<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 28, 1996
REGISTRATION NO. 333-10385
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------
AMENDMENT NO. 3
TO
FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
------------------
EDUCATION MANAGEMENT CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
PENNSYLVANIA 8200 25-1119571
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
</TABLE>
300 SIXTH AVENUE
PITTSBURGH, PENNSYLVANIA 15222
(412) 562-0900
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------
FREDERICK W. STEINBERG
VICE PRESIDENT, GENERAL COUNSEL AND SECRETARY
EDUCATION MANAGEMENT CORPORATION
300 SIXTH AVENUE
PITTSBURGH, PENNSYLVANIA 15222
(412) 562-0900
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
------------------
Copies to:
<TABLE>
<S> <C>
LEONARD S. FERLEGER MORTON A. PIERCE
KIRKPATRICK & LOCKHART LLP DEWEY BALLANTINE
1500 OLIVER BUILDING 1301 AVENUE OF THE AMERICAS
PITTSBURGH, PENNSYLVANIA 15222 NEW YORK, NY 10019-6092
(412) 355-6500 (212) 259-8000
</TABLE>
------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this registration statement becomes effective.
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [ ]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ] __________
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ] __________
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 2
CROSS-REFERENCE TABLE
LOCATION IN PROSPECTUS
OF INFORMATION REQUIRED BY PART I
OF FORM S-1
<TABLE>
<CAPTION>
ITEM NO. CAPTION LOCATION IN PROSPECTUS
-------- ------------------------------------- -------------------------------------
<C> <S> <C>
1. Forepart of the Registration
Statement and Outside Front Cover
Page of Prospectus................... Outside Front Cover Page
2. Inside Front and Outside Back Cover Inside Front and Outside Back Cover
Pages of Prospectus.................. Pages
3. Summary Information, Risk Factors and
Ratio of Earnings to Fixed Charges... Prospectus Summary; Risk Factors
4. Use of Proceeds...................... Prospectus Summary; Use of Proceeds
5. Determination of Offering Price...... Underwriting
6. Dilution............................. Dilution
7. Selling Security Holders............. Principal and Selling Shareholders
8. Plan of Distribution................. Outside Front Cover Page;
Underwriting
9. Description of Securities to be Dividend Policy; The Transactions;
Registered........................... Description of Capital Stock; Shares
Eligible for Future Sale
10. Interests of Named Experts and
Counsel.............................. Not applicable
11. Information with Respect to the Prospectus Summary; Risk Factors; The
Registrant........................... Transactions; Dividend Policy;
Capitalization; Pro Forma
Consolidated Financial Data; Selected
Consolidated Financial and Other
Data; Management's Discussion and
Analysis of Financial Condition and
Results of Operations; Business;
Management and Directors; Certain
Transactions; Principal and Selling
Shareholders; Description of Capital
Stock; Shares Eligible for Future
Sale; Index to Consolidated Financial
Statements
12. Disclosure of Commission Position on
Indemnification for Securities Act
Liabilities.......................... Not applicable
</TABLE>
<PAGE> 3
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS
OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED OCTOBER 28, 1996
4,530,000 Shares
Education Management Corporation
Common Stock
($.01 par value)
------------------
Of the 4,530,000 shares of the Common Stock, $.01 par value (the "Common
Stock"), of Education Management Corporation ("EMC" or the "Company") offered
hereby (the "Offering"), 3,230,000 shares are being offered by the
Company and 1,300,000 shares are being offered by the Selling
Shareholders named herein under "Principal and Selling
Shareholders." Prior to the Offering, there has been no public
market for the Common Stock. It is anticipated that the
initial public offering price will be between $14.00 and
$17.00 per share. For information relating to the factors
considered in determining the initial offering price
to the public, see "Underwriting."
The Common Stock has been approved for listing on the Nasdaq National Market
under the symbol "EDMC," subject to official notice of issuance.
------------------
FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED IN CONNECTION WITH
AN INVESTMENT IN THE COMMON STOCK, SEE "RISK FACTORS" BEGINNING ON PAGE 7.
------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR
HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE
SECURITIES COMMISSION PASSED UPON THE ACCURACY OR AD-
EQUACY OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<S> <C> <C> <C> <C>
Underwriting
Discounts Proceeds to
Price to and Proceeds to Selling
Public Commissions Company (1) Shareholders
----------- ----------- ----------- -----------
Per Share................................... $ $ $ $
Total (2)................................... $ $ $ $
</TABLE>
(1) Before deduction of expenses payable by the Company estimated at $1,550,000.
(2) The Company and the Selling Shareholders have granted the Underwriters an
option, exercisable for 30 days from the date of this Prospectus, to
purchase up to 142,209 additional shares from the Company and an aggregate
of 401,391 additional shares from the Selling Shareholders to cover
over-allotments of shares. If the option is exercised in full, the total
Price to Public will be $ , Underwriting Discounts and Commissions
will be $ , Proceeds to Company will be $ , and Proceeds
to Selling Shareholders will be $ .
------------------
The shares of Common Stock are offered by the several Underwriters when, as
and if delivered to and accepted by the Underwriters and subject to their right
to reject orders in whole or in part. It is expected that the shares of Common
Stock will be ready for delivery on or about , 1996, against payment
in immediately available funds.
CS First Boston
Smith Barney Inc.
The Chicago Corporation
The date of this Prospectus is , 1996.
<PAGE> 4
[GRAPHICS DEPICTING THE COMPANY'S SCHOOLS, STUDENTS AND CLASSROOMS.]
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK AT
A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH
TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ STOCK MARKET NATIONAL MARKET OR
OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
DURING THIS OFFERING, CERTAIN PERSONS AFFILIATED WITH PERSONS PARTICIPATING
IN THE DISTRIBUTION MAY ENGAGE IN TRANSACTIONS FOR THEIR OWN ACCOUNTS OR FOR THE
ACCOUNTS OF OTHERS IN THE COMMON STOCK PURSUANT TO EXEMPTIONS FROM RULES 10B-6,
10B-7 AND 10B-8 UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED.
<PAGE> 5
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and the Company's Consolidated Financial Statements and Notes
thereto included elsewhere in this Prospectus. Prospective investors should
consider carefully, among other things, the information set forth under "Risk
Factors" below. Unless otherwise indicated, all information in this Prospectus
assumes no exercise of the over-allotment option and gives effect to the
Transactions and the NYRS Acquisition (both as defined below). See "The
Transactions" and "Description of Capital Stock." As used in this Prospectus,
unless the context indicates otherwise, the terms the "Company" and "EMC" refer
to Education Management Corporation and its subsidiaries, including all of its
schools, and the term "pro forma" includes the pro forma effect of the NYRS
Acquisition.
THE COMPANY
Education Management Corporation is among the largest providers of
proprietary postsecondary education in the United States based on student
enrollments and revenues. Through its operating units, the Art Institutes ("The
Art Institutes"), the New York Restaurant School ("NYRS"), the National Center
for Paralegal Training ("NCPT") and the National Center for Professional
Development ("NCPD"), the Company offers associate's and bachelor's degree
programs and non-degree programs in the areas of design, media arts, culinary
arts, fashion and paralegal studies. The Company has provided career-oriented
education programs for nearly 35 years, and its schools have graduated over
100,000 students. In the fall quarter beginning October 1, 1995, EMC's schools
had approximately 14,000 students enrolled on a pro forma basis, representing
all 50 states and 65 countries worldwide.
The Company's main operating unit, The Art Institutes, consists of 11
schools in ten cities throughout the United States and accounted for
approximately 92% of the Company's pro forma net revenues in the fiscal year
ended June 30, 1996. Art Institute programs are designed to provide the
knowledge and skills necessary for entry-level employment in various fields,
including computer animation, multimedia, advertising design, culinary arts,
graphic, interior and industrial design, video production and commercial
photography. Those programs typically are completed in 18 to 27 months and
culminate in an associate's degree. Four Art Institutes currently offer
bachelor's degree programs, and EMC expects to continue to introduce bachelor's
degree programs at schools in states in which applicable regulations permit
proprietary postsecondary institutions, such as The Art Institutes, to offer
such programs.
The Company offers a culinary arts curriculum at six Art Institutes. In
addition, in August 1996, the Company acquired (subject to obtaining certain
regulatory approvals) NYRS, a well-known culinary arts and restaurant management
school located in New York City, and certain intangible assets of an affiliate
of NYRS, for $9.5 million in cash (the "NYRS Acquisition"). NYRS offers an
associate's degree program and certificate programs. On a pro forma basis, NYRS
accounted for approximately 6% of the Company's net revenues in fiscal 1996.
The Company offers paralegal training at NCPT in Atlanta, a leading source
of paralegals in the southeastern United States. NCPT offers certificate
programs that generally are completed in four to nine months. NCPD maintains
consulting relationships with seven colleges and universities to assist in the
development, marketing and delivery of paralegal, nurse legal consultant and
financial planner test preparation programs for recent college graduates and
working adults. In fiscal 1996, the Company derived approximately 2% of its pro
forma net revenues from NCPT and NCPD combined.
EMC's primary objective is to provide career-focused education that
maximizes employment opportunities for its students after graduation. EMC's
graduates are employed by a broad range of employers nationwide. In calendar
year 1995, approximately 87% of the graduates with Art Institute associate's
degrees who were available for employment obtained positions in fields related
to their programs of study within six months of graduation.
The Company believes that demand for postsecondary education will generally
increase due to (i) an increase of 20% in the number of new high school
graduates from approximately 2.5 million in 1994 to 3.0 million in 2004 (as
projected by the National Center for Education Statistics), (ii) the growing
interest of working adults in enhancing the marketability of their skills, (iii)
the income premium attributable to higher education degrees, and (iv) employers'
continuing demand for entry-level workers with appropriate technical skills.
3
<PAGE> 6
EMC intends to capitalize on these favorable trends through continued
implementation of broad strategic initiatives undertaken in 1994. Key elements
of those initiatives and the results to date include:
- Enhancing Growth at the Company's Schools: The total number of students
attending The Art Institutes rose approximately 8% from the fall quarter
of fiscal 1993 to the fall quarter of fiscal 1995, despite little change
in the number of new high school graduates nationwide. In fiscal 1996,
The Art Institutes experienced a 23% increase over the prior year in the
number of applications from high school seniors for education programs
starting in fiscal 1996 or fiscal 1997.
- Improving Student Outcomes: At The Art Institutes, the average quarterly
net persistence rate, a measure of the number of students that are
enrolled during an academic quarter and advance to the next academic
quarter, improved from 88.4% in fiscal 1994 to 90.1% for the first three
quarters of fiscal 1996. From calendar year 1993 to calendar year 1995,
the placement rate for new graduates available for employment improved
from 82.3% to 87.4% and average starting salaries rose 21% from
approximately $15,700 to $19,000.
- Opening or Acquiring Schools: Since the beginning of fiscal 1996, the
Company has opened or acquired four schools: The Illinois Institute of
Art at Chicago, The Illinois Institute of Art at Schaumburg, The Art
Institute of Phoenix and NYRS.
- Expanding Education Programs: Since the beginning of fiscal 1994, the
Company has introduced culinary arts programs at three schools (in
addition to acquiring NYRS), bringing the total number of such programs
at The Art Institutes to six, and has added education program offerings
in high growth fields such as computer animation, multimedia and video
production. The Company intends to begin offering degree programs in
interactive multimedia programming and web site development in fiscal
1997.
- Improving Operating Efficiencies: The Company has invested approximately
$9.1 million in an integrated, customized information network that
assists its managers and employees in maximizing internal efficiency. The
Company believes that this investment in information systems technology
significantly enhances its ability to integrate newly established or
acquired schools into the Company's operations.
The Company believes the experience of its management team and the
substantial equity ownership of its employees are significant factors
contributing to its success. EMC's senior management has an average of nine
years with EMC and 18 years of experience in the education industry. Upon
completion of the Offering, approximately 47% of the Common Stock (on a fully
diluted basis, but excluding any additional shares purchased by management in
the Offering) will be held by management and the Education Management
Corporation Employee Stock Ownership Plan and Trust (the "ESOP").
EMC's principal executive offices are located at 300 Sixth Avenue,
Pittsburgh, Pennsylvania 15222, and its telephone number is (412) 562-0900. The
Art Institutes' Internet web site address is "http://www.aii.edu". See
"Business."
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered by:
The Company....................................... 3,230,000 shares
Selling Shareholders.............................. 1,300,000 shares
Total.......................................... 4,530,000 shares
Common Stock to be outstanding after the Offering... 14,240,134 shares(1)
Use of proceeds..................................... Repayment of certain indebtedness and
for general corporate purposes. See
"Use of Proceeds." The Company will
not receive any proceeds from the
sale of shares by the Selling
Shareholders.
Proposed Nasdaq National Market symbol.............. EDMC
</TABLE>
- ---------------
(1) Excludes shares reserved for issuance under the Company's stock-based
compensation plans. See "Management and Directors -- Compensation of
Executive Officers" and "-- Benefit Plans."
4
<PAGE> 7
SUMMARY CONSOLIDATED FINANCIAL AND OTHER DATA
The following summary consolidated financial and other data should be read
in conjunction with the Company's Consolidated Financial Statements and Notes
thereto, "Selected Consolidated Financial and Other Data" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
included elsewhere in this Prospectus. Certain of the summary consolidated
financial data presented below are derived from the Company's Consolidated
Financial Statements audited by Arthur Andersen LLP, independent public
accountants, whose report covering the financial statements as of June 30, 1995
and 1996 and for each of the three years in the period ended June 30, 1996 also
is included elsewhere in this Prospectus. The summary consolidated income
statement data for the years ended June 30, 1992 and 1993 and the summary
consolidated balance sheet data as of June 30, 1992, 1993 and 1994 are derived
from audited financial statements not included in this Prospectus. The summary
consolidated pro forma financial data set forth below are derived from the pro
forma consolidated financial data included elsewhere in this Prospectus. The
summary pro forma financial data are not necessarily indicative of the results
of operations or the financial position of the Company that actually would have
occurred had the NYRS Acquisition, the Transactions and the Offering been
consummated as of the dates indicated.
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
----------------------------------------------------------------------
PRO FORMA
AS ADJUSTED
1992(9) 1993 1994(10) 1995(11)(12) 1996(12) 1996(12)(13)
-------- -------- -------- ------------ -------- ------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net revenues...................... $112,533 $117,234 $122,549 $131,227 $147,863 $157,504
Amortization of intangibles(1).... 21,499 10,025 6,599 1,937 1,060 2,128
ESOP expense(2)................... 2,653 4,791 4,759 7,086 1,366 3,615
Income (loss) from continuing
operations before extraordinary
item(3)......................... (7,073) (1,174) (1,702) 1,513 6,846 6,560
Net income (loss)................. (11,070) (1,174) (1,702) 1,513 5,920
Dividends on Series A
Preferred Stock................. 2,249 2,249 2,249 2,249 2,249 -
PER SHARE DATA, FULLY DILUTED(4):
Income (loss) from continuing
operations before
extraordinary item(5)........ (1.35) (.49) (.57) (.11) .39 .45
Net income (loss)............... (1.93) (.49) (.57) (.11) .31
Weighted average number of
shares of Common Stock
outstanding, in
thousands(6)................. 6,930 6,960 6,927 6,891 11,875 14,526
OTHER DATA:
EBITDA(7)......................... $ 22,922 $ 23,340 $ 18,629 $ 21,089 $ 24,148 $ 26,389
Cash flow from:
Operating activities............ 13,048 12,742 4,073 22,221 16,314 19,627
Investing activities............ (7,189) (8,993) (6,798) (11,973) (18,431) (27,931)
Financing activities............ (4,092) (1,280) (6,049) 6,482 (3,841) 5,659
Capital expenditures.............. 6,466 8,448 6,289 11,640 14,981 15,052
Enrollments at beginning of fall
quarter during period(8)........ 12,548 12,708 12,592 12,749 13,407 13,922
</TABLE>
5
<PAGE> 8
<TABLE>
<CAPTION>
AS OF JUNE 30, 1996
------------------------------
PRO FORMA
HISTORICAL AS ADJUSTED(13)
---------- ---------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
BALANCE SHEET DATA:
Total cash and cash equivalents................................. $ 27,399 $ 27,399
Working capital................................................. 12,594 12,822
Total assets.................................................... 101,412 113,068
Long-term debt (including the current portions of capitalized
lease obligations)............................................ 65,919 38,026
Redeemable shareholders' investment(14)......................... 9,656 -
Shareholders' investment........................................ - 47,049
</TABLE>
- ---------------
(1) Includes the amortization of goodwill and intangibles resulting from
the application of purchase accounting to the establishment and
financing of the ESOP and the related leveraged transaction in 1989.
See "Business -- Company History" and Note 2 of Notes to Consolidated
Financial Statements. The majority of the intangible assets related to
student enrollments and applications, accreditation and contracts with
colleges and universities and were written off over two to five year
periods. The excess of the investment in EMC and other acquisitions
over the fair market value of the net assets acquired has been assigned
to goodwill and is being amortized over 40 years.
(2) ESOP expense equals the sum of the payments on the senior term loan
obtained for the ESOP's acquisition of securities from EMC (the "ESOP
Term Loan"), plus repurchases of shares from participants in the ESOP,
less the dividends paid on the Series A 10.19% Convertible Preferred
Stock, $.0001 par value (the "Series A Preferred Stock"), of EMC held
by the ESOP. In fiscal 1995, the Company made a voluntary prepayment of
$2.1 million on the ESOP Term Loan. In fiscal 1996, the ESOP Term Loan
was repaid in full, including a voluntary prepayment of $0.4 million
that would have been due on September 30, 1996. Therefore, there will
be no future ESOP expense resulting from the repayment of such loan or,
after the Offering is consummated, from repurchases of shares.
(3) In fiscal 1996, the $25.0 million aggregate principal amount of the
Company's 13.25% Senior Subordinated Notes due 1999 (the "Subordinated
Notes") was prepaid in full. The resulting $1.5 million prepayment
penalty is classified as an extraordinary item net of the related tax
benefit.
(4) Dividends on the Series A Preferred Stock have been deducted from net
income (loss) in calculating net income (loss) per share of Common
Stock.
(5) There will be no future ESOP expense because of the repayment of the
ESOP Term Loan in fiscal 1996. If such ESOP expense were excluded from
the pro forma results, pro forma income from continuing operations
before extraordinary item would have been $.60 per share.
(6) The weighted average number of shares of Common Stock used to calculate
income (loss) per share includes, where dilutive, equivalent shares of
Common Stock calculated under the treasury stock method and the
conversion of Series A Preferred Stock.
(7) EBITDA equals, for any period, earnings before ESOP expense, interest
expense, taxes, depreciation and amortization. EBITDA is presented
because it is an accepted and useful financial indicator of a company's
ability to incur and service debt. EBITDA should not be considered (i)
as an alternative to net income or any other accounting measure of
performance, (ii) as an indicator of operating performance or cash
flows generated by operating, investing or financing activities, or
(iii) as a measure of liquidity.
(8) Excludes students enrolled at colleges and universities having
consulting agreements with NCPD.
(9) In May 1992, the Company determined to discontinue its Ocean World
theme park operations. The loss of approximately $4.0 million on such
discontinuation includes the effect of the write-down of assets to
estimated net realizable values and the estimated losses of the
operation through the expiration of its lease. The loss was recorded
net of the related income tax benefits.
(10) A special charge of $3.0 million was recorded in fiscal 1994 for
unusual items, including the early write-off of equipment, program
termination expenses, severance compensation, expenses related to the
settlement of a lease and various legal expenses. Such special charge
was included in educational services and general and administrative
expenses.
(11) Results for fiscal 1995 include a $1.1 million nonrecurring credit for
the refund of state and local business and occupation taxes.
(12) Charges of $1.1 million and $0.5 million are reflected in 1995 and
1996, respectively, to account for non-cash compensation expense
related to the performance-based vesting of nonstatutory stock options.
(13) Adjusted, pro forma, as if the NYRS Acquisition, the Transactions, the
termination of ESOP expense and the consummation of the Offering had
occurred as of July 1, 1995 for income statement and other data and as
of June 30, 1996 for balance sheet data. Such adjustments assume that
no borrowings are made in connection with the ESOP Conversion (as
defined below). See "The Transactions" and "Pro Forma Consolidated
Financial Data."
(14) Prior to the closing date of an initial public offering, holders of the
Company's equity securities may, under certain circumstances, require
the Company to repurchase such securities. In addition, the Company has
the right to redeem shares of Series A Preferred Stock and its Class B
Common Stock, $.0001 par value, under certain circumstances. These
rights will expire upon consummation of the Offering. See "The
Transactions."
6
<PAGE> 9
RISK FACTORS
In addition to the other information contained in this Prospectus, the
following risk factors should be considered carefully in evaluating the Company
and its business before purchasing any shares of Common Stock offered hereby.
POTENTIAL ADVERSE EFFECTS OF REGULATION; IMPAIRMENT OF FEDERAL FUNDING
GENERAL
The Company and its schools are subject to extensive regulation by federal
and state governmental agencies and accrediting agencies. In particular, the
Higher Education Act of 1965, as amended (the "HEA"), and the regulations
promulgated thereunder by the United States Department of Education (the "U.S.
