention to appear at the hearing. Persons who intend to object to the Settlement and/or counsel's application for an award of attorneys fees and expenses and desire to present evidence at the Settlement Fairness Hearing must include in their written objections the identity of witnesses they may call to testify and exhibits they intend to introduce into evidence at the Settlement Fairness Hearing. Class Members do not need to appear at the hearing or take any other action to indicate their approval. 57. Pending final determination of whether the Settlement should be approved, the Plaintiffs, all Class Members, and each of them, and anyone who acts or purports to act on their behalf, shall not institute, commence or prosecute any action which asserts Settled Claims against any Released Party. 58. If: (a) the Settlement is terminated pursuant to the Stipulation; (b) any specified condition to the Settlement set forth in the Stipulation is not satisfied and the satisfaction of such condition is not waived in writing by Plaintiffs' Co-Lead Counsel and Counsel for the defendants; (c) the Court rejects, in any respect, the Order and Final Judgment in substantially the form and content annexed to the Stipulation as Exhibit B and/or Plaintiffs' Co-Lead Counsel and Counsel for the defendants fail to consent to the entry of another form of order in lieu thereof; (d) the Court rejects the Stipulation, including any amendment thereto approved by Plaintiffs' - 29 - 30 Co-Lead Counsel and Counsel for the defendants; or (e) the Court approves the Stipulation, including any amendment thereto approved by Plaintiffs' Co-Lead Counsel and Counsel for the defendants, but such approval is reversed on appeal and such reversal becomes final by lapse of time or otherwise, then, in any such event, the Stipulation, including any amendment(s) thereof, and this Preliminary Order certifying the Class and the Class Representatives for purposes of the Settlement shall be null and void, of no further force or effect, and without prejudice to any party, and may not be introduced as evidence or referred to in any actions or proceedings by any person or entity, and each party shall be restored to his, her or its respective position as it existed prior to the execution of the Stipulation. 59. The Court retains exclusive jurisdiction over the action to consider all further matters arising out of or connected with the Settlement. Dated: Alexandria, Virginia , 1999 ------- ----- ----------------------------------- UNITED STATES DISTRICT JUDGE
- 30 - 31 EXHIBIT 1 IN THE UNITED STATES DISTRICT COURT FOR THE EASTERN DISTRICT OF VIRGINIA ALEXANDRIA DIVISION GANESH, L.L.C., et al., On Behalf of Themselves and All )) Others Similarly Situated, )) )) )) )) Plaintiffs, ) Civil Action No. 98-859-A ) ) ) vs. CLASS ACTION ------------ COMPUTER LEARNING CENTERS, INC., REID R. BECHTLE, CHARLES L. COSGROVE, HARRY H. GAINES and STEPHEN P. REYNOLDS, Defendants.
NOTICE OF PENDENCY OF CLASS ACTION, PROPOSED SETTLEMENT THEREOF, SETTLEMENT HEARING AND RIGHT TO SHARE IN SETTLEMENT FUND TO: ALL PERSONS WHO PURCHASED COMMON STOCK IN COMPUTER LEARNING CENTERS, INC., ("CLC") DURING THE PERIOD APRIL 30, 1997 TO APRIL 6, 1998, EXCLUDING THOSE WHOSE PURCHASE TRANSACTIONS WERE MADE TO COVER SHORT POSITIONS. PLEASE READ THIS NOTICE CAREFULLY AND IN ITS ENTIRETY. YOUR RIGHTS WILL BE AFFECTED BY PROCEEDINGS IN THIS LITIGATION. IF YOU ARE A CLASS MEMBER, YOU ULTIMATELY MAY BE ENTITLED TO RECEIVE BENEFITS PURSUANT TO THE PROPOSED SETTLEMENT DESCRIBED HEREIN. CLAIMS DEADLINE: CLAIMANTS MUST SUBMIT PROOFS OF CLAIM, ON FORM ACCOMPANYING THIS NOTICE, POST-MARKED ON OR BEFORE _______________, 1999. EXCLUSION DEADLINE: REQUESTS FOR EXCLUSION MUST BE FILED SO AS TO BE RECEIVED NO LATER THAN _____________, 1999. SECURITIES BROKERS AND OTHER NOMINEES: PLEASE SEE INSTRUCTIONS ON PAGE ___ HEREIN. - 31 - 32 SUMMARY OF SETTLEMENT AND RELATED MATTERS 60. Purpose of this Notice This Notice is given pursuant to Rule 23 of the Federal Rules of Civil Procedure and Orders of the Court dated March 12, 1999 and _____ 1999. The purpose of this Notice is to inform you that this Action and the proposed Settlement will affect all Class Members' rights. This Notice describes rights you may have under the proposed Settlement and what steps you may take in relation to this litigation. This Notice is not an expression of any opinion by the Court as to the merits of any claims or any defenses asserted by any party in this litigation, or the fairness or adequacy of the proposed Settlement. 61. Statement of Plaintiff Recovery Pursuant to the Settlement described herein, a Settlement Fund consisting of $3,000,000 in cash, plus interest has been established. In addition Defendant CLC shall issue at least $4,500,000 worth of CLC stock for the Class, subject to certain conditions. Plaintiffs estimate that there were approximately 11.2 million shares of CLC common stock traded during the Class Period which may have been damaged as a result of the alleged wrongdoing described at paragraphs 6 to 8 below. Plaintiffs estimate that the average recovery per damaged share of CLC common stock under the Settlement is $0.67 per share before deduction of Court-awarded attorneys fees and expenses. Depending on the number of claims filed, and when and if those shares were sold, an individual Class Member may receive more or less than this average amount. A Class Member's distribution from the Settlement Fund will be governed by the Plan of Allocation, as approved by the Court. Under the relevant securities laws, a claimant's recoverable damages are limited to the losses attributable to the alleged fraud. Losses which resulted from factors other than the alleged fraud are not compensable from the Settlement Fund. A detailed explanation of how each Class Member's claim will be calculated is set forth in the Plan of Allocation which appears at page [ ] of this Notice. 62. Statement of Potential Outcome of Case If this litigation had proceeded to trial and Plaintiffs had prevailed on every claim and contention asserted, Plaintiffs' counsel estimate that the average per share recovery could have been as high as $7.21 per share before deduction of any Court-awarded attorneys' fees and expenses. However, Plaintiffs consider that there was a - 32 - 33 substantial risk that Plaintiffs and the Class might not have prevailed on all their claims and that there were risks that the decline in the price of CLC stock could be attributed, in whole or in part, to other factors, therefore Plaintiffs could have recovered nothing or substantially less than this amount. Moreover, throughout the settlement discussions, Defendants' Counsel gave their opinion that the United States Department of Education financial responsibility regulations, and similar regulations of at least one state in which CLC does business, impose various requirements such that if a substantial Judgment (e.g. $15 million or more) were entered against CLC, CLC could be required to post a very large cash surety to enable it to continue its participation in certain federal student aid programs and could lose its right to continue in business in the state. If this occurred, CLC's ability to continue in business would be in substantial doubt, and CLC probably would be required to seek protection under the bankruptcy laws, which in turn would, as a matter of federal law, result in the immediate, complete and permanent exclusion of CLC from participation in the federal student aid programs and therefore require the liquidation of the company, in which event the ultimate recovery would likely be substantially less than is being obtained in this Settlement. The Defendants deny that they are liable to the Plaintiffs or the Class and deny that Plaintiffs or the Class have suffered any damages. The parties disagreed on both liability and damages. 