Document:

exv10w2

 

Exhibit 10.2

 

AMERICAN PUBLIC EDUCATION, INC.

2007 OMNIBUS INCENTIVE PLAN

 

 

 

TABLE OF CONTENTS

	 	 	 	 	 
	 	 	Page
	1. PURPOSE 
	 	 	1	 
	2. DEFINITIONS 
	 	 	1	 
	3. ADMINISTRATION OF THE PLAN 
	 	 	5	 
	3.1. Board 
	 	 	5	 
	3.2. Committee
	 	 	5	 
	3.3. Terms of Awards
	 	 	6	 
	3.4. Deferral Arrangement
	 	 	7	 
	3.5. No Liability
	 	 	7	 
	3.6. Share Issuance/Book-Entry 
	 	 	7	 
	4. STOCK SUBJECT TO THE PLAN 
	 	 	7	 
	5. EFFECTIVE DATE, DURATION AND AMENDMENTS 
	 	 	8	 
	5.1. Effective Date
	 	 	8	 
	5.2. Term
	 	 	8	 
	5.3. Amendment and Termination of the Plan 
	 	 	9	 
	6. AWARD ELIGIBILITY AND LIMITATIONS 
	 	 	9	 
	6.1. Service Providers and Other Persons 
	 	 	9	 
	6.2. Successive Awards and Substitute Awards
	 	 	9	 
	6.3. Limitation on Shares of Stock Subject to
Awards and Cash Awards
	 	 	9	 
	7. AWARD AGREEMENT 
	 	 	10	 
	8. TERMS AND CONDITIONS OF OPTIONS 
	 	 	10	 
	8.1. Option Price 
	 	 	10	 
	8.2. Vesting
	 	 	10	 
	8.3. Term
	 	 	10	 
	8.4. Termination of Service
	 	 	10	 
	8.5. Method of Exercise
	 	 	10	 
	8.6. Rights of Holders of Options 
	 	 	11	 
	8.7. Delivery of Stock Certificates
	 	 	11	 
	8.8. Transferability of Options 
	 	 	11	 
	8.9. Family Transfers
	 	 	11	 
	8.10. Limitations on Incentive Stock Options
	 	 	11	 
	8.11. Notice of Disqualifying Disposition 
	 	 	12	 
	9. TERMS AND CONDITIONS OF STOCK APPRECIATION RIGHTS 
	 	 	12	 
	9.1. Right to Payment and Grant Price
	 	 	12	 
	9.2. Other Terms
	 	 	12	 
	9.3. Term
	 	 	13	 
	9.4. Transferability of SARS 
	 	 	13	 
	9.5. Family Transfers
	 	 	13	 
	10. TERMS AND CONDITIONS OF RESTRICTED STOCK AND STOCK UNITS
	 	 	13	 
	10.1. Grant of Restricted Stock or Stock Units
	 	 	13	 

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	 	 	Page
	10.2. Restrictions
	 	 	13	 
	10.3. Restricted Stock Certificates
	 	 	14	 
	10.4. Rights of Holders of Restricted Stock
	 	 	14	 
	10.5. Rights of Holders of Stock Units
	 	 	14	 
	10.5.1. Voting and Dividend Rights
	 	 	14	 
	10.5.2. Creditor’s Rights
	 	 	14	 
	10.6. Termination of Service
	 	 	15	 
	10.7. Purchase of Restricted Stock
	 	 	15	 
	10.8. Delivery of Stock
	 	 	15	 
	11. TERMS AND CONDITIONS OF UNRESTRICTED STOCK AWARDS
	 	 	15	 
	12. FORM OF PAYMENT FOR OPTIONS AND RESTRICTED STOCK 
	 	 	15	 
	12.1. General Rule
	 	 	15	 
	12.2. Surrender of Stock
	 	 	16	 
	12.3. Cashless Exercise
	 	 	16	 
	12.4. Other Forms of Payment
	 	 	16	 
	13. TERMS AND CONDITIONS OF DIVIDEND EQUIVALENT RIGHTS 
	 	 	16	 
	13.1. Dividend Equivalent Rights
	 	 	16	 
	13.2. Termination of Service
	 	 	17	 
	14. TERMS AND CONDITIONS OF PERFORMANCE AND ANNUAL INCENTIVE AWARDS
	 	 	17	 
	14.1. Performance Conditions 
	 	 	17	 
	14.2. Performance or Annual Incentive Awards Granted to
Designated Covered Employees
	 	 	17	 
	14.2.1. Performance Goals Generally
	 	 	17	 
	14.2.2. Business Criteria
	 	 	18	 
	14.2.3. Timing For Establishing Performance Goals
	 	 	18	 
	14.2.4. Settlement of Performance or Annual Incentive
Awards; Other Terms
	 	 	18	 
	14.3. Written Determinations
	 	 	19	 
	14.4. Status of Section 14.2 Awards Under Code Section 162(m) 
	 	 	19	 
	15. PARACHUTE LIMITATIONS 
	 	 	19	 
	16. REQUIREMENTS OF LAW 
	 	 	20	 
	16.1. General
	 	 	20	 
	16.2. Rule 16b-3
	 	 	21	 
	17. EFFECT OF CHANGES IN CAPITALIZATION 
	 	 	21	 
	17.1. Changes in Stock
	 	 	21	 
	17.2. Reorganization in Which the Company Is the Surviving Entity Which
does not Constitute a Corporate Transaction
	 	 	21	 
	17.3. Corporate Transaction
	 	 	22	 
	17.4. Adjustments
	 	 	23	 
	17.5. No Limitations on Company
	 	 	23	 
	18. GENERAL PROVISIONS 
	 	 	23	 

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	 	 	Page
	18.1. Disclaimer of Rights
	 	 	23	 
	18.2. Nonexclusivity of the Plan
	 	 	24	 
	18.3. Withholding Taxes
	 	 	24	 
	18.4. Captions
	 	 	24	 
	18.5. Other Provisions
	 	 	24	 
	18.6. Number and Gender
	 	 	25	 
	18.7. Severability
	 	 	25	 
	18.8. Governing Law
	 	 	25	 
	18.9. Section 409A of the Code
	 	 	25	 

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AMERICAN PUBLIC EDUCATION, INC.

2007 STOCK INCENTIVE PLAN

     American Public Education, Inc., a Delaware corporation (the “Company”), sets forth herein the
terms of its American Public Education, Inc. 2007 Omnibus Incentive Plan (the “Plan”), as follows:

1. PURPOSE

     The Plan is intended to enhance the Company’s and its Affiliates’ (as defined herein) ability
to attract and retain highly qualified officers, directors, key employees, and other persons, and
to motivate such persons to serve the Company and its Affiliates and to expend maximum effort to
improve the business results and earnings of the Company, by providing to such persons an
opportunity to acquire or increase a direct proprietary interest in the operations and future
success of the Company. To this end, the Plan provides for the grant of stock options, stock
appreciation rights, restricted stock, stock units, unrestricted stock, dividend equivalent rights
and cash awards. Any of these awards may, but need not, be made as performance incentives to
reward attainment of annual or long-term performance goals in accordance with the terms hereof.
Stock options granted under the Plan may be non-qualified stock options or incentive stock options,
as provided herein, except that stock options granted to outside directors and any consultant or
advisor currently providing services to the Company or an Affiliate shall in all cases be
non-qualified stock options.

2. DEFINITIONS

     For purposes of interpreting the Plan and related documents (including Award Agreements), the
following definitions shall apply:

     2.1
“Affiliate” means, with respect to the Company, any company or other trade or business
that controls, is controlled by or is under common control with the Company within the meaning of
Rule 405 of Regulation C under the Securities Act, including, without limitation, any Subsidiary.
For purposes of granting stock options or stock appreciation rights, an entity may not be
considered an Affiliate if it results in noncompliance with Code Section 409A.

     2.2 “Annual Incentive Award” means an Award made subject to attainment of performance goals
(as described in Section 14) over a performance period of up to one year (the Company’s fiscal
year, unless otherwise specified by the Committee).

     2.3 “Award” means a grant of an Option, Stock Appreciation Right, Restricted Stock,
Unrestricted Stock, Stock Unit, Dividend Equivalent Rights, or cash award under the Plan.

     2.4 “Award Agreement” means the written agreement between the Company and a Grantee that
evidences and sets out the terms and conditions of an Award.

 

 

     2.5 “Benefit Arrangement” shall have the meaning set forth in Section 15 hereof.

     2.6 “Board” means the Board of Directors of the Company.

     2.7 “Cause” means, as determined by the Board and unless otherwise provided in an applicable
agreement with the Company or an Affiliate, (i) gross negligence or willful misconduct in
connection with the performance of duties; (ii) conviction of a criminal offense (other than minor
traffic offenses); or (iii) material breach of any term of any employment, consulting or other
services, confidentiality, intellectual property or non-competition agreements, if any, between the
Service Provider and the Company or an Affiliate.

     2.8 “Code” means the Internal Revenue Code of 1986, as now in effect or as hereafter amended.

     2.9 “Committee” means a committee of, and designated from time to time by resolution of, the
Board, which shall be constituted as provided in Section 3.2.

     2.10 “Company” means American Public Education, Inc.

     2.11 “Corporate Transaction” means (i) the dissolution or liquidation of the Company or a
merger, consolidation, or reorganization of the Company with one or more other entities in which
the Company is not the surviving entity, (ii) a sale of substantially all of the assets of the
Company to another person or entity, or (iii) any transaction (including without limitation a
merger or reorganization in which the Company is the surviving entity) which results in any person
or entity (other than persons who are stockholders or Affiliates immediately prior to the
transaction) owning 50% or more of the combined voting power of all classes of stock of the
Company.

     2.12 “Covered Employee” means a Grantee who is a covered employee within the meaning of
Section 162(m)(3) of the Code.

     2.13 “Disability” means the Grantee is unable to perform each of the essential duties of such
Grantee’s position by reason of a medically determinable physical or mental impairment which is
potentially permanent in character or which can be expected to last for a continuous period of not
less than 12 months; provided, however, that, with respect to rules regarding expiration of an
Incentive Stock Option following termination of the Grantee’s Service, Disability shall mean the
Grantee is unable to engage in any substantial gainful activity by reason of a medically
determinable physical or mental impairment which can be expected to result in death or which has
lasted or can be expected to last for a continuous period of not less than 12 months.

     2.14 “Dividend Equivalent Right” means a right, granted to a Grantee under Section 13 hereof,
to receive cash, Stock, other Awards or other property equal in value to dividends paid with
respect to a specified number of shares of Stock, or other periodic payments.

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     2.15 “Effective Date” means August 4, 2007, the date the Plan is approved by the Board.

     2.16 “Exchange Act” means the Securities Exchange Act of 1934, as now in effect or as
hereafter amended.

     2.17 “Fair Market Value” means the value of a share of Stock, determined as follows: if on
the Grant Date or other determination date the Stock is listed on an established national or
regional stock exchange, or is publicly traded on an established securities market, the Fair Market
Value of a share of Stock shall be the closing price of the Stock on such exchange or in such
market (if there is more than one such exchange or market the Board shall determine the appropriate
exchange or market) on the Grant Date or such other determination date (or if there is no such
reported closing price, the Fair Market Value shall be the mean between the highest bid and lowest
asked prices or between the high and low sale prices on such trading day) or, if no sale of Stock
is reported for such trading day, on the next preceding day on which any sale shall have been
reported. If the Stock is not listed on such an exchange, quoted on such system or traded on such
a market, Fair Market Value shall be the value of the Stock as determined by the Board in good
faith in a manner consistent with Code Section 409A.