Department of Education") set forth numerous standards that schools must satisfy
in order to participate in the various federal student financial assistance
programs under Title IV of the HEA ("Title IV Programs"). For example, the HEA
and the regulations issued thereunder (i) establish maximum acceptable rates of
default by students on federally guaranteed or funded student loans, (ii) limit
the proportion of school revenues that may be derived from Title IV Programs,
(iii) establish certain financial responsibility and administrative capability
standards, (iv) restrict the ability of a school or its parent corporation to
engage in certain types of transactions that would result in a change in
ownership and control of that school or corporation, and (v) prohibit the
payment of certain types of incentives to personnel engaged in student
recruiting and admissions activities. See "Business -- Student Financial
Assistance -- Federal Oversight of Title IV Programs." Under the rule concerning
the limitation on the amount of school revenues that may be derived from Title
IV sources, commonly referred to as the "85/15 Rule," a school would be
disqualified from participation in Title IV Programs if more than 85% of its
revenues in any year was derived from Title IV Programs. For the year ended June
30, 1996, approximately 66% of the Company's net revenues was indirectly derived
from Title IV Programs. See "Business -- Student Financial Assistance -- Federal
Oversight of Title IV Programs -- The '85/15 Rule'."
Based upon independent, governmental and other outside agencies' reviews
and audits, the Company's schools have been found to be in substantial
compliance with the requirements for participating in Title IV Programs, and the
Company believes that its schools continue to be in substantial compliance with
those requirements. However, because the U.S. Department of Education
periodically revises its regulations (e.g., the U.S. Department of Education has
recently proposed new regulations with respect to financial responsibility
standards) and changes its interpretation of existing laws and regulations,
there can be no assurance that the U.S. Department of Education will agree with
the Company's understanding of each such requirement.
In the event of a determination by the U.S. Department of Education that
one of the Company's schools had improperly disbursed Title IV Program funds,
the affected school could be required to repay those funds and could be assessed
an administrative fine. Alternatively, the U.S. Department of Education could
transfer that school from the "advance" system of payment of Title IV Program
funds, under which a school requests and receives funding from the U.S.
Department of Education in advance based on anticipated needs, to the
"reimbursement" system of payment, under which a school must disburse funds to
students and document their eligibility for Title IV Programs funds before
receiving funds from the U.S. Department of Education. Violations of Title IV
Program requirements could also subject a school or the Company to sanctions
under the False Claims Act as well as other civil and criminal penalties. The
failure by any of the Company's schools to comply with applicable federal, state
or accrediting agency requirements could result in the limitation, suspension or
termination of that school's ability to participate in Title IV Programs or the
loss of state licensure or accreditation. Any such event could have a material
adverse effect on the Company. There are no proceedings for any such purposes
pending, and the Company has no reason to believe that any such proceeding is
contemplated. See "Business -- Student Financial Assistance -- Federal Oversight
of Title IV Programs."
Significant factors related to the HEA and its implementing regulations
that could adversely affect the Company include the following:
7
<PAGE> 10
RISK OF LEGISLATIVE ACTION
Title IV Programs are subject to significant political and budgetary
pressures. The next reauthorization of the HEA by the U.S. Congress will begin
in 1997, and it is not possible to predict the outcome of that process. There
can be no assurance that government funding for Title IV Programs will continue
to be available or maintained at current levels. A reduction in government
funding levels could lead to lower enrollments at the Company's schools and
require the Company to arrange for alternative sources of financial aid for
students enrolled in its schools. Given the significant percentage of the
Company's revenues that are indirectly derived from Title IV Programs, the loss
thereof or a significant reduction in Title IV Program funds could have a
material adverse effect on the Company.
STUDENT LOAN DEFAULTS
Under the HEA, an institution could lose its eligibility to participate in
some or all Title IV Programs if the defaults of its students on their federal
student loans exceed specified rates for specified periods of time. A school's
annual cohort default rate is calculated as the rate at which borrowers
scheduled to begin repayment on their loans in one year default on those loans
by the end of the following year. Under the Federal Family Education Loan (the
"FFEL") program, any institution that has FFEL cohort default rates of 25% or
greater for three consecutive federal fiscal years will no longer be eligible to
participate in the FFEL program or the Federal Direct Student Loan (the "FDSL")
program for the remainder of the federal fiscal year in which the determination
of ineligibility is made and for the two subsequent federal fiscal years. An
institution whose FFEL cohort default rate for any federal fiscal year exceeds
40% may have its eligibility to participate in all Title IV Programs limited,
suspended or terminated. If an institution's FFEL cohort default rate is 25% or
greater in any of the three most recent federal fiscal years, or if an
institution's cohort default rate for loans under the Federal Perkins Loan
("Perkins") program exceeds 15% for the most recent federal award year, that
institution may be placed on "provisional certification" status for up to four
years. Provisional certification does not limit an institution's access to Title
IV Program funds, but does subject that institution to closer review by the U.S.
Department of Education and possible summary adverse action if that institution
commits violations of Title IV Program requirements.
None of the Company's schools has published FFEL cohort default rates of
25% or greater for three consecutive federal fiscal years. The Art Institute of
Houston, which accounted for approximately 7.9% of the Company's net revenues in
fiscal 1996, had a published FFEL cohort default rate of 25.8% for federal
fiscal year 1993 (the latest year for which rates have been published) and has
received a preliminary FFEL cohort default rate of 28.6% for federal fiscal year
1994. That school's published FFEL cohort default rate for federal fiscal year
1992 was less than 25%. The remainder of the Company's schools had published
1993 and preliminary 1994 FFEL cohort default rates below 25%. (Preliminary
cohort default rates are subject to revision by the U.S. Department of Education
based on information that schools and guaranty agencies identify and submit to
the U.S. Department of Education for review in order to correct any errors in
the data previously provided to the U.S. Department of Education. Any such
adjustment will be made by the U.S. Department of Education at the time that
final rates are officially published. The Art Institute of Houston has submitted
such corrections for its preliminary 1994 cohort default rate.) Five of the
Company's schools have Perkins cohort default rates in excess of 15% for
students who were scheduled to begin repayment in the 1994/1995 federal award
year, the most recent year for which such rates have been calculated. Those
schools and their Perkins cohort default rates for that year are: The Art
Institute of Atlanta (37.7%); The Art Institute of Dallas (45.3%); The Art
Institute of Fort Lauderdale (27.5%); The Art Institute of Houston (41.5%); and
The Art Institute of Seattle (17.7%). Those schools accounted for approximately
10.4%, 8.6%, 13.8%, 7.9% and 14.4%, respectively, of the Company's net revenues
in fiscal 1996. For each such school, funds from the Perkins program equalled
less than 2% of the school's net revenues in fiscal 1996, other than The Art
Institute of Houston where such funds equalled approximately 5% of net revenues
in fiscal 1996. Thus, those schools could be placed on provisional certification
status, which would subject them to closer review by the U.S. Department of
Education. To date, none of those schools has been placed on such status,
although four of those schools have submitted or will submit before December 31,
1996 applications for recertification to participate in Title IV Programs as
required under routine procedures of the U.S. Department of Education. In
connection with those recertification applications, the regulations provide that
those schools' Perkins cohort
8
<PAGE> 11
default rates will be reviewed. If one of those schools were placed on
provisional certification status for this reason and that school reduced its
Perkins cohort default rate below 15% in a subsequent year, that school could
ask the U.S. Department of Education to remove the provisional status. The loss
of eligibility to participate in Title IV Programs by any of the Company's
schools due to high FFEL cohort default rates could have a material adverse
effect on the Company. See "Business -- Student Financial Assistance -- Federal
Oversight of Title IV Programs -- Cohort Default Rates."
FINANCIAL RESPONSIBILITY STANDARDS
The HEA and its implementing regulations establish specific standards of
financial responsibility that must be satisfied in order to qualify for
participation in Title IV Programs. Under such standards, an institution must:
(i) have an acid test ratio (defined as the ratio of cash, cash equivalents and
current accounts receivable to current liabilities) of at least 1:1 at the end
of each fiscal year, (ii) have a positive tangible net worth at the end of each
fiscal year, and (iii) not have a cumulative net operating loss during its two
most recent fiscal years that results in a decline of more than 10% of the
institution's tangible net worth at the beginning of that two-year period. While
those standards generally are applied on an individual school basis, the Ray
College of Design (renamed The Illinois Institute of Art at Chicago and The
Illinois Institute of Art at Schaumburg) under prior ownership did not satisfy
the acid test ratio as of August 31, 1994. Therefore, following their
acquisition by the Company in November 1995, those schools (which, together,
accounted for approximately 1.1% of the Company's net revenues in fiscal 1996)
satisfied the standards of financial responsibility by relying on the
consolidated financial statements of their new parent corporation, The Art
Institutes International, Inc. ("AII"). Those schools will submit combined
financial statements independent of AII for fiscal 1996, and the Company
believes those financial statements will satisfy the requisite standards. If the
U.S. Department of Education determines that those schools do not satisfy those
standards, they will have an opportunity to demonstrate financial responsibility
based on the consolidated financial statements of AII. Each of the other Art
Institutes individually, as well as on a consolidated basis at the level of AII
(which is the parent of all The Art Institutes other than The Art Institute of
Pittsburgh, which is a division of AII), has met the standards described above
as applied by the U.S. Department of Education for the relevant periods.
An institution that is determined by the U.S. Department of Education not
to meet the standards of financial responsibility on the basis of failing to
meet one or more of the specified numeric indicators is nonetheless entitled to
participate in Title IV Programs if it can demonstrate to the U.S. Department of
Education that it is financially responsible on an alternative basis. An
institution may do so by demonstrating, with the support of a statement from a
certified public accountant, proof of prior compliance with the numeric
standards and other information specified in the regulations, that its continued
operation is not jeopardized by its financial condition. Alternatively, an
institution may post surety either in an amount equal to one-half of the total
Title IV Program funds received by students enrolled at such institution during
the prior year or in an amount equal to 10% of such prior year's funds and agree
to disburse those funds only on an "as-earned" basis. The U.S. Department of
Education has interpreted this surety condition to require the posting of an
irrevocable letter of credit in favor of the U.S. Department of Education.
In the past, the U.S. Department of Education has not applied the financial
responsibility standards on a consolidated basis at the level of the Company in
evaluating the financial condition of any of the Company's schools. If the U.S.
Department of Education were to apply such financial responsibility standards to
the Company on the basis of consolidated financial statements adjusted for the
consummation of the Offering, the Company believes that it would be found to be
in compliance with those financial responsibility standards. However, if the
U.S. Department of Education were to apply the financial responsibility
standards to the Company on a consolidated basis prior to consummation of the
Offering, the Company believes that it would not satisfy the tangible net worth
standard due to the exclusion by the U.S. Department of Education of goodwill in
calculating tangible net worth. (The consolidated tangible net worth of the
Company as of June 30, 1996 on a pro forma basis and as adjusted for the
Transactions and the Offering would be approximately $26.8 million.) To the
knowledge of the Company, the U.S. Department of Education does not consider the
financial position of an entity such as the Company when evaluating a school
unless the indebtedness of that entity is guaranteed by, or secured by a pledge
of the revenues of, an operating unit such
9
<PAGE> 12
as one of the Company's schools. Neither AII nor any of the Company's schools is
a guarantor of the Company's indebtedness and none of the revenues of AII or any
of the Company's schools are pledged as security for such indebtedness. If the
U.S. Department of Education were to determine that on a consolidated basis the
Company fails to meet the numeric indicators of financial responsibility, the
required surety, as described in the preceding paragraph, would be based on the
aggregate Title IV Program funds received by students enrolled at all of the
Company's schools during the prior year. Presently, such surety, if calculated
on the basis of 10% of the prior year's Title IV Program funds, would be
approximately $10.0 million. The application of the financial responsibility
standards on a consolidated basis at the Company level prior to consummation of
the Offering could have a material adverse effect on the Company. See "Business
- -- Student Financial Assistance -- Federal Oversight of Title IV Programs --
Financial Responsibility Standards."
STATE AUTHORIZATION
In order to award degrees and certificates and to participate in Title IV
Programs, an institution must be authorized to offer its programs of instruction
by the relevant agency of the state in which such school is located. Each state
has its own standards and requirements for authorization, which vary
substantially among the states. Typically, state laws require that an
institution demonstrate that it has the personnel, resources and facilities
appropriate to its instructional programs. Each of the Company's schools is
licensed and approved by the relevant agency of the state in which such school
is located. If one of the Company's schools were to lose its state license or
authorization, such school would lose its eligibility to participate in Title IV
Programs, which could have a material adverse effect on the Company. See
"Business -- State Authorization."
ACCREDITATION
In order to participate in Title IV Programs, an institution must be
accredited by an accrediting agency recognized by the U.S. Department of
Education. Accreditation is a non-governmental process through which an
institution submits to qualitative review by an organization of peer
institutions, based on the standards of the accrediting agency and the stated
aims and purposes of the institution. The three types of accrediting agencies
are: (i) regional accrediting associations, of which there are six, which
accredit degree-granting institutions located within their geographic areas,
(ii) national accrediting agencies, which accredit institutions on the basis of
the overall natures of the institutions without regard to their locations, and
(iii) specialized accrediting agencies, which accredit specific programs within
an institution. An accrediting agency primarily examines the academic quality of
an institution's programs, as well as the institution's administrative and
financial operations. Certain states require institutions to maintain
accreditation as a condition of continued authorization to grant degrees. The
HEA specifies certain standards that each accrediting agency must utilize in
reviewing institutions in order for such accrediting agency to be recognized by
the U.S. Department of Education. Each of the Company's schools is accredited by
at least one accrediting agency recognized by the U.S. Department of Education.
If one of the Company's schools were to lose its accreditation, such school
would lose its eligibility to participate in Title IV Programs, which could have
a material adverse effect on the Company. See "Business -- Accreditation."
REGULATORY CONSEQUENCES OF A CHANGE OF OWNERSHIP OR CONTROL
Upon a "change of ownership" of an institution resulting in a "change in
control," as defined in the HEA and applicable regulations, that institution
becomes ineligible to participate in Title IV Programs. In such event, an
institution may receive and disburse only previously committed Title IV Program
funds to its students until it has applied for and received from the U.S.
Department of Education recertification under such institution's new ownership.
Approval of an application for recertification must be based upon a
determination by the U.S. Department of Education that the institution under its
new ownership is in compliance with the requirements for institutional
eligibility. The time required to act on such an application can vary
substantially and may take several months. Under the HEA and its implementing
regulations, a change of ownership resulting in a change in control would occur
upon the transfer of a controlling interest in the voting stock of an
institution or such institution's parent corporation. For a corporation
determined to be closely held under applicable state law, such as EMC, a change
of ownership resulting in a change in control
10
<PAGE> 13
would occur (i) if any person acquires ownership or control of more than 50% of
such corporation's total outstanding voting stock, or (ii) if a person having
ownership or control of more than 50% of such corporation's total outstanding
stock ceases to hold or control more than 50% of such corporation's total
outstanding stock. With respect to a publicly traded corporation, which the
Company will be following consummation of the Offering, a change of ownership
resulting in a change in control occurs when there is an event that would
obligate that corporation to file a Current Report on Form 8-K with the
Securities and Exchange Commission (the "Commission") disclosing a change of
control. A change of ownership and control also could require an institution to
reaffirm its state authorization and accreditation. The requirements of state
and accrediting agencies with jurisdiction over the Company's schools vary
widely in this regard.
If the Offering were determined to constitute a change of ownership
resulting in a change in control, EMC would be required to reestablish the state
authorization and accreditation of each of its schools and apply to the U.S.
Department of Education to reestablish the certification of each of its schools
to participate in Title IV Programs. A significant delay in reobtaining or the
failure to reobtain state authorization, accreditation or Title IV Program
certification for any or all of the Company's schools could have a material
adverse effect on the Company. Based upon its review of the HEA, applicable
federal regulations and applicable state and accrediting agency standards and
upon the advice of its regulatory legal counsel, Dow, Lohnes & Albertson, PLLC
(which advice is based upon such legal counsel's review of applicable laws and
regulations and U.S. Department of Education precedent and practice), the
Company does not believe that the Offering will constitute a change of ownership
resulting in a change in control for purposes of the HEA or a change of
ownership and control for state authorization or accreditation purposes, except
with respect to the State of Arizona where the sale of more than 20% of the
stock of a corporation constitutes a change of ownership, and with respect to
the Accrediting Council for Independent Colleges and Schools, which accredits
NCPT, the standards of which provide that a change from being a closely held
corporation to being a publicly traded corporation is considered a change of
ownership. As a result, The Art Institute of Phoenix will be subject to review
by the Arizona Board for Private Postsecondary Education to reaffirm its state
authorization and NCPT will be subject to review by its accrediting agency to
reaffirm its accreditation. As The Art Institute of Phoenix was opened in fiscal
1996, the Company believes that any delay in reestablishing or failure to
reestablish its state authorization is unlikely to have a material adverse
effect on the Company. In addition, since NCPT does not currently participate in
Title IV Programs, the Company believes that any delay in reestablishing or
failure to reestablish its accreditation is unlikely to have a material adverse
effect on the Company.
Once the Company is deemed to be publicly traded, the potential adverse
implications of a change of ownership resulting in a change in control could
influence future decisions by the Company and its shareholders regarding the
sale, purchase, transfer, issuance or redemption of the Company's capital stock.
However, the Company believes that any such future transaction having an adverse
effect on state authorization, accreditation or participation in Title IV
Programs of any of the Company's schools is not likely to occur without the
consent of the Company's Board of Directors (the "Board of Directors"). See
"--Ownership and Significant Influence of Principal Shareholders," "--Certain
Anti-Takeover Effects," "Principal and Selling Shareholders" and "Description of
Capital Stock."
SEASONALITY IN RESULTS OF OPERATIONS
EMC has experienced seasonality in its results of operations primarily due
to the pattern of student enrollments. Historically, EMC's lowest quarterly
revenues and income have been in the first quarter (July to September) of its
fiscal year due to fewer students being enrolled during the summer months and
the expenses incurred in preparation for the peak in enrollment in the fall
quarter (October to December). EMC expects that this seasonal trend will
continue. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Seasonality and Other Factors Affecting Quarterly
Results."
RISKS ASSOCIATED WITH CHANGES IN MARKET NEEDS AND TECHNOLOGY
Many prospective employers of Art Institute graduates increasingly demand
that their entry-level employees possess appropriate technological skills.
Education programs at The Art Institutes, particularly programs for advertising
artists, computer animators, graphic designers and multimedia technicians, must
11
<PAGE> 14
keep pace with such shifting requirements. The Company believes its management
processes and information systems should permit the Company to make changes in
curriculum content and supporting technology in response to market needs.
However, the inability of the Company to adequately respond to changes in market
requirements due to financial constraints, unusually rapid technological change
or other factors could have a material adverse effect on the Company.
RISKS ASSOCIATED WITH EXPANSION AND ACQUISITION PLANS
Prior to fiscal 1996, EMC had not acquired a school since fiscal 1985 and
had not established a new school since the early 1970's. In fiscal 1996, the
Company opened The Art Institute of Phoenix and acquired the Ray College of
Design (renamed The Illinois Institute of Art at Chicago and The Illinois
Institute of Art at Schaumburg). In August 1996 (fiscal 1997), EMC acquired
NYRS. As part of its business strategy, EMC intends to continue to expand its
operations through the establishment of new schools and the acquisition of
existing institutions. When the Company acquires an existing school, a
significant portion of the purchase price for such school typically will be
allocated to goodwill and intangibles (e.g., student enrollments and curricula),
since most of these acquisitions will not involve the purchase of significant
amounts of tangible property. The Company amortizes goodwill over a period of 40
years and intangible assets over periods of two to five years. In addition,
start-up schools and smaller acquisitions are expected to incur operating losses
during the first several quarters following their opening or purchase.
There can be no assurance that suitable expansion or acquisition
opportunities will be identified or that any new or acquired institutions
(including the schools described above) can be operated profitably or
successfully integrated into the Company's operations. Growth through expansion
or acquisition also could involve other risks, including the diversion of
management's attention from normal operating activities, the inability to find
appropriate personnel to manage the Company's expanding operations and the
possibility that new or acquired schools will be subject to unanticipated
business or regulatory uncertainties or liabilities. In addition, the Company's
acquisition of a school would constitute a change in ownership resulting in a
change of control with respect to such school for purposes of eligibility to
participate in Title IV Programs. See "--Potential Adverse Effects of
Regulation; Impairment of Federal Funding -- Regulatory Consequences of a Change
of Ownership or Control." Generally, the Company intends to acquire schools
subject to the condition that they be recertified promptly for such eligibility
by the U.S. Department of Education. The failure of the Company to manage its
expansion and acquisition program effectively could have a material adverse
effect on the Company.