63. Statement of Attorneys' Fees and Costs Sought Plaintiffs' counsel intend to apply for fees of up to one-third of the Settlement Fund, and for reimbursement of expenses incurred in connection with the prosecution of this litigation in the approximate amount of $575,000, or an average of $0.27 per share. - 33 - 34 64. Further Information Further information regarding the litigation and this Notice may be obtained by contacting Lead Counsel for Plaintiffs and the Class: Robert P. Sugarman, Esq., MILBERG WEISS BERSHAD HYNES & LERACH, LLP, One Pennsylvania Plaza, New York, NY 10019-0165, Telephone (212) 954-5300; Randall H. Steinmeyer, Esq., REINHARDT & ANDERSON, E-1000 First National Bank Bldg., 332 Minnesota Street, St. Paul, MN 55101, Telephone (651) 227-9990; Jules Brody, Esq., STULL, STULL & BRODY, 6 East 45th Street, New York, NY 10017, Telephone (212) 687-7230. NOTICE OF SETTLEMENT HEARING NOTICE IS HEREBY GIVEN, pursuant to Rule 23 of the Federal Rules of Civil Procedure and an Order of the United States District Court for the Eastern District of Virginia Alexandria Division (the "Court") dated _________, 1999, that a hearing will be held before the Honorable ______________________ in Courtroom No. ___ of the United States Courthouse, 401 Courthouse Square, Alexandria, Virginia 22314, at ___, on _________, 1999 (the "Settlement Hearing") to determine whether a proposed settlement (the "Settlement") of the above-captioned litigation (the "Litigation") as set forth in the Stipulation of Settlement dated February 17, 1999 (the "Stipulation"), is fair, reasonable and adequate, and to consider the Plan of Allocation and the application of class counsel for attorneys' fees and reimbursement of expenses. The Court, by Order dated March 12, 1999, has certified for purposes of settlement a plaintiff class consisting of: "all persons who purchased common stock of Computer Learning Centers, Inc. ("CLC") during the period April 30, 1997 to April 6, 1998, excluding those whose purchase transactions were made to cover short positions, and also excluding the Defendants themselves, members of their immediate families, and any entity in which any of them has a controlling interest." BACKGROUND OF THE LITIGATION 65. Plaintiffs allege that, during the Class Period, Defendants issued material misstatements to and omitted material facts from the investing public to inflate the price of CLC stock in violation of the federal securities laws. Plaintiffs allege that as a purported provider of information technology and computer-related education and training, CLC's primary goal and focus was to admit as many students as possible, including a large number of unqualified students, simply to increase revenues, while providing a woefully substandard education. As part of - 34 - 35 their alleged scheme, Defendants allegedly issued materially false and misleading statements about the quality of education offered by CLC, the modernity of the equipment and software used by CLC for educational purposes, the qualifications of CLC's instructors and CLC's graduate placement rates. Allegedly, by increasing its admissions improperly, CLC was able to report materially greater revenues and earnings, principally through students eligible for federal financial grants and loans. The Company derived approximately 70%-75% of its revenues from Title IV federal student financial aid assistance. 66. The Consolidated Amended Class Action Complaint seeks redress on behalf of thousands of investors who, relying on the Company's public statements regarding the Company and its purported profitability and success, as well as the integrity of the market for CLC's common stock, suffered substantial damage because they bought shares of CLC common stock at prices artificially inflated by these material misrepresentations and omissions. Meanwhile, Defendants allegedly profited handsomely from their own sales of CLC stock. 67. The Complaint further alleges that, commencing on April 30, 1997, when Defendants filed with the SEC CLC's Report on Form 10-K for the fiscal year ended January 31, 1997, Plaintiffs and other class members purchased the common stock of CLC during the Class Period at artificially inflated prices as a result of the Defendants' dissemination of false and misleading statements regarding CLC in violation of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, and Rule 10b-5 promulgated thereunder. On April 6, 1998, CLC shocked investors, revealing that the Company had been ordered to suspend marketing of and enrollment in one of its training centers. It was also revealed that all CLC "Learning Centers" had been placed on heightened cash-monitoring status by the United States Department of Education. CLC shares plummeted to $13 per share. 68. The Defendants filed a motion to dismiss the Action. By Order dated September 11, 1998, the Court denied Defendants' motion to dismiss. Plaintiffs' motion for class certification was heard on December 18, 1998, and that same day the Court issued an Order denying the class but granting Plaintiffs leave to file an amended motion redefining the class consistent with the Court's Opinion. Plaintiffs refiled the motion to certify the action as a class action in accordance with the Court's Opinion. Thereafter the parties negotiated the proposed Settlement. Plaintiffs' amended motion for class certification was granted for purposes of the Settlement by Order dated March 12, 1999. BACKGROUND TO THE SETTLEMENT - 35 - 36 69. The Defendants have denied all averments of wrongdoing or liability in the Litigation and all other accusations of wrongdoing or violations of law. The Stipulation is not and shall not be construed or be deemed to be evidence or an admission or a concession on the part of any of the Defendants of any fault or liability or damages whatsoever, and Defendants do not concede any infirmity in the defenses which they have asserted or intended to assert in the Litigation. 70. Prior to entering into the Stipulation, Plaintiffs' Counsel conducted an investigation relating to the events and transactions underlying Plaintiffs' claims and conducted pretrial discovery on the merits, including, inter alia, analysis of over three hundred fifty thousand pages of documents produced by Defendants and numerous non-parties, which included among others, outside auditors, securities analysts, loan servicing agencies, regulatory agencies and product and service providers and interviews and depositions of witnesses. Plaintiffs' Counsel's decision to enter into this Settlement was made with knowledge of the facts and circumstances underlying Plaintiffs' claims and the strengths and weaknesses of those claims. In determining to settle the action, they have evaluated the extensive discovery taken in the litigation and taken into account the substantial expense and length of time necessary to prosecute the litigation through trial, post-trial motions and likely appeals, taking into consideration the significant uncertainties in predicting the outcome of this complex litigation. Plaintiffs' Counsel also considered the financial condition of the company and the potential bankruptcy that could result from a more substantial Judgment. Counsel for Plaintiffs believe that the Settlement described herein confers very substantial benefits upon the Class. Based upon their consideration of all of these factors, Plaintiffs and their counsel have concluded that it is in the best interest of the Class to settle the action on the terms described herein. 71. All of the parties have now agreed to settle all aspects of the Litigation, subject to approval of the Court. 72. Plaintiffs recognized the uncertainty and the risk of the outcome of any litigation, especially complex litigation such as this, and the difficulties and risks inherent in the trial of such an action. Plaintiffs desired to settle the claims of the Class against Defendants on the terms and conditions described herein which provide substantial benefits to the Class. Counsel for the Class deem such settlement to be fair, reasonable and adequate to, and in the best interests of the members of the Class. - 36 - 37 73. The Defendants, while continuing to deny all allegations of wrongdoing or liability whatsoever, desired to settle and terminate all existing or potential claims against them, without in any way acknowledging any fault or liability. 