     2.18 “Family Member” means a person who is a spouse, former spouse, child, stepchild,
grandchild, parent, stepparent, grandparent, niece, nephew, mother-in-law, father-in-law,
son-in-law, daughter-in-law, brother, sister, brother-in-law, or sister-in-law, including adoptive
relationships, of the Grantee, any person sharing the Grantee’s household (other than a tenant or
employee), a trust in which any one or more of these persons have more than fifty percent of the
beneficial interest, a foundation in which any one or more of these persons (or the Grantee)
control the management of assets, and any other entity in which one or more of these persons (or
the Grantee) own more than fifty percent of the voting interests.

     2.19 “Grant Date” means, as determined by the Board, the latest to occur of (i) the date as of
which the Board approves an Award, (ii) the date on which the recipient of an Award first becomes
eligible to receive an Award under Section 6 hereof, or (iii) such other date as may be specified
by the Board.

     2.20 “Grantee” means a person who receives or holds an Award under the Plan.

     2.21 “Incentive Stock Option” means an “incentive stock option” within the meaning of Section
422 of the Code, or the corresponding provision of any subsequently enacted tax statute, as amended
from time to time.

     2.22 “Non-qualified Stock Option” means an Option that is not an Incentive Stock Option.

     2.23 “Option” means an option to purchase one or more shares of Stock pursuant to the Plan.

     2.24 “Option Price” means the exercise price for each share of Stock subject to an Option.

 - 3 - 

 

     2.25 “Other Agreement” shall have the meaning set forth in Section 15 hereof.

     2.26 “Outside Director” means a member of the Board who is not an officer or employee of the
Company.

     2.27 “Performance Award” means an Award made subject to the attainment of performance goals
(as described in Section 14) over a performance period of up to ten (10) years.

     2.28 “Plan” means this American Public Education, Inc. 2007 Omnibus Incentive Plan.

     2.29 “Prior Plan” means the American Military University, Inc. 2002 Stock Incentive Plan.

     2.30 “Purchase Price” means the purchase price for each share of Stock pursuant to a grant of
Restricted Stock or Unrestricted Stock.

     2.31 “Reporting Person” means a person who is required to file reports under Section 16(a) of
the Exchange Act.

     2.32 “Restricted Stock” means shares of Stock, awarded to a Grantee pursuant to Section 10
hereof.

     2.33 “SAR Exercise Price” means the per share exercise price of an SAR granted to a Grantee
under Section 9 hereof.

     2.34 “Securities Act” means the Securities Act of 1933, as now in effect or as hereafter
amended.

     2.35 “Service” means service as a Service Provider to the Company or an Affiliate. Unless
otherwise stated in the applicable Award Agreement, a Grantee’s change in position or duties shall
not result in interrupted or terminated Service, so long as such Grantee continues to be a Service
Provider to the Company or an Affiliate. Subject to the preceding sentence, whether a termination
of Service shall have occurred for purposes of the Plan shall be determined by the Board, which
determination shall be final, binding and conclusive.

     2.36 “Service Provider” means an employee, officer or director of the Company or an Affiliate,
or a consultant or adviser currently providing services to the Company or an Affiliate.

     2.37 “Stock” means the common stock, par value $.01 per share, of the Company.

 - 4 - 

 

     2.38 “Stock Appreciation Right” or “SAR” means a right granted to a Grantee under Section 9
hereof.

     2.39 “Stock Unit” means a bookkeeping entry representing the equivalent of one share of Stock
awarded to a Grantee pursuant to Section 10 hereof.

     2.40 “Subsidiary” means any “subsidiary corporation” of the Company within the meaning of
Section 424(f) of the Code.

     2.41 “Substitute Awards” means Awards granted upon assumption of, or in substitution for,
outstanding awards previously granted by a company or other entity acquired by the Company or any
Affiliate or with which the Company or any Affiliate combines.

     2.42 “Ten Percent Stockholder” means an individual who owns more than ten percent (10%) of the
total combined voting power of all classes of outstanding stock of the Company, its parent or any
of its Subsidiaries. In determining stock ownership, the attribution rules of Section 424(d) of
the Code shall be applied.

     2.43 “Unrestricted Stock” means an Award pursuant to Section 11 hereof.

3. ADMINISTRATION OF THE PLAN

     3.1. Board

     The Board shall have such powers and authorities related to the administration of the Plan as
are consistent with the Company’s certificate of incorporation and by-laws and applicable law. The
Board shall have full power and authority to take all actions and to make all determinations
required or provided for under the Plan, any Award or any Award Agreement, and shall have full
power and authority to take all such other actions and make all such other determinations not
inconsistent with the specific terms and provisions of the Plan that the Board deems to be
necessary or appropriate to the administration of the Plan, any Award or any Award Agreement. All
such actions and determinations shall be by the affirmative vote of a majority of the members of
the Board present at a meeting or by unanimous consent of the Board executed in writing in
accordance with the Company’s certificate of incorporation and by-laws and applicable law. The
interpretation and construction by the Board of any provision of the Plan, any Award or any Award
Agreement shall be final, binding and conclusive.

     3.2. Committee.

     The Board from time to time may delegate to the Committee such powers and authorities related
to the administration and implementation of the Plan, as set forth in Section 3.1 above and other
applicable provisions, as the Board shall determine, consistent with the certificate of
incorporation and by-laws of the Company and applicable law.

     (i) Except as provided in Subsection (ii) and except as the Board may otherwise
determine, the Committee, if any, appointed by the Board to administer

 - 5 - 

 

the Plan shall consist of two or more Outside Directors of the Company who: (a) qualify
as “outside directors” within the meaning of Section 162(m) of the Code and who (b) meet
such other requirements as may be established from time to time by the Securities and
Exchange Commission for plans intended to qualify for exemption under Rule 16b—3 (or its
successor) under the Exchange Act and who (c) comply with the independence requirements of
the stock exchange on which the Common Stock is listed.

     (ii) The Board may also appoint one or more separate committees of the Board, each
composed of one or more directors of the Company who need not be Outside Directors, who may
administer the Plan with respect to employees or other Service Providers who are not
officers or directors of the Company, may grant Awards under the Plan to such employees or
other Service Providers, and may determine all terms of such Awards.

In the event that the Plan, any Award or any Award Agreement entered into hereunder provides for
any action to be taken by or determination to be made by the Board, such action may be taken or
such determination may be made by the Committee if the power and authority to do so has been
delegated to the Committee by the Board as provided for in this Section. Unless otherwise
expressly determined by the Board, any such action or determination by the Committee shall be
final, binding and conclusive. To the extent permitted by law, the Committee may delegate its
authority under the Plan to a member of the Board.

     3.3. Terms of Awards.

     Subject to the other terms and conditions of the Plan, the Board shall have full and final
authority to:

     (i) designate Grantees,

     (ii) determine the type or types of Awards to be made to a Grantee,

     (iii) determine the number of shares of Stock to be subject to an Award,

     (iv) establish the terms and conditions of each Award (including, but not limited to, the
exercise price of any Option, the nature and duration of any restriction or condition (or provision
for lapse thereof) relating to the vesting, exercise, transfer, or forfeiture of an Award or the
shares of Stock subject thereto, and any terms or conditions that may be necessary to qualify
Options as Incentive Stock Options),

     (v) prescribe the form of each Award Agreement evidencing an Award, and

     (vi) amend, modify, or supplement the terms of any outstanding Award. Such authority
specifically includes the authority, in order to effectuate the purposes of the Plan but without
amending the Plan, to modify Awards to eligible individuals who are foreign nationals or are
individuals who are employed outside the United States to recognize differences in local law, tax
policy, or custom. Notwithstanding the foregoing, no
amendment, modification or supplement of any Award shall, without the consent of the Grantee,
impair the Grantee’s rights under such Award.

 - 6 - 

 

     The Company may retain the right in an Award Agreement to cause a forfeiture of the gain
realized by a Grantee on account of actions taken by the Grantee in violation or breach of or in
conflict with any employment agreement, non-competition agreement, any agreement prohibiting
solicitation of employees or clients of the Company or any Affiliate thereof or any confidentiality
obligation with respect to the Company or any Affiliate thereof or otherwise in competition with
the Company or any Affiliate thereof, to the extent specified in such Award Agreement applicable to
the Grantee. Furthermore, the Company may annul an Award if the Grantee is an employee of the
Company or an Affiliate thereof and is terminated for Cause as defined in the applicable Award
Agreement or the Plan, as applicable.

     Notwithstanding the foregoing, no amendment or modification may be made to an outstanding
Option or SAR which reduces the Option Price or SAR Exercise Price, either by lowering the Option
Price or SAR Exercise Price or by canceling the outstanding Option or SAR and granting a
replacement Option or SAR with a lower exercise price without the approval of the stockholders of
the Company, provided, that, appropriate adjustments may be made to outstanding Options and SARs
pursuant to Section 17.

     3.4. Deferral Arrangement.

     The Board may permit or require the deferral of any award payment into a deferred compensation
arrangement, subject to such rules and procedures as it may establish, which may include provisions
for the payment or crediting of interest or dividend equivalents, including converting such credits
into deferred Stock equivalents. Any such deferrals shall be made in a manner that complies with
Code Section 409A.

     3.5. No Liability.

     No member of the Board or of the Committee shall be liable for any action or determination
made in good faith with respect to the Plan or any Award or Award Agreement.

     3.6. Share Issuance/Book-Entry

     Notwithstanding any provision of this Plan to the contrary, the issuance of the Stock under
the Plan may be evidenced in such a manner as the Board, in its discretion, deems appropriate,
including, without limitation, book-entry registration or issuance of one or more Stock
certificates.

4. STOCK SUBJECT TO THE PLAN

     4.1. Number of Shares Available for Awards

     Subject to adjustment as provided in Section 17 hereof, the number of shares of Stock
available for issuance under the Plan shall be one million one hundred thousand (1,100,000)
plus (i) any shares of Stock remaining available for issuance under the Prior Plan as of the
Effective Date, and (ii) any shares of Stock that are subject to outstanding awards under the Prior
Plan that expire or are forfeited, canceled or settled for cash without delivery of shares

 - 7 - 

 

of Stock after the Effective Date. Stock issued or to be issued under the Plan shall be authorized but
unissued shares.

     4.2. Adjustments in Authorized Shares

     The Board shall have the right to substitute or assume Awards in connection with mergers,
reorganizations, separations, or other transactions to which Section 424(a) of the Code applies.
The number of shares of Stock reserved pursuant to Section 4 shall be increased by the
corresponding number of Awards assumed and, in the case of a substitution, by the net increase in
the number of shares of Stock subject to Awards before and after the substitution.

     4.3. Share Usage

     Shares covered by an Award shall be counted as used as of the Grant Date. If any shares
covered by an Award are not purchased or are forfeited or expire, or if an Award otherwise
terminates without delivery of any Stock subject thereto or is settled in cash in lieu of shares,
then the number of shares of Stock counted against the aggregate number of shares available under
the Plan with respect to such Award shall, to the extent of any such forfeiture, termination or
expiration, again be available for making Awards under the Plan. Moreover, if the Option Price of
any Option granted under the Plan, or if pursuant to Section 18.3 the withholding obligation of any
Grantee with respect to an Option or other Award, is satisfied by tendering shares of Stock to the
Company (by either actual delivery or by attestation) or by withholding shares of Stock, such
tendered or withheld shares of Stock will again be available for issuance under the Plan.
Furthermore, the number of shares subject to an award of SARs will be counted against the aggregate
number of shares available for issuance under the Plan regardless of the number of shares actually
issued to settle the SAR upon exercise.