OWNERSHIP AND SIGNIFICANT INFLUENCE OF PRINCIPAL SHAREHOLDERS
After consummation of the Offering, the current management of the Company,
the ESOP and the Selling Shareholders collectively will own approximately 68.2%
of the outstanding shares of Common Stock (approximately 64.7% if the
over-allotment option is exercised in full). In particular, the five largest
shareholders, the ESOP, Mr. Knutson and the Selling Shareholders (in the
aggregate) will own approximately 25.0%, 14.6%, and 23.1%, respectively
(approximately 24.8%, 14.5%, and 20.1%, respectively, if the over-allotment
option is exercised in full). As a result of such concentration of ownership, if
the employees of the Company, through the ESOP, the current management of the
Company and the Selling Shareholders or some combination thereof vote together,
they will have the ability to exert significant influence on the policies and
affairs of the Company and corporate actions requiring shareholder approval,
including the election of the members of the Board of Directors. This
concentration of ownership could have the effect of delaying, deferring or
preventing a change of control of the Company, including any business
combination with an unaffiliated party, and could also affect the price that
investors might be willing to pay in the future for shares of Common Stock. See
"Principal and Selling Shareholders" and "Description of Capital Stock."
CERTAIN ANTI-TAKEOVER EFFECTS
Certain provisions of EMC's proposed Amended and Restated Articles of
Incorporation (the "New Articles") and proposed Restated By-Laws (the "New
By-Laws"), together with the terms of the proposed Rights Agreement (as defined
below), could have the effect of delaying, deferring or preventing a change of
control of the Company not approved by the Board of Directors or could affect
the price that investors might
12
<PAGE> 15
be willing to pay in the future for shares of Common Stock. Such provisions
include (i) a classified board of directors, (ii) advance notice requirements
for shareholder proposals and nominations, (iii) a requirement that the holders
of two-thirds of the Common Stock approve the amendment, alteration or repeal of
certain provisions of the New Articles and the New By-Laws, and (iv) the
authorization of the Board of Directors to fix the rights and preferences of,
and issue shares of, the preferred stock, $.01 par value (the "Preferred
Stock"), of the Company without further action by its shareholders. See
"Description of Capital Stock."
COMPETITION
The postsecondary education market is highly competitive. The Art
Institutes compete with traditional public and private two-year and four-year
colleges and universities and other proprietary schools. Certain public and
private colleges and universities may offer programs similar to those of The Art
Institutes. Public institutions are often able to charge lower tuition than The
Art Institutes, due in part to government subsidies, government and foundation
grants, tax-deductible contributions and other financial sources not available
to proprietary schools. However, tuition at private non-profit institutions is,
on average, higher than The Art Institutes' tuition. See
"Business -- Competition."
RELIANCE ON CURRENT MANAGEMENT
The Company's success to date has been, and its continuing success will be,
substantially dependent on the continued services of its executive officers and
other key personnel, who, generally, have extensive experience in the industry
and have been employed by the Company for substantial periods of time. None of
EMC's executive officers or other key employees is subject to an employment or
non-competition agreement other than Mr. Knutson. The loss of the services of
any one or more of its executive officers and other key personnel or the
inability to attract and retain other qualified employees could have a material
adverse effect on the Company. There can be no assurance that the Company will
continue to be successful in attracting and retaining such personnel. See
"Management and Directors."
DIVIDEND POLICY
The Company currently anticipates that it will retain future earnings, if
any, to fund the development and growth of its business and does not anticipate
paying any cash dividends in the foreseeable future. See "Dividend Policy."In
addition, U.S. Department of Education financial responsibility standards
applicable to the Company's schools could, in certain circumstances, restrict
the ability of the Company to obtain dividends or other funds from its
subsidiaries, which, in turn, could limit the Company's ability to pay
dividends. See "-- Potential Adverse Effects of Regulation; Impairment of
Federal Funding -- Financial Responsibility Standards."
ABSENCE OF PRIOR PUBLIC MARKET
Prior to the Offering, there has been no public market for the Common Stock
and there can be no assurance that an active trading market for the Common Stock
will develop or be sustained after consummation of the Offering. The initial
public offering price for the shares of Common Stock offered hereby will be
determined by negotiation among the Company, the Selling Shareholders and the
Underwriters and may not be indicative of the market price of the Common Stock
after the consummation of the Offering. See "Underwriting." There can be no
assurance that the market price of the Common Stock will not decline from the
initial public offering price. After consummation of the Offering, the market
price of the Common Stock will be subject to fluctuations in response to a
variety of factors, including variations in the Company's operating results and
new regulations or interpretations of regulations applicable to the Company, as
well as general political, economic and market conditions.
IMMEDIATE AND SUBSTANTIAL DILUTION
Purchasers of shares of Common Stock in the Offering will experience
immediate and substantial dilution of $13.62 in net tangible book value per
share with respect to their shares of Common Stock. In addition, as of September
30, 1996, certain officers and employees of the Company held options to purchase
up to
13
<PAGE> 16
600,092 shares of Common Stock at prices ranging from $2.54 to $11.00. See
"Dilution," "Management and Directors" and "Principal and Selling Shareholders."
SHARES ELIGIBLE FOR FUTURE SALE
After consummation of the Offering, approximately 9,580,522 shares of
Common Stock (approximately 9,179,131 shares if the over-allotment option is
exercised in full) held by the Company's current shareholders will be eligible
for sale pursuant to an exemption from registration under the Securities Act of
1933, as amended (the "Securities Act"), including exemptions provided by Rule
144 under the Securities Act. The Company also has granted certain registration
rights to certain shareholders (including the Selling Shareholders, the ESOP and
Mr. Knutson) who or which will own an aggregate of 9,710,134 shares of Common
Stock (9,308,743 shares if the over-allotment option is exercised in full)
following consummation of the Offering. In addition, the Company intends to
register 2,634,642 shares of Common Stock reserved for issuance pursuant to the
Company's stock-based compensation plans, of which 543,842 shares of Common
Stock are subject to options that are fully vested. See "Management and
Directors -- Compensation of Executive Officers" and "-- Benefit Plans." Certain
of the Merrill Lynch Entities (as defined under "Principal and Selling
Shareholders") that are limited partnerships will distribute an aggregate of
approximately shares of Common Stock owned by them to their partners
that elect not to receive their pro rata share of the proceeds of the sale of
shares of Common Stock by such limited partnerships (the "Merrill Lynch
Distribution"). As a condition to receiving shares of Common Stock in the
Merrill Lynch Distribution, such partners have agreed to be bound by the same
lock-up provision as the Company, its officers and directors, the Selling
Shareholders and certain other shareholders (including the ESOP). The Merrill
Lynch Distribution is expected to occur as soon as practicable after 180 days
after the date of this Prospectus or on such earlier date consented to by CS
First Boston Corporation. The Company, its officers and directors, the Selling
Shareholders and certain other shareholders (including the ESOP) who or which,
immediately following the consummation of the Offering, will own in the
aggregate 9,538,967 shares of Common Stock and vested and exercisable options to
purchase an additional 543,842 shares of Common Stock in the aggregate, have
agreed not to offer, sell, contract to sell, pledge or otherwise dispose of,
directly or indirectly, or file or cause to be filed with the Commission a
registration statement under the Securities Act relating to, any shares of
Common Stock or securities or other rights convertible into or exchangeable or
exercisable for any shares of Common Stock, or publicly disclose the intention
to make any such offer, sale, pledge, disposal or filing, without the prior
written consent of CS First Boston Corporation, for a period of 180 days after
the date of this Prospectus. No prediction can be made as to the effect, if any,
that future sales of any of these shares of Common Stock, or the availability of
these shares for future sale, will have on the market price of the Common Stock
prevailing from time to time. Sales of a substantial number of these shares of
Common Stock in the public market following the Offering, or the perception that
such sales could occur, could adversely affect market prices for the Common
Stock and could impair the Company's ability to raise capital through an
offering of its equity securities. See "Shares Eligible for Future Sale" and
"Underwriting."
14
<PAGE> 17
THE TRANSACTIONS
As of the date of this Prospectus, the Company's outstanding capital stock
consists of (i) two classes of common stock: Class A Common Stock, $.0001 par
value (the "Class A Stock"), and Class B Common Stock, $.0001 par value (the
"Class B Stock" and, together with the Class A Stock, the "Existing Common
Stock"), and (ii) the Series A Preferred Stock, all the outstanding shares of
which are held by the ESOP. The Series A Preferred Stock is redeemable at any
time at the option of the Company and is convertible at any time at the option
of the holder into 15.43708 shares of Class A Stock (which is the equivalent of
7.71854 shares of Common Stock after the Articles Amendment) for each share of
Series A Preferred Stock. On August 9, 1996, the Company redeemed 75,000 shares
of Series A Preferred Stock at a purchase price of $101.43 per share, plus
accrued and unpaid dividends, which redemption was financed by $7.6 million
borrowed under the Revolving Credit Agreement (as defined below) (the
"Redemption"). See "Certain Transactions."
Prior to the consummation of the Offering, (i) all outstanding warrants to
purchase Class B Stock held by two Selling Shareholders (the "Warrants") will be
exercised (the "Warrant Exercise") for an aggregate of 5,956,079 shares of Class
B Stock (which Class B Stock will become 2,978,039 shares of Common Stock after
the Articles Amendment, as defined below); (ii) the ESOP will, subject to the
satisfaction of certain conditions described below, convert all shares of Series
A Preferred Stock into 2,249,954 shares of Class A Stock (which Class A Stock
will become 1,124,977 shares of Common Stock after the Articles Amendment) (the
"ESOP Conversion"); and (iii) the New Articles providing for, among other
things, only two classes of capital stock consisting of the Common Stock and the
Preferred Stock and the conversion of all shares of Existing Common Stock into
Common Stock at the rate of one share of Common Stock for every two shares of
Existing Common Stock will become effective (the "Articles Amendment" and,
together with the Warrant Exercise and the ESOP Conversion, the "Concurrent
Transactions"). The consummation of the Offering and the Concurrent Transactions
are conditioned upon one another. The Concurrent Transactions and the Redemption
are sometimes referred to in this Prospectus collectively as the "Transactions."
The trustee of the ESOP has agreed with the Company that, upon request by
the Company and subject to compliance with the trustee's fiduciary duties, the
ESOP will, prior to the consummation of the Offering, convert all shares of
Series A Preferred Stock that it owns into shares of Class A Stock, which in
turn will be reclassified as shares of Common Stock as a result of the Articles
Amendment. The conversion ratio for the Series A Preferred Stock implies a
conversion price of $6.48 for each share of Class A Stock (or $12.96 for each
share of Common Stock, after giving effect to the Articles Amendment) at the
stated value of $100.00 per share for the Series A Preferred Stock (assuming the
Offering is consummated on or after October 26, 1996).
If the initial offering price for the Common Stock (before underwriting
discounts and commissions) is less than an amount (the "Specified Amount") equal
to the sum of (i) the implied conversion price of $12.96 and (ii) the amount of
any accrued and unpaid dividends on the Series A Preferred Stock through the
date of the conversion, and the Company were to determine nonetheless to
consummate the Offering and therefore to effect the ESOP Conversion, the Company
would pay to the ESOP an amount equal to the difference between the Specified
Amount and the initial offering price (before underwriting discounts and
commissions). It is estimated that the amount of accrued and unpaid dividends on
each share of Series A Preferred Stock will be $3.40 (or an implied amount of
$0.44 per share of Common Stock). As the estimated range of the initial offering
price set forth on the cover page of this Prospectus exceeds the Specified
Amount, the Company anticipates that no such payment to the ESOP will occur.
USE OF PROCEEDS
The net proceeds to the Company from the sale of the shares of Common Stock
offered by the Company hereby, after deduction of the estimated underwriting
discount and estimated offering expenses payable by the Company, are estimated
to be approximately $45.0 million (assuming an initial public offering price of
$15.50 per share). The Company will not receive any proceeds from the sale of
shares of Common Stock by the Selling Shareholders. The Company intends to use
up to $41.0 million of its net proceeds from the Offering to repay the
outstanding indebtedness under the Amended and Restated Credit Agreement, dated
March 16, 1995, as amended (the "Revolving Credit Agreement"), and approximately
$4.0 million for general corporate
15
<PAGE> 18
purposes. For fiscal 1996, the weighted average interest rate on the obligations
under the Revolving Credit Agreement was 7.3%. Outstanding obligations under the
Revolving Credit Agreement are scheduled to mature on October 13, 2000.
Indebtedness incurred thereunder after October 12, 1995 was used for the
redemption of the Subordinated Notes, recent acquisitions by the Company, the
Redemption and general corporate purposes. If a payment to the ESOP is made in
connection with the ESOP Conversion, the Company would obtain the funds therefor
under the Revolving Credit Agreement.
DIVIDEND POLICY
EMC has not declared or paid any cash dividends on its capital stock during
the last ten years other than on the shares of Series A Preferred Stock, none of
which will be outstanding after consummation of the Offering. EMC currently
intends to retain future earnings, if any, to fund the development and growth of
its business and does not anticipate paying any cash dividends in the
foreseeable future. The payment of dividends by EMC is, and will continue to be,
subject to certain restrictions under the terms of the Revolving Credit
Agreement.
16
<PAGE> 19
CAPITALIZATION
The following table sets forth the capitalization of the Company as of June
30, 1996 and as adjusted to reflect: (i) the NYRS Acquisition, and (ii) the
Transactions and the sale of the shares of Common Stock offered by the Company
in the Offering (at an assumed initial public offering price of $15.50 per
share) and the application of the net proceeds therefrom to repay outstanding
indebtedness under the Revolving Credit Agreement. The following table should be
read in conjunction with the Company's Consolidated Financial Statements and
Notes thereto and "Pro Forma Consolidated Financial Data" included elsewhere in
this Prospectus.
<TABLE>
<CAPTION>
AS OF JUNE 30, 1996
-----------------------------------------------
PRO FORMA
PRO FORMA FOR AS ADJUSTED FOR THE
THE NYRS TRANSACTIONS AND
ACTUAL ACQUISITION THE OFFERING
------- ------------ ----------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Total cash and cash equivalents........................ $27,399 $27,399 $27,399
======= ======= =======
Long-term debt:
Capitalized lease obligations (including current
portions)......................................... $10,919 $10,919 $10,919
Borrowings under Revolving Credit Agreement(1)....... 55,000 64,500 27,107
Redeemable shareholders' investment(2):
Preferred Stock, $.0001 par value, 1,000,000 shares
authorized, 220,750 shares of Series A Preferred
Stock issued and outstanding...................... 22,075 22,075 -
Common Stock, $.0001 par value, 42,000,000 shares
authorized, including 25,000,000 shares of Class A
Stock and 17,000,000 shares of Class B Stock;
3,685,604 shares of Class A Stock issued and
outstanding and 10,207,434 shares of Class B Stock
issued (which is the equivalent of 1,842,802 and
5,103,717 shares of Common Stock, respectively)... 1 1 -
Additional paid-in capital........................... 19,742 19,742 -
Warrants outstanding................................. 7,683 7,683 -
Treasury stock (57,000 shares of Class B Stock, which
is the equivalent of 28,500 shares of Common
Stock)............................................ (99) (99) -
Stock subscriptions receivable....................... (442) (442) -
Accumulated deficit.................................. (39,304) (39,304) -
------- ------- -------
Total redeemable shareholders' investment......... 9,656 9,656 -
------- ------- -------
Shareholders' investment:
Common Stock, $.01 par value, 60,000,000 shares
authorized, 14,279,535 shares of Common Stock
issued(3)......................................... - - 143
Additional paid-in capital........................... - - 86,751
Treasury stock (28,500 shares)....................... - - (99)
Stock subscriptions receivable....................... - - (442)
Accumulated deficit.................................. - - (39,304)
------- ------- -------
Total shareholders' investment.................... - - 47,049
------- ------- -------
Total capitalization............................ $75,575 $85,075 $85,075
======= ======= =======
</TABLE>
- ---------------
(1) The average outstanding balance under the Revolving Credit Agreement during
fiscal 1996 was approximately $16.8 million, which bore interest at a
weighted average rate of 7.3%. For purposes of this table, it is assumed
that no borrowings will be made in connection with the ESOP Conversion. See
"The Transactions."
(2) Prior to the closing date of an initial public offering, the holders of the
Company's equity securities may, under certain circumstances, require the
Company to purchase such securities. In addition, the Company has the right
to redeem shares of Series A Preferred Stock and purchase shares of Class B
Stock under certain circumstances. These rights will expire upon
consummation of the Offering. The issued shares of Class A Stock and Class B
Stock reflect the results of the two-for-one reverse stock split.
(3) Excludes shares reserved for issuance under the Company's stock-based
compensation plans. See "Management and Directors -- Compensation of
Executive Officers" and "-- Benefit Plans."
17
<PAGE> 20
DILUTION
The pro forma deficit in net tangible book value of the Company as of June
30, 1996 was $(18,214,000), or $(1.65) per share of Common Stock, after giving
effect to the NYRS Acquisition (which resulted in an increase of $5,584,000 in
intangible assets because of the allocation of the purchase price) and the
Transactions (which decreased tangible net worth by $7,607,000 because of the
Redemption). Pro forma net tangible book value per share represents the amount
of the Company's tangible assets less total liabilities divided by the number of
shares of Common Stock treated as outstanding. After giving effect to the sale
of 3,230,000 shares of Common Stock offered hereby by the Company (at an assumed
initial public offering price of $15.50 per share) and after deduction of the
estimated underwriting discount and estimated offering expenses payable by the
Company and the application of the net proceeds therefrom, the Company's pro
forma as adjusted net tangible book value as of June 30, 1996 would have been
$26,786,000, or $1.88 per share. This represents an immediate increase in pro
forma net tangible book value of $3.53 per share for existing shareholders and
an immediate dilution of $13.62 per share to new investors purchasing shares of
Common Stock in the Offering. The following table illustrates such per share
dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share.......................... $ 15.50
-------
Pro forma net tangible book value per share before the Offering........ $(1.65)
------
Increase per share attributable to the Offering........................ 3.53
------
Pro forma as adjusted net tangible book value per share after the
Offering............................................................... 1.88
-------
Dilution per share to new investors(1)................................... $ 13.62
=======
</TABLE>
- ---------------
(1) Dilution is determined by subtracting pro forma as adjusted net tangible
book value per share after the Offering from the assumed initial public
offering price per share.
The following table summarizes, on a pro forma as adjusted basis as of June
30, 1996, the differences between existing shareholders and new investors with
respect to the number of shares of Common Stock purchased from the Company, the
total consideration paid and the average price per share paid by existing
shareholders and by new investors at an assumed initial public offering price of
$15.50 per share, before deduction of the estimated underwriting discount and
estimated offering expenses payable by the Company:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
---------------------- ------------------------ AVERAGE PRICE
NUMBER PERCENT AMOUNT (000) PERCENT PER SHARE
---------- ------- ------------ ------- -------------
<S> <C> <C> <C> <C> <C>
Existing shareholders(1)........... 11,021,035 77.3% $ 47,792 48.8% $ 4.34
New investors(1)................... 3,230,000 22.7 50,065 51.2 $ 15.50
---------- ----- -------- -----
Total............................ 14,251,035 100.0% $ 97,857 100.0%
========== ===== ======== =====
</TABLE>
- ---------------
(1) Sales of shares of Common Stock by the Selling Shareholders in the Offering
will reduce the number of shares held by existing shareholders to 9,721,035,
or approximately 68.2% of the total shares of Common Stock outstanding after
the Offering (9,319,644 shares, or approximately 64.8%, if the
over-allotment option is exercised in full), and will increase the number of
shares held by new investors to 4,530,000, or approximately 31.8% of the
total shares of Common Stock outstanding after the Offering (5,073,600
shares, or approximately 35.2%, if the over-allotment option is exercised in
full). See "Principal and Selling Shareholders."
The foregoing tables assume (i) that no payment will be made to the ESOP in
connection with the ESOP Conversion and (ii) no exercise of outstanding options.
As of June 30, 1996, there were outstanding options to purchase 613,142 shares
of Common Stock at exercise prices ranging from $2.54 to $11.00 and at a
weighted average exercise price of $4.98 per share. If all such options had been
exercised as of June 30, 1996, the dilution per share to new investors would
have been $13.49 per share. See "The Transactions," "Management and
Directors -- Compensation of Executive Officers" and " -- Benefit Plans" and
Note 4 of Notes to Consolidated Financial Statements.
18
<PAGE> 21
PRO FORMA CONSOLIDATED FINANCIAL DATA
The following unaudited pro forma condensed consolidated statement of
income of the Company gives effect to the NYRS Acquisition, the Transactions and
the Offering as if they had occurred on July 1, 1995. The following unaudited
pro forma condensed consolidated balance sheet gives effect to the NYRS
Acquisition, the Transactions and the Offering as if they had occurred on June
30, 1996.
The following unaudited pro forma financial information is presented for
informational purposes only and is not necessarily indicative of (i) the results
of operations or the financial position of the Company that actually would have
occurred had the NYRS Acquisition, the Transactions and the Offering been
consummated as of the dates indicated, or (ii) the results of operations or the
financial position of the Company in the future. The following information is
qualified in its entirety by reference to and should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Company's Consolidated Financial Statements and Notes
thereto and the other historical financial information included elsewhere in
this Prospectus.
The following unaudited pro forma financial information reflects the NYRS
Acquisition using the purchase method of accounting. The acquired assets and
liabilities of NYRS and its affiliate are stated at values representing an
allocation of the purchase cost based upon estimated fair market values at the
date of acquisition. These values were determined using preliminary results of
an appraisal of the tangible and intangible assets. The final values will be
determined based upon the resolution of certain preacquisition contingencies and
the final appraised values. The purchase accounting adjustments are not expected
to differ significantly from the estimates used herein.