74. The amount of damages, if any, which Plaintiffs could prove was also a matter of serious dispute, and the Settlement's use of a Recognized Claim formula for distributing the Settlement proceeds does not constitute a finding, admission or concession that provable damages could be measured by the Recognized Claim formula. No determination has been made by the Court as to liability or the amount, if any, of damages suffered by the Class, nor on the proper measure of any such damages. The determination of damages, like the determination of liability, is a complicated and uncertain process, typically involving conflicting expert opinions. During the course of the Litigation Defendants, in addition to denying any liability, disputed that Plaintiffs and the Class were damaged by any wrongful conduct on Defendants' part. The Settlement herein is providing an immediate and substantial cash benefit and avoids the risks that liability or damages might not have been proven at trial. 75. THE COURT HAS NOT FINALLY DETERMINED THE MERITS OF THE PLAINTIFFS' CLAIMS OR THE DEFENSES THERETO. THIS NOTICE DOES NOT IMPLY THAT THERE HAS BEEN OR WOULD BE ANY FINDING OF VIOLATION OF THE LAW OR THAT RECOVERY COULD BE HAD IN ANY AMOUNT IF THE ACTION WERE NOT SETTLED. TERMS OF THE SETTLEMENT 76. In full and complete settlement of the claims which have or could have been asserted in this action, and subject to the terms and conditions of the Stipulation, Defendants have paid into escrow on behalf of Plaintiffs and the Class Three Million Dollars ($3,000,000.00) (the "Cash Settlement Amount"), which has been earning interest for the benefit of the Class since __________ _____ __, 1999. In addition, Defendants will deliver 550,000 shares of freely tradeable CLC common stock ("Shares") for the benefit of the Class at a guaranteed minimum value as of the time of the Settlement Hearing of $8.19 per share(4) for a minimum total value of $4.5 million. The value of - ---------------------------------- (4) The Stipulation provides the following terms and conditions for the Shares: (1) If during the 10 trading days ending five business days prior to the final settlement hearing, or ending on any other date to which the parties may agree, the average - 37 - 38 the CLC stock is not guaranteed by the Defendants beyond the date of the Settlement Hearing and may go up or down depending on numerous factors, including market conditions and the operations and prospects of CLC. 77. Pursuant to the Settlement, and on the Effective Date, Plaintiffs and members of the Class on behalf of themselves, their heirs, executors, administrators, successors and assigns, and any persons they represent, shall release and forever discharge, and shall forever be enjoined from prosecuting the Released Parties (defined below) with respect to each and every Settled Claim (defined below). 78. The "Defendants" include the following, each of whom will be released from all claims relating to the allegations in the Complaint or to any purchase of common stock of CLC during the Class Period: Computer Learning Centers, Inc., ("CLC"), Reid R. Bechtle, Charles L. Cosgrove, Harry H. Gaines and Stephen P. Reynolds. In addition the Settlement will release the Class' claims against any and all of the Defendants their past or present subsidiaries, parents, successors and predecessors, officers, directors, shareholders, agents, employees, attorneys, advisors, and investment advisors, insurers, auditors, accountants and any person, firm, trust, corporation, officer, director or other individual or entity in which any Defendant has a controlling interest or which is related to or affiliated with any of the Defendants, and the legal representatives, heirs, successors in interest or assigns of the Defendants (collectively the "Released Parties"). 79. "Settled Claims" means any and all claims, rights or causes of action or liabilities whatsoever, whether based on federal, state, local, statutory or common law or any other law, rule or regulation, including both known and unknown claims, that have been or could have been asserted in any forum by the Plaintiffs, Class Members or any of them or the successors and assigns of any of them, whether directly, indirectly, representatively - ------------------------------------------------------------------------------- closing market price per share of CLC stock for that ten day period (the "Average Price") is less than $8.19, Defendants will pay to plaintiffs, in the form of cash and/or additional shares of CLC stock, an amount for each of the 550,000 shares equal to the difference between $8.19 and the Average Price, but in no event shall that additional amount paid exceed $6.19 per share. If additional CLC Shares are used to make up the shortfall, they shall be valued at the Average Price; or (2) If the Average Price is $2.00 or less, Plaintiffs' Co-Lead Counsel may, at their option, terminate this agreement. - 38 - 39 or in any other capacity, against any of the Released Parties which arise out of or relate in any way to the allegations, transactions, facts, matters or occurrences, representations or omissions involved, set forth, referred to or that could have been asserted in the Consolidated Complaint relating to the purchase of shares of the common stock of CLC during the Class Period. 80. If the Settlement is approved by the Court, all claims which have or could have been asserted in the action will be dismissed on the merits and with prejudice as to all Class Members and all Class Members shall be forever barred from prosecuting a class action or any other action raising any Settled Claims against any Released Party. 81. The Stipulation provides that the Defendants may withdraw from and terminate the Settlement in the event that in excess of a certain amount of claimants exclude themselves from the Class. 82. The Settlement will become effective at such time as Orders entered by the Court approving the Settlement shall become final and not subject to appeal (the "Effective Date"). PLAN OF ALLOCATION OF SETTLEMENT PROCEEDS AMONG CLASS MEMBERS 83. The $3,000,000 Cash Settlement Amount and the interest earned thereon, and the 550,000 shares of CLC common stock (or the proceeds of the sale of any or all of such shares, if sold) shall be the Gross Settlement Fund. The Gross Settlement Fund, less all taxes, approved costs, fees and expenses (the "Net Settlement Fund") shall be distributed to members of the Class who file acceptable Proofs of Claim ("Authorized Claimants"). 84. The Claims Administrator shall determine each Authorized Claimant's pro rata share of the Net Settlement Fund based upon each Authorized Claimant's "Recognized Claim." The Recognized Claim formula set forth below reflects Plaintiffs' contention that the price of the shares of CLC began to be artificially inflated at the beginning of the Class Period, April 30, 1997, until March 9, 1998, when part of the alleged artificial inflation was allegedly eliminated by the disclosures in an article in the Washington Post. Plaintiffs further contended that some artificial inflation continued thereafter until April 6, 1998, the end of the Class Period, when CLC disclosed that the Company had been ordered to suspend marketing and enrollment at one of its training centers and that each and every CLC facility had been placed on heightened cash-monitoring status by the United States Department of Education, immediately after which the price of CLC shares fell to $13 per share. Thereafter, - 39 - 40 in the 90-day period following April 6, 1998, (ending July 2, 1998) the mean trading price of CLC shares was $17.17. The Defendants deny that their conduct caused any artificial inflation in the price of CLC shares and the use of the Recognized Claim formula herein does not constitute any admission or concession on the part of the Defendants that there was any wrongdoing, liability or damages. 