5. EFFECTIVE DATE, DURATION AND AMENDMENTS

     5.1. Effective Date.

     The Plan shall be effective as of the Effective Date, subject to approval of the Plan by the
Company’s stockholders within one year of the Effective Date. Upon approval of the Plan by the
stockholders of the Company as set forth above, all Awards made under the Plan on or after the
Effective Date shall be fully effective as if the stockholders of the Company had approved the Plan
on the Effective Date. If the stockholders fail to approve the Plan within one year of the
Effective Date, any Awards made hereunder shall be null and void and of no effect. Upon the
Effective Date, no further awards will be made under the Prior Plan, provided that if the
stockholders fail to approve the Plan within one year of the Effective Date, awards will again be
made under the Prior Plan.

     5.2. Term.

     The Plan shall terminate automatically ten (10) years after its adoption by the Board and may
be terminated on any earlier date as provided in Section 5.3.

 - 8 - 

 

     5.3. Amendment and Termination of the Plan

     The Board may, at any time and from time to time, amend, suspend, or terminate the Plan as to
any shares of Stock as to which Awards have not been made. An amendment shall be contingent on
approval of the Company’s stockholders to the extent stated by the Board, required by applicable
law or required by applicable stock exchange listing requirements. No Awards shall be made after
termination of the Plan. No amendment, suspension, or termination of the Plan shall, without the
consent of the Grantee, impair rights or obligations under any Award theretofore awarded under the
Plan.

6. AWARD ELIGIBILITY AND LIMITATIONS

     6.1. Service Providers and Other Persons

     Subject to this Section 6, Awards may be made under the Plan to: (i) any Service Provider to
the Company or of any Affiliate, including any Service Provider who is an officer or director of
the Company, or of any Affiliate, as the Board shall determine and designate from time to time and
(ii) any other individual whose participation in the Plan is determined to be in the best interests
of the Company by the Board.

     6.2. Successive Awards and Substitute Awards.

     An eligible person may receive more than one Award, subject to such restrictions as are
provided herein. Notwithstanding Sections 8.1 and 9.1, the Option Price of an Option or the grant
price of an SAR that is a Substitute Award may be less than 100% of the Fair Market Value of a
share of Common Stock on the original date of grant; provided, that, the Option Price or grant
price is determined in accordance with the principles of Code Section 424 and the regulations
thereunder.

     6.3. Limitation on Shares of Stock Subject to Awards and Cash Awards.

     During any time when the Company has a class of equity security registered under Section 12 of
the Exchange Act and the transition period under Treasury Reg. section 1.162-27(f)(2) has lapsed or
does not apply:

     (i) the maximum number of shares of Stock subject to Options or SARs that can be awarded under
the Plan to any person eligible for an Award under Section 6 hereof is 275,000 shares per calendar
year;

     (ii) the maximum number of shares that can be awarded under the Plan, other than pursuant to
an Option or SARs, to any person eligible for an Award under Section 6 hereof is 275,000 per
calendar year; and

     (iii) the maximum amount that may be earned as an Annual Incentive Award or other cash Award
in any calendar year by any one Grantee shall be $2,000,000 and the maximum amount that may be
earned as a Performance Award or other cash Award in respect of a performance period by any one
Grantee shall be $3,000,000.

     The preceding limitations in this Section 6.3 are subject to adjustment as provided in Section
17 hereof.

 - 9 - 

 

7. AWARD AGREEMENT

     Each Award granted pursuant to the Plan shall be evidenced by an Award Agreement, in such form
or forms as the Board shall from time to time determine. Award Agreements granted from time to
time or at the same time need not contain similar provisions but shall be consistent with the terms
of the Plan. Each Award Agreement evidencing an Award of Options shall specify whether such
Options are intended to be Non-qualified Stock Options or Incentive Stock Options, and in the
absence of such specification such options shall be deemed Non-qualified Stock Options.

8. TERMS AND CONDITIONS OF OPTIONS

     8.1. Option Price

     The Option Price of each Option shall be fixed by the Board and stated in the Award Agreement
evidencing such Option. The Option Price of each Option shall be at least the Fair Market Value on
the Grant Date of a share of Stock; provided, however, that in the event that a
Grantee is a Ten Percent Stockholder, the Option Price of an Option granted to such Grantee that is
intended to be an Incentive Stock Option shall be not less than 110 percent of the Fair Market
Value of a share of Stock on the Grant Date. In no case shall the Option Price of any Option be
less than the par value of a share of Stock.

     8.2. Vesting.

     Subject to Sections 8.3 and 17.3 hereof, each Option granted under the Plan shall become
exercisable at such times and under such conditions as shall be determined by the Board and stated
in the Award Agreement. For purposes of this Section 8.2,
fractional numbers of shares of Stock subject to an Option shall be rounded down to the next
nearest whole number.

     8.3. Term.

     Each Option granted under the Plan shall terminate, and all rights to purchase shares of Stock
thereunder shall cease, upon the expiration of ten years from the date such Option is granted, or
under such circumstances and on such date prior thereto as is set forth in the Plan or as may be
fixed by the Board and stated in the Award Agreement relating to such Option; provided,
however, that in the event that the Grantee is a Ten Percent Stockholder, an Option granted
to such Grantee that is intended to be an Incentive Stock Option shall not be exercisable after the
expiration of five years from its Grant Date.

     8.4. Termination of Service.

     Each Award Agreement shall set forth the extent to which the Grantee shall have the right to
exercise the Option following termination of the Grantee’s Service. Such provisions shall be
determined in the sole discretion of the Board, need not be uniform among all Options issued
pursuant to the Plan, and may reflect distinctions based on the reasons for termination of Service.
Limitations on Exercise of Option.

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     Notwithstanding any other provision of the Plan, in no event may any Option be exercised, in
whole or in part, prior to the date the Plan is approved by the stockholders of the Company as
provided herein or after the occurrence of an event referred to in Section 17 hereof which results
in termination of the Option.

     8.5. Method of Exercise.

     An Option that is exercisable may be exercised by the Grantee’s delivery to the Company of
written notice of exercise on any business day, at the Company’s principal office, on the form
specified by the Company. Such notice shall specify the number of shares of Stock with respect to
which the Option is being exercised and shall be accompanied by payment in full of the Option Price
of the shares for which the Option is being exercised plus the amount (if any) of federal and/or
other taxes which the Company may, in its judgment, be required to withhold with respect to an
Award. The minimum number of shares of Stock with respect to which an Option may be exercised, in
whole or in part, at any time shall be the lesser of (i) 100 shares or such lesser number set forth
in the applicable Award Agreement and (ii) the maximum number of shares available for purchase
under the Option at the time of exercise.

     8.6. Rights of Holders of Options

     Unless otherwise stated in the applicable Award Agreement, an individual holding or exercising
an Option shall have none of the rights of a stockholder (for example, the right to receive cash or
dividend payments or distributions attributable to the subject shares of Stock or to direct the
voting of the subject shares of Stock ) until the shares of Stock covered thereby are fully paid
and issued to him. Except as provided in Section 17 hereof, no adjustment shall be made for
dividends, distributions or other rights for which the record date is prior to the date of such
issuance.

     8.7. Delivery of Stock Certificates.

     Promptly after the exercise of an Option by a Grantee and the payment in full of the Option
Price, such Grantee shall be entitled to the issuance of a stock certificate or certificates
evidencing his or her ownership of the shares of Stock subject to the Option.

     8.8. Transferability of Options

     Except as provided in Section 8.10, during the lifetime of a Grantee, only the Grantee (or, in
the event of legal incapacity or incompetency, the Grantee’s guardian or legal representative) may
exercise an Option. Except as provided in Section 8.10, no Option shall be assignable or
transferable by the Grantee to whom it is granted, other than by will or the laws of descent and
distribution.

     8.9. Family Transfers.

     If authorized in the applicable Award Agreement, a Grantee may transfer, not for value, all or
part of an Option which is not an Incentive Stock Option to any Family Member. For the purpose of
this Section 8.10, a “not for value” transfer is a transfer which is (i) a gift, (ii) a transfer
under a domestic relations order in settlement of marital property rights; or (iii) a transfer to
an entity in which more than fifty percent of the voting interests are owned by Family Members (or
the Grantee) in exchange for an interest in that entity.

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Following a transfer under this Section 8.10, any such Option shall continue to be subject to the same terms and conditions as were
applicable immediately prior to transfer. Subsequent transfers of transferred Options are
prohibited except to Family Members of the original Grantee in accordance with this Section 8.10 or
by will or the laws of descent and distribution. The events of termination of Service of Section
8.4 hereof shall continue to be applied with respect to the original Grantee, following which the
Option shall be exercisable by the transferee only to the extent, and for the periods specified, in
Section 8.4.

     8.10. Limitations on Incentive Stock Options.

     An Option shall constitute an Incentive Stock Option only (i) if the Grantee of such Option is
an employee of the Company or any Subsidiary of the Company; (ii) to the extent specifically
provided in the related Award Agreement; and (iii) to the extent that the aggregate Fair Market
Value (determined at the time the Option is granted) of the shares of Stock with respect to which
all Incentive Stock Options held by such Grantee become exercisable for the first time during any
calendar year (under the Plan and all other plans of the Grantee’s employer and its Affiliates)
does not exceed $100,000. This limitation shall be applied by taking Options into account in the
order in which they were granted.

     8.11. Notice of Disqualifying Disposition

     If any Grantee shall make any disposition of shares of Stock issued pursuant to the exercise
of an Incentive Stock Option under the circumstances described in Code Section 421(b) (relating to
certain disqualifying dispositions), such Grantee shall notify the Company of such disposition
within ten (10) days thereof.

9. TERMS AND CONDITIONS OF STOCK APPRECIATION RIGHTS

     9.1. Right to Payment and Grant Price.

     A SAR shall confer on the Grantee to whom it is granted a right to receive, upon exercise
thereof, the excess of (A) the Fair Market Value of one share of Stock on the date of exercise over
(B) the grant price of the SAR as determined by the Board. The Award Agreement for a SAR shall
specify the grant price of the SAR, which shall be at least the Fair Market Value of a share of
Stock on the date of grant. SARs may be granted in conjunction with all or part of an Option
granted under the Plan or at any subsequent time during the term of such Option, in conjunction
with all or part of any other Award or without regard to any Option or other Award; provided that
an SAR that is granted subsequent to the Grant Date of a related Option must have an SAR Price that
is no less than the Fair Market Value of one share of Stock on the SAR Grant Date.

     9.2. Other Terms.

     The Board shall determine at the date of grant or thereafter, the time or times at which and
the circumstances under which an SAR may be exercised in whole or in part (including based on
achievement of performance goals and/or future service requirements), the time or times at which
SARs shall cease to be or become exercisable following

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termination of Service or upon other
conditions, the method of exercise, method of settlement, form of consideration payable in
settlement, method by or forms in which Stock will be delivered or deemed to be delivered to
Grantees, whether or not an SAR shall be in tandem or in combination with any other Award, and any
other terms and conditions of any SAR.

     9.3. Term.

     Each SAR granted under the Plan shall terminate, and all rights thereunder shall cease, upon
the expiration of ten years from the date such SAR is granted, or under such circumstances and on
such date prior thereto as is set forth in the Plan or as may be fixed by the Board and stated in
the Award Agreement relating to such SAR.

     9.4. Transferability of SARS

     Except as provided in Section 9.5, during the lifetime of a Grantee, only the Grantee (or, in
the event of legal incapacity or incompetency, the Grantee’s guardian or legal representative) may
exercise a SAR. Except as provided in Section 9.5, no SAR shall be assignable or transferable by
the Grantee to whom it is granted, other than by will or the laws of descent and distribution.