19
<PAGE> 22
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME
FOR THE TWELVE MONTHS ENDED JUNE 30, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
PRO FORMA
PRO FORMA AS ADJUSTED
HISTORICAL FOR THE FOR THE
-------------------- NYRS TRANSACTIONS
EMC NYRS ADJUSTMENTS(2) ACQUISITION ADJUSTMENTS AND THE OFFERING
-------- ------ -------------- ----------- ----------- -----------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C>
Net revenues............... $147,863 $9,641 $157,504 $ 157,504
Costs and expenses:
Educational services..... 98,841 6,271 63(3) 105,175 105,175
General and
administrative......... 32,344 1,518 33,862 33,862
Amortization of
intangibles............ 1,060 344 724(4)(5) 2,128 2,128
ESOP expense............. 1,366 - 1,366 2,249(8) 3,615(12)
-------- ------ -------- -------- ------- ---------
133,611 8,133 787 142,531 2,249 144,780
-------- ------ -------- -------- ------- ---------
ncome before interest and
taxes.................... 14,252 1,508 (787) 14,973 (2,249) 12,724
Interest expense, net.... 3,371 124 507(6) 4,002 (2,888)(9)(10) 1,114
-------- ------ -------- -------- ------- ---------
Income before income
taxes.................... 10,881 1,384 (1,294) 10,971 639 11,610
Provision for income
taxes.................. 4,035 554 (518)(7) 4,071 979(11) 5,050
-------- ------ -------- -------- ------- ---------
Income before extraordinary
item..................... 6,846 830 (776) 6,900 (340) 6,560
-------- ------ -------- -------- ------- ---------
Dividends on Series A
Preferred Stock.......... 2,249 - - 2,249 (2,249) -
-------- ------ -------- -------- ------- ---------
Income applicable to common
shareholders before
extraordinary item....... $ 4,597 $ 830 $ (776) $ 4,651 $ 1,909 $ 6,560
======== ====== ======== ======== ======= =========
PER SHARE, FULLY
DILUTED(1):
Income before
extraordinary item..... $ .39 $ .45(12)
Weighted average number
of shares of Common
Stock outstanding, in
thousands.............. 11,875 14,526()
</TABLE>
20
<PAGE> 23
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
AS OF JUNE 30, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
PRO FORMA
PRO FORMA AS ADJUSTED
HISTORICAL FOR THE FOR THE
-------------------- NYRS TRANSACTIONS
EMC NYRS ADJUSTMENTS(2) ACQUISITION ADJUSTMENTS AND THE OFFERING
-------- ------ ------------- ----------- ----------- ----------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Total cash and cash
equivalents............ $ 27,399 $ 606 $ (606) $ 27,399 $ 27,399
Accounts receivable...... 8,172 2,386 (28) 10,530 10,530
Other current assets..... 4,287 97 (71) 4,313 4,313
-------- ------ ------- -------- -------- --------
Total current assets... 39,858 3,089 (705) 42,242 42,242
Property and equipment,
net.................... 41,174 1,227 2,483(3) 44,884 44,884
Intangible and other
long-term assets....... 5,837 131 1,489(5) 7,457 7,457
Goodwill................. 14,543 2,539 1,403(5) 18,485 18,485
-------- ------ ------- -------- -------- --------
Total assets......... $101,412 $6,986 $ 4,670 $113,068 $ $113,068
======== ====== ======= ======== ======== ========
LIABILITIES AND
SHAREHOLDERS'
INVESTMENT
Current liabilities
including the current
portions of capitalized
lease obligations...... $ 27,264 $ 959 $ 1,197 $ 29,420 $ 29,420
Long-term debt........... 62,029 3,272 6,228(2) 71,529 37,393(9)(10) 34,136
Other long-term
liabilities............ 2,463 - - 2,463 2,463
-------- ------ ------- -------- -------- --------
Total liabilities...... 91,756 4,231 7,425 103,412 66,019
Shareholders'
investment............. 9,656 2,755 (2,755) 9,656 (37,393)(9)(10) 47,049
-------- ------ ------- -------- -------- --------
Total liabilities and
shareholders'
investment........... $101,412 $6,986 $ 4,670 $113,068 $ - $113,068
======== ====== ======= ======== ======== ========
</TABLE>
21
<PAGE> 24
NOTES TO PRO FORMA CONSOLIDATED FINANCIAL DATA
(1) The weighted average number of shares of Common Stock outstanding used
to calculate pro forma income per share includes the Offering of
3,230,000 shares of Common Stock by the Company and the Redemption,
assumed to have occurred as of July 1, 1995.
(2) Certain net assets of NYRS (and an affiliate) were acquired (subject
to obtaining certain regulatory approvals) in August 1996 for $9.5
million in cash. The Company funded the NYRS Acquisition through
borrowings under the Revolving Credit Agreement. The adjustment to
long-term debt reflects the borrowing of $9.5 million, offset by the
long-term debt of NYRS (and an affiliate) of $3,272,000 which was not
assumed in connection with the NYRS Acquisition. This offset results
in a net increase in long-term debt of $6,228,000.
(3) The appraised value of the property and equipment of NYRS has been
assigned to the respective assets. The additional depreciation and
amortization over the historical amount of such expense is included in
educational services expense.
(4) The historical amortization of intangibles of NYRS (and an affiliate)
is eliminated because new values were assigned to intangible assets at
the acquisition date. The Company's pro forma statement of income has
been adjusted to reflect one full year of amortization of intangibles
based on the new values and useful lives assigned at the time of the
NYRS Acquisition.
(5) Subject to the finalization of an appraisal, the excess of the
purchase price over the value of NYRS's (and an affiliate's) tangible
assets has been assigned to intangible assets, including $1.4 million
to student enrollments and applications, $0.2 million to curricula and
$3.9 million to goodwill. These assets have estimated useful lives of
18 months, five years and 40 years, respectively.
(6) The historical interest expense of NYRS is eliminated because EMC did
not assume any of NYRS's debt at the acquisition date. The Company's
pro forma statement of income has been adjusted to reflect one full
year of interest expense on the acquisition borrowings of $9.5 million
at an interest rate of 7.3%, the weighted average interest rate paid
by the Company on its borrowings under the Revolving Credit Agreement
during fiscal 1996.
(7) A 40% combined state and federal statutory rate is assumed in
calculating the income tax effect of the pro forma adjustments.
(8) The adjustment to ESOP expense is the result of the additional
contributions necessary to replace dividends that would not have been
paid assuming the Redemption and the ESOP Conversion. All outstanding
shares of the Series A Preferred Stock are eliminated because of the
Redemption (75,000 shares redeemed at $101.43 per share) and the ESOP
Conversion (145,750 shares converted to 2,249,954 shares of Class A
Stock, which is the equivalent of 1,124,977 shares of Common Stock).
Both transactions are assumed to have occurred on July 1, 1995 for
income statement purposes. Accordingly, on a pro forma basis, no
dividends would have been paid after June 30, 1995.
(9) In connection with the Redemption, the Company borrowed $7.6 million
under the Revolving Credit Agreement. Additional interest expense is
reflected for the fiscal year on such amount at an interest rate of
7.3%, the weighted average interest rate paid by the Company on its
borrowings under the Revolving Credit Agreement during fiscal 1996.
(10) The Company's net proceeds from the Offering, assumed to be $45.0
million net of expenses and fees, will be applied to reduce the amount
outstanding under the Revolving Credit Agreement. The resulting pro
forma interest expense savings amount to $3.4 million. A 1/8% change
in the applicable interest rate would change annual interest expense
by $24,000. The calculation of pro forma long-term debt and interest
expense assumes that no payment will be made to the ESOP in connection
with the ESOP Conversion. See "The Transactions."
(11) The adjustment to the provision for income taxes reflects additional
taxes associated with the elimination of tax deductible dividends on
the Series A Preferred Stock.
(12) There will be no future ESOP expense because of the repayment in full
of the ESOP Term Loan in fiscal 1996. If ESOP expense were excluded
from the pro forma results, income before extraordinary item would
have been $.60 per share.
22
<PAGE> 25
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
The following selected consolidated financial and other data should be read
in conjunction with the Company's Consolidated Financial Statements and Notes
thereto and "Management's Discussion and Analysis of Financial Condition and
Results of Operations" included elsewhere in this Prospectus. Certain of the
selected consolidated financial data presented below have been derived from the
Company's Consolidated Financial Statements audited by Arthur Andersen LLP,
independent public accountants, whose report covering the financial statements
as of June 30, 1995 and 1996 and for each of the three years in the period ended
June 30, 1996 also is included elsewhere herein. The consolidated income
statement data for the years ended June 30, 1992 and 1993 and the consolidated
balance sheet data as of June 30, 1992, 1993 and 1994 are derived from audited
financial statements not included herein.
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
--------------------------------------------------------
1992 1993 1994(9) 1995(10)(11) 1996(11)
-------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net revenues........................... $112,533 $117,234 $122,549 $131,227 $147,863
Costs and expenses:
Educational services................. 68,895 73,823 83,566 86,865 98,841
General and administrative........... 24,608 24,679 26,174 28,841 32,344
Amortization of intangibles(1)....... 21,499 10,025 6,599 1,937 1,060
ESOP expense(2)...................... 2,653 4,791 4,759 7,086 1,366
-------- -------- -------- -------- --------
117,655 113,318 121,098 124,729 133,611
-------- -------- -------- -------- --------
Income (loss) before interest and
taxes................................ (5,122) 3,916 1,451 6,498 14,252
Interest expense, net.................. 5,578 5,113 4,765 4,495 3,371
-------- -------- -------- -------- --------
Income (loss) before income taxes...... (10,700) (1,197) (3,314) 2,003 10,881
Provision (credit) for income taxes.... (3,627) (23) (1,612) 490 4,035
-------- -------- -------- -------- --------
Income (loss) before extraordinary
item................................. (7,073) (1,174) (1,702) 1,513 6,846
Extraordinary item(3).................. - - - - 926
-------- -------- -------- -------- --------
Income (loss) from continuing
operations........................... $ (7,073) $ (1,174) $ (1,702) $ 1,513 $ 5,920
-------- -------- -------- -------- --------
Loss on discontinued operation(4)...... (3,997) - - - -
-------- -------- -------- -------- --------
Net income (loss)...................... $(11,070) $ (1,174) $ (1,702) $ 1,513 $ 5,920
======== ======== ======== ======== ========
Dividends on Series A Preferred
Stock................................ $ 2,249 $ 2,249 $ 2,249 $ 2,249 $ 2,249
PER SHARE DATA(5):
Primary:
Income (loss) from continuing
operations before extraordinary
item................................. $ (1.35) $ (.49) $ (.57) $ (.11) $ .45
Net income (loss)...................... $ (1.93) $ (.49) $ (.57) $ (.11) $ .36
Weighted average number of shares of
Common Stock outstanding, in
thousands(6)......................... 6,930 6,960 6,927 6,891 10,171
Fully diluted:
Income (loss) from continuing
operations before extraordinary
item................................. $ (1.35) $ (.49) $ (.57) $ (.11) $ .39
Net income (loss)...................... $ (1.93) $ (.49) $ (.57) $ (.11) $ .31
Weighted average number of shares of
Common Stock outstanding, in
thousands(6)......................... 6,930 6,960 6,927 6,891 11,875
</TABLE>
23
<PAGE> 26
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
--------------------------------------------------------
1992 1993 1994(9) 1995 1996
-------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
OTHER DATA:
EBITDA(7).............................. $ 22,922 $ 23,340 $ 18,629 $ 21,089 $ 24,148
Cash flow from:
Operating activities................. 13,048 12,742 4,073 22,221 16,314
Investing activities................. (7,189) (8,993) (6,798) (11,973) (18,431)
Financing activities................. (4,092) (1,280) (6,049) 6,482 (3,841)
Capital expenditures................... 6,466 8,448 6,289 11,640 14,981
Enrollments at beginning of fall
quarter during period(8)............. 12,548 12,708 12,592 12,749 13,407
</TABLE>
<TABLE>
<CAPTION>
AS OF JUNE 30,
--------------------------------------------------------
1992 1993 1994 1995 1996
-------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Total cash and cash equivalents........ $ 21,695 $ 24,164 $ 20,487 $ 39,623 $ 27,399
Working capital........................ (1,755) 1,386 576 14,944 12,594
Total assets........................... 87,059 85,091 78,527 102,303 101,412
Long-term debt (including the current
portions of capitalized lease
obligations)......................... 70,529 68,923 63,112 69,810 65,919
Redeemable shareholders' investment
(deficit)............................ (14,791) (10,790) (7,724) 1,855 9,656
</TABLE>
- ---------------
(1) Includes the amortization of goodwill and intangibles resulting from the
application of purchase accounting to the establishment and financing of
the ESOP and the related leveraged transaction in 1989. See
"Business -- Company History" and Note 2 of Notes to Consolidated Financial
Statements. The majority of the intangible assets related to student
enrollments and applications, accreditation and contracts with colleges and
universities were written off over two to five year periods. The excess of
the investment in EMC and other acquisitions over the fair market value of
the net assets acquired has been assigned to goodwill and is being
amortized over 40 years.
(2) ESOP expense equals the sum of the payments on the ESOP Term Loan, plus
repurchases of shares from participants in the ESOP, less the dividends
paid on the Series A Preferred Stock held by the ESOP. In fiscal 1995, the
Company made a voluntary prepayment of $2.1 million on the ESOP Term Loan.
In fiscal 1996, the ESOP Term Loan was repaid in full, including a
voluntary prepayment of $0.4 million that would have been due on September
30, 1996. Therefore, there will be no future ESOP expense resulting from
the repayment of such loan or, after the Offering is consummated, from
repurchases of shares.
(3) In fiscal 1996, the $25.0 million aggregate principal amount of the
Subordinated Notes was prepaid in full. The resulting $1.5 million
prepayment penalty is classified as an extraordinary item net of the
related tax benefit.
(4) In May 1992, the Company determined to discontinue its Ocean World theme
park operations. The loss of approximately $4.0 million on such
discontinuation includes the effect of the write-down of assets to
estimated net realizable values and the estimated losses of the operation
through the expiration of its lease. The loss was recorded net of tax.
(5) Dividends on the Series A Preferred Stock have been deducted from net
income (loss) in calculating net income (loss) per share of Common Stock.
(6) The weighted average number of shares of Common Stock used to calculate
income (loss) per share includes, where dilutive, equivalent shares of
Common Stock calculated under the treasury stock method and the conversion
of Series A Preferred Stock.
(7) EBITDA equals, for any period, earnings before ESOP expense, interest
expense, taxes, depreciation and amortization. EBITDA is presented because
it is an accepted and useful financial indicator of a company's ability to
incur and service debt. EBITDA should not be considered (i) as an
alternative to net income or any other accounting measure of performance,
(ii) as an indicator of operating performance or cash flows generated by
operating, investing or financing activities, or (iii) as a measure of
liquidity.
(8) Excludes students enrolled at colleges and universities having consulting
agreements with NCPD.
(9) A special charge of $3.0 million was recorded in fiscal 1994 for unusual
items including the early write-off of equipment, program termination
expenses, severance compensation, expenses related to the settlement of a
lease and various legal expenses. Such special charge was included in
educational services and general and administrative expenses.
(10) Results for fiscal 1995 include a $1.1 million nonrecurring credit for the
refund of state and local business and occupation taxes.
(11) Charges of $1.1 million and $0.5 million are reflected in 1995 and 1996,
respectively, for non-cash compensation expense related to the
performance-based vesting of nonstatutory stock options.
24
<PAGE> 27
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of the Company's results of operations and
financial condition should be read in conjunction with "Selected Consolidated
Financial and Other Data" and the Company's Consolidated Financial Statements
and Notes thereto included elsewhere in this Prospectus. Unless otherwise
specified, any reference to a "year" is to a fiscal year ended June 30.
OVERVIEW
EMC is among the largest providers of proprietary postsecondary education
in the United States based on student enrollments and revenues. Through its
operating units, The Art Institutes, NYRS (acquired in August 1996, subject to
obtaining certain regulatory approvals), NCPT and NCPD, the Company offers
associate's and bachelor's degree programs and non-degree programs in the areas
of design, media arts, culinary arts, fashion and paralegal studies. The Company
has provided career-oriented education programs for nearly 35 years, and its
schools have graduated over 100,000 students. The Company's main operating unit,
The Art Institutes, consists of 11 schools in ten cities throughout the United
States and accounted for approximately 98% of the Company's net revenues in
1996.
Net revenues, income before interest and taxes and net income increased in
each of the last two years. Net revenues are presented after deducting refunds,
scholarships and other adjustments. Net revenues increased 20.7% to $147.9
million in 1996 from $122.5 million in 1994. Income before interest and taxes
increased 853.3% to $14.3 million in 1996 from $1.5 million in 1994. Net income
improved to $5.9 million in 1996 from a loss of $1.7 million in 1994. Average
quarterly student enrollments at the Company's schools were 11,996 in 1996
compared to 11,062 in 1994. The increase in average enrollments was due in part
to the introduction of new programs and expanded weekend and evening offerings.
The Company's revenues consist of tuition and fees, student housing fees
and student supply store and restaurant sales. In 1996, the Company derived 87%
of its net revenues from tuition and fees paid by, or on behalf of, its
students. Tuition revenue generally varies based on the average tuition charge
per credit hour and the average student population. Student supply store,
housing and restaurant revenue is largely a function of the average student
population. The average student population is influenced by the number of
continuing students attending school at the beginning of a fiscal period and by
the number of new students entering school during such period. New students
enter The Art Institutes at the beginning of each academic quarter, which
typically commences in January, April, July or October. The Company believes
that the size of its student population is influenced by the number of
graduating high school students, the attractiveness of its program offerings,
the effectiveness of its marketing efforts, the strength of employment markets,
the persistence of its students, the length of its education programs and
general economic conditions. The introduction of additional program offerings at
existing schools and the establishment of new schools (either through
acquisition or start-up) are expected to be important influences on the
Company's average student population.
Tuition increases have been implemented in varying amounts in each of the
past several years. Historically, the Company has been able to pass along cost
increases through increases in tuition. Tuition rates are generally consistent
across the Company's schools and programs. The Company believes that it can
continue to increase tuition as educational costs at other postsecondary
institutions, both public and private, continue to rise. The Company's schools
implemented tuition rate increases averaging approximately 5.5% for the fall
quarter of fiscal 1997.
The majority of students at The Art Institutes rely on funds received under
various government sponsored student financial aid programs, especially Title IV
Programs, to pay a substantial portion of their tuition and other
education-related expenses. For the year ended June 30, 1996, approximately 66%
of the Company's net revenues was indirectly derived from Title IV Programs.
Educational services expense consists primarily of costs related to the
delivery and administration of the Company's education programs. Major cost
components are faculty compensation, administrative salaries, costs of
educational materials, facility leases and school occupancy costs, computer
systems costs, bad debt expense and depreciation and amortization of property
and equipment. During 1996, the Art Institutes' faculty was comprised of
approximately 45% full-time and approximately 55% part-time employees.
25
<PAGE> 28
Information systems costs increased significantly over the last several
years as the Company installed a new integrated information network which
supports payroll and human resources, accounting, student financial services,
marketing and student admissions and employment assistance. As of June 30, 1996,
that network was installed at all Art Institutes and its integration and
implementation was substantially completed. Management believes the substantial
investment in such integrated information network has improved services to
students and will facilitate the integration of new schools into the Company's
operations.
General and administrative expense consists of marketing and student
admissions expenses and departmental costs such as executive management, finance
and accounting, legal, corporate development and other departments that do not
provide direct services to the Company's students. The Company has centralized
many of these services to gain consistency in management reporting, efficiency
in administrative effort and control of costs. All marketing and student
admissions costs are expensed in the year incurred.
Amortization of intangibles relates to the values assigned to student
contracts and applications, accreditation, contracts with colleges and
universities and goodwill which arose principally from the application of
purchase accounting to the establishment and financing of the ESOP and the
related leveraged transaction in October 1989. See Note 2 of Notes to
Consolidated Financial Statements.
ESOP expense equals the sum of the payments on the ESOP Term Loan, plus
repurchases of shares from participants in the ESOP, less the dividends paid on
the Series A Preferred Stock held by the ESOP. As of June 30, 1996, the entire
ESOP Term Loan was repaid. As a result, there will be no future ESOP expense
resulting from the repayment of such loan and, after the Offering is
consummated, from repurchases of shares. In addition, following the ESOP
Conversion, dividends will no longer be payable on the Series A Preferred Stock.
In November 1995, the Company purchased the assets of the Ray College of
Design for $1.1 million in cash and the assumption of specified liabilities. The
Company acquired accounts receivable, property and equipment and certain other
assets. The school, which is eligible to participate in Title IV Programs, has
been renamed The Illinois Institute of Art at Chicago and The Illinois Institute
of Art at Schaumburg.
In 1996, the Company established The Art Institute of Phoenix at which
classes commenced in January 1996. The approval processes for accreditation and
U.S. Department of Education certification for eligibility to participate in
Title IV Programs cannot commence until a school's first students begin classes.