85. An Authorized Claimant's "Recognized Claim" shall mean the amount determined in accordance with the following formula: (i) for each share of common stock of CLC Corporation purchased during the period from April 30, 1997 through the close of trading on March 9, 1998 which an Authorized Claimant continued to hold as of the close of trading on July 2, 1998, the Recognized Claim shall be equal to the difference, if a loss, between the amount paid for CLC common stock (including brokerage commissions and transaction charges), and $17.17; (ii) for each share of common stock of CLC Corporation purchased during the period from April 30, 1997 through the close of trading on March 9, 1998 which an Authorized Claimant continued to hold as of the close of trading on March 9, 1998, but sold on or prior to July 2, 1998, the Recognized Claim shall be equal to the difference, if a loss, between the amount paid for CLC common stock (including brokerage commissions and transaction charges), and the sum for which said shares were sold at a loss (net of brokerage commissions and transaction charges); (iii) for each share of common stock of CLC Corporation purchased during the period from April 30, 1997 through the close of trading on March 9, 1998 which an Authorized Claimant sold prior to the close of trading on March 9, 1998, the Recognized Claim shall be equal to 50% of the difference, if a loss, between the amount paid for CLC common stock (including brokerage commissions and transaction charges), and the sum for which said shares were sold at a loss (net of brokerage commissions and transaction charges); (iv) for each share of common stock of CLC Corporation purchased during the period from March 10, 1998, through the close of trading on April 6, 1998 which an Authorized Claimant continued to hold as of the close of trading on July 2, 1998, the Recognized Claim shall be equal to the difference, if a - 40 - 41 loss, between the amount paid for CLC common stock (including brokerage commissions and transaction charges), and $17.17; (v) for each share of common stock of CLC Corporation purchased during the period from March 10, 1998 through the close of trading on April 6, 1998 which an Authorized Claimant continued to hold as of the close of trading on April 6, 1998, but sold on or prior to July 2, 1998, the Recognized Claim shall be equal to the difference, if a loss, between the amount paid for CLC common stock (including brokerage commissions and transaction charges), and the sum for which said shares were sold at a loss (net of brokerage commissions and transaction charges); (vi) for each share of common stock of CLC Corporation purchased during the period from March 10, 1998 through the close of trading on April 6, 1998 which an Authorized Claimant sold prior to the close of trading on April 6, 1998, the Recognized Claim shall be equal to 50% of the difference, if a loss, between the amount paid for CLC common stock (including brokerage commissions and transaction charges), and the sum for which said shares were sold at a loss (net of brokerage commissions and transaction charges); 86. Transactions resulting in a gain shall not be included. In the event a Class Member has more than one purchase or sale of CLC common stock, all purchases and sales shall be matched on a First In First Out ("FIFO") basis. Any person or entity who sold shares of CLC common stock "short" shall have no Recognized Claim with respect to any purchase during the Class Period to cover such short sale. A purchase or sale of CLC common stock shall be deemed to have occurred on the "contract" or "trade" date as opposed to the "settlement" or "payment" date. The receipt or grant by gift, devise or operation of law of CLC common stock during the Class Period shall not be deemed a purchase or sale of CLC common stock for the calculation of an Authorized Claimant's Recognized Claim nor shall it be deemed an assignment of any claim relating to the purchase of such shares unless specifically provided in the instrument of gift or assignment. The receipt of CLC common stock during the Class Period in exchange for securities of any other corporation or entity shall not be deemed a purchase or sale of CLC common stock. 87. Each Authorized Claimant shall be allocated pro rata shares of the cash and CLC Shares in Net Settlement Fund based on his, her or its Recognized Claim compared to the Total Recognized Claims of all - 41 - 42 accepted claimants. The amount of cash to be paid to each Authorized Claimant shall be determined by multiplying his, her or its "Recognized Claim" by a fraction the numerator of which shall be the cash Net Settlement Fund and the denominator of which shall be the Total Recognized Claims of all Authorized Claimants. To the extent not previously sold or distributed, the amount of CLC Shares to be paid to each Authorized Claimant shall be determined by multiplying his, her or its "Recognized Claim" by a fraction the numerator of which shall be the CLC Shares in the Net Settlement Fund and the denominator of which shall be the Total Recognized Claims of all Authorized Claimants. No fractional shares shall be issued. No adjustment will be made in the cash distributions for fractional shares. 88. Class Members who do not file acceptable Proofs of Claim will not share in the settlement proceeds. Class Members who do not either file a request for exclusion or file acceptable Proofs of Claim will nevertheless be bound by the judgment and the Settlement. THE RIGHTS OF CLASS MEMBERS 89. The Court has certified this action to proceed as a class action for purposes of the Settlement. If you purchased common stock of CLC during the period from April 30, 1997 through and including April 6, 1998 (excluding any purchase transactions to cover short positions and excluding the Defendants themselves, members of their immediate families, and any entity in which any of them has a controlling interest), then you are a Class Member. Class Members have the following options pursuant to Rule 23 (c) (2) of the Federal Rules of Civil Procedure: (a) If you wish to remain a member of the Class you may share in the proceeds of the settlement, provided that you submit an acceptable Proof of Claim. Class Members will be represented by the Plaintiffs and their counsel, unless you enter an appearance through counsel of your own choice at your own expense. You are not required to retain your own counsel, but if you choose to do so, such counsel must file an appearance on your behalf on or before ___________, 1999, and must serve copies of such appearance on the attorneys listed in Paragraph 37 below. (b) If you do not wish to remain a member of the Class you may exclude yourself from the Class by following the instructions in Paragraph 37 below. Persons who exclude themselves from the Class will NOT receive any share of the settlement proceeds and will not be bound by the Settlement. - 42 - 43 (c) If you object to the Settlement or any of its terms, including the Plan of Allocation, or to Plaintiffs' Counsel's application for fees and expenses, and if you do not exclude yourself from the Class, you may present your objections by following the instructions in paragraph 37 below. FILING AND PROCESSING OF PROOFS OF CLAIM 90. IN ORDER TO BE ELIGIBLE TO RECEIVE ANY DISTRIBUTION FROM THE SETTLEMENT FUND, YOU MUST COMPLETE AND SIGN THE ATTACHED PROOF OF CLAIM AND RELEASE FORM AND SEND IT BY PREPAID FIRST CLASS MAIL POST-MARKED ON OR BEFORE ______________, 1999, ADDRESSED AS FOLLOWS: In re Computer Learning Centers Securities Litigation C/O Gilardi & Co. LLC Claims Administrator Post Office Box 8040 San Rafael, CA 94912-8040 91. IF YOU DO NOT FILE A PROPER PROOF OF CLAIM FORM, YOU WILL NOT BE ENTITLED TO ANY SHARE OF THE SETTLEMENT FUND. 92. IF YOU ARE A CLASS MEMBER AND YOU DO NOT PROPERLY EXCLUDE YOURSELF FROM THE CLASS, YOU WILL BE BOUND BY THE SETTLEMENT AND THE FINAL JUDGMENT OF THE COURT DISMISSING THIS LITIGATION, EVEN IF YOU DO NOT FILE A PROOF OF CLAIM. IF YOU EXCLUDE YOURSELF, YOU WILL NOT BE BOUND BY THE JUDGMENT BUT YOU WILL NOT BE ENTITLED TO ANY SHARE OF THE SETTLEMENT FUND. 93. All Proofs of Claim must be submitted by the date specified in this Notice unless such period is extended by Order of the Court. 