     9.5. Family Transfers.

     If authorized in the applicable Award Agreement, a Grantee may transfer, not for value, all or
part of a SAR to any Family Member. For the purpose of this Section 9.5, a
“not for value” transfer is a transfer which is (i) a gift, (ii) a transfer under a domestic
relations order in settlement of marital property rights; or (iii) a transfer to an entity in which
more than fifty percent of the voting interests are owned by Family Members (or the Grantee) in
exchange for an interest in that entity. Following a transfer under this Section 9.5, any such SAR
shall continue to be subject to the same terms and conditions as were applicable immediately prior
to transfer. Subsequent transfers of transferred SARs are prohibited except to Family Members of
the original Grantee in accordance with this Section 9.5 or by will or the laws of descent and
distribution.

10. TERMS AND CONDITIONS OF RESTRICTED STOCK AND STOCK UNITS

     10.1. Grant of Restricted Stock or Stock Units.

     Awards of Restricted Stock or Stock Units may be made for no consideration (other than par
value of the shares which is deemed paid by Services already rendered).

     10.2. Restrictions.

     At the time a grant of Restricted Stock or Stock Units is made, the Board may, in its sole
discretion, establish a period of time (a “restricted period”) applicable to such Restricted Stock
or Stock Units. Each Award of Restricted Stock or Stock Units may be subject to a

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different restricted period. The Board may, in its sole discretion, at the time a grant of Restricted Stock
or Stock Units is made, prescribe restrictions in addition to or other than the expiration of the
restricted period, including the satisfaction of corporate or individual performance objectives,
which may be applicable to all or any portion of the Restricted Stock or Stock Units as described
in Article 14. Neither Restricted Stock nor Stock Units may be sold, transferred, assigned,
pledged or otherwise encumbered or disposed of during the restricted period or prior to the
satisfaction of any other restrictions prescribed by the Board with respect to such Restricted
Stock or Stock Units.

     10.3. Restricted Stock Certificates.

     The Company shall issue, in the name of each Grantee to whom Restricted Stock has been
granted, stock certificates representing the total number of shares of Restricted Stock granted to
the Grantee, as soon as reasonably practicable after the Grant Date. The Board may provide in an
Award Agreement that either (i) the Secretary of the Company shall hold such certificates for the
Grantee’s benefit until such time as the Restricted Stock is forfeited to the Company or the
restrictions lapse, or (ii) such certificates shall be delivered to the Grantee, provided,
however, that such certificates shall bear a legend or legends that comply with the
applicable securities laws and regulations and makes appropriate reference to the restrictions
imposed under the Plan and the Award Agreement.

     10.4. Rights of Holders of Restricted Stock.

     Unless the Board otherwise provides in an Award Agreement, holders of Restricted Stock shall
have the right to vote such Stock and the right to receive any dividends declared or paid with
respect to such Stock. The Board may provide that any dividends paid on Restricted Stock must be
reinvested in shares of Stock, which may or may not be subject to
the same vesting conditions and restrictions applicable to such Restricted Stock. All
distributions, if any, received by a Grantee with respect to Restricted Stock as a result of any
stock split, stock dividend, combination of shares, or other similar transaction shall be subject
to the restrictions applicable to the original Grant.

     10.5. Rights of Holders of Stock Units.

          10.5.1. Voting and Dividend Rights.

     Holders of Stock Units shall have no rights as stockholders of the Company. The Board may
provide in an Award Agreement evidencing a grant of Stock Units that the holder of such Stock Units
shall be entitled to receive, upon the Company’s payment of a cash dividend on its outstanding
Stock, a cash payment for each Stock Unit held equal to the per-share dividend paid on the Stock.
Such Award Agreement may also provide that such cash payment will be deemed reinvested in
additional Stock Units at a price per unit equal to the Fair Market Value of a share of Stock on
the date that such dividend is paid.

          10.5.2. Creditor’s Rights.

     A holder of Stock Units shall have no rights other than those of a general creditor of the
Company. Stock Units represent an unfunded and unsecured obligation of the Company, subject to the
terms and conditions of the applicable Award Agreement.

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     10.6. Termination of Service.

     Unless the Board otherwise provides in an Award Agreement or in writing after the Award
Agreement is issued, upon the termination of a Grantee’s Service, any Restricted Stock or Stock
Units held by such Grantee that have not vested, or with respect to which all applicable
restrictions and conditions have not lapsed, shall immediately be deemed forfeited. Upon
forfeiture of Restricted Stock or Stock Units, the Grantee shall have no further rights with
respect to such Award, including but not limited to any right to vote Restricted Stock or any right
to receive dividends with respect to shares of Restricted Stock or Stock Units.

     10.7. Purchase of Restricted Stock.

     The Grantee shall be required, to the extent required by applicable law, to purchase the
Restricted Stock from the Company at a Purchase Price equal to the greater of (i) the aggregate par
value of the shares of Stock represented by such Restricted Stock or (ii) the Purchase Price, if
any, specified in the Award Agreement relating to such Restricted Stock. The Purchase Price shall
be payable in a form described in Section 12 or, in the discretion of the Board, in consideration
for past Services rendered to the Company or an Affiliate.

     10.8. Delivery of Stock.

     Upon the expiration or termination of any restricted period and the satisfaction of any other
conditions prescribed by the Board, the restrictions applicable to shares of Restricted Stock or
Stock Units settled in Stock shall lapse, and, unless otherwise provided in the Award Agreement, a
stock certificate for such shares shall be delivered, free of all such restrictions, to the Grantee
or the Grantee’s beneficiary or estate, as the case may be. Neither the Grantee, nor the Grantee’s
beneficiary or estate, shall have any further rights
with regard to a Stock Unit once the share of Stock represented by the Stock Unit has been
delivered.

11. TERMS AND CONDITIONS OF UNRESTRICTED STOCK AWARDS

     The Board may, in its sole discretion, grant (or sell at par value or such other higher
purchase price determined by the Board) an Unrestricted Stock Award to any Grantee pursuant to
which such Grantee may receive shares of Stock free of any restrictions (“Unrestricted Stock”)
under the Plan. Unrestricted Stock Awards may be granted or sold as described in the preceding
sentence in respect of past services and other valid consideration, or in lieu of, or in addition
to, any cash compensation due to such Grantee.

12. FORM OF PAYMENT FOR OPTIONS AND RESTRICTED STOCK

     12.1. General Rule.

     Payment of the Option Price for the shares purchased pursuant to the exercise of an Option or
the Purchase Price for Restricted Stock shall be made in cash or in cash equivalents acceptable to
the Company.

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     12.2. Surrender of Stock.

     To the extent the Award Agreement so provides, payment of the Option Price for shares
purchased pursuant to the exercise of an Option or the Purchase Price for Restricted Stock may be
made all or in part through the tender to the Company of shares of Stock, which shall be valued,
for purposes of determining the extent to which the Option Price or Purchase Price has been paid
thereby, at their Fair Market Value on the date of exercise or surrender.

     12.3. Cashless Exercise.

     With respect to an Option only (and not with respect to Restricted Stock), to the extent
permitted by law and to the extent the Award Agreement so provides, payment of the Option Price for
shares purchased pursuant to the exercise of an Option may be made all or in part by delivery (on a
form acceptable to the Board) of an irrevocable direction to a licensed securities broker
acceptable to the Company to sell shares of Stock and to deliver all or part of the sales proceeds
to the Company in payment of the Option Price and any withholding taxes described in Section 18.3.

     12.4. Other Forms of Payment.

     To the extent the Award Agreement so provides, payment of the Option Price for shares
purchased pursuant to exercise of an Option or the Purchase Price for Restricted Stock may be made
in any other form that is consistent with applicable laws, regulations and rules.

13. TERMS AND CONDITIONS OF DIVIDEND EQUIVALENT RIGHTS

     13.1. Dividend Equivalent Rights.

     A Dividend Equivalent Right is an Award entitling the recipient to receive credits based on
cash distributions that would have been paid on the shares of Stock specified in the Dividend
Equivalent Right (or other award to which it relates) if such shares had been issued to and held by
the recipient. A Dividend Equivalent Right may be granted hereunder to any Grantee. The terms and
conditions of Dividend Equivalent Rights shall be specified in the grant. Dividend equivalents
credited to the holder of a Dividend Equivalent Right may be paid currently or may be deemed to be
reinvested in additional shares of Stock, which may thereafter accrue additional equivalents. Any
such reinvestment shall be at Fair Market Value on the date of reinvestment. Dividend Equivalent
Rights may be settled in cash or Stock or a combination thereof, in a single installment or
installments, all determined in the sole discretion of the Board. A Dividend Equivalent Right
granted as a component of another Award may provide that such Dividend Equivalent Right shall be
settled upon exercise, settlement, or payment of, or lapse of restrictions on, such other award,
and that such Dividend Equivalent Right shall expire or be forfeited or annulled under the same
conditions as such other award. A Dividend Equivalent Right granted as a component of another
Award may also contain terms and conditions different from such other award.

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     13.2. Termination of Service.

     Except as may otherwise be provided by the Board either in the Award Agreement or in writing
after the Award Agreement is issued, a Grantee’s rights in all Dividend Equivalent Rights or
interest equivalents shall automatically terminate upon the Grantee’s termination of Service for
any reason.

14. TERMS AND CONDITIONS OF PERFORMANCE AND ANNUAL INCENTIVE AWARDS

     14.1. Performance Conditions

          The right of a Grantee to exercise or receive a grant or settlement of any Award, and the
timing thereof, may be subject to such performance conditions as may be specified by the Board.
The Board may use such business criteria and other measures of performance as it may deem
appropriate in establishing any performance conditions, and may exercise its discretion to reduce
the amounts payable under any Award subject to performance conditions, except as limited under
Sections 14.2 hereof in the case of a Performance Award or Annual Incentive Award intended to
qualify under Code Section 162(m). If and to the extent required under Code Section 162(m), any
power or authority relating to a Performance Award or Annual Incentive Award intended to qualify
under Code Section 162(m), shall be exercised by the Committee and not the Board.

     14.2. Performance or Annual Incentive Awards Granted to Designated Covered Employees

          If and to the extent that the Committee determines that a Performance or Annual Incentive
Award to be granted to a Grantee who is designated by the Committee as likely to be a Covered
Employee should qualify as “performance-based compensation” for purposes of Code Section 162(m),
the grant, exercise and/or settlement of such Performance or Annual Incentive Award shall be
contingent upon achievement of pre-established performance goals and other terms set forth in this
Section 14.2.

          14.2.1. Performance Goals Generally.

     The performance goals for such Performance or Annual Incentive Awards shall consist of one or
more business criteria and a targeted level or levels of performance with respect to each of such
criteria, as specified by the Committee consistent with this Section 14.2. Performance goals shall
be objective and shall otherwise meet the requirements of Code Section 162(m) and regulations
thereunder including the requirement that the level or levels of performance targeted by the
Committee result in the achievement of performance goals being “substantially uncertain.” The
Committee may determine that such Performance or Annual Incentive Awards shall be granted,
exercised and/or settled upon achievement of any one performance goal or that two or more of the
performance goals must be achieved as a condition to grant, exercise and/or settlement of such
Performance or Annual Incentive Awards. Performance goals may differ for Performance or Annual
Incentive Awards granted to any one Grantee or to different Grantees.

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          14.2.2. Business Criteria.