The Art Institute of Phoenix initiated the accreditation process in January
1996, submitted its application to the U.S. Department of Education in June
1996, and became eligible to participate in Title IV Programs in August 1996.
The Company's policy is to defer pre-opening expenses and to amortize such
expenses in the next year. Approximately $0.4 million of pre-opening expenses
associated with The Art Institute of Phoenix was deferred in fiscal 1996.
Start-up schools and smaller acquisitions are expected to incur operating
losses during the first several quarters following their opening or purchase. As
expected, the combined operating losses of the Company's new schools in Phoenix
and Illinois totaled approximately $3.0 million in 1996.
In August 1996, the NYRS Acquisition was consummated subject to obtaining
certain regulatory approvals. The Company acquired accounts receivable, property
and equipment, certain contracts and student agreements, curricula, trade names,
goodwill and certain other assets from the owner of NYRS and one of its
affiliates. The NYRS Acquisition was accounted for as a purchase. As a result of
the change in ownership, NYRS currently is not eligible to participate in Title
IV Program funding; however, all such funding that had been committed to NYRS
students prior to the sale is still being received. During its fiscal year ended
December 31, 1995, NYRS indirectly derived approximately 48% of its net revenues
from Title IV Programs. In September 1996, the Company filed with the U.S.
Department of Education an application to reestablish the eligibility of NYRS to
participate in Title IV Programs. If the Company is not successful in obtaining
approval of that application in a timely fashion, the Company may need to
provide short-term financing to NYRS students in an aggregate amount of up to
$800,000 over approximately a two-month period. However, the Company does not
anticipate that any such short-term financing would have a significant effect on
its liquidity. The purchase price of NYRS is being held in escrow pending
recertification of NYRS by the
26
<PAGE> 29
U.S. Department of Education to participate in Title IV Programs. In the event
that recertification is denied, EMC has the right to rescind the NYRS
Acquisition.
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated the percentage
relationships of certain income statement items to net revenues.
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
-----------------------------
1994 1995 1996
----- ----- -----
<S> <C> <C> <C>
Net revenues................................................ 100.0% 100.0% 100.0%
Costs and expenses:
Educational services...................................... 68.2 66.2 66.8
General and administrative................................ 21.4 22.0 21.9
Amortization of intangibles............................... 5.4 1.5 0.7
ESOP expense.............................................. 3.9 5.4 0.9
----- ----- -----
98.8 95.0 90.4
----- ----- -----
Income before interest and taxes............................ 1.2 5.0 9.6
Interest expense, net....................................... 3.9 3.4 2.3
----- ----- -----
Income (loss) before income taxes........................... (2.7) 1.6 7.3
Provision (credit) for income taxes......................... (1.3) 0.4 2.7
----- ----- -----
Income (loss) before extraordinary item..................... (1.4) 1.2 4.6
Extraordinary item.......................................... - - 0.6
----- ----- -----
Net income (loss)........................................... (1.4)% 1.2% 4.0%
===== ===== =====
</TABLE>
YEAR ENDED JUNE 30, 1996 COMPARED WITH YEAR ENDED JUNE 30, 1995
Net Revenues
Net revenues increased by 12.7% to $147.9 million in 1996 from $131.2
million in 1995 due primarily to a 5.7% increase in average quarterly student
enrollments ($6.3 million), an average 6.0% tuition price increase at The Art
Institutes owned by EMC prior to 1996 ($7.4 million), and the addition of three
new schools ($2.0 million). The average academic year (three academic quarters)
tuition rate for a student attending classes at an Art Institute on a
recommended full schedule increased to $9,345 in 1996 from $8,820 in 1995. In
November 1995, the Ray College of Design was acquired and renamed The Illinois
Institute of Art at Chicago and The Illinois Institute of Art at Schaumburg. A
new school, The Art Institute of Phoenix, commenced classes in January 1996.
Net housing revenues increased by 7.7% to $9.2 million in 1996 from $8.6
million in 1995, primarily resulting from price increases. Revenues from the
sale of educational materials in 1996 increased by 6.5% to $6.5 million.
Refunds for fiscal year 1996 increased $0.6 million from $4.1 million in
fiscal year 1995 to $4.7 million in fiscal year 1996.
Educational Services
Educational services expense increased by $12.0 million, or 13.8%, to $98.8
million in 1996 from $86.9 million in 1995. The increase was due to $6.8 million
of incremental education expenses related to higher student enrollments at the
schools owned by EMC prior to 1996, $3.5 million of education expenses at the
three new schools and $1.7 million of additional depreciation expense resulting
from expanded capital spending for culinary arts programs and classroom
technology. Contributing to the increases at the schools owned by the Company
prior to 1996 were investments in initiatives to improve student persistence
rates and
27
<PAGE> 30
to increase graduates' starting salaries. These initiatives included additional
student remediation, instructor development and expanded employment assistance
services. The Art Institutes have implemented a system-wide remediation program
to help students overcome deficiencies in academic preparedness so they can
successfully complete their education. In addition, a $1.1 million refund of
state and local business and occupation taxes reduced educational services
expense in 1995. As a result of an administrative appeal, The Art Institute of
Seattle was exempted from the State of Washington and the City of Seattle
business and occupation taxes. Requests for refunds were filed for prior years
to the extent permitted by the statute of limitations. The taxes to which the
refunds applied had been originally recorded as educational services expense in
the years paid.
General and Administrative
General and administrative expense increased by $3.5 million, or 12.1%, to
$32.3 million in 1996 from $28.8 million in 1995 due in large measure to the
incremental increase in marketing and student admissions expenses that resulted
in higher student enrollments at the schools owned by EMC prior to 1996 and the
addition of marketing and student admissions expenses for three new schools.
Amortization of Intangibles
Amortization of intangibles decreased by $0.9 million, or 45.3%, to $1.1
million in 1996 from $1.9 million in 1995. The reduction in amortization expense
occurred because certain intangible assets resulting from the 1989 leveraged
transaction were fully amortized during 1995.
ESOP Expense
ESOP expense decreased by $5.7 million, or 80.7%, to $1.4 million in 1996
from $7.1 million in 1995 due to the repayment in 1996 of $3.6 million of ESOP
debt, as compared to the repayment in 1995 of $9.1 million of ESOP debt.
Repayments in 1996 and 1995 included voluntary prepayments of $0.4 million and
$2.1 million, respectively, on the ESOP Term Loan. As of June 30, 1996, the
entire ESOP Term Loan had been repaid. As a result there will be no future ESOP
expense resulting from the repayment of such loan.
Interest Expense
Net interest expense decreased by $1.1 million, or 25.0%, to $3.4 million
in 1996 from $4.5 million in 1995. The decrease was attributable to (i) a
reduction in the average debt balance outstanding to approximately $38.0 million
in 1996 from $45.0 million in 1995 as a result of principal payments on the ESOP
Term Loan and capitalized leases, and (ii) the retirement in 1996 of the
Subordinated Notes through borrowings under the Revolving Credit Agreement.
Borrowings under the Revolving Credit Agreement were at a weighted average
interest rate of 7.3% during 1996. The Subordinated Notes had an interest rate
of 13.25%.
Provision for Income Tax
The Company's effective tax rate increased from 24.5% in 1995 to 37.1% in
1996, which is lower than the Company's blended state and federal statutory rate
of 40.0%. The variance from the statutory rate in 1996 was due to the tax
deductibility of $1.6 million of dividends on the Series A Preferred Stock paid
to the ESOP and used for ESOP Term Loan repayment. The favorable effect of those
dividends was partly offset by $0.4 million of non-deductible goodwill
amortization and other items. In 1995, tax deductible dividends were $1.6
million which offset approximately 80% of the Company's income before taxes,
substantially reducing the Company's effective tax rate. Non-deductible goodwill
amortization in 1995 was $0.4 million. The effective tax rate increased in 1996
because the dollar amount of non-deductible goodwill amortization and deductible
ESOP dividends remained largely unchanged from 1995, whereas 1996 earnings
before taxes were $8.9 million higher than in 1995.
28
<PAGE> 31
Income Before Extraordinary Item
Income before extraordinary item increased by $5.3 million to $6.8 million
in 1996 from $1.5 million in 1995. Higher income before extraordinary item
resulted from improved operations at The Art Institutes, coupled with diminished
amortization of intangibles, lower ESOP expense and reduced net interest charges
and was partially offset by a higher provision for income taxes.
Extraordinary Item
The $25.0 million aggregate principal amount of the Subordinated Notes was
prepaid in full in October 1995. The resulting $1.5 million prepayment penalty
was classified as an extraordinary item net of the related tax benefit.
YEAR ENDED JUNE 30, 1995 COMPARED WITH YEAR ENDED JUNE 30, 1994
Net Revenues
Net revenues increased by 7.1% to $131.2 million from $122.5 million in
1994 due primarily to a 2.2% increase in average quarterly student enrollments
($1.8 million) and an average 5.5% tuition price increase at The Art Institutes
($6.5 million). The average academic year (three academic quarters) tuition rate
for a student attending classes at an Art Institute on a recommended full
schedule increased to $8,820 in 1995 from $8,360 in 1994.
Net housing revenues increased by 17.7% to $8.6 million in 1995 from $7.3
million in 1994, primarily as a result of increased student occupancy and price
increases. Revenues from the sale of educational materials increased by 5.3% to
$6.1 million in 1995 from $5.8 million in 1994.
Refunds of tuition and other charges increased $0.3 million from $3.8
million in 1994 to $4.1 million in 1995.
Educational Services
Educational services expense increased by $3.3 million, or 3.9%, to $86.9
million in 1995 from $83.6 million in 1994. The increase was due to incremental
education expenses related to higher student enrollments, greater depreciation
expense resulting from an expanded capital spending program and additional bad
debt expense caused by longer term credit extension to students and changes to
the U.S. Department of Education's refund policy.
The cost of educational services, while increasing on an annual basis,
decreased as a percentage of revenues. The reduction from 68.2% of net revenues
in 1994 to 66.2% in 1995 resulted from the combination of a $1.1 million refund
for state and local business and occupation taxes in 1995 and approximately $2.4
million of the special charge recorded in 1994 for early write-off of equipment,
various expense accruals and program termination costs.
General and Administrative
General and administrative expense increased by $2.6 million, or 10.2%, to
$28.8 million in 1995 from $26.2 million in 1994 due to incremental marketing
and student admissions expenses related to increased student enrollments and an
increase in administrative expense at EMC's corporate headquarters.
Administrative expense increased as a result of the development of corporate
infrastructure to support anticipated growth in the number of schools and the
increased cost of regulatory compliance.
Amortization of Intangibles
Amortization of intangibles decreased to $1.9 million in 1995 from $6.6
million in 1994 because many of the intangible assets resulting from the 1989
leveraged transaction were fully amortized during 1994.
ESOP Expense
ESOP expense increased by $2.3 million, or 48.9%, to $7.1 million in 1995
from $4.8 million in 1994 due to the repayment in 1995 of $9.1 million of ESOP
debt as compared to the repayment in 1994 of $7.0 million of ESOP debt. The 1995
payments included a voluntary prepayment of $2.1 million on the ESOP Term Loan.
29
<PAGE> 32
Interest Expense
Net interest expense decreased by $0.3 million, or 5.7%, to $4.5 million in
1995 from $4.8 million in 1994 due to a decline in the average debt outstanding
to approximately $45.0 million during 1995 from approximately $51.0 million
during 1994, and because of a $0.3 million year-to-year increase in interest
income. In 1995, the Company incurred additional interest expense on its
borrowings due to slightly increased interest rates that partially offset the
reduction in net interest expense from the lower average debt outstanding.
Provision (Credit) for Income Tax
The Company's effective tax rate increased from (48.6)% in 1994 to 24.5% in
1995 and varies from the Company's blended state and federal statutory tax rate
of 40.0%. The variance from the statutory rate was due, in part, to the tax
deductibility of a large portion of the dividends on the Series A Preferred
Stock paid to the ESOP and used for ESOP Term Loan repayment. The favorable
effect of those dividends is partly offset by non-deductible goodwill
amortization and other items. In 1994, the tax benefit of the dividends on the
Series A Preferred Stock did not include dividends on unallocated shares in the
ESOP, because the tax benefit of dividends paid on such Series A Preferred Stock
is required to be credited directly to EMC's retained earnings account in
accordance with Financial Accounting Standards Board Statement No. 109. In 1995,
a greater number of shares of Series A Preferred Stock held by the ESOP was
allocated to accounts of ESOP participants and the related benefit is reflected
in the provision for income taxes. In addition, the impact of the dividends on
the effective tax rate was more significant in 1995 than in 1994 because the
dividends were a relatively larger portion of income (loss) before taxes.
Net Income (Loss)
Net income increased by $3.2 million to $1.5 million in 1995 from a loss of
$1.7 million in 1994. Higher net income resulted from improved operations at the
Company's schools, lower amortization of intangibles expense and reduced net
interest charges, partially offset by higher ESOP expense and a greater
provision for income taxes.
SEASONALITY AND OTHER FACTORS AFFECTING QUARTERLY RESULTS
The Company's quarterly revenues and income fluctuate primarily as a result
of the pattern of student enrollments. The Company experiences a seasonal
increase in new enrollments in the fall (fiscal year second quarter), which is
traditionally when the largest number of new high school graduates begin
postsecondary education. Some students choose not to attend classes during
summer months, although The Art Institutes encourage year-round attendance. As a
result, total student enrollments at the Company's schools are highest in the
fall quarter and lowest in the summer months (fiscal year first quarter). The
Company's costs and expenses, however, do not fluctuate as significantly as
revenues on a quarterly basis. Historically, EMC has experienced net losses in
its fiscal first quarter ending September 30 due to lower revenues combined with
expenses incurred in preparation for the peak enrollments in the fall quarter.
The Company anticipates that this seasonal pattern will continue in the future.
30
<PAGE> 33
The following table sets forth the Company's revenues in each fiscal
quarter during the fiscal years 1994 through 1996.
QUARTERLY NET REVENUES
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1994 1995 1996
------------------- ------------------- -------------------
QUARTER ENDING AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
- -------------- -------- ------- -------- ------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
September 30..................... $ 23,739 19.4% $ 25,658 19.5% $ 28,333 19.2%
December 31...................... 36,093 29.5 37,951 28.9 42,635 28.8
March 31......................... 33,140 27.0 35,386 27.0 39,637 26.8
June 30.......................... 29,577 24.1 32,232 24.6 37,258 25.2
-------- ----- -------- ----- -------- -----
Total for the fiscal year...... $122,549 100.0% $131,227 100.0% $147,863 100.0%
======== ===== ======== ===== ======== =====
</TABLE>
LIQUIDITY AND CAPITAL RESOURCES
Liquidity
The Company has generated positive cash flow from operations over the last
three years. Cash flow from operations was $9.2 million, $24.6 million and $10.0
million for the years 1994, 1995 and 1996, respectively. During 1995, the
Company began to receive student loan receipts via electronic funds transfers
("EFT") from lenders. The introduction of EFT resulted in a one-time increase in
cash flows from operations in 1995.
The Company had $12.6 million of working capital as of June 30, 1996 as
compared to $14.9 million of working capital as of June 30, 1995. The decrease
in working capital was due primarily to an increase in capital spending.
The Company's allowance for doubtful accounts increased by $1.4 million, or
93%, to $2.9 million in 1996 from $1.5 million in 1995. This increase was the
result of the timing of accounts being written off against the reserve in 1996
as compared to 1995. The implementation of the Company's integrated, customized
information network in 1996 has allowed the Company to track accounts receivable
for longer periods prior to write-off. The allowance for doubtful accounts as of
June 30, 1995 decreased by $0.1 million, or 6%, to $1.5 million from $1.6
million as of June 30, 1994.
Debt Service
Effective October 13, 1995, the Company and its lenders amended the
Revolving Credit Agreement in order to increase the amount of the facility
thereunder to $70.0 million and to extend its term to October 13, 2000.
Borrowings under the Revolving Credit Agreement bear interest at one of three
rates set forth in the Revolving Credit Agreement at the election of the
Company. The Revolving Credit Agreement contains customary covenants that, among
other things, require the Company to maintain specified levels of consolidated
net worth and meet specified interest and leverage ratio requirements, restrict
capital expenditures by the Company, restrict the payment of dividends on the
Common Stock and restrict the incurrence of certain additional indebtedness. As
of June 30, 1996, the Company was in compliance with all covenants under the
Revolving Credit Agreement. As of June 30, 1996, the Company had $14.8 million
of additional borrowing capacity available under the Revolving Credit Agreement.
Borrowings under the Revolving Credit Agreement are used by the Company
primarily to fund its working capital needs. The pattern of cash receipts is
seasonal throughout the year. The level of accounts receivable reaches a peak
immediately after the billing of tuition and fees at the beginning of each
academic quarter. Collection of these receivables is heaviest at the start of
each academic quarter.
Borrowings under the Revolving Credit Agreement were used to prepay all of
the Subordinated Notes on October 13, 1995 in order to reduce interest expense.
The Company incurred a $1.5 million prepayment ($0.9 million after the related
income tax benefit) penalty as a result. In August 1996, the Company used
borrowings under the Revolving Credit Agreement to fund the NYRS Acquisition and
the Redemption.
31
<PAGE> 34
In June 1995, the Company made a voluntary prepayment of $2.1 million on
the ESOP Term Loan. In June 1996, the Company made another voluntary prepayment
of $0.4 million on the ESOP Term Loan, at which time it was completely repaid.
Following the consummation of the Offering, approximately $41.0 million of
the net proceeds received by the Company will be used to repay indebtedness
under the Revolving Credit Agreement, assuming that no borrowing will be made in
connection with the ESOP Conversion. See "The Transactions." Thereafter, the
Company expects to have outstanding approximately $10.0 million of indebtedness,
consisting primarily of capitalized leases. It is expected that the Company's
interest expense will be lower and will have a lesser proportionate impact on
net income in comparison to periods prior to the Offering.
Future Financing and Cash Flows
The Company believes that cash flow from operations, supplemented from time
to time by borrowings under the Revolving Credit Agreement, will provide
adequate funds for ongoing operations, planned expansion to new locations,
planned capital expenditures and debt service during the term of the Revolving
Credit Agreement.
Capital Expenditures
Capital expenditures in 1995 and 1996 have, in substantial part, resulted
from the implementation of the Company's strategic initiatives emphasizing the
addition of new schools and programs (particularly culinary programs),
investment in classroom technology and the completion of the Company's
integrated information network, as discussed in "Business--Improving Operating
Effectiveness." The Company's capital expenditures were $6.3 million, $11.6
million and $15.0 million for 1994, 1995 and 1996, respectively. The Company
anticipates increased capital spending for 1997, principally related to the
introduction and expansion of culinary programs, further investment in schools
acquired during 1996 and additional classroom technology. The Company does not
have any material commitments for any capital expenditures in 1997 or beyond.
The Company leases nearly all of its facilities. Future commitments on
existing leases will be paid from cash provided by operating activities.
REGULATION
The Company indirectly derived approximately 66% of its net revenues from
Title IV Programs in 1996. U.S. Department of Education regulations prescribe
the timing of disbursements of funds under Title IV Programs. Students must
apply for a new loan for each academic year. Loan funds are generally provided
by lenders in multiple disbursements each academic year. The first disbursement
is generally received either at least 30 days after, in the case of students
commencing a program of study, or, at the earliest, ten days before, the
commencement of the first academic quarter of a student's academic year.
Title IV Program funds received by the Company's schools in excess of the
tuition and fees owed by the relevant students at that time are, with these
students' permission, maintained and classified as restricted until they are
billed for the portion of their education program related to those funds. In
addition, all funds transferred to the Company through EFT programs are held in
a separate cash account until certain conditions are satisfied. These
restrictions have not significantly affected the Company's ability to fund daily
operations.
Regulations promulgated under the HEA require all higher education
institutions to meet an acid test ratio of at least 1:1 calculated at the end of
each fiscal year. The acid test ratio is defined as the ratio of cash (including
funds classified as restricted), cash equivalents and current accounts
receivable to total current liabilities. If an institution fails to meet the
acid test ratio, it may be deemed to be not financially responsible by the U.S.
Department of Education, which could result in a loss of its eligibility to
participate in Title IV Programs. This requirement applies to the separate
audited financial statements of each of The Art Institutes and historically has
not been applied to the Company's consolidated financial statements. The acid
test ratios for the Company's schools ranged from 1.08:1 to 3.46:1 at June 30,
1995 and from 1.13:1 to 8.82:1 at June 30, 1996.
32
<PAGE> 35
EFFECT OF INFLATION
The Company does not believe its operations have been materially affected
by inflation.
IMPACT OF NEW ACCOUNTING STANDARDS
Financial Accounting Standards Board Statement No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of"
("SFAS No. 121"), was issued in March 1995 and is effective for fiscal years
beginning after December 15, 1995. This statement will be applied prospectively
and requires that an impairment loss on a long-lived asset be recognized when
the book value of the asset exceeds its expected undiscounted cash flows. The
Company will adopt SFAS No. 121 during 1997, and adoption is not anticipated to
have a material impact on the Company's financial position or results of
operations.