94. Each Claimant shall be deemed to have submitted to the jurisdiction of the United States District Court for the Eastern District of Virginia with respect to his, her or its claim. EXCLUSION FROM THE SETTLEMENT 95. Each Member of the Class shall be bound by all determinations and judgments in this action concerning the Settlement, whether favorable or unfavorable, unless such person shall mail, by first class mail, a written request for exclusion from the Class, postmarked no later than ________, 1999, addressed to "Computer Learning Centers Securities Litigation Exclusions, C/O Gilardi & Co. LLC, P.O. Box 8040, San Rafael, CA 94912- - 43 - 44 8040." No person may exclude himself from the Settlement Class after that date. In order to be valid, each such request for exclusion must set forth the name and address of the person or entity requesting exclusion, must state that such person or entity "requests exclusion from the Class in the Computer Learning Centers Securities Litigation, Civil Action No. 98-859-A" and must be signed by such person or entity. Persons and entities requesting exclusion are requested to also provide the following information: Social Security or Taxpayer Identification Number, the number(s) of shares of CLC common stock purchased during the Class Period and the price(s) paid therefor, and the number(s) of shares of CLC common stock sold during the class period and the amount(s) received therefor, and the number of shares still owned as of the close of trading on April 6, 1998. SETTLEMENT HEARING 96. At the Settlement Hearing, the Court will determine whether to finally approve this Settlement and dismiss the Litigation and the claims of the Class. The Court will also determine whether the Plan of Allocation for the Net Settlement Fund, and the terms and conditions for the distribution of CLC common stock pursuant to the Settlement Agreement are fair, reasonable, adequate and in the best interests of the Class. The Settlement Hearing may be adjourned from time to time by the Court without further written notice to the Class. - 44 - 45 97. At the Settlement Hearing, any Class member who has not properly filed a Request for Exclusion from the Class may appear in person or by counsel and be heard to the extent allowed by the Court in opposition to the fairness, reasonableness and adequacy of the Settlement, the Plan of Allocation or the application for an award of attorneys' fees and reimbursement of expenses, provided, however, that in no event shall any person be heard in opposition to the Settlement, Plan of Allocation or Plaintiffs' Counsel's application for attorneys' fees and expenses and in no event shall any paper or brief submitted by any such person be accepted or considered by the Court, unless, on or before _________, 1999, such person (a) files with the Clerk of the Court notice of such person's intention to appear, together with a statement that indicates the basis for such opposition, along with any documentation in support of such objection, and (b) simultaneously serves copies of such notice, statement and documentation, together with copies of any other papers or briefs such person files with the Court, in person or by mail upon the following counsel: for Plaintiffs, Robert P. Sugarman, Esq., MILBERG WEISS BERSHAD HYNES & LERACH, LLP, One Pennsylvania Plaza, New York, NY 10019-0165; Randall H. Steinmeyer, Esq., REINHARDT & ANDERSON, E-1000 First National Bank Bldg., 332 Minnesota Street, St. Paul, MN 55101; Jules Brody, Esq., STULL, STULL & BRODY, 6 East 45th Street, New York, NY 10017; and for Defendants, Geoffrey S. Stewart, Esq., HALE and DORR LLP, 1455 Pennsylvania Avenue, N.W., Suite 1000, Washington, DC 20004; and Steven B. Rosenfeld, Esq., PAUL, WEISS, RIFKIND, WHARTON & GARRISON, 1285 Avenue of the Americas, New York, New York 10019-6064. ATTORNEYS' FEES AND DISBURSEMENTS 98. At the Settlement Hearing or at such other time as the Court may direct, Plaintiffs' Counsel intend to apply to the Court for an award of attorneys' fees from the Settlement Fund in an amount not greater than one third of the both the cash and CLC Shares in the Gross Settlement Fund and for reimbursement, from the cash settlement proceeds, of their actual, out-of-pocket expenses up to a maximum amount of $575,000, plus interest at the same rate as earned by the cash Settlement Fund. Plaintiffs' Counsel, without further notice to the Class, may subsequently apply to the Court for fees and expenses incurred in connection with administering and distributing the settlement proceeds to the members of the Class. - 45 - 46 FURTHER INFORMATION 99. For a more detailed statement of the matters involved in this Litigation, reference is made to the pleadings, to the Stipulation, to the Orders entered by the Court and to the other papers filed in the Litigation, which may be inspected at the Office of the Clerk of the United States District Court for the Eastern District of Virginia, Alexandria Division, United States Courthouse, 401 Courthouse Square, Alexandria, Virginia 22314 during regular business hours. 100. ALL INQUIRIES CONCERNING THIS NOTICE OR THE PROOF OF CLAIM FORM BY CLASS MEMBERS SHOULD BE MADE TO THE CLAIMS ADMINISTRATOR IN WRITING. NO INQUIRIES SHOULD BE DIRECTED TO THE COURT. SPECIAL NOTICE TO SECURITIES BROKERS AND OTHER NOMINEES 101. If you purchased common stock of Computer Learning Centers, Inc., during the Class Period for the beneficial interest of a person or organization other than yourself, the Court has directed that within seven days of your receipt of this Notice, you either (a) provide to the Claims Administrator the name and last known address of each person or organization for whom or which you purchased such stock during such time period or (b) you request additional copies of this Notice and the Proof of Claim form, which will be provided to you free of charge, and within seven days mail the Notice and Proof of Claim form directly to the beneficial owners of the securities referred to herein. If you choose to follow this alternative procedure (b), the Court has ordered that you must, upon such mailing, send a statement to the Claims Administrator confirming that the mailing was made as directed. You are entitled to reimbursement from the Settlement Fund of your reasonable out-of-pocket expenses actually incurred in connection with the foregoing, including reimbursement of postage expense and the cost of ascertaining the names and addresses of beneficial owners. Those expenses will be paid upon request and submission of appropriate supporting documentation. All communications concerning the foregoing should be addressed to the Claims Administrator: In re Computer Learning Centers Securities Litigation By Order of the Court C/O Gilardi & Co. LLC --------------------- Claims Administrator CLERK OF THE COURT Post Office Box 8040 San Rafael, CA 94912-8040 Dated: , 1999 Alexandria, Virginia
- 46 - 47 EXHIBIT 2 IN THE UNITED STATES DISTRICT COURT FOR THE EASTERN DISTRICT OF VIRGINIA ALEXANDRIA DIVISION GANESH, L.L.C., et al., On Behalf of Themselves and All ) Others Similarly Situated, ) ) Plaintiffs, ) Civil Action No. 98-859-A ) vs. ) CLASS ACTION ) ------------ COMPUTER LEARNING CENTERS, INC., REID R. BECHTLE, CHARLES ) L. COSGROVE, HARRY H. GAINES and STEPHEN P. REYNOLDS, ) ) Defendants. ) ) )