     One or more of the following business criteria for the Company, on a consolidated basis,
and/or specified subsidiaries or business units of the Company (except with respect to the total
stockholder return and earnings per share criteria), shall be used exclusively by the Committee in
establishing performance goals for such Performance or Annual Incentive Awards: (1) total
stockholder return; (2) such total stockholder return as compared to total return (on a comparable
basis) of a publicly available index such as, but not limited to, the Standard & Poor’s 500 Stock
Index; (3) net income; (4) pretax earnings; (5) earnings before interest expense, taxes,
depreciation and amortization, or other identified expenses, including stock-based compensation
expenses; (6) pretax operating earnings after interest expense and before bonuses, service fees,
and extraordinary or special items; (7) operating margin; (8) earnings per share; (9) return on
equity; (10) return on capital; (11) return on investment; (12) operating earnings; (13) working
capital; (14) ratio of debt to stockholders’ equity; (15) revenue; (16) enrollments; (17)
enrollments in particular populations, (18) retention, (19) course registrations, (20) student
satisfaction measures and (21) quality measures. Business criteria may be measured on an absolute
basis or on a relative basis (i.e., performance relative to peer companies) and on a GAAP or
non-GAAP basis. The Committee may provide, in a manner that meets the requirements of Code Section
162(m), including the timing requirements set forth in Section 14.2.3 that any evaluation of
performance may include or exclude any of the following events that occur during the applicable
performance period: (a) asset write-downs; (b) litigation or claim judgments or settlements; (c)
the effect of changes in tax laws, accounting principles or other laws or provisions affecting
reported results; (d) any reorganization or
restructuring programs; (e) extraordinary nonrecurring items; (f) acquisitions or divestitures; (g)
foreign exchange gains and losses; and (h) changes in governmental rules or regulations applicable
to the Company and its operations or rules and regulations of regulatory or accrediting bodies or
agencies.

          14.2.3. Timing For Establishing Performance Goals.

     Performance goals shall be established not later than 90 days after the beginning of any
performance period applicable to such Performance or Annual Incentive Awards, or at such other date
as may be required or permitted for “performance-based compensation” under Code Section 162(m).

          14.2.4. Settlement of Performance or Annual Incentive Awards; Other Terms.

     Settlement of such Performance or Annual Incentive Awards shall be in cash, Stock, other
Awards or other property, in the discretion of the Committee. The Committee may, in its
discretion, reduce the amount of a settlement otherwise to be made in connection with such
Performance or Annual Incentive Awards. The Committee shall specify the circumstances in which
such Performance or Annual Incentive Awards shall be paid or forfeited in the event of termination
of Service by the Grantee prior to the end of a performance period or settlement of Performance
Awards.

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     14.3. Written Determinations.

          All determinations by the Committee as to the establishment of performance goals, the amount
of any potential Performance Awards and as to the achievement of performance goals relating to
Performance Awards, and the amount of any potential individual Annual Incentive Awards and the
amount of final Annual Incentive Awards, shall be made in writing in the case of any Award intended
to qualify under Code Section 162(m). To the extent permitted by Section 162(m), the Committee may
delegate any responsibility relating to such Performance Awards or Annual Incentive Awards.

     14.4. Status of Section 14.2 Awards Under Code Section 162(m)

          It is the intent of the Company that Performance Awards and Annual Incentive Awards under
Section 14.2 hereof granted to persons who are designated by the Committee as likely to be Covered
Employees within the meaning of Code Section 162(m) and regulations thereunder shall, if so
designated by the Committee, constitute “qualified performance-based compensation” within the
meaning of Code Section 162(m) and regulations thereunder. Accordingly, the terms of Section 14.2,
including the definitions of Covered Employee and other terms used therein, shall be interpreted in
a manner consistent with Code Section 162(m) and regulations thereunder. The foregoing
notwithstanding, because the Committee cannot determine with certainty whether a given Grantee will
be a Covered Employee with respect to a fiscal year that has not yet been completed, the term
Covered Employee as used herein shall mean only a person designated by the Committee, at the time
of grant of Performance Awards or an Annual Incentive Award, as likely to be a Covered Employee
with respect to that fiscal year. If any provision of the Plan or any agreement relating to such
Performance Awards or Annual Incentive
Awards does not comply or is inconsistent with the requirements of Code Section 162(m) or
regulations thereunder, such provision shall be construed or deemed amended to the extent necessary
to conform to such requirements.

15. PARACHUTE LIMITATIONS

     Notwithstanding any other provision of this Plan or of any other agreement, contract, or
understanding heretofore or hereafter entered into by a Grantee with the Company or any Affiliate,
except an agreement, contract, or understanding that expressly addresses Section 280G or Section
4999 of the Code (an “Other Agreement”), and notwithstanding any formal or informal plan or other
arrangement for the direct or indirect provision of compensation to the Grantee (including groups
or classes of Grantees or beneficiaries of which the Grantee is a member), whether or not such
compensation is deferred, is in cash, or is in the form of a benefit to or for the Grantee (a
“Benefit Arrangement”), if the Grantee is a “disqualified individual,” as defined in Section
280G(c) of the Code, any Option, Restricted Stock or Stock Unit held by that Grantee and any right
to receive any payment or other benefit under this Plan shall not become exercisable or vested (i)
to the extent that such right to exercise, vesting, payment, or benefit, taking into account all
other rights, payments, or benefits to or for the Grantee under this Plan, all Other Agreements,
and all Benefit Arrangements, would cause any payment or benefit to the Grantee under this Plan to
be considered a “parachute payment” within the meaning of Section 280G(b)(2) of the Code as then in
effect (a “Parachute Payment”) and (ii) if, as a result of receiving a Parachute Payment,
the aggregate after-tax amounts received by the Grantee from the Company under this Plan, all Other
Agreements, and all Benefit Arrangements would be less than the maximum after-tax

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amount that could
be received by the Grantee without causing any such payment or benefit to be considered a Parachute
Payment. In the event that the receipt of any such right to exercise, vesting, payment, or benefit
under this Plan, in conjunction with all other rights, payments, or benefits to or for the Grantee
under any Other Agreement or any Benefit Arrangement would cause the Grantee to be considered to
have received a Parachute Payment under this Plan that would have the effect of decreasing the
after-tax amount received by the Grantee as described in clause (ii) of the preceding sentence,
then the Grantee shall have the right, in the Grantee’s sole discretion, to designate those rights,
payments, or benefits under this Plan, any Other Agreements, and any Benefit Arrangements that
should be reduced or eliminated so as to avoid having the payment or benefit to the Grantee under
this Plan be deemed to be a Parachute Payment.

16. REQUIREMENTS OF LAW

     16.1. General.

     The Company shall not be required to sell or issue any shares of Stock under any Award if the
sale or issuance of such shares would constitute a violation by the Grantee, any other individual
exercising an Option, or the Company of any provision of any law or regulation of any governmental
authority, including without limitation any federal or state securities laws or regulations. If at
any time the Company shall determine, in its discretion, that the listing, registration or
qualification of any shares subject to an Award upon any
securities exchange or under any governmental regulatory body is necessary or desirable as a
condition of, or in connection with, the issuance or purchase of shares hereunder, no shares of
Stock may be issued or sold to the Grantee or any other individual exercising an Option pursuant to
such Award unless such listing, registration, qualification, consent or approval shall have been
effected or obtained free of any conditions not acceptable to the Company, and any delay caused
thereby shall in no way affect the date of termination of the Award. Without limiting the
generality of the foregoing, in connection with the Securities Act, upon the exercise of any Option
or any SAR that may be settled in shares of Stock or the delivery of any shares of Stock underlying
an Award, unless a registration statement under such Act is in effect with respect to the shares of
Stock covered by such Award, the Company shall not be required to sell or issue such shares unless
the Board has received evidence satisfactory to it that the Grantee or any other individual
exercising an Option may acquire such shares pursuant to an exemption from registration under the
Securities Act. Any determination in this connection by the Board shall be final, binding, and
conclusive. The Company may, but shall in no event be obligated to, register any securities
covered hereby pursuant to the Securities Act. The Company shall not be obligated to take any
affirmative action in order to cause the exercise of an Option or a SAR or the issuance of shares
of Stock pursuant to the Plan to comply with any law or regulation of any governmental authority.
As to any jurisdiction that expressly imposes the requirement that an Option (or SAR that may be
settled in shares of Stock) shall not be exercisable until the shares of Stock covered by such
Option (or SAR) are registered or are exempt from registration, the exercise of such Option (or
SAR) under circumstances in which the laws of such jurisdiction apply shall be deemed conditioned
upon the effectiveness of such registration or the availability of such an exemption.

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     16.2. Rule 16b-3.

     During any time when the Company has a class of equity security registered under Section 12 of
the Exchange Act, it is the intent of the Company that Awards pursuant to the Plan and the exercise
of Options and SARs granted hereunder will qualify for the exemption provided by Rule 16b-3 under
the Exchange Act. To the extent that any provision of the Plan or action by the Board does not
comply with the requirements of Rule 16b-3, it shall be deemed inoperative to the extent permitted
by law and deemed advisable by the Board, and shall not affect the validity of the Plan. In the
event that Rule 16b-3 is revised or replaced, the Board may exercise its discretion to modify this
Plan in any respect necessary to satisfy the requirements of, or to take advantage of any features
of, the revised exemption or its replacement.

17. EFFECT OF CHANGES IN CAPITALIZATION

     17.1. Changes in Stock.

     If the number of outstanding shares of Stock is increased or decreased or the shares of Stock
are changed into or exchanged for a different number or kind of shares or other securities of the
Company on account of any recapitalization, reclassification, stock split, reverse split,
combination of shares, exchange of shares, stock dividend or other distribution payable in capital
stock, or other increase or decrease in such shares effected without receipt of consideration by
the Company occurring after the Effective Date, the number and kinds of
shares for which grants of Options and other Awards may be made under the Plan shall be adjusted
proportionately and accordingly by the Company. In addition, the number and kind of shares for
which Awards are outstanding shall be adjusted proportionately and accordingly so that the
proportionate interest of the Grantee immediately following such event shall, to the extent
practicable, be the same as immediately before such event. Any such adjustment in outstanding
Options or SARs shall not change the aggregate Option Price or SAR Exercise Price payable with
respect to shares that are subject to the unexercised portion of an outstanding Option or SAR, as
applicable, but shall include a corresponding proportionate adjustment in the Option Price or SAR
Exercise Price per share. The conversion of any convertible securities of the Company shall not be
treated as an increase in shares effected without receipt of consideration. Notwithstanding the
foregoing, in the event of any distribution to the Company’s stockholders of securities of any
other entity or other assets (including an extraordinary dividend but excluding a non-extraordinary
dividend of the Company) without receipt of consideration by the Company, the Company shall, in
such manner as the Company deems appropriate, adjust (i) the number and kind of shares subject to
outstanding Awards and/or (ii) the exercise price of outstanding Options and Stock Appreciation
Rights to reflect such distribution.

     17.2. Reorganization in Which the Company Is the Surviving Entity Which does not
Constitute a Corporate Transaction.

     Subject to Section 17.3 hereof, if the Company shall be the surviving entity in any
reorganization, merger, or consolidation of the Company with one or more other entities which does
not constitute a Corporate Transaction, any Option or SAR theretofore granted

 - 21 - 

 

pursuant to the Plan
shall pertain to and apply to the securities to which a holder of the number of shares of Stock
subject to such Option or SAR would have been entitled immediately following such reorganization,
merger, or consolidation, with a corresponding proportionate adjustment of the Option Price or SAR
Exercise Price per share so that the aggregate Option Price or SAR Exercise Price thereafter shall
be the same as the aggregate Option Price or SAR Exercise Price of the shares remaining subject to
the Option or SAR immediately prior to such reorganization, merger, or consolidation. Subject to
any contrary language in an Award Agreement evidencing an Award, any restrictions applicable to
such Award shall apply as well to any replacement shares received by the Grantee as a result of the
reorganization, merger or consolidation. In the event of a transaction described in this Section
17.2, Stock Units shall be adjusted so as to apply to the securities that a holder of the number of
shares of Stock subject to the Stock Units would have been entitled to receive immediately
following such transaction.