Financial Accounting Standards Board Statement No. 123, "Accounting for
Stock-Based Compensation" ("SFAS No. 123"), was issued in October 1995. This
statement establishes a "fair value based method" of financial accounting and
related reporting standards for stock-based employee compensation plans. SFAS
No. 123 becomes effective in 1997 and provides for adoption in the income
statement or by disclosure in footnotes only. The Company anticipates continuing
to account for its stock option plans under Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees" as permitted by SFAS No. 123,
but will provide the new disclosure in the footnotes to its 1997 financial
statements.
33
<PAGE> 36
BUSINESS
THE COMPANY
EMC is among the largest providers of proprietary postsecondary education
in the United States based on student enrollments and revenues. Through its
operating units, The Art Institutes, NYRS, NCPT and NCPD, the Company offers
associate's and bachelor's degree programs and non-degree programs in the areas
of design, media arts, culinary arts, fashion and paralegal studies. The Company
has provided career-oriented education programs for nearly 35 years, and its
schools have graduated over 100,000 students. In the fall quarter of fiscal
1996, EMC's schools had approximately 14,000 students enrolled on a pro forma
basis, representing all 50 states and 65 countries worldwide.
The Company's main operating unit, The Art Institutes, consists of 11
schools in ten cities throughout the United States and accounted for
approximately 92% of the Company's pro forma net revenues in fiscal 1996. Art
Institute programs are designed to provide the knowledge and skills necessary
for entry-level employment in various fields, including computer animation,
multimedia, advertising design, culinary arts, graphic, interior and industrial
design, video production and commercial photography. Those programs typically
are completed in 18 to 27 months and culminate in an associate's degree. Four
Art Institutes currently offer bachelor's degree programs, and EMC expects to
continue to introduce bachelor's degree programs at schools in states in which
applicable regulations permit proprietary postsecondary institutions, such as
The Art Institutes, to offer such programs.
The Company offers a culinary arts curriculum at six Art Institutes. In
addition, in August 1996, the Company acquired NYRS, a well-known culinary arts
and restaurant management school located in New York City. NYRS offers an
associate's degree program and certificate programs. On a pro forma basis, NYRS
accounted for approximately 6% of the Company's net revenues in fiscal 1996. In
September 1996, NYRS filed an application to reestablish its eligibility to
participate in Title IV Programs with the U.S. Department of Education. Approval
of this application is the final regulatory approval needed to complete the
acquisition.
The Company offers paralegal training at NCPT in Atlanta, a leading source
of paralegals in the southeastern United States. NCPT offers certificate
programs that generally are completed in four to nine months. NCPD maintains
consulting relationships with seven colleges and universities to assist in the
development, marketing and delivery of paralegal, nurse legal consultant and
financial planner test preparation programs for recent college graduates and
working adults. In fiscal 1996, the Company derived approximately 2% of its pro
forma net revenues from NCPT and NCPD combined.
EMC's primary objective is to provide career-focused education that
maximizes employment opportunities for its students after graduation. EMC's
graduates are employed by a broad range of employers nationwide. In calendar
year 1995, approximately 87% of the graduates with Art Institute associate's
degrees who were available for employment obtained positions in fields related
to their programs of study within six months of graduation.
The Company believes that demand for postsecondary education will generally
increase due to (i) an increase of 20% in the number of new high school
graduates from approximately 2.5 million in 1994 to 3.0 million in 2004 (as
projected by the National Center for Education Statistics), (ii) the growing
interest of working adults in enhancing their marketable skills, (iii) the
income premium attributable to higher education degrees, and (iv) employers'
continuing demand for entry-level workers with appropriate technical skills.
EMC intends to capitalize on these favorable trends through continued
implementation of broad strategic initiatives undertaken in 1994. Key elements
of those initiatives and the results to date include:
- Enhancing Growth at the Company's Schools: The total number of students
attending The Art Institutes rose approximately 8% from the fall quarter
of fiscal 1993 to the fall quarter of fiscal 1995, despite little change
in the number of new high school graduates nationwide. In fiscal 1996,
The Art Institutes experienced a 23% increase over the prior year in the
number of applications from high school seniors for education programs
starting in fiscal 1996 or fiscal 1997.
34
<PAGE> 37
- Improving Student Outcomes: At The Art Institutes, the average quarterly
net persistence rate, a measure of the number of students that are
enrolled during an academic quarter and advance to the next academic
quarter, improved from 88.4% in fiscal 1994 to 90.1% for the first three
quarters of fiscal 1996. From calendar year 1993 to calendar year 1995,
the placement rate for new graduates available for employment improved
from 82.3% to 87.4% and average starting salaries rose 21% from
approximately $15,700 to $19,000.
- Opening or Acquiring Schools: Since the beginning of fiscal 1996, the
Company has opened or acquired four schools: The Illinois Institute of
Art at Chicago, The Illinois Institute of Art at Schaumburg, The Art
Institute of Phoenix and NYRS.
- Expanding Education Programs: Since the beginning of fiscal 1994, the
Company has introduced culinary arts programs at three schools (in
addition to acquiring NYRS), bringing the total number of such programs
at The Art Institutes to six, and has added education program offerings
in high growth fields such as computer animation, multimedia and video
production. The Company intends to begin offering degree programs in
interactive multimedia programming and web site development in fiscal
1997.
- Improving Operating Efficiencies: The Company has invested approximately
$9.1 million in an integrated, customized information network that
assists its managers and employees in maximizing internal efficiency. The
Company believes that this investment in information systems technology
significantly enhances its ability to integrate newly established or
acquired schools into the Company's operations.
The Company believes the experience of its management team and the
substantial equity ownership of its employees are significant factors
contributing to its success. EMC's senior management has an average of nine
years with EMC and 18 years of experience in the education industry. Upon
completion of the Offering, approximately 47% of the Common Stock (on a fully
diluted basis, but excluding any additional shares purchased by management in
the Offering) will be held by management and the ESOP.
COMPANY HISTORY
The Company was organized as a Pennsylvania corporation in 1962. The
Company's first significant acquisition was of The Art Institute of Pittsburgh
in 1970.
In 1971, Robert B. Knutson (currently the Chairman and Chief Executive
Officer) became President of the Company. At that time, EMC consisted primarily
of The Art Institute of Pittsburgh. Since 1970, the Company's net revenues have
increased from approximately $1.9 million to $147.9 million in fiscal 1996.
Between 1971 and fiscal 1985, the Company opened one school and acquired
seven others, which were reorganized and greatly expanded. In 1986, the Company
effected a leveraged transaction to permit a founding shareholder to retire. In
1989, the Company underwent a second leveraged transaction in connection with
the establishment of the ESOP. Over the ten-year period ending June 30, 1996,
the Company operated with a leveraged capital structure and generated sufficient
cash flow to repay approximately $69.0 million of indebtedness. During that same
period, the Company invested approximately $68.0 million in facilities and
equipment.
In fiscal 1994, EMC determined that certain strategic changes were required
to position it for growth over the next decade. EMC began to install a
company-wide, integrated information network and decided to substantially
increase its expenditures on classroom technology, to accelerate the pace of
culinary program expansion, to increase the rate at which new education programs
were developed, to restructure certain education programs, and to establish or
acquire schools in attractive markets. In addition, EMC implemented initiatives
with the goal of improving student persistence rates and graduates' starting
salaries.
INDUSTRY OVERVIEW
According to the National Center for Education Statistics, education is the
second largest sector of the U.S. economy, accounting for approximately 9% of
gross domestic product in 1994, or over $600 billion.
35
<PAGE> 38
EMC's schools are part of the postsecondary education market, which accounts for
approximately one-third of the total sector, or $200 billion. Of the
approximately 6,000 postsecondary schools that are eligible to participate in
Title IV Programs, approximately 500 are proprietary degree-granting
institutions such as EMC's schools. The U.S. Department of Education estimates
that by the year 2005 the number of students enrolled in higher education
institutions will increase by more than 1.5 million to over 16 million students.
The Company believes that a significant portion of the growth in the
postsecondary education market will result from an increase in the number of new
high school graduates. According to the U.S. Department of Education, the number
of new high school graduates is expected to increase by approximately 20%, from
2.5 million graduates in 1994 to 3.0 million graduates in 2004. Significant
growth is also expected to result from increased enrollment of working adults.
The U.S. Department of Education estimates that, over the next five years,
initial enrollments in postsecondary education institutions by working adults
will increase more rapidly than initial enrollments of recent high school
graduates.
The postsecondary education industry is also expected to benefit from the
public's increased recognition of the value of a postsecondary education.
According to The National Center for Education Statistics, the percentage of
recent high school graduates who continued their education after graduation
increased from 53% in 1983 to 63% in 1993. The Company believes that the income
premium associated with a postsecondary education has been a significant factor
contributing to this trend. The Census Bureau has reported that, in 1995, a
full-time male worker with an associate's degree earned an average of 37% more
per year than a comparable worker with only a high school diploma, and a
full-time male worker with a bachelor's degree earned an average of 72% more per
year than a comparable worker with only a high school diploma. In addition,
employment in technical occupations is expected to increase over the next
several years as the demand for technically skilled labor increases.
The Company believes that private degree-granting institutions, such as The
Art Institutes and NYRS, will have an advantage over their principal
competitors, the public two-year and four-year institutions, in capitalizing on
the trends in the postsecondary education market. Private degree-granting
institutions have the ability to work closely with employers to develop
education programs. Well-capitalized companies, such as EMC, should benefit from
their ability to absorb the increasing costs of regulatory compliance and
capital expenditure requirements through their economies of scale and national
marketing presence.
BUSINESS STRATEGY
EMC intends to capitalize on the trends in the postsecondary education
market, creating an opportunity for increased revenues and profitability, by (i)
enhancing growth at its current schools, (ii) improving student outcomes, (iii)
opening or acquiring schools in attractive markets, (iv) expanding its program
offerings and (v) continuing to improve operating efficiencies.
ENHANCING GROWTH AT THE COMPANY'S SCHOOLS
EMC believes that it will continue to benefit from trends relating to the
growing number of potential students, particularly new high school graduates and
working adults. EMC augmented its efforts to recruit high school students by
enlarging its high school admissions staff by over 20% in fiscal 1996 and by
increasing the number of visits to high schools to approximately 6,900 in fiscal
1996 (an increase of approximately 15% over fiscal 1995). The Company believes
that, due in part to these efforts, applications from high school seniors in
fiscal 1996 (for education programs starting in fiscal 1996 or fiscal 1997) were
23% greater than in fiscal 1995. The Company also believes it can penetrate the
growing working adult market by introducing and augmenting evening and weekend
degree programs. Following the first introduction of such programs at The Art
Institute of Dallas in fiscal 1993, substantially all of The Art Institutes
currently offer evening and weekend degree programs. The total number of
students participating in such programs at The Art Institutes increased to
approximately 1,000 students in the spring quarter of fiscal 1996 from 410
students in the spring quarter of fiscal 1995.
In addition, the Company actively seeks international students for The Art
Institutes. The Company employs both admissions personnel with international
experience and independent recruiters abroad. Much of the Company's success in
recruiting international students is based on referrals. In fiscal 1996, over
65% of
36
<PAGE> 39
foreign student applicants learned about The Art Institutes from friends,
relatives, current students and alumni. To accommodate the special needs of
international students, staff members are assigned to act as international
student advisors. Although international students currently constitute less than
5% of the total enrollments at The Art Institutes, new international student
enrollments in fiscal 1996 were 26% greater than in fiscal 1995.
IMPROVING STUDENT OUTCOMES
EMC intends to continue to improve student persistence and graduate
starting salaries in order to enhance the reputation of its schools and their
education programs and increase student enrollments. Measures implemented by the
Company include higher admissions standards, more comprehensive programs to
assist new students in adjusting to college life, academic placement testing,
remediation courses, improved faculty training and administrative resources
dedicated to placement assistance. The Art Institutes' average net quarterly
persistence rate, which measures the number of students that are enrolled during
an academic quarter and advance to the next academic quarter, increased from
88.4% in fiscal 1994 to 89.0% in fiscal 1995 to 90.1% for the first three
quarters of fiscal 1996. From calendar year 1993 to calendar year 1995, The Art
Institutes' placement rate for new graduates available for employment improved
from 82.3% to 87.4% and average starting salaries rose 21% from approximately
$15,700 to $19,000.
TARGETING EXPANSION OPPORTUNITIES IN A FRAGMENTED MARKET
To further its national presence and to take advantage of the highly
fragmented postsecondary education market, EMC plans to establish new schools
and to acquire existing schools in favorable locations. The Company analyzes a
new market for enrollment potential, positive long-term demographic trends, the
concentration of likely employers, the level of competition, facility costs, the
availability of management talent and the regulatory approval process.
Establishing New Schools. New schools, such as The Art Institute of
Phoenix which the Company opened in fiscal 1996, will be established primarily
as Art Institutes, allowing the Company to use its accumulated knowledge and
experience in Art Institute operations. In recent years, the Company has
developed a financial and operational model to analyze prospective start-up
investments, which takes into account, among other things, enrollment
projections, pre-opening expenditures, the marketing expenses necessary to build
interest in a school and a risk/return profile.
Acquiring Existing Schools. The Company also believes that significant
opportunities exist for growth through acquisitions. In particular, many smaller
institutions have limited resources to manage the increasingly complex
regulatory environment or to fund the high costs of developing the new programs
required to meet the changing demands of the employment market. The Company's
acquisition focus will be on schools that (i) can be integrated efficiently into
its existing operations, (ii) will benefit from EMC's expertise and scale in
marketing and administration, and (iii) possess a strong, established
reputation. In November 1995, the Company acquired the Ray College of Design
(renamed The Illinois Institute of Art at Chicago and The Illinois Institute of
Art at Schaumburg). In August 1996, the Company acquired (subject to obtaining
certain regulatory approvals) NYRS, a well-known culinary arts and restaurant
management school located in New York City.
EXPANDING EDUCATION PROGRAMS
EMC currently offers education programs in a variety of fields and
continually seeks to optimize its portfolio of programs to meet both the needs
of its students and the employment market. The Company believes that developing
programs that balance the opportunities in the job market and the interests of
students will increase enrollment and expand the Company's revenue base. Within
two years of its development and introduction, the Company's computer animation
curriculum had a fiscal fall 1996 enrollment of 1,700 students and generated
tuition revenues during fiscal 1996 of approximately $18.7 million. In addition
to the NYRS Acquisition, the Company has introduced culinary arts programs at
six Art Institutes and plans to start one additional program in fiscal 1997.
37
<PAGE> 40
The Company also offers bachelor's degree programs in several of its fields
of study which are designed to appeal to students seeking enhanced career
preparation and credentials. Bachelor's degree programs benefit the Company by
providing a longer revenue stream than two-year associate's degree programs. The
Company will seek to introduce additional bachelor's degree programs at schools
in states in which applicable regulations permit proprietary postsecondary
institutions, such as The Art Institutes, to offer such programs. For fiscal
1997, the Company intends to introduce bachelor's degree programs in the areas
of advertising design, computer animation, graphic design, industrial design and
interactive multimedia programming. See "--The Business of Education -- Programs
of Study."
IMPROVING OPERATING EFFICIENCIES
During the last three years, EMC has centralized many of its administrative
functions to permit the staff at its schools to devote more of their efforts to
attracting new students and promoting student success. Centralized
administrative functions include: accounting, marketing, finance, real estate,
student financial aid, curricula research and development, purchasing, human
resource management, legal, regulatory and legislative affairs, information
systems and technology support services. The Company believes that this
centralization has contributed to operating efficiencies and has positioned the
Company to control general and administrative costs more effectively during its
planned expansion.
The Company has invested approximately $9.1 million and devoted substantial
resources to set-up an integrated, customized information network designed to
assist Company personnel in maximizing internal efficiency. The Company believes
that this system has improved its ability to recruit new students, administer
student financial aid, prepare and track student academic schedules, monitor
part-time and full-time employment opportunities for its students and graduates,
perform general and student accounting and manage human resources. The Company
believes that its investment in technology also facilitates the integration of
acquisitions and newly established schools into the Company's operations.
THE BUSINESS OF EDUCATION
EMC's primary mission is to maximize student success by providing students
with the education necessary to meet employers' current and anticipated needs.
To achieve this objective, the Company focuses on (i) marketing to a broad
universe of potential students, (ii) admitting students who possess the relevant
interests and capabilities, (iii) providing students with courses taught by
industry professionals, and (iv) assisting students in job placement upon
graduation.
STUDENT RECRUITMENT AND MARKETING
EMC seeks to attract students with both the motivation and ability to
complete the programs offered by its schools. To generate interest, the Company
engages in a broad range of activities to inform potential students and their
parents about its schools and programs of study.
The general reputation of The Art Institutes and referrals from current
students, alumni and employers are the largest source of new students. The
Company also employs marketing tools such as television and print media
advertising, high school visits and recruitment events, and utilizes its
internal advertising agency to create publications, television commercials,
videos and other promotional materials for the Company's schools. The Company
estimates that in fiscal 1996 referrals accounted for 37% of student enrollments
at The Art Institutes, television advertising accounted for 23%, high school
recruitment programs accounted for 18%, print media accounted for 12%,
international marketing accounted for 3% and the remaining 7% was classified as
miscellaneous. The goal of the Company's recruitment efforts is to increase
awareness of the Company's schools among potential applicants in a
cost-effective manner.
The Company carefully monitors the effectiveness of its marketing efforts.
In fiscal 1996, The Art Institutes' marketing efforts generated inquiries from
approximately 179,000 qualified prospective students. The Art Institutes'
inquiry-to-application conversion ratio increased from 6.6% in fiscal 1992 to
9.0% in fiscal 1996, and the applicant-to-new student ratio increased from 55.8%
in fiscal 1992 to 66.7% in fiscal 1996.
38
<PAGE> 41
NYRS relies primarily on local television and referrals as its primary
marketing tools. NCPT uses direct mail, local newspaper and print media and
advertisements in related national trade periodicals to generate interest.
Referrals, especially from employers, are an important source of new students
for NCPT. In addition, NCPT conducts an extensive recruitment program at
colleges, featuring college visits, participation in college career fairs,
posters and advertising in college newspapers.
Each Art Institute employs a director of admissions, who reports to the
president of that Art Institute, and assistant and associate directors of
admissions. At each Art Institute, one or more of the assistant/associate
directors is responsible for a different potential applicant pool. Several
schools have assistant/associate directors who, together with independent
representatives, recruit international students. Art Institutes that have
culinary arts programs have assistant/associate directors who recruit solely for
such programs. Other assistant/associate directors focus exclusively on high
school seniors. Recruitment policies and procedures are coordinated centrally,
but are implemented at each school individually.
To capitalize on the growing number of new high school graduates, the
Company employs approximately 50 high school representatives and utilizes a
variety of strategies. In fiscal 1996, EMC high school representatives made
presentations at approximately 6,900 high schools. During high school visits,
student artwork, videos and a multimedia presentation are shown to students and
educators to promote The Art Institutes. Each Art Institute also conducts
college preview seminars at which prospective students can meet with a
representative, view artwork and videos, and receive enrollment information.
Summer teenager and teacher workshops are held to inform students and educators
of the education programs offered by The Art Institutes. The Company's marketing
efforts to reach young adults and working adults who may be attracted to evening
and weekend degree programs are conducted through local newspaper advertising,
direct mail campaigns and broadcast advertising.
STUDENT ADMISSION AND RETENTION
Each applicant for admission to an Art Institute is required to have a high
school diploma or a recognized equivalent, submit a written essay and take a
standardized academic diagnostic test used by many postsecondary institutions.
Prospective students are interviewed to assess their qualifications, their
interest in the degree programs offered by the applicable Art Institute and
their commitment to their education. In addition, the curricula, student
services, education cost, available financial resources and student housing are
reviewed during interviews, and tours of the facilities are conducted for
prospective students.
At each Art Institute, student admissions is overseen by a committee,
comprised principally of members of the faculty, that reviews each application
and makes admissions decisions. Art Institute students are of varying ages and
backgrounds. For fiscal 1996, approximately 29% of the entering students
matriculated directly from high school, approximately 23% were between the ages
of 19 and 21, approximately 28% were 22 to 29 years of age and approximately 20%
were 30 years old or older.
The Company recognizes that the ability to retain students until graduation
is an important indicator of the success of its schools and that early academic
intervention is crucial to improve student persistence and completion rates. As
with other postsecondary institutions, many of the Company's students fail to
complete their programs for a variety of personal, financial or academic
reasons. To minimize the risk of student withdrawals, each Art Institute devotes
staff resources to advise students regarding academic and financial matters,
part-time employment and housing. Tutoring is encouraged for students
experiencing academic difficulties. The average student-to-faculty ratio at the
Company's schools was approximately 18:1 during fiscal 1996.
At The Art Institutes, the average net quarterly persistence rate, which
measures the number of students that are enrolled during an academic quarter and
advance to the next academic quarter, improved from 88.4% in fiscal 1994 to
90.1% for the first three quarters of fiscal 1996. The Company believes that it
has been able to improve its average net quarterly persistence rate, in part,
due to its investment in academic programs, student academic testing and
placement, remediation programs and faculty training initiatives, the increased
availability of supplemental student financing and orientation and socialization
programs designed to provide transition assistance to incoming students.