PROOF OF CLAIM AND RELEASE DEADLINE FOR SUBMISSION: , 1999. ----------- IF YOU PURCHASED COMMON STOCK OF COMPUTER LEARNING CENTERS, INC., ("CLC") DURING THE PERIOD APRIL 30, 1997 TO APRIL 6, 1998("CLASS PERIOD"), (EXCLUDING THOSE WHOSE PURCHASE TRANSACTIONS WERE MADE TO COVER SHORT POSITIONS, AND ALSO EXCLUDING THE DEFENDANTS THEMSELVES, MEMBERS OF THEIR IMMEDIATE FAMILIES, AND ANY ENTITY IN WHICH ANY OF THEM HAS A CONTROLLING INTEREST) YOU ARE A "CLASS MEMBER" AND YOU MAY BE ENTITLED TO SETTLEMENT PROCEEDS. IF YOU ARE A CLASS MEMBER, YOU MUST COMPLETE AND SUBMIT THIS FORM IN ORDER TO BE ELIGIBLE FOR ANY SETTLEMENT BENEFITS. YOU MUST COMPLETE AND SIGN THIS PROOF OF CLAIM AND MAIL IT BY PRE-PAID, FIRST CLASS MAIL, POSTMARKED NO LATER THAN _________ , 1999 TO THE FOLLOWING ADDRESS: In re Computer Learning Centers Securities Litigation C/O Gilardi & Co. LLC Claims Administrator Post Office Box 8040 San Rafael, CA 94912-8040 YOUR FAILURE TO SUBMIT YOUR CLAIM BY ________, 1999 WILL SUBJECT YOUR CLAIM TO REJECTION AND PRECLUDE YOUR RECEIVING ANY MONEY IN CONNECTION WITH THE SETTLEMENT OF THIS LITIGATION. DO NOT MAIL OR DELIVER YOUR CLAIM TO THE COURT OR TO ANY OF THE PARTIES OR THEIR COUNSEL AS ANY SUCH CLAIM WILL BE DEEMED NOT TO HAVE BEEN SUBMITTED. SUBMIT YOUR CLAIM ONLY TO THE CLAIMS ADMINISTRATOR. - 47 - 48 I. I did ___, I did not ___ (check one) purchase the Common Stock of COMPUTER LEARNING CENTERS, INC., between April 30, 1997 through and including April 6, 1998, excluding all purchase transactions that were made to cover short positions. II. By submitting this Proof of Claim, I state that I believe in good faith that I am a Class member as defined above and in the Notice Of Pendency Of Class Action, Proposed Settlement Thereof, Settlement Hearing And Right To Share In Settlement Fund (the "Notice"), or am acting for such person; that I have read and understand the Notice; that I believe that I am entitled to receive a share of the Net Settlement Fund; that I elect to participate in the proposed Settlement described in the Notice; and that I have not filed a request for exclusion. III. I have set forth where requested below all relevant information with respect to each purchase of CLC common stock, during the Class Period, and each sale, if any, of such securities. I represent that in connection with any purchases of CLC stock during the Class Period claimed herein that such purchase(s) were not made to cover any short position. IV. I have enclosed photocopies of the stockbroker's confirmation slips, stockbroker's statements, relevant portions of my tax returns or other documents evidencing each purchase, sale or retention of CLC common stock listed below in support of my claim. IF ANY SUCH DOCUMENTS ARE NOT IN YOUR POSSESSION, PLEASE OBTAIN A COPY OR EQUIVALENT DOCUMENTS FROM YOUR BROKER OR TAX ADVISOR BECAUSE THESE DOCUMENTS ARE NECESSARY TO PROVE AND PROCESS YOUR CLAIM. V. I understand that the information contained in this Proof of Claim is subject to such verification as the Court may direct, and I agree to cooperate in any such verification. I further agree and understand that if the proposed Settlement is approved by the Court and becomes effective, all claims, demands, or causes of action against any or all defendants, and certain other persons or entities further identified below, which have been or could have been asserted relating to the subject matter of the Litigation will be satisfied, discharged and extinguished forever. VI. Upon the occurrence of the Effective Date (as defined in the Notice) my signature hereto will constitute a full and complete release, remise and discharge by me or, if I am submitting this Proof of Claim on behalf of a corporation, a partnership, estate or one or more other persons, by it, him, her or them, and by my, its, - 48 - 49 his, her or their heirs, executors, administrators, successors, and assigns, of each of the "Released Parties" of all "Settled Claims," as defined in the Notice. VII. Statement of Claim Name(s) of Beneficial Owner(s): Name -------------------------------------------------------- Name -------------------------------------------------------- Street No. -------------------------------------------------------- City State Zip Code -------------------- --------------- ----------- ( ) ( ) -------------------- --------------------- Telephone No. (Day) Telephone No. (Night) Taxpayer I.D. No. or Social Security No. Check one: ___ Individual ___ Corporation ___ Estate ___ Other (specify) ---------------------------------------------- Record Owner's Name (if different from Beneficial -------------------------------------------------------- Owner listed above)
I. At the close of business on April 29, 1997, I owned _______ shares of CLC common stock. - 49 - 50 J. I made the following purchases of CLC common stock during the period April 30, 1997 through April 6, 1998, inclusive. (Persons who received CLC common stock during the Class Period other than by purchase are not eligible to file claims for those transactions.) Do not include any purchase transactions made to cover any short positions.
Date(s) of Purchase Aggregate Purchase Number of Price Per Cost (including (List Chrono- Shares of Share of commission, logically) Common Stock Common Stock taxes and fees) - ------------- ------------ ------------ --------------- $ $ - ------------- ------------ ------------ --------------- $ $ - ------------- ------------ ------------ --------------- $ $ - ------------- ------------ ------------ --------------- $ $ - ------------- ------------ ------------ ---------------
K. I made the following sales of CLC common stock during the period April 30, 1997 through July 2, 1998 inclusive:
Date(s) of Number of Proceeds Sale (List Shares of Sales Price (net of Chronologically) Common Stock Per Share of commission, Month/Day/Year Sold Common Stock taxes and fees) - -------------- ------------ ------------ --------------- $ $ - -------------- ------------ ------------ --------------- $ $ - -------------- ------------ ------------ --------------- $ $ - -------------- ------------ ------------ --------------- $ $ - -------------- ------------ ------------ ---------------
L. At the close of business on July 2, 1998, I still owned ____ shares of CLC common stock. VIII. Substitute Form W-9 Request for Taxpayer Identification Number: Enter taxpayer identification number below for the Beneficial Owner(s). For most individuals, this is your Social Security number. The Internal Revenue Service ("I.R.S.") requires such taxpayer identification number. If you fail to provide this information, your claim may be rejected. - 50 - 51 Social Security Number --------------------------------------------------------- (for individuals) or Employer Identification Number -------------------------------------------------------- (for estates, trusts, corporations, etc.)
IX. Certification UNDER THE PENALTIES OF PERJURY, I (WE) CERTIFY THAT ALL OF THE INFORMATION PROVIDED ON THIS FORM IS TRUE, CORRECT AND COMPLETE. I (We) certify that I am (we are) NOT subject to backup withholding under the provisions of Section 3406 (a)(1)(c) of the Internal Revenue Code because: (a) I am (We are) exempt from backup withholding, or (b) I (We) have not been notified by the I.R.S. that I am (we are) subject to backup withholding as a result of a failure to report all interest or dividends, or (c) the I.R.S. has notified me (us) that I am (we are) no longer subject to backup withholding. NOTE: If you have been notified by the I.R.S. that you are subject to backup withholding, please strike out the language that you are not subject to backup withholding in the certification above. Signature of Claimant (If this claim is being made on behalf of Joint Claimants, then each must sign) (Signature) ------------------------------- (Signature) ------------------------------- Date: ------------------------ THIS PROOF OF CLAIM MUST BE SUBMITTED NO LATER THAN ____________, 1999, AND MUST BE MAILED TO: In re Computer Learning Centers Securities Litigation C/O Gilardi & Co. LLC Claims Administrator Post Office Box 8040 San Rafael, CA 94912-8040 - 51 - 52 A Proof of Claim received by the Claims Administrator shall be deemed to have been submitted when posted, if mailed by ________, 1999, and if a postmark is indicated on the envelope and it is mailed first class postage prepaid, and addressed in accordance with the above instructions. In all other cases, a Proof of Claim shall be deemed to have been submitted when actually received by the Claims Administrator. If you wish to be assured that your Proof of Claim is actually received by the Claims Administrator then you should send it by Certified Mail, Return Receipt Requested. No acknowledgment will be made as to the receipt of claim forms. You should be aware that it will take a significant amount of time to process fully all of the Proofs of Claim and to administer the Settlement. This work will be completed as promptly as time permits, given the need to investigate and tabulate each Proof of Claim. - 52 - 53 EXHIBIT 3 IN THE UNITED STATES DISTRICT COURT FOR THE EASTERN DISTRICT OF VIRGINIA ALEXANDRIA DIVISION GANESH, L.L.C., et al., ) Plaintiffs, ) Civil Action No. 98-859-A vs. ) COMPUTER LEARNING CENTERS, INC., et al., ) CLASS ACTION -- --- ) ------------ Defendants.