     17.3. Corporate Transaction.

          Subject to the exceptions set forth in the next to last sentence of this Section 17.3 and the
last sentence of Section 17.4, upon the occurrence of a Corporate Transaction:

          (i) all outstanding shares of Restricted Stock shall be deemed to have vested, and all Stock
Units shall be deemed to have vested and the shares of Stock subject thereto shall be delivered,
immediately prior to the occurrence of such Corporate Transaction, and

          (ii) either of the following two actions shall be taken:

               (A) fifteen days prior to the scheduled consummation of a Corporate Transaction, all Options
and SARs outstanding hereunder shall become immediately exercisable and shall remain exercisable
for a period of fifteen days, or

               (B) the Board may elect, in its sole discretion, to cancel any outstanding Awards of Options,
Restricted Stock, Stock Units, and/or SARs and pay or deliver, or cause to be paid or delivered, to
the holder thereof an amount in cash or securities having a value (as determined by the Board
acting in good faith), in the case of Restricted Stock or Stock Units, equal to the formula or
fixed price per share paid to holders of shares of Stock and, in the case of Options or SARs, equal
to the product of the number of shares of Stock subject to the Option or SAR (the “Award Shares”)
multiplied by the amount, if any, by which (I) the formula or fixed price per share paid to holders
of shares of Stock pursuant to such transaction exceeds (II) the Option Price or SAR Exercise Price
applicable to such Award Shares.

          With respect to the Company’s establishment of an exercise window, (i) any exercise of an
Option or SAR during such fifteen-day period shall be conditioned upon the consummation of the
event and shall be effective only immediately before the consummation of the event, and (ii) upon
consummation of any Corporate Transaction the Plan, and all outstanding but unexercised Options and
SARs shall terminate. The Board shall send written notice of an event that will result in such a
termination to all individuals who hold Options and SARs not later than the time at which the
Company gives notice thereof to its stockholders. This Section 17.3 shall not apply to any
Corporate Transaction to the extent that provision is made in writing in connection with such
Corporate Transaction for the

 - 22 - 

 

assumption or continuation of the Options, SARs, Stock Units and
Restricted Stock theretofore granted, or for the substitution for such Options, SARs, Stock Units
and Restricted Stock for new common stock options and stock appreciation rights and new common
stock units and restricted stock relating to the stock of a successor entity, or a parent or
subsidiary thereof, with appropriate adjustments as to the number of shares (disregarding any
consideration that is not common stock) and option and stock appreciation right exercise prices, in
which event the Plan, Options, SARs, Stock Units and Restricted Stock theretofore granted shall
continue in the manner and under the terms so provided. In the event a Grantee’s Award is assumed,
continued or substituted upon the consummation of any Corporate Transaction and his employment is
terminated without Cause within one year following the consummation of such Corporate Transaction,
the Grantee’s Award will be fully vested and may be exercised in full, to the extent applicable,
beginning on the date of such termination and for the one-year period immediately following such
termination or for such longer period as the Committee shall determine.

     17.4. Adjustments.

     Adjustments under this Section 17 related to shares of Stock or securities of the Company
shall be made by the Board, whose determination in that respect shall be final, binding and
conclusive. No fractional shares or other securities shall be issued pursuant to any such
adjustment, and any fractions resulting from any such adjustment shall be eliminated in each case
by rounding downward to the nearest whole share. The Board shall determine the effect of a
Corporate Transaction upon Awards other than Options, SARs, Stock Units and Restricted Stock, and
such effect shall be set forth in the appropriate Award Agreement. The Board may provide in the
Award Agreements at the time of grant, or any
time thereafter with the consent of the Grantee, for different provisions to apply to an Award in
place of those described in Sections 17.1, 17.2 and 17.3.

     17.5. No Limitations on Company.

     The making of Awards pursuant to the Plan shall not affect or limit in any way the right or
power of the Company to make adjustments, reclassifications, reorganizations, or changes of its
capital or business structure or to merge, consolidate, dissolve, or liquidate, or to sell or
transfer all or any part of its business or assets.

18. GENERAL PROVISIONS

     18.1. Disclaimer of Rights.

     No provision in the Plan or in any Award or Award Agreement shall be construed to confer upon
any individual the right to remain in the employ or service of the Company or any Affiliate, or to
interfere in any way with any contractual or other right or authority of the Company either to
increase or decrease the compensation or other payments to any individual at any time, or to
terminate any employment or other relationship between any individual and the Company. In
addition, notwithstanding anything contained in the Plan to the contrary, unless otherwise stated
in the applicable Award Agreement, no Award granted under the Plan shall be affected by any change
of duties or position of the Grantee, so long as such Grantee continues to be a director, officer,
consultant or employee of the Company or an Affiliate. The obligation of the Company to pay any
benefits pursuant to this Plan shall be

 - 23 - 

 

interpreted as a contractual obligation to pay only those
amounts described herein, in the manner and under the conditions prescribed herein. The Plan shall
in no way be interpreted to require the Company to transfer any amounts to a third party trustee or
otherwise hold any amounts in trust or escrow for payment to any Grantee or beneficiary under the
terms of the Plan.

     18.2. Nonexclusivity of the Plan.

     Neither the adoption of the Plan nor the submission of the Plan to the stockholders of the
Company for approval shall be construed as creating any limitations upon the right and authority of
the Board to adopt such other incentive compensation arrangements (which arrangements may be
applicable either generally to a class or classes of individuals or specifically to a particular
individual or particular individuals) as the Board in its discretion determines desirable,
including, without limitation, the granting of stock options otherwise than under the Plan.

     18.3. Withholding Taxes.

     The Company or an Affiliate, as the case may be, shall have the right to deduct from payments
of any kind otherwise due to a Grantee any federal, state, or local taxes of any kind required by
law to be withheld with respect to the vesting of or other lapse of restrictions applicable to an
Award or upon the issuance of any shares of Stock upon the exercise of an Option or pursuant to an
Award. At the time of such vesting, lapse, or exercise, the Grantee shall pay to the Company or
the Affiliate, as the case may be, any amount that the Company or the Affiliate may reasonably
determine to be necessary to satisfy such withholding
obligation. Subject to the prior approval of the Company or the Affiliate, which may be withheld
by the Company or the Affiliate, as the case may be, in its sole discretion, the Grantee may elect
to satisfy such obligations, in whole or in part, (i) by causing the Company or the Affiliate to
withhold shares of Stock otherwise issuable to the Grantee or (ii) by delivering to the Company or
the Affiliate shares of Stock already owned by the Grantee. The shares of Stock so delivered or
withheld shall have an aggregate Fair Market Value equal to such withholding obligations. The Fair
Market Value of the shares of Stock used to satisfy such withholding obligation shall be determined
by the Company or the Affiliate as of the date that the amount of tax to be withheld is to be
determined. A Grantee who has made an election pursuant to this Section 18.3 may satisfy his or
her withholding obligation only with shares of Stock that are not subject to any repurchase,
forfeiture, unfulfilled vesting, or other similar requirements. The maximum number of shares of
Stock that may be withheld from any Award to satisfy any federal, state or local tax withholding
requirements upon the exercise, vesting, lapse of restrictions applicable to such Award or payment
of shares pursuant to such Award, as applicable, cannot exceed such number of shares having a Fair
Market Value equal to the minimum statutory amount required by the Company to be withheld and paid
to any such federal, state or local taxing authority with respect to such exercise, vesting, lapse
of restrictions or payment of shares.

     18.4. Captions.

     The use of captions in this Plan or any Award Agreement is for the convenience of reference
only and shall not affect the meaning of any provision of the Plan or such Award Agreement.

     18.5. Other Provisions.

 - 24 - 

 

     Each Award granted under the Plan may contain such other terms and conditions not inconsistent
with the Plan as may be determined by the Board, in its sole discretion.

     18.6. Number and Gender.

     With respect to words used in this Plan, the singular form shall include the plural form, the
masculine gender shall include the feminine gender, etc., as the context requires.

     18.7. Severability.

     If any provision of the Plan or any Award Agreement shall be determined to be illegal or
unenforceable by any court of law in any jurisdiction, the remaining provisions hereof and thereof
shall be severable and enforceable in accordance with their terms, and all provisions shall remain
enforceable in any other jurisdiction.

     18.8. Governing Law.

     The validity and construction of this Plan and the instruments evidencing the Awards hereunder
shall be governed by the laws of the State of Virginia, other than any conflicts or choice of law
rule or principle that might otherwise refer construction or interpretation of this Plan and the
instruments evidencing the Awards granted hereunder to the substantive laws of any other
jurisdiction.

     18.9. Section 409A of the Code.

     The Board intends to comply with Section 409A of the Code (“Section 409A”), or an exemption to
Section 409A, with regard to Awards hereunder that constitute nonqualified deferred compensation
within the meaning of Section 409A. To the extent that the Board determines that a Grantee would
be subject to the additional 20% tax imposed on certain nonqualified deferred compensation plans
pursuant to Section 409A as a result of any provision of any Award granted under this Plan, such
provision shall be deemed amended to the minimum extent necessary to avoid application of such
additional tax. The nature of any such amendment shall be determined by the Board.

* * *

 - 25 -exv10w6

 

Exhibit 10.6

EMPLOYMENT AGREEMENT

          THIS EMPLOYMENT AGREEMENT (“Agreement”) is entered into as of this 18th day of April, 2005, by
and between American Public University System, Inc., a West Virginia corporation (the “Company”),
American Public Education, Inc., a Delaware corporation (“the Parent”) and Frank B. McCluskey (the
“Executive”).

          WHEREAS, the Company is a wholly owned subsidiary of the Parent; and

          WHEREAS, the Company desires to employ the Executive, and the Executive desires to be employed
by the Company, on the terms and conditions set forth herein.

          NOW, THEREFORE, in consideration of the mutual covenants and agreements set forth herein and
other good and valuable consideration, the receipt and sufficiency of which hereby are
acknowledged, the parties hereto agree as follows:

          1. Employment. On the terms and conditions set forth in this Agreement, the Company
agrees to employ the Executive, and the Executive agrees to be employed by the Company, for the
term set forth in Section 2 hereof and in the position and with the duties set forth in Section 3
hereof.

          2. Term. The employment of the Executive by the Company as provided in Section 1
hereof shall commence on the date of execution of this Agreement and, unless sooner terminated as
hereinafter set forth, shall end three (3) years thereafter; provided, however, that this Agreement
may be renewed at the Company’s option (with the consent of the Executive) for additional one (1)
year periods (each a “Renewal Term”) on the third anniversary of the Effective Date and on each
additional anniversary thereafter by Company’s delivery to Executive of written notice at least
thirty (30) days prior to the expiration of the Term or any Renewal Term. If this Agreement is
renewed for one or more Renewal Terms, such Renewal Term shall be on the basis stated herein,
except for the base salary of Executive for any Renewal Term which shall be negotiated in good
faith and agreed upon by the Parties prior to the Commencement of each Renewal Term.

          3. Position and Duties. The Executive shall serve as the Executive Vice President and
Provost (Chief Academic Officer) of the Company, or in another position of equal or greater title,
authority and responsibility, as assigned by the board of directors of the Company, with duties and
responsibilities as the board of

 

 

directors of the Company may from time to time determine and assign to the Executive. The
Executive shall devote the Executive’s best efforts and full business time to the performance of
the Executive’s duties and the advancement of the business and affairs of the Company.