39
<PAGE> 42
The Company's schools bill students for their tuition and other
institutional charges by the term of instruction, typically an academic quarter.
Each school's refund policies must meet the requirements of the U.S. Department
of Education and such school's state and accrediting agencies. Generally, if a
student ceases attendance during the first 60% of his or her first term, the
applicable school will refund institutional charges based on the number of weeks
remaining in that term. After a student has attended 60% of that term, the
school will retain 100% of the institutional charges. After a student's first
term, the school refunds institutional charges based on the number of weeks
attended in the quarter in which the student withdrew. Generally, after six
weeks of a term, the school will retain 100% of the institutional charges for
that academic quarter.
PROGRAMS OF STUDY
EMC's degree programs are designed to provide career-oriented education to
students. The Company believes that the educational needs of students are served
through curricula and a teaching/learning model that support the development of
problem-solving, interpersonal and team skills, as well as technical and
professional skills. The Art Institutes attempt to serve students through
education provided by industry-experienced faculty, a low student-to-faculty
ratio and an interactive learning methodology. Classes at The Art Institutes are
scheduled throughout the year with quarterly start dates for the convenience of
students. Classes at NYRS begin monthly and classes at NCPT begin three times
annually.
The development of new education programs at any postsecondary institution
demands a substantial commitment of human resources and capital. Most new
programs at The Art Institutes are currently approved on a system-wide basis and
are made available to each of The Art Institutes for implementation as
determined by that school's administration and its Board of Trustees, where
applicable. Faculty, employment assistance specialists, curricula advisory
boards, industry experts, industry literature and employers are the most common
sources for new program offerings. Approximately 425 employers are represented
on local curricula advisory boards for The Art Institutes. Generally, proposed
education programs are referred to a series of system-wide administrative bodies
that decide whether to proceed with development of those programs. As part of
such process, an independent contractor, or internal analyst where appropriate,
may be retained to develop and compile data for the purpose of identifying both
potential student interest in a program and the skills required of a graduate
upon program completion. Such research is then used to produce a curriculum
model for final review. The goals of the curriculum development process are to
provide new program opportunities and to revise existing curricula to be
consistent with changing industry needs.
The Art Institutes offer the following degree programs, among others. Not
all programs are offered at each Art Institute.
<TABLE>
<S> <C>
THE SCHOOL OF DESIGN THE SCHOOL OF MEDIA ARTS
Associate's Degree Programs Associate's Degree Programs
Computer Animation Multimedia
Graphic Design Photography
Interior Design Video Production
Industrial Design Technology Web Development*
Bachelor's Degree Programs Bachelor's Degree Programs
Advertising Design* Interactive Multimedia Programming*
Computer Animation*
Graphic Design*
Interior Design
Industrial Design*
THE SCHOOL OF CULINARY AND HOSPITALITY ARTS THE SCHOOL OF FASHION
Associate's Degree Programs Associate's Degree Programs
Culinary Arts Fashion Design
Travel and Tourism Fashion Marketing
</TABLE>
- ---------------
* New program for fiscal 1997.
40
<PAGE> 43
Approximately 5% of The Art Institutes' average quarterly student
enrollments in fiscal 1996 was in specialized diploma programs. Academic credits
from nearly all of the specialized diploma programs are fully transferable into
associate's and bachelor's degree programs at The Art Institutes. Diploma
programs are designed for working adults who seek to supplement their education
or are interested in enhancing their marketable skills.
The Company expects to continue to add additional bachelor's degree
programs at schools in states in which applicable regulations permit proprietary
postsecondary institutions, such as The Art Institutes, to offer such programs.
In Pennsylvania, where there are two Art Institutes, the State Board of
Education has declined to authorize proprietary postsecondary institutions, such
as the Company's schools, to offer bachelor's degree programs. For several other
Art Institutes, the Company has determined not to offer such programs at this
time because of possible interference with the current accreditation process for
those schools. See "--Accreditation."
GRADUATE EMPLOYMENT
The Company believes that employment of its graduates in occupations
related to their fields of study is critical to the ability of its schools to
continue to recruit students successfully. Based on information received from
graduating students and employers, the Company believes that students graduating
from The Art Institutes during the five fiscal years ended June 30, 1995
obtained employment in fields related to their programs of study as follows:
<TABLE>
<CAPTION>
NUMBER OF PERCENT OF AVAILABLE GRADUATES
AVAILABLE WHO OBTAINED EMPLOYMENT
GRADUATING CLASSES (CALENDAR YEAR) GRADUATES(1) RELATED TO PROGRAM OF STUDY(2)
- ---------------------------------- ------------ ---------------------------------
<S> <C> <C>
1995.............................................. 3,734 87.4%
1994.............................................. 3,495 86.4
1993.............................................. 3,585 82.3
1992.............................................. 3,491 81.4
1991.............................................. 3,488 84.1
</TABLE>
- ---------------
(1) The term "Available Graduates" refers to all graduates except those pursuing
further education, that are deceased, in active military service, with
medical conditions that prevent such graduates from working, or who are
international students no longer residing in the United States.
(2) For calendar years 1995 and 1994, the information presented reflects
employment in fields related to graduates' programs of study within six
months after graduation. Prior to calendar year 1994, the Company tracked
graduate employment data based on employment rates within nine months after
graduation.
For calendar year 1995, the approximate average starting salaries of
graduates of The Art Institutes with associate's degrees were as follows: The
School of Culinary and Hospitality Arts -- $20,257; The School of
Design -- $20,308; The School of Fashion -- $16,881; and The School of Media
Arts -- $16,465.
Each Art Institute offers career-planning services to all graduating
students through its employment assistance department. Specific career advice is
provided during the last two quarters of a student's education. Interviewing
techniques and resume-writing skills are developed, and students receive
portfolio counseling where appropriate. The Art Institutes maintain contact with
approximately 38,000 employers nationwide. Employment assistance advisors
educate employers about the programs at The Art Institutes and the caliber of
their graduates. Employment assistance advisors participate in professional
organizations, trade shows and community events to keep apprised of industry
trends and maintain relationships with key employers. The Company believes that
the ability of employment assistance advisors to generate job leads and match
employers' needs with graduates' skills and the active role of graduates in
their own job searches are major reasons for the percentage of Art Institute
graduates employed in their fields throughout the country.
Employers of Art Institute graduates include numerous small and
medium-sized companies (such as radio and television stations), as well as
better-known larger companies. The following companies are representative of the
larger companies that employ Art Institute graduates: American Greetings
Corporation, Blockbuster Entertainment Group, The Boeing Company, Eddie Bauer,
Inc., Ethan Allen Interiors Inc.,
41
<PAGE> 44
Hallmark Cards, Inc., Humongous Entertainment, Inc., J. C. Penney Company, Inc.,
The May Department Stores Company, LucasArts Entertainment Company, Marriott
International, Inc., Microsoft Corporation, The Neiman Marcus Group, Inc.,
Nordstrom, Inc., Sierra On-Line, Inc., Sun Sportswear, Inc., Take2 Interactive
Software, Inc., Time Warner Inc., Turner Broadcasting System, Inc., USAir Group,
Inc., and The Walt Disney Company.
SCHOOLS
The following table shows the location of each of EMC's schools, the name
under which it operates, the date of its establishment, the date EMC opened or
acquired it, and the number of students enrolled as of the beginning of the
second quarter of fiscal 1996.
<TABLE>
<CAPTION>
CALENDAR YEAR FISCAL YEAR EMC
SCHOOL LOCATION ESTABLISHED ACQUIRED/OPENED ENROLLMENT(1)
- ------ -------- --------------- ------------------ -------------
<S> <C> <C> <C> <C>
The Art Institute of Atlanta............ Atlanta, GA 1949 1971 1,412
The Art Institute of Dallas............. Dallas, TX 1964 1985 1,204
The Art Institute of Fort Lauderdale.... Fort Lauderdale, FL 1968 1974 1,923
The Art Institute of Houston............ Houston, TX 1974 1979 1,112
The Art Institute of Philadelphia....... Philadelphia, PA 1971 1980 1,728
The Art Institute of Phoenix............ Phoenix, AZ 1995 1996 -
The Art Institute of Pittsburgh......... Pittsburgh, PA 1921 1970 2,221
The Art Institute of Seattle............ Seattle, WA 1946 1982 1,963
The Colorado Institute of Art........... Denver, CO 1952 1976 1,518
The Illinois Institute of Art at
Chicago............................... Chicago, IL 1916 1996 -
The Illinois Institute of Art at
Schaumburg............................ Schaumburg, IL 1983 1996 -
National Center for Paralegal
Training.............................. Atlanta, GA 1973 1973 326
New York Restaurant School.............. New York, NY 1980 1997 -
</TABLE>
- ---------------
(1) Enrollments are as of October 1, 1995 (i.e., the start of the second quarter
of fiscal 1996), prior to the acquisitions of The Illinois Institutes of Art
and NYRS and prior to the start-up of The Art Institute of Phoenix.
GOVERNANCE OF THE ART INSTITUTES
EMC believes that the governance structure for The Art Institutes differs
from governance structures at other proprietary school systems and possesses
several advantages. EMC's three-tier structure is modeled on the one used by
many state college and university systems. One of the advantages of this
structure is to permit each of EMC's schools to be recognized by regulatory
authorities and accrediting agencies on an individual basis, thereby enabling
the school to be accredited in its geographic region.
The Board of Directors of AII approves the annual and long-range operating
plans of The Art Institutes, including their annual budgets. The AII Board of
Directors also appoints the members of the AII System Coordinating Board, the
primary focus of which is AII system-wide education quality. The AII System
Coordinating Board coordinates education research, development and planning. It
also communicates with external governmental and corporate entities on behalf of
AII, approves new education programs, reviews existing programs and assists The
Art Institutes in developing policies and procedures.
At most of The Art Institutes, a Board of Trustees is vested with the
management of the school's business and affairs. Thus, each such Art Institute
puts its own imprint on the academic programs it offers, consistent with
applicable state laws, regulations and licensure requirements and accreditation
standards, while maintaining compatibility among The Art Institutes. Each Board
of Trustees is empowered to select the president and adopt institutional
policies and procedures to achieve the mission of its Art Institute.
In addition, in calendar 1994, AII organized an International Advisory
Board (the "IAB"). The IAB is comprised of renowned artists, designers, chefs
and entertainment professionals who provide advice and support to AII. Members
of the IAB also review curricula as requested and provide other services as
agreed upon by the IAB members.
42
<PAGE> 45
TECHNOLOGY
EMC is committed to providing its students access to the technology
necessary for developing the skills required by their education programs. To
help fulfill this commitment, at June 30, 1996, The Art Institutes had
approximately 1,650 desktop computers with applicable software in classroom
laboratories, largely operating on a seven-day per week basis. Each Art
Institute monitors the utilization of these classroom laboratories to ensure
that students have sufficient and appropriate equipment and software. Animation
students use powerful desktop and workstation computer technologies to create,
animate, color and render two-dimensional and three-dimensional projects.
Multimedia students integrate digital audio, screen-layout and motion content
into their productions. Design students make significant use of technologies for
computer-aided design and layout, photo composition and digital prepress
applications. Video production students use computer technologies for
programming schedules, digital non-linear editing and special effects.
Photography students utilize computers to translate traditional silver-based
images into digital forms, where composition, perspective, sharpness and color
can be manipulated. Interior and industrial design students learn to use
computer-aided drafting and visualization technology and equipment.
The Art Institutes have implemented a process to systematize the
specification and acquisition of equipment, computer hardware and software based
upon present and proposed curricula. Through its director of technology and a
technology committee comprised of key faculty and technology staff, each Art
Institute researches and monitors changing market and technological
requirements. These efforts, conducted in each school's market area and
coordinated on a national basis, are used to develop a system-wide, unified
strategy for the purchase and implementation of classroom technology.
MANAGEMENT AND EMPLOYEES
EMC is led by a senior management team possessing an average of more than
18 years of experience in the education industry and nine years with the
Company. A substantial majority of the management team has an ownership interest
in the Company through direct holdings, participation in the ESOP or both. As of
June 30, 1996, EMC had 1,328 full-time and 536 part-time staff and faculty. The
staff and faculty are experienced in assessing the needs of the employment
markets and designing and updating education programs to prepare students for
employment opportunities. Many faculty members are or have been successful
professionals in their respective fields.
NATIONAL CENTER FOR PARALEGAL TRAINING
NCPT is one of the leading sources of paralegals in the southeastern United
States. NCPT offers certificate programs in paralegal studies to recent college
graduates, employer-sponsored students and adults interested in changing
careers. Programs offered by NCPT include: business transactions, estates,
trusts and wills, litigation, real estate and mortgages, employee benefit plans
and general practice. NCPT also offers a certificate program in nurse legal
consulting. NCPT paralegal graduates are employed as paralegals in law firms and
corporations. Nurse legal consultants typically are employed on a project basis
and are trained to be independent contractors. NCPT had a total fall fiscal 1996
enrollment of 326 students.
NATIONAL CENTER FOR PROFESSIONAL DEVELOPMENT
NCPD maintains consulting relationships with seven colleges and
universities. NCPD offers a wide range of services to its college and university
clients, including assistance with curriculum development, the formulation and
execution of marketing strategies for the program offerings, training for
admissions staff and program directors, preparation of annual program budgets,
establishment of instructor evaluation guidelines and development of strategies
for employment assistance and consultation on other academic issues as requested
by a client institution. Certificate programs, developed by NCPD and offered by
its client institutions, are paralegal studies, nurse legal consultant training
and financial planner test preparation. In the fall of fiscal 1996, NCPD client
institutions had 1,263 students enrolled in these programs.
43
<PAGE> 46
COMPETITION
The postsecondary education market is highly competitive. The Art
Institutes compete with traditional public and private two-year and four-year
colleges and universities and other proprietary schools. Certain public and
private colleges and universities may offer programs similar to those of The Art
Institutes. Public institutions are often able to charge lower tuition than The
Art Institutes due in part to government subsidies, government and foundation
grants, tax-deductible contributions and other financial sources not available
to proprietary schools. However, tuition at private non-profit institutions is,
on average, higher than The Art Institutes' tuition.
EMC believes its students are well served by its student-centered education
environment, career-oriented curricula developed with employer input, the
effectiveness of its employment assistance activities and its national
reputation and market presence. The Company believes that its students also
should benefit from its investments in technology, including modern facilities
with well-equipped classrooms, programs that permit attendance year-round
thereby facilitating early graduation, and the Company's commitment to selecting
faculty with appropriate academic credentials and relevant employment
experience. The competitive strengths of EMC's schools also include the ability
to address evolving regulatory and accreditation requirements.
FACILITIES
EMC's schools are located in major metropolitan areas in nine states.
Typically, the schools occupy an entire building or several floors or portions
of floors in a building. The Company and its subsidiaries lease all of their
facilities, except in Denver where one building with 44,495 square feet is owned
by the Company. Such leases currently have remaining terms ranging from less
than one year to 18 years and typically include options for renewal. Most school
leases are guaranteed by EMC. In fiscal 1996, the Company and its subsidiaries
paid approximately $10.5 million in rent for educational and administrative
facilities.
New leases entered into for schools typically are for ten years to 15
years, with two to four five-year renewal options. Currently, the Company
expects to spend $40 to $50 per square foot, in addition to any allowance
provided by the landlord, to make improvements necessary for the facility to
meet the Company's operating standards. For new or rapidly growing schools, a
lease typically provides for expansion rights within a building in order to
accommodate increases in student enrollment.
The majority of schools lease facilities for student parking and housing.
These arrangements generally are intended to assist only a limited number of a
school's students, are designed to be flexible, are for terms of one to five
years and usually do not involve an EMC guarantee. Annual rent for
school-sponsored housing arrangements ranges from approximately $80,000 to $1.2
million per school, depending on the number of housing units and local market
conditions.
Most of the leases of the Company and its subsidiaries that address
environmental issues provide that (i) the landlord is responsible for compliance
with environmental laws with respect to conditions in existence prior to the
relevant school's use or occupancy, and (ii) the school generally is responsible
for any environmental conditions caused by such school's occupancy. The Company
has no knowledge of any environmental conditions for which it could be liable at
any school location.
44
<PAGE> 47
The following table sets forth certain information as of September 30, 1996
with respect to the principal properties leased by the Company and its
subsidiaries:
<TABLE>
<CAPTION>
LOCATION LOCATION
(CITY/STATE) SQUARE FEET (CITY/STATE) SQUARE FEET
- ------------ ----------- ------------- -----------
<S> <C> <C> <C>
Phoenix, AZ 53,500 New York, NY 30,500
Denver, CO 59,755 Philadelphia, PA(4) 80,000
Ft. Lauderdale, FL(1) 118,500 Pittsburgh, PA 25,985
Atlanta, GA(2) 88,250 Pittsburgh, PA(5) 126,500
Atlanta, GA 14,570 Dallas, TX(6) 75,250
Chicago, IL 24,500 Houston, TX 79,345
Schaumburg, IL(3) 17,000 Seattle, WA 114,750
</TABLE>
- ---------------
(1) This property is owned in part by a limited partnership that includes one
current member of EMC's management who is also a director among its limited
partners. See "Certain Transactions."
(2) This lease permits the landlord to cancel the lease's five-year renewal
option with respect to a portion of this property in 1997. If the landlord
exercises this cancellation right, the lease will expire in the year 1999.
(3) This lease expires in the year 1997 with no renewal option.
(4) This property is owned indirectly by a limited partnership that includes one
current member of EMC's management who is also a director and another
current director of EMC among its limited partners. See "Certain
Transactions."
(5) This lease expires in the year 2000 with no renewal option.
(6) This lease expires in the year 1999 with no renewal option.
ACCREDITATION
Accreditation is a process through which an institution submits itself to
qualitative review by an organization of peer institutions. Accrediting agencies
primarily examine the academic quality of the instructional programs of an
institution, and a grant of accreditation is generally viewed as certification
that an institution's programs meet generally accepted academic standards.
Accrediting agencies also review the administrative and financial operations of
the institutions they accredit to ensure that each institution has the resources
to perform its educational mission.
Pursuant to provisions of the HEA, the U.S. Department of Education relies
on accrediting agencies to determine whether institutions' educational programs
qualify them to participate in Title IV Programs. The HEA specifies certain
standards that all recognized accrediting agencies must adopt in connection with
their review of postsecondary institutions. Accrediting agencies that meet U.S.
Department of Education standards are recognized as reliable arbiters of
educational quality. All of EMC's schools are accredited by one or more
accrediting agencies recognized by the U.S. Department of Education. Four of the
Company's schools are either accredited by, or are candidates for accreditation
with, one of the six regional accrediting agencies that accredit virtually all
of the public and private non-profit colleges and universities in the United
States.
45
<PAGE> 48
The accrediting agencies for each of the Company's schools are set forth in
the following table (for schools accredited by more than one recognized
accrediting agency, the primary accrediting agency is listed first):
<TABLE>
<CAPTION>
SCHOOL ACCREDITING AGENCY
- ------ ------------------
<S> <C>
The Art Institute of Atlanta Commission on Colleges of the Southern
Association of Colleges and Schools
("COC of SACS")
The Art Institute of Dallas Accrediting Commission of Career Schools and
Colleges of Technology ("ACCSCT")
COC of SACS (Candidate)
The Art Institute of Fort Lauderdale ACCSCT
The Art Institute of Houston ACCSCT
COC of SACS (Candidate)
The Art Institute of Philadelphia ACCSCT
The Art Institute of Phoenix ACCSCT
The Art Institute of Pittsburgh ACCSCT
The Art Institute of Seattle ACCSCT
Commission on Colleges of the Northwest
Association of Schools and Colleges
(Candidate)
The Colorado Institute of Art ACCSCT
The Illinois Institute of Art at Chicago ACCSCT
The Illinois Institute of Art at Schaumburg ACCSCT
National Center for Paralegal Training Accrediting Council for Independent Colleges
(NCPT, Inc.) and Schools
New York Restaurant School ACCSCT
New York State Board of Regents
</TABLE>
The HEA requires each recognized accrediting agency to submit to a periodic
review of its procedures and practices by the U.S. Department of Education as a
condition of its continued recognition. Each of the accrediting agencies listed
above has been reviewed within the past 18 months and has had its recognition
extended, except for the Commission on Colleges of the Northwest Association of
Schools and Colleges, which is scheduled for review in 1997.
An accrediting agency may place an institution on "reporting" status in
order to monitor one or more specified areas of a school's performance. An
institution placed on reporting status is required to report periodically to its
accrediting agency on that school's performance in the specified areas. While on
reporting status, an institution may not open and commence teaching at new
locations without first receiving a waiver from its accrediting agency. Two of
the Company's schools, The Art Institute of Dallas and The Art Institute of
Houston, which accounted for approximately 8.6% and 7.9%, respectively, of the
Company's net revenues in fiscal 1996, have been placed on reporting status by
their accrediting agency, based on that accrediting agency's concern about those
schools' reported student completion rates for certain programs. The Art
Institute of Philadelphia, which accounted for approximately 12.4% of the
Company's net revenues in fiscal 1996, has been placed on reporting status by
the same accrediting agency based on that accrediting agency's concern about
that school's overall student completion rate. The accrediting agency's
standards define a program's completion rate as the percentage of the students
who started that program during a twelve-month period and who have either
graduated from that program within a period of time equal to 150% of that
program's length or withdrawn from that program during the same period in order
to accept full-time employment in the occupation or job category for which the
program was offered. Because that calculation can only be performed after a
student's scheduled completion date, it does not provide a timely basis for a
school to affect student outcomes. For that reason, the Company uses the net
quarterly persistence rate as a method to track the retention rate of students.