SUMMARY NOTICE OF PENDENCY OF CLASS ACTION, PROPOSED SETTLEMENT AND SETTLEMENT HEARING TO: ALL PERSONS WHO PURCHASED THE COMMON STOCK IN COMPUTER LEARNING CENTERS, INC., ("CLC") DURING THE PERIOD APRIL 30, 1997 THROUGH AND INCLUDING APRIL 6, 1998, EXCLUDING THOSE WHOSE PURCHASE TRANSACTIONS WERE MADE TO COVER SHORT POSITIONS. YOU ARE HEREBY NOTIFIED, pursuant to Rule 23 of the Federal Rules of Civil Procedure and an Order of the Court dated ____________, 1999, that the above-captioned action has been certified as a class action, and that a settlement for $3,000,000, plus 550,000 shares of common stock of CLC has been proposed. A hearing will be held at the United States Courthouse, 401 Courthouse Square, Alexandria, VA 22314, at ____, on ___________, 1999 to determine whether the proposed settlement should be approved by the Court as fair, reasonable and adequate, and to consider the application of Class Counsel for attorneys' fees and reimbursement of expenses. IF YOU ARE A MEMBER OF THE CLASS DESCRIBED ABOVE, YOUR RIGHTS WILL BE AFFECTED AND YOU MAY BE ENTITLED TO SHARE IN THE SETTLEMENT FUND. If you have not yet received the full printed Notice of Pendency of Class Action, Proposed Settlement and Settlement Hearing and a Proof of Claim form, you may obtain copies of these documents by identifying yourself as a member of the Class and by writing to: In re Computer Learning Centers Securities Litigation C/O Gilardi & Co. LLC Claims Administrator Post Office Box 8040 San Rafael, CA 94912-8040 - 53 - 54 Inquiries, other than requests for the forms of Notice and Proof of Claim, may be made to the following counsel for plaintiffs: Robert P. Sugarman, Esq. Jules Brody, Esq. Randall Steinmeyer,Esq. MILBERG WEISS BERSHAD STULL, STULL & BRODY REINHARDT & ANDERSON HYNES & LERACH, LLP 6 East 45th Street E-1000 First National One Penn Plaza New York, NY 10017 Bank Bldg. New York, NY 10019-0165 Tel. (212) 687-7230 332 Minnesota Street Tel. (212) 954-5300 St. Paul, MN 55101 Tel. (651) 227-9990
To participate in the Settlement, you must file a Proof of Claim no later than ___________, 1999. To exclude yourself from the Class you must file a request for exclusion so as to be received no later than ________, 1999. IF YOU ARE A CLASS MEMBER AND DO NOT EXCLUDE YOURSELF OR DO NOT FILE A PROPER PROOF OF CLAIM, YOU WILL NOT SHARE IN THE SETTLEMENT BUT YOU WILL BE BOUND BY THE FINAL ORDER AND JUDGMENT OF THE COURT. Further information may be obtained by directing your inquiry in writing to the Claims Administrator. PLEASE DO NOT CONTACT THE COURT OR THE CLERK'S OFFICE FOR INFORMATION. By Order of The Court - 54 - 55 EXHIBIT B IN THE UNITED STATES DISTRICT COURT FOR THE EASTERN DISTRICT OF VIRGINIA ALEXANDRIA DIVISION GANESH, L.L.C., et al., On Behalf of Themselves and All ) Others Similarly Situated, ) ) ) Plaintiffs, ) ) Civil Action No. 98-859-A ) vs. ) ) CLASS ACTION ) ------------ ) COMPUTER LEARNING CENTERS, INC., REID R. BECHTLE, CHARLES ) L. COSGROVE, HARRY H. GAINES and STEPHEN P. REYNOLDS, ) ) Defendants.
ORDER AND FINAL JUDGMENT On this ______ day of _______________, 1999, a hearing having been held before this Court to determine: (1) whether the terms and conditions of the Stipulation and Agreement of Settlement, dated February __, 1999 (the "Stipulation") are fair, reasonable and adequate for the settlement of all claims asserted by the Class against the Defendants in the complaint now pending in this Court under the above caption, including the release of the Defendants and the Released Parties and should be approved; (2) whether judgment should be entered dismissing the complaint on the merits and with prejudice in favor of the Defendants only and as against all persons or entities who are members of the Class herein who have not requested exclusion therefrom; (3) whether to approve the Plan of Allocation; and (4) whether and in what amount to award counsel for plaintiffs and the Class fees and reimbursement of expenses. The Court having considered all matters submitted to it at the hearing and otherwise; and it appearing that a notice of the hearing substantially in the form approved by the Court was mailed to all persons or entities reasonably identifiable, who purchased common stock of Computer Learning Centers, Inc., ("CLC") during the period April 30, 11997 through April 6, 1998 (the "Class Period") excluding all purchase transactions that were made to cover short positions, and except those persons or entities excluded from the definition of the Class, as shown by the records of CLC's transfer agent, at the respective addresses set forth in such - 55 - 56 records, and that a summary notice of the hearing substantially in the form approved by the Court was published in The Wall Street Journal pursuant to the specifications of the Court; and the Court having considered and determined the fairness and reasonableness of the award of attorneys' fees and expenses requested; and all capitalized terms used herein having the meanings as set forth and defined in the Stipulation. NOW, THEREFORE, IT IS HEREBY ORDERED THAT: - 56 - 57 1. The Stipulation is approved as fair, reasonable and adequate, and in the best interests of the Class, and the Class Members and the Parties are directed to consummate the Stipulation in accordance with its terms and provisions. 2. The Complaint is hereby dismissed with prejudice and without costs, except as provided in the Stipulation, as against any and all of the Defendants, their past or present subsidiaries, parents, successors and predecessors, officers, directors, shareholders, agents, employees, attorneys, advisors, and investment advisors, insurers, auditors, accountants and any person, firm, trust, corporation, officer, director or other individual or entity in which any Defendant has a controlling interest or which is related to or affiliated with any of the Defendants, and the legal representatives, heirs, successors in interest or assigns of the Defendants (collectively the "Released Parties"). 3. The Defendants and the successors and assigns of any of them, are hereby permanently barred and enjoined from instituting, commencing or prosecuting, either directly or in any other capacity, any Settled Defendants' Claims against any of the Plaintiffs, Class Members or their attorneys. The Settled Defendants' Claims are hereby compromised, settled, released, discharged and dismissed on the merits and with prejudice by virtue of the proceedings herein and this Order and Final Judgment. 4. Members of the Class and the successors and assigns of any of them, are hereby permanently barred and enjoined from instituting, commencing or prosecuting, either directly or in any other capacity, any and all claims, rights or causes of action or liabilities whatsoever, whether based on federal, state, local, statutory or common law or any other law, rule or regulation, including both known and unknown claims, that have been or could have been asserted in any forum by the Plaintiffs, Class Members or any of them or the successors and assigns of any of them, whether directly, indirectly, representatively or in any other capacity, against any of the Released Parties which arise out of or relate in any way to the allegations, transactions, facts, matters or occurrences, representations or omissions involved, set forth, referred to or that could have been asserted in the Consolidated Complaint relating to the purchase of shares of the common stock of CLC during the Class Period (the "Settled Claims") against any and all of the Released Parties. The Settled Claims are hereby compromised, settled, released, - 57 - 58 discharged and dismissed as against the Released Parties on the merits and with prejudice by virtue of the proceedings herein and this Order and Final Judgment. 5. The Plan of Allocation is approved as fair and reasonable, and in the best interests of the Class, and Plaintiffs' Counsel and the Claims Administrator are directed to administer the Stipulation in accordance with its terms and provisions. 6. The terms and conditions for the distribution of the CLC Shares pursuant to the Stipulation are approved as fair, reasonable and adequate and in the best interests of the Class. The Court finds that the provisions of Section 3(a)(10) of the Securities Act of 1933 have been met and that the CLC Shares may be issued by CLC and are exempt from the registration requirements of the federal securities laws. 7. Neither the Stipulation, nor any of its terms and provisions, nor any of the negotiations or proceedings connected with it, nor any of the documents or statements referred to therein shall be: (a) offered or received against the Defendants as evidence of or construed as or deemed to be evidence of any presumption, concession, or admission by any of the Defendants of the truth of any fact alleged by Plaintiffs or the validity of any claim that had been or could have been asserted in the Action or in any litigation, or the deficiency of any defense that has been or could have been asserted in the Action or in any litigation, or of any liability, negligence, fault, or wrongdoing of Defendants; (b) offered or received against the Defendants as evidence of a presumption, concession or admission of any fault, misrepresentation or omission with respect to any statement or written document approved or made by any Defendant, or against the Plaintiffs and the Class as evidence of any infirmity in the claims of Plaintiffs and the Class; (c) offered or received against the Defendants as evidence of a presumption, concession or admission of any liability, negligence, fault or wrongdoing, or in any way referred to for any other reason as against any of the parties to this Stipula- - 58 - 59 tion, in any other civil, criminal or administrative action or proceeding, other than such proceedings as may be necessary to effectuate the provisions of this Stipulation; provided, however, that if this Stipulation is approved by the Court, Defendants may refer to it to effectuate the liability protection granted them hereunder; (d) offered or received as evidence of a presumption, concession or admission of the lack of any liability, fault or wrongdoing claimed by Plaintiffs or of any infirmity of the claims Plaintiffs asserted or intended to assert, or in any way referred to for any other reason, against the Plaintiffs or any member of the Class in this or any other civil, criminal or administrative action or proceeding other than such proceedings as may be necessary to consummate or enforce this Stipulation; and (e) offered or construed against the Defendants or the Plaintiffs or the Class as an admission or concession that the consideration to be given hereunder represents the amount which could be or would have been recovered after trial. 8. Counsel for plaintiffs and the Class are hereby awarded ____________% of the both the Cash Settlement Amount and CLC Shares in the Gross Settlement Fund as and for their attorneys' fees, which amounts the Court finds to be fair and reasonable, and $__________ from the cash in the Gross Settlement Fund in reimbursement of their litigation expenses, which cash payments shall be paid to Plaintiffs' Co-Lead Counsel from the Settlement Fund with interest from the date such Settlement Fund was funded to the date of payment at the same rate that the Gross Settlement Fund earns. The award of attorneys' fees shall be allocated among counsel for plaintiffs and the Class in a fashion which, in the opinion of Plaintiffs' Co-Lead Counsel, fairly compensates counsel for the plaintiffs and the Class for their respective contributions in the prosecution of the litigation. 9. Exclusive jurisdiction is hereby retained over the Parties and the Class Members for all matters relating to this litigation, including the administration, interpretation, effectuation or enforcement of the Stipulation and this Order and Final Judgment, and including any application for fees and expenses incurred in connection with administering and distributing the settlement proceeds to the members of the Class. 10. Without further order of the Court, the Parties may agree to reasonable extensions of time to carry out any of the provisions of the Stipulation. - 59 - 60 11. There is no just reason for delay in the entry of this Order and Final Judgment and immediate entry by the Clerk of the Court is expressly directed pursuant to Rule 54 (b) of the Federal Rules of Civil Procedure. Dated: Alexandria, Virginia , 1999 ------------ ----------------------------------- UNITED STATES DISTRICT JUDGE - 60 - EX-11.1 4 COMPUTATION OF EARNINGS PER SHARE 1 EXHIBIT 11.1 COMPUTATION OF EARNINGS PER SHARE JANUARY 31, 1999, 1998, AND 1997 (DOLLAR AMOUNTS IN THOUSANDS, EXPECT PER SHARE AMOUNTS) SEE NOTES 3 AND 5 TO CONSOLIDATED FINANCIAL STATEMENTS
1999 1998 1997 ----------- ----------- ----------- Net (loss) income..................................... $ (586) $ 9,580 $ 5,601 =========== =========== =========== Weighted average number of common shares outstanding -- Basic................................ 17,318,049 15,892,943 13,718,912 Dilutive securities: Employee stock options.............................. (a) 1,197,052 998,199 Non employee stock options.......................... (a) 98,869 201,507 Subscription note receivable........................ -- -- 99,226 ----------- ----------- ----------- Weighted average number of common shares outstanding -- Diluted.............................. 17,318,049 17,188,864 15,017,844 =========== =========== =========== Earnings per share: Basic............................................... $ (0.03) $ 0.60 $ 0.41 =========== =========== =========== Diluted............................................. $ (0.03) $ 0.56 $ 0.37 =========== =========== ===========
- --------------- (a) The Company had a total of 1,664,831 options outstanding as of January 31, 1999; however, these options are not included in the calculation of the number of dilutive securities outstanding as their impact is antidulitive due to the net loss in 1999 and that certain options exercise prices were below the average market price of the common shares during the period. Share amounts and earnings per share restated to reflect the January 1998 two for one stock split and the April 1997 three for two stock split. EX-23.1 5 CONSENT OF PRICEWATERHOUSECOOPERS LLP 1 EXHIBIT 23.1 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (Nos. 333-17009, 333-43633 and 333-69583) of Computer Learning Centers, Inc. of our report dated March 17, 1999, except as to Note 16, which is as of April 29, 1999, appearing on page F-2 of this Form 10-K. /s/ PRICEWATERHOUSECOOPERS LLP - --------------------------------------------------------- PricewaterhouseCoopers LLP New York, New York May 3, 1999 EX-23.2 6 CONSENT OF PRICEWATERHOUSECOOPERS LLP 1 EXHIBIT 23.2 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the Prospectus constituting part of the Registration Statements on Form S-3 (Nos. 333-44729 and 333-48467) of Computer Learning Centers, Inc. of our report dated March 17, 1999, except as to Note 16, which is as of April 29, 1999, appearing on page F-2 of this Form 10-K. /s/ PRICEWATERHOUSECOOPERS LLP - --------------------------------------------------------- PricewaterhouseCoopers LLP New York, New York May 3, 1999 EX-27 7 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED STATEMENT OF OPERATIONS AND THE CONSOLIDATED BALANCE SHEET AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH. 0000943206 COMPUTER LEARNING CENTERS, INC. 1,000 YEAR JAN-31-1999 FEB-01-1998 JAN-31-1999 7,691 0 90,140 (22,783) 1,224 77,972 57,396 (19,792) 130,736 67,551 0 0 0 175 54,361 130,736 0 144,351 0 140,278 5,599 8,388 0 (734) (393) (341) 0 0 (245) (586) (.03) (.03)
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