          4. Place of Performance. In connection with the Executive’s employment by the
Company, the Executive shall be based at the principal executive offices of the Company, which the
Company retains the right to change in its discretion, or such other place as the Company and the
Executive mutually agree.

          5. Compensation.

               5(a). Base Salary. The Company shall pay to the Executive an annual base salary (the
“Base Salary”) at the rate of $160,000 per year. The Base Salary shall be reviewed no less
frequently than annually and may be increased at the discretion of the Compensation Committee (the
“Compensation Committee”) of the board of directors of the Parent (the “Board”). If the
Executive’s Base Salary is increased, the increased amount shall be the Base Salary for the
remainder of the employment term hereunder, except that the Company may reduce the Executive’s Base
Salary at any time as part of a general salary reduction applied to all employees of the Company
with annual salaries in excess of $100,000 (the “Senior Executive Group”) in which case the
Executive’s reduced Base Salary shall be the Base Salary for the remainder of the employment term
hereunder. Any such reduction in the Executive’s Base Salary shall be no more than the lesser of
the median percentage salary reduction applied to the Senior Executive Group or 20%. The Base
Salary shall be payable biweekly or in such other installments as shall be consistent with the
Company’s payroll procedures.

               5(b). Annual Bonus. The Executive shall be eligible to receive a bonus of up to 50% of
the Executive’s Base Salary for each year as determined by the Compensation Committee in its sole
discretion, based upon the achievement of certain performance goals established by the Compensation
Committee for each year. The Executive shall be entitled to a pro-rata portion of the Annual Bonus
and additional bonus for any period less than a full calendar year (or fiscal year, if other than a
calendar year) for which he is entitled to his salary except in the case of a termination for Cause
pursuant to Section 11(c).

               5(c). Other Benefits. The Executive shall be entitled to receive such other benefits
approved by the Compensation Committee and made available to senior executives of the Company. The
Executive also shall be entitled to participate in such plans and to receive such bonuses,
incentive compensation and fringe benefits as may be granted or established by the Company from
time to time. Nothing contained in this Agreement shall prevent the Company from changing carriers
or from effecting modifications in insurance coverage for the Executive.

- 2 -

 

               5(d). Vacation; Holidays. The Executive shall be entitled to all public holidays
observed by the Company and vacation days in accordance with the applicable vacation policies for
senior executives of the Company, which shall be taken at a reasonable time or times.

               5(e) Stock Options. The Executive shall be granted a stock option (the “Option”) for
the purchase 5,000 shares of American Public Education, Inc., common stock pursuant to the terms of
the American Public Education, Inc. 2002 Stock Incentive Plan. The Option shall vest twenty
percent (20%) on the first anniversary of the date of grant and shall vest an additional twenty
percent (20%) on each of the next four anniversaries of the date of grant thereafter. The Option
exercise price shall be the fair market value of the shares on the date of grant. The Option shall
be granted at the next Compensation Committee meeting following execution of this Agreement.

               5(f). Withholding Taxes and Other Deductions. To the extent required by law, the
Company shall withhold from any payments due Executive under this Agreement any applicable federal,
state or local taxes and such other deductions as are prescribed by law or Company policy.

          6. Expenses. The Company shall reimburse the Executive for all reasonable expenses
incurred by the Executive (in accordance with the policies and procedures in effect for senior
executives of the Company) in connection with the Executive’s services under this Agreement. The
Executive shall account to the Company for expenses in accordance with policies and procedures
established by the Company.

          7. Relocation Expenses. The Company will pay or reimburse the Executive for the
customary and reasonable moving expenses incurred by the Executive in connection with Executive’s
initial employment and/or in connection with any subsequent relocation of Executive’s place of
performance pursuant to Section 4 of this Agreement. If the Internal Revenue Service or any state
or local taxing authority takes the position that the relocation expenses paid or reimbursed
subject to this Section 7 results in the receipt of taxable income to Executive, such expenses
shall include an amount equal to the aggregate Federal, state and local income and employment taxes
imposed on Executive as a direct result of such payment or reimbursement.

          8. Confidential Information.

               8(a). The Executive covenants and agrees that the Executive will not ever, without the prior
written consent of the Board or a person authorized by the Board or except as may be ordered by a
court of competent jurisdiction,

- 3 -

 

publish or disclose to any unaffiliated third party or use for the Executive’s personal benefit or
advantage any confidential information with respect to the Company’s past, present, or planned
business, including but not limited to all information and materials related to any Company
business, business plan, product, service, procedure, strategy, method, technique, technology,
research, strategy, plan, customer or supplier information, customer or supplier list, financial
data, technical data, computer files, and computer software, including any of the foregoing that is
in any stage of research, development, or planning, and any other information which the Executive
obtained while employed by, or otherwise serving or acting on behalf of, the Company or which the
Executive may possess or have under his control, that is not generally known (except for
unauthorized disclosures) to the public or within the industry in which the Company does business.

               8(b). The Executive acknowledges that the restrictions contained in Section 8(a) hereof are
reasonable and necessary, in view of the nature of the Company’s business, in order to protect the
legitimate interests of the Company, and that any violation thereof would result in irreparable
injury to the Company. Therefore, the Executive agrees that in the event of a breach or threatened
breach by the Executive of the provisions of Section 8(a) hereof, the Company shall be entitled to
obtain from any court of competent jurisdiction, preliminary or permanent injunctive relief
restraining the Executive from disclosing or using any confidential information. Nothing herein
shall be construed as prohibiting the Company from pursuing any other remedies available to it for
breach or threatened breach, including, without limitation, recovery of damages from the Executive.

               8(c). The Executive shall deliver promptly to the Company on termination of employment, or at
any other time the Company may so request, all confidential materials, memoranda, notes, records,
reports and other documents and materials (and all copies thereof), in whatever form or medium,
that contain any of the foregoing, including but not limited to computer data, files, software, and
hardware, relating to the Company’s or its affiliates’ respective businesses which the Executive
obtained while employed by, or otherwise serving or acting on behalf of, the Company or which the
Executive may then possess or have under his control.

          9. Non-Competition.

               9(a). Non-Competition. The Executive covenants and agrees that the Executive will
not, during the Executive’s employment hereunder and for a period of one (1) year thereafter (to
the extent permitted by law), at any time and in the United States or any other jurisdiction in
which the Company is engaged or has reasonably firm plans to engage in business, (i) compete with
the Company on behalf of the Executive or any third party; (ii) participate as a director, agent,
representative, stockholder or partner or have any direct or indirect financial

- 4 -

 

interest in any enterprise which engages in any business in which the Company is engaged; or (iii)
participate as an employee or officer in any enterprise in which the Executive’s responsibility
relates to any business in which the Company is engaged. The ownership by the Executive of less
than five percent (5%) of the outstanding stock of any corporation listed on a national securities
exchange shall not be deemed a violation of this Section 9(a).

               9(b). Injunctive Relief. In the event the restrictions against engaging in a
competitive activity contained in Section 9(a) hereof shall be determined by any court of competent
jurisdiction to be unenforceable by reason of their extending for too great a period of time or
over too great a geographical area or by reason of their being too extensive in any other respect,
Section 9(a) hereof shall be interpreted to extend only over the maximum period of time for which
it may be enforceable and over the maximum geographical area as to which it may be enforceable and
to the maximum extent in all other respects as to which it may be enforceable, all as determined by
the court in the action.

               9(c). Non-Solicitation. The Executive covenants and agrees that the Executive will
not, during the Executive’s employment hereunder and for a period of one (1) year thereafter
solicit, induce, entice, or encourage or attempt to solicit, induce, entice, or encourage any
employee of the Company or any of the Company’s affiliates to render services for any other person,
firm, entity, or corporation or to terminate his or her employment with the Company.

          10. Termination of Employment.

               10(a). Death. The Executive’s employment hereunder shall terminate upon the
Executive’s death.

               10(b). By the Company. The Company or Parent may terminate the Executive’s
employment hereunder under the following circumstances:

                    (i) The Company or Parent may terminate the Executive’s employment hereunder for
“Disability.” For purposes of this Agreement, “Disability” shall mean the Executive shall have
been unable to perform all of the Executive’s duties hereunder by reason of illness, physical or
mental disability or other similar incapacity, which inability shall continue for more than three
(3) consecutive months.

                    (ii) The Company or Parent may terminate the Executive’s employment hereunder for “Cause.”
For purposes of this Agreement, “Cause” shall mean (A) refusal by the Executive to follow a
written order of the Chief Executive Officer, Chairman of the Board or the Board of Directors, (B)
the Executive’s engagement in conduct materially injurious to the Company or its

- 5 -

 

reputation, (C) dishonesty of a material nature that relates to the performance of the Executive’s
duties under this Agreement, (D) the Executive’s conviction for any crime involving moral turpitude
or any felony, and (E) the Executive’s continued failure to perform his duties under this Agreement
(except due to the Executive’s incapacity as a result of physical or mental illness) to the
satisfaction of the Board of Directors of the Company for a period of at least thirty (30)
consecutive days after written notice is delivered to the Executive specifically identifying the
manner in which the Executive has failed to perform his duties.

                    (iii) The Company, in the sole discretion of its board of directors, or the Parent, in the
sole discretion of the Board, may terminate the Executive’s employment hereunder at any time other
than for Disability or Cause, for any reason or for no reason at all.

               10(c). By the Executive. The Executive may terminate the Executive’s employment
hereunder for “Good Reason.” For purposes of this Agreement, “Good Reason” shall mean:

                    (i) the assignment to the Executive of any duties inconsistent in any material respect with
the Executive’s position as contemplated by Section 3 of this Agreement, excluding for this purpose
an isolated, insubstantial and inadvertent action which is remedied by the Company promptly after
receipt of notice thereof given by the Executive;

                    (ii) any failure by the Company to comply with any of the provisions of this Agreement, other
than an isolated, insubstantial and inadvertent failure which is remedied by the Company or Parent
promptly after receipt of notice thereof given by the Executive;

                    (iii) there is a merger, acquisition or other similar affiliation with another entity and the
Executive does not continue as the Chief Academic Officer, or any other office he holds at the time
of the transaction, of the most senior resulting entity succeeding to the business of the Company;

                    (iv) any failure by the Company or Parent to comply with and satisfy Section 16(c) of this
Agreement.

               10(d). Notice of Termination. Any termination of the Executive’s employment by the
Company, the Parent or the Executive (other than pursuant to Section 10(a) hereof) shall be
communicated by written “Notice of Termination” to the other party hereto in accordance with
Section 13 hereof. 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, if any, and
shall set forth in reasonable detail the facts and circumstances claimed to

- 6 -

 

provide a basis for termination of the Executive’s employment under the provision so
indicated.

               10(e). Date of Termination. For purposes of this Agreement, the “Date of
Termination” shall mean (i) if the Executive’s employment is terminated by the Executive’s death,
the date of the Executive’s death; (ii) if the Executive’s employment is terminated pursuant to
Section 10(b)(i) hereof, thirty (30) days after Notice of Termination, provided that the Executive
shall not have returned to the performance of the Executive’s duties on a full-time basis during
this 30-day period; (iii) if the Executive’s employment is terminated pursuant to Section
10(b)(ii), 10(b)(iii) or 10(c) hereof, the date specified in the Notice of Termination; and (iv) if
the Executive’s employment is terminated for any other reason, the date on which Notice of
Termination is given.

          11. Compensation Upon Termination.

               11(a). If the Executive’s employment is terminated by the Executive’s death, the Company
shall pay to the Executive’s estate, or as may be directed by the legal representatives of the
estate, the Executive’s full Base Salary through the Date of Termination and all other unpaid
amounts, if any, to which the Executive is entitled as of the Date of Termination in connection
with any fringe benefits or under any incentive compensation plan or program of the Company
pursuant to Sections 5(b) and (c) hereof, at the time these payments are due and the Company shall
have no further obligations to the Executive under this Agreement.

               11(b). If the Company terminates the Executive’s employment for Disability as provided in
Section 10(b)(i) hereof, the Company shall pay the Executive his full Base Salary through the Date
of Termination and all other unpaid amounts, if any, to which the Executive is entitled as of the
Date of Termination in connection with any fringe benefits or under any incentive compensation plan
or program of the Company pursuant to Sections 5(b) and (c) hereof, at the time these payments are
due, and the Company shall have no further obligations to the Executive under this Agreement;
provided, that payments made to the Executive during the Disability Period shall be reduced
by the sum of the amounts, if any, payable to the Executive at or prior to the time of any payment
under disability benefit plans of the Company and which amounts were not previously applied to
reduce any payment.

               11(c). If the Company terminates the Executive’s employment for Cause as provided in Section
10(b)(ii) hereof, the Company shall pay the Executive the Executive’s full Base Salary through the
Date of Termination and all other unpaid amounts, if any, to which Executive is entitled as of the
Date of Termination in connection with any fringe benefits or under any incentive compensation plan
or program of the Company pursuant to Section 5(c) hereof, and

- 7 -

 

the Company shall have no further obligations to the Executive under this Agreement.

               11(d). If the Executive terminates the Executive’s employment other than for Good Reason, the
Company shall pay the Executive the Executive’s full Base Salary through the Date of Termination
and all other unpaid amounts, if any, to which Executive is entitled as of the Date of Termination
in connection with any fringe benefits or under any incentive compensation plan or program of the
Company pursuant to Sections 5(b) and (c) hereof, and the Company shall have no further obligations
to the Executive under this agreement.

               11(e). If the Company terminates the Executive’s employment other than for Cause or
Disability or the Executive terminates the Executive’s employment for Good Reason as provided in
Section 10(c) hereof, the Company shall pay the Executive the following amounts and shall have no
further obligations to the Executive:

                    (i) the sum of (1) the Executive’s Base Salary through the Date of Termination to the extent
not theretofore paid, (2) the product of (x) the Annual Bonus (to the extent Company and Executive
performance were satisfying the performance targets, adjusted for the short period through the Date
of Termination, for an Annual Bonus) and (y) a fraction, the numerator of which is the number of
days in the current fiscal year through the effective date of termination of the Executive’s
employment (the “Date of Termination”), and the denominator of which is 365, and (3) any
compensation previously deferred by the Executive (together with any accrued interest or earnings
thereon) and any accrued vacation pay, in each case, to the extent not theretofore paid, (the sum
of the amounts described in clauses (1), (2), and (3) shall be hereinafter referred to as the
“Accrued Obligations”) in a lump sum in cash within 30 days of the Date of Termination;

                    (ii) an amount equal to the sum of (x) the Executive’s Base Salary and (y) the Annual Bonus
(to the extent Company and Executive performance were satisfying the performance targets, adjusted
for the short period, after the Date of Termination to the end of the calendar year for an Annual
Bonus and as to the remainder of the twelve month period following the Date of Termination, only if
net income has increased from the same period in the prior year and the performance targets
established for the successor Chief Academic Officer were being satisfied for that period), in
substantially equal proportionate installments in accordance with the Company’s normal payroll
practices, commencing with the first payroll period in the month following the month in which the
Date of Termination occurs, for a period of twelve (12) months;
and 

                    (iii) for twelve (12) months after the Date of Termination, or any longer period as may be
provided by the terms of the appropriate plan, program, practice or policy, the Company shall continue benefits

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to the
Executive and/or the Executive’s family at least equal to those which would have been provided to
them in accordance with the welfare benefit plans, practices, policies and programs provided by
the Company and its affiliated companies (including, without limitation, medical, prescription,
dental, disability, employee life, group life, accidental death and travel accident insurance plans
and programs) to the extent applicable generally to other peer employees of the Company and its
affiliated companies, as if the Executive’s employment had not been terminated; provided,
however, that if the Executive becomes reemployed with another employer and is eligible to
receive medical or other welfare benefits under another employer provided plan, the medical and
other welfare benefits described herein shall be secondary to those provided under the other plan
during the applicable period of eligibility.

                    (iv) to the extent not theretofore paid or provided, for twelve (12) months after the Date of
Termination, the Company shall timely pay or provide to the Executive any other amounts or benefits
required to be paid or provided or which the Executive is eligible to receive under any plan,
program, policy or practice or contract or agreement of the Company and its affiliated companies
(these other amounts and benefits shall be hereinafter referred to as the “Other Benefits”).

               11(f). No Duty to Mitigate. The Executive shall not be required to mitigate
amounts payable pursuant to Section 11 hereof by seeking other employment.

               11(g). No Additional Payments. Notwithstanding anything to the contrary in this
Agreement, the Executive acknowledges and agrees that in the event of the termination of his
employment, even if in breach of this Agreement, he will be entitled only to those payments
specified herein for the circumstances of his termination, and not to any other payments by way of
damages or claims of any nature, whether under this Agreement or under any other agreements between
the Executive and the Company.

          12. Acceleration of Options Upon Change of Control. Immediately prior to a Change of
Control (as hereinafter defined), all stock options granted to the Executive under the American
Public Education, Inc. 2002 Stock Incentive Plan or any other employee stock option plain
maintained for Company employees which are outstanding immediately prior to such event shall be
vested and fully exercisable. This Agreement is intended to amend all stock option grants
previously awarded to the Executive to modify vesting as described above to the extent vesting
would not otherwise accelerate in full under the terms of such stock option grants. For purposes
of this Agreement, “Change of Control” means (i) the dissolution or liquidation of the Parent or a
merger, consolidation, or reorganization of the Parent with one or more other entities in which the
Parent is not the
surviving entity, (ii) a sale of substantially all of the assets of the Parent to another person or
entity, or (iii) any transaction (including without limitation a merger or

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reorganization in which
the Parent is the surviving entity) which results in any person or entity (other than persons who
are shareholders or affiliates immediately prior to the transaction) owning 50% or more of the
combined voting power of all classes of stock of the Parent.

          13. Notices. All notices, demands, requests or other communications required or
permitted to be given or made hereunder shall be in writing and shall be delivered, telecopied or
mailed by first class registered or certified mail, postage prepaid, addressed as follows:

	 	 	 	 	 
	 

	 	(a)
	 	If to the Company:
	 
	 	 	 	 
	 

	 	 	 	American Public University System, Inc.
	 

	 	 	 	111 West Congress Street
	 

	 	 	 	Charles Town, WV 25414
	 

	 	 	 	Telecopy: (304) 724-3801
	 

	 	 	 	Attention: Secretary
	 
	 	 	 	 
	 

	 	(b)
	 	If to the Parent:
	 
	 	 	 	 
	 

	 	 	 	American Public Education, Inc.
	 

	 	 	 	111 West Congress Street
	 

	 	 	 	Charles Town, WV 25414
	 

	 	 	 	Telecopy: (304) 724-3801
	 

	 	 	 	Attention: Secretary
	 
	 	 	 	 
	 

	 	(c)
	 	If to the Executive:

or to such other address as may be designated by either party in a notice to the other. Each
notice, demand, request or other communication that shall be given or made in the manner described
above shall be deemed sufficiently given or made for all purposes three (3) days after it is
deposited in the U.S. mail, postage prepaid, or at such time as it is delivered to the addressee
(with the return receipt, the delivery receipt, the answer back or the affidavit of messenger being
deemed conclusive evidence of delivery) or at such time as delivery is refused by the addressee
upon presentation.

          14. Severability. The invalidity or unenforceability of any one or more provisions of
this Agreement shall not affect the validity or enforceability of the other provisions of this
Agreement, which shall remain in full force and effect.

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          15. Survival. It is the express intention and agreement of the parties hereto that
the provisions of Sections 8 and 9 hereof shall survive the termination of employment of the
Executive. In addition, all obligations of the Company to make payments hereunder shall survive
any termination of this Agreement on the terms and conditions set forth herein.

          16. Successors and Assigns. (a) This Agreement is personal to the Executive and
without the prior written consent of the Company and the Parent shall not be assignable by the
Executive otherwise than by will or the laws of descent and distribution. This Agreement shall
inure to the benefit of and be enforceable by the Executive’s legal representatives.

          (b) This Agreement shall inure to the benefit of and be binding upon the Company and the
Parent and their successors and assigns.

          (c) The Company and the Parent will require any successor or any party that acquires control
of the Company and the Parent (whether direct or indirect, by purchase, merger, consolidation or
otherwise) or all or substantially all of the business and/or assets of the Company or the Parent
to assume expressly and agree to perform this Agreement in the same manner and to the same extent
that the Company and the Parent would be required to perform it if no succession had taken place.
As used in this Agreement, “Company” and “Parent” shall mean the Company or Parent, respectively,
as hereinbefore defined and any successor to its business and/or assets as aforesaid which assumes
and agrees to perform this Agreement by operation of law, or otherwise.

          17. Binding Effect. Subject to any provisions hereof restricting assignment, this
Agreement shall be binding upon the parties hereto and shall inure to the benefit of the parties
and their respective heirs, devisees, executors, administrators, legal representatives, successors
and assigns.

          18. Amendment; Waiver. This Agreement shall not be amended, altered or modified
except by an instrument in writing duly executed by the parties hereto. Neither the waiver by
either of the parties hereto of a breach of or a default under any of the provisions of this
Agreement, nor the failure of either of the parties, on one or more occasions, to enforce any of
the provisions of this Agreement or to exercise any right or privilege hereunder, shall thereafter
be construed as a waiver of any subsequent breach or default of a similar nature, or as a waiver of
any provisions, rights or privileges hereunder.

          19. Headings. Section and subsection headings contained in this Agreement are
inserted for convenience of reference only, shall not be deemed to be a part of this Agreement for any purpose, and shall not in any way define or affect the meaning,
construction or scope of any of the provisions hereof.

- 11 -

 

          20. Governing Law. This Agreement, the rights and obligations of the parties hereto,
and any claims or disputes relating thereto, shall be governed by and construed in accordance with
the laws of the State of West Virginia (but not including the choice of law rules thereof).

          21. Entire Agreement. This Agreement constitutes the entire agreement between the
parties hereto with respect to the subject matter hereof, and it supersedes all prior oral or
written agreements, commitments or understandings with respect to the matters provided for herein.

          22. Counterparts. This Agreement may be executed in two or more counterparts, each of
which shall be an original and all of which shall be deemed to constitute one and the same
instrument.

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          IN WITNESS WHEREOF, the undersigned have duly executed this Agreement, or have caused this
Agreement to be duly executed on their behalf, as of the day and year first hereinabove written.

	 	 	 	 	 
	 	AMERICAN PUBLIC UNIVERSITY SYSTEM, INC.

 	 
	 	By:  	/s/ Wallace E. Boston, Jr.
 	 
	 	 	Name:  	Wallace E. Boston, Jr. 	 
	 	 	Title:  	President 	 
	 

	 	 	 	 	 
	 	AMERICAN PUBLIC EDUCATION, INC.

 	 
	 	By:  	/s/ Wallace E. Boston, Jr.
 	 
	 	 	Name:  	Wallace E. Boston, Jr. 	 
	 	 	Title:  	CEO 	 
	 

	 	 	 	 	 
	 	THE EXECUTIVE:

 	 
	 	/s/ Frank B. McCluskey
 	 
	 	Frank B. McCluskey 	 
	 	 	 
	 

- 13 -

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