Such rate is equal to the number of students in a program at the beginning of an
academic quarter, including any formerly withdrawn students who restarted the
program
46
<PAGE> 49
during the prior academic quarter, divided by the number of students enrolled in
that program at the beginning of that prior academic quarter.
Each of the three schools on reporting status has filed completion and
placement reports as required by the accrediting agency, using the accrediting
agency's definition of student completion rate. Although the accrediting agency
has acknowledged that there has been some improvement with respect to the
completion rates of some programs at the schools, and although for two of the
schools the total number of students enrolled in the programs being monitored is
only a small portion of those schools' total enrollments, the accrediting agency
has continued each of the three institutions on reporting status based on its
concern about some of the reported completion rates. The Company plans to
request that the accrediting agency remove The Art Institute of Dallas and The
Art Institute of Houston from reporting status in early 1997 based on their
improved student completion rates. The Art Institute of Philadelphia, which was
placed on reporting status in August 1995, will likely remain on reporting
status until at least late 1997. EMC's expansion plans do not depend on any of
those schools opening additional locations while on reporting status with the
applicable accrediting agency. See "Risk Factors -- Potential Adverse Effects of
Regulation; Impairment of Federal Funding -- Accreditation."
STUDENT FINANCIAL ASSISTANCE
As is the case at most other postsecondary institutions, many students
enrolled at one of EMC's schools must rely, at least in part, on financial
assistance to pay the cost of their education. The largest source of such
support is the federal programs of student financial assistance under Title IV
of the HEA. Additional sources of funds include other federal grant programs,
state grant and loan programs, private loan programs and institutional grants
and scholarships.
To provide students access to financial assistance resources available
through Title IV Programs, a school must be (i) authorized to offer its programs
of instruction by the relevant agency of the state in which it is located, (ii)
accredited by an accrediting agency recognized by the U.S. Department of
Education, and (iii) certified as an eligible institution by the U.S. Department
of Education. In addition, that school must ensure that Title IV Program funds
are properly accounted for and disbursed in the correct amounts to eligible
students. See "Risk Factors -- Potential Adverse Effects of Regulation;
Impairment of Federal Funding."
Under the HEA and its implementing regulations, each of the Company's
schools that participates in Title IV Programs must comply with certain
standards on an institutional basis. For purposes of these standards, the
regulations define an institution as a main campus and its additional locations
(formerly called branch campuses), if any. Under this definition, each of the
Company's schools is a separate institution, except for The Art Institute of
Phoenix, which is an additional location of The Colorado Institute of Art, and
The Illinois Institute of Art at Schaumburg, which is an additional location of
The Illinois Institute of Art at Chicago.
All Art Institutes participate in Title IV Programs. NCPT has not yet
participated in Title IV Programs, but plans to apply for eligibility to
participate before the end of the 1996 calendar year. Due to its recent
acquisition by EMC, NYRS is not currently participating in such programs. NYRS
filed an application with the U.S. Department of Education in September 1996 to
reestablish its eligibility to participate in Title IV Programs, and the Company
believes that its participation will be approved. If the U.S. Department of
Education declines to approve NYRS's continued participation in Title IV
Programs, the Company has the right to rescind the NYRS Acquisition. See "Risk
Factors -- Potential Adverse Effects of Regulation; Impairment of Federal
Funding."
NATURE OF FEDERAL SUPPORT FOR POSTSECONDARY EDUCATION
While the states support public colleges and universities primarily through
direct state subsidies, the federal government provides a substantial part of
its support for postsecondary education in the form of grants and loans to
students who can use this support at any institution that has been certified as
eligible by the U.S. Department of Education. Title IV Programs have provided
aid to students for more than 30 years and, since the mid-1960's, the scope and
size of such programs have steadily increased. Since 1972, Congress has expanded
the scope of the HEA to provide for the needs of the changing national student
population by,
47
<PAGE> 50
among other things, providing that students at proprietary schools are eligible
for assistance under Title IV Programs, establishing a program for loans to
parents of eligible students, opening Title IV Programs to part-time students,
increasing maximum loan limits and eliminating the requirement that students
demonstrate financial need to obtain federally guaranteed student loans. Most
recently, the FDSL program was enacted, enabling students to obtain loans from
the federal government rather than from commercial lenders. In recent years,
federal funds appropriated for Title IV Programs have increased from $8.6
billion for the federal fiscal year ending September 30, 1994 to $10.5 billion
for the federal fiscal year ending September 30, 1996. The volume of federally
guaranteed student loans (and, more recently, loans issued under the FDSL
program) has increased from $17.9 billion in the federal fiscal year ending
September 30, 1993 to $24.7 billion in the federal fiscal year ending September
30, 1995.
Students at EMC's schools receive grants and loans to fund their education
under several Title IV Programs, of which the two largest are the Federal Pell
Grant ("Pell") program and the FFEL program. The Company's schools also
participate in the Federal Supplemental Educational Opportunity Grant ("FSEOG")
program, the Perkins program and the Federal Work-Study ("FWS") program. Most of
the Company's schools also have been selected by the U.S. Department of
Education to participate in the FDSL program.
Pell. Pell grants are the primary component of the Title IV Programs under
which the U.S. Department of Education makes grants to students who demonstrate
financial need. Every eligible student is entitled to receive a Pell grant;
there is no institutional allocation or limit. Grants presently range from $400
to $2,470 per year. Amounts received by students enrolled in the Company's
schools in fiscal 1996 under the Pell program equalled approximately 6% of the
Company's net revenues.
FSEOG. FSEOG awards are designed to supplement Pell grants for the
neediest students. FSEOG grants generally range in amount from $100 to $4,000
per year; however, the availability of FSEOG awards is limited by the amount of
those funds allocated to an institution under a formula that takes into account
the size of the institution, its costs and the income levels of its students. At
most of the Company's schools, FSEOG awards generally do not exceed $1,200 per
eligible student per year. The Company is required to make a 25% matching
contribution for all FSEOG program funds disbursed. Resources for this
institutional contribution may include institutional grants and scholarships
and, in certain states, portions of state scholarships. In fiscal 1996, the
Company's required 25% institutional match was approximately $710,000. Amounts
received by students in the Company's schools under the FSEOG program in fiscal
1996 equalled less than 2% of the Company's net revenues.
FFEL. The FFEL program consists of two types of loans, Stafford loans,
which are made available to students regardless of financial need, and PLUS
loans, which are made available to parents of students classified as dependents.
Under the Stafford loan program, a student may borrow up to $2,625 for the first
academic year, $3,500 for the second academic year and, in some educational
programs, $5,500 for each of the third and fourth academic years. Students with
significant financial need qualify for interest subsidies while in school and
during grace periods. Students who are classified as independent can increase
their borrowing limits and receive additional unsubsidized Stafford loans. Such
students can obtain an additional $4,000 for each of the first and second
academic years and, depending upon the educational program, an additional $5,000
for each of the third and fourth academic years. The obligation to begin
repaying Stafford loans does not commence until six months after a student
ceases enrollment as at least a half-time student. Amounts received by students
in the Company's schools under the Stafford program in fiscal 1996 equalled
approximately 42% of the Company's net revenues. PLUS loans may be obtained by
the parents of a dependent student in an amount not to exceed the difference
between the total cost of that student's education (including allowable
expenses) and other aid to which that student is entitled. Amounts received by
students in the Company's schools under the PLUS loan program in fiscal 1996
equalled approximately 13% of the Company's net revenues.
Perkins. Eligible undergraduate students may borrow up to $3,000 under the
Perkins program during each academic year, with an aggregate maximum of $15,000,
at a 5% interest rate and with repayment delayed until nine months after the
termination of studies. Perkins loans are made available to those students who
demonstrate the greatest financial need. Perkins loans are made from a revolving
account, 75% of which is capitalized by the U.S. Department of Education.
Subsequent federal capital contributions in the same
48
<PAGE> 51
proportion may be received if an institution meets certain requirements. Each
school collects payments on Perkins loans from its former students and reloans
those funds to currently enrolled students. Collection and disbursement of
Perkins loans is the responsibility of each participating institution. During
fiscal 1996, the Company collected approximately $2,200,000 from its former
students. In fiscal 1996, the Company's required matching contribution was
approximately $224,000. The Perkins loans disbursed to students in the Company's
schools in fiscal 1996 equalled approximately 2% of the Company's net revenues.
Federal Work-Study. Under the FWS program, federal funds are made
available to pay up to 75% of the cost of part-time employment of eligible
students, based on their financial need, to perform work for the institution or
for off-campus public or non-profit organizations. At least 5% of an
institution's FWS allocation must be used to fund student employment in
community service positions. In fiscal 1996, FWS funds accounted for less than
1% of the Company's net revenues.
FDSL. Under the FDSL program, students may obtain loans directly from the
U.S. Department of Education rather than commercial lenders. The conditions on
FDSL loans are generally the same as on loans made under the FFEL program. Ten
of the Company's 13 schools have been selected by the U.S. Department of
Education to participate in the FDSL program, but none have elected to
participate since their respective students' loan needs continue to be satisfied
under the FFEL program.
AVAILABILITY OF LENDERS
Four lending institutions (Bank One, Indianapolis, National Association;
National City Bank, Indiana; Central Bank; and Mellon PSFS (NJ) National
Association) currently provide over 80% of all federally guaranteed loans to
students attending the Company's schools. While the Company believes that other
lenders would be willing to make federally guaranteed student loans to its
students if loans were no longer available from its current lenders, there can
be no assurance in this regard. In addition, the HEA requires the establishment
of lenders of last resort in every state to make loans to students at any school
that cannot otherwise identify lenders willing to make federally guaranteed
loans to its students.
One student loan guaranty agency currently guarantees over 90% of all
federally guaranteed student loans made to students enrolled at the Company's
schools. The Company believes that other guaranty agencies would be willing to
guarantee loans to the Company's students if that agency ceased guaranteeing
those loans or reduced the volume of those loans guaranteed.
OTHER FINANCIAL ASSISTANCE SOURCES
Students at several of the Company's schools participate in state grant
programs. In fiscal 1996, approximately 2% of the Company's net revenues was
derived from state grant programs. In addition, certain students at some of the
Company's schools receive financial aid provided by the United States Department
of Veterans Affairs, the United States Department of the Interior (Bureau of
Indian Affairs) and the Rehabilitative Services Administration of the U.S.
Department of Education (vocational rehabilitation funding). In fiscal 1996,
financial assistance from such federal programs equalled less than 2% of the
Company's net revenues. The Art Institutes also provide institutional
scholarships to qualified students. In fiscal 1996, institutional scholarships
had a value equal to approximately 3% of the Company's net revenues. In
September 1995, the Company negotiated access to a supplemental loan program
with a commercial bank that allows students to repay loans over ten years after
graduation and allows students with lower than average credit ratings to obtain
loans. The Art Institutes are the only institutions offering two-year education
programs that are eligible to participate in that loan program. The primary
objective of such loan program is to lower the monthly payments required of
students. Such loans are without recourse to the Company or its schools.
FEDERAL OVERSIGHT OF TITLE IV PROGRAMS
The substantial amount of federal funds disbursed through Title IV Programs
coupled with the large numbers of students and institutions participating in
them have led to instances of fraud, waste and abuse. As a result, the United
States Congress has required the U.S. Department of Education to increase its
level of regulatory oversight of schools to ensure that public funds are
properly used. Each institution must annually submit to the U.S. Department of
Education an audit by an independent accounting firm of that school's
49
<PAGE> 52
compliance with Title IV Program requirements, as well as audited financial
statements. The U.S. Department of Education also conducts compliance reviews,
which include on-site evaluations, of several hundred institutions each year,
and directs student loan guaranty agencies to conduct additional reviews
relating to student loan programs. In addition, the Office of the Inspector
General of the U.S. Department of Education conducts audits and investigations
in certain circumstances. Under the HEA, accrediting agencies and state
licensing agencies also have responsibilities for overseeing institutions'
compliance with Title IV Program requirements. As a result, each participating
institution, including each Art Institute and NYRS, is subject to frequent and
detailed oversight and must comply with a complex framework of laws and
regulations or risk being required to repay funds or becoming ineligible to
participate in Title IV Programs. See "Risk Factors -- Potential Adverse Effects
of Regulation; Impairment of Federal Funding."
Largely as a result of this increased oversight, more than 800 institutions
have either ceased to be eligible for, or have voluntarily relinquished their,
participation in some or all Title IV Programs since October 1, 1992. This has
reduced competition among institutions with respect to certain markets and
education programs. Due to the specialized nature of their education programs,
the reduction in the number of participating institutions has had no substantial
effect on The Art Institutes.
Cohort Default Rates. A significant component of the Congressional
initiative aimed at reducing fraud, waste and abuse was the imposition of
limitations on participation in Title IV Programs by institutions whose former
students defaulted on the repayment of federally guaranteed student loans at an
"excessive" rate. Since the U.S. Department of Education began to impose
sanctions on institutions with cohort default rates above certain levels, more
than 600 institutions have lost their eligibility to participate in some or all
Title IV Programs for this reason. However, many institutions, including all of
The Art Institutes, have responded by implementing aggressive student loan
default management programs aimed at reducing the likelihood of students failing
to repay their loans in a timely manner.
A school's cohort default rate under the FFEL program is calculated on an
annual basis as the rate at which student borrowers scheduled to begin repayment
on their loans in one federal fiscal year default on those loans by the end of
the next federal fiscal year. Any institution whose FFEL cohort default rates
equal or exceed 25% for three consecutive years will no longer be eligible to
participate in that program or the FDSL program for the remainder of the federal
fiscal year in which the U.S. Department of Education determines that such
institution has lost its eligibility and for the two subsequent federal fiscal
years. In addition, an institution whose FFEL cohort default rate for any
federal fiscal year exceeds 40% may have its eligibility to participate in all
Title IV Programs limited, suspended or terminated. Since the calculation of
FFEL cohort default rates involves the collection of data from many
non-governmental agencies (i.e., lenders and private guarantors), as well as the
U.S. Department of Education, the HEA provides a formal process for the review
and appeal of the accuracy of FFEL cohort default rates before the U.S.
Department of Education takes any action against an institution based on its
FFEL cohort default rates.
None of the Company's schools has had a FFEL cohort default rate of 25% or
greater for three consecutive federal fiscal years. The Art Institute of
Houston, which accounted for approximately 7.9% of the Company's net revenues in
fiscal 1996, had a published FFEL cohort default rate of 25.8% for federal
fiscal year 1993 (the latest year for which rates have been published) and has
received a preliminary FFEL cohort default rate of 28.6% for federal fiscal year
1994. That school's published FFEL cohort default rate for federal fiscal year
1992 was less than 25%. The remainder of the Company's schools had published
1993 FFEL cohort default rates and preliminary 1994 rates below 25%. For federal
fiscal year 1993, the combined FFEL cohort default rate for all borrowers at the
Company's schools was 18.6% and the individual schools' rates ranged from 10.3%
to 25.8%. The average FFEL cohort default rate for all proprietary institutions
for federal fiscal year 1993 was 23.9%. For federal fiscal year 1994, the
combined preliminary FFEL cohort default rate for all borrowers at the Company's
schools was 18.4% and the individual schools' rates ranged from 9.0% to 28.6%.
(Preliminary cohort default rates are subject to revision by the U.S. Department
of Education based on information that schools and guaranty agencies identify
and submit to the U.S. Department of Education for review, in order to correct
any errors in the data previously provided to the U.S. Department of Education.
Any such adjustment will be made by the U.S. Department of Education at the time
that final rates are officially published. The Art Institute of Houston has
submitted such corrections for its preliminary 1994 cohort default rate.) The
Company understands that the U.S. Department of Education anticipates issuing
50
<PAGE> 53
official 1994 FFEL cohort default rates in November or December 1996, and the
Company expects preliminary 1995 FFEL cohort default rates to be issued early in
calendar year 1997.
If an institution's FFEL cohort default rate equals or exceeds 25% in any
of the three most recent federal fiscal years, or if its cohort default rate for
loans under the Perkins program exceeds 15% for any federal award year (i.e.,
July 1 through June 30), that institution may be placed on provisional
certification status for up to four years. Provisional certification does not
limit an institution's access to Title IV Program funds; however, an institution
with provisional status is under closer review by the U.S. Department of
Education and may be subject to summary adverse action if it commits violations
of Title IV Program requirements. To EMC's knowledge, the U.S. Department of
Education reviews an institution's compliance with the cohort default rate
thresholds described in this paragraph only when that school is otherwise
subject to a U.S. Department of Education certification review. Five of the
Company's schools have Perkins cohort default rates in excess of 15% for
students who were scheduled to begin repayment in the 1994/1995 federal award
year, the most recent year for which such rates have been calculated. Those
schools and their Perkins cohort default rates for that year are: The Art
Institute of Atlanta (37.7%); The Art Institute of Dallas (45.3%); The Art
Institute of Fort Lauderdale (27.5%); The Art Institute of Houston (41.5%); and
The Art Institute of Seattle (17.7%). Those schools accounted for approximately
10.4%, 8.6%, 13.8%, 7.9% and 14.4%, respectively, of the Company's net revenues
in fiscal 1996. For each such school, funds from the Perkins program equalled
less than 2% of the school's net revenues in fiscal 1996, other than The Art
Institute of Houston where such funds equalled approximately 5% of net revenues
in fiscal 1996. Thus, those schools could be placed on provisional certification
status, which would subject them to closer review by the U.S. Department of
Education. To date, none of those schools has been placed on such status. If one
of those schools were placed on provisional certification status for this reason
and that school reduced its Perkins cohort default rate below 15% in a
subsequent year, that school could ask the U.S. Department of Education to
remove the provisional status. One of those schools is in the process of
withdrawing voluntarily from participation in the Perkins program. Of the other
four schools, one currently has an application pending with the U.S. Department
of Education for recertification to participate in Title IV Programs, two have
been directed by the U.S. Department of Education to submit such applications by
December 31, 1996 as part of the routine recertification process, and the fourth
one will be submitting such an application soon in connection with its plan to
add new degree programs.
Each of the Company's schools has adopted a student loan default management
plan. Those plans provide for extensive loan counseling, methods to increase
student persistence and completion rates and graduate employment rates,
strategies to increase graduates' salaries and, for most schools, the use of
external agencies to assist the school with loan counseling and loan servicing
if a student ceases attending that school. Those activities are in addition to
the loan servicing and collection activities of FFEL lenders and guaranty
agencies. See "Risk Factors -- Potential Adverse Effects of Regulation;
Impairment of Federal Funding -- Student Loan Defaults."
Increased Regulatory Scrutiny. The 1992 reauthorization of the HEA
contained a three-part initiative, referred to as the Program Integrity Triad,
intended to increase regulatory scrutiny of postsecondary education
institutions. Part one of that initiative required each state to establish a
State Postsecondary Review Entity ("SPRE") to review certain institutions within
that state to determine their eligibility to continue participating in Title IV
Programs. SPRE review would be mandatory for an institution that met specified
statutory criteria, such as high cohort default rates, lack of financial
responsibility, certain changes in ownership or a pattern of student complaints,
and would be conducted using standards developed by the applicable SPRE based on
guidelines in the HEA. Currently, no SPREs are actively functioning. The United
States Congress has declined to provide funding for SPREs in appropriations
legislation that has been signed into law, the U.S. Department of Education has
not requested any future funding for SPREs, and the United States House of
Representatives has passed legislation repealing SPRE authority.
Part two of the Program Integrity Triad expanded the role of accrediting
agencies in the oversight of institutions participating in Title IV Programs. As
a result, the accrediting agencies of which the Company's schools are members
have increased the depth and intensity of reviews and have expanded examinations
in such areas as financial responsibility and timeliness of student refunds. The
Program Integrity Triad provisions also require each accrediting agency
recognized by the U.S. Department of Education to undergo comprehen-
51
<PAGE> 54
sive periodic reviews by the U.S. Department of Education to ascertain whether
such accrediting agency is adhering to required standards. Each accrediting
agency that accredits any of the Company's schools (with the exception of the
Commission on Colleges of the Northwest Association of Schools and Colleges, an
accrediting agency for The Art Institute of Seattle) has been reviewed by the
U.S. Department of Education under the Program Integrity Triad provisions and
reapproved for continued recognition by the U.S. Department of Education.
Part three of the Program Integrity Triad tightened the standards to be
applied by the U.S. Department of Education in evaluating the financial
responsibility and administrative capability of institutions participating in
Title IV Programs, and mandated that the U.S. Department of Education
periodically review the eligibility and certification to participate in Title IV
Programs of every such eligible institution. By law, all institutions are
required to undergo such a recertification review by the U.S. Department of
Education by 1997 and every four years thereafter. Under these standards, each
of the Company's schools would be evaluated by the U.S. Department of Education
more frequently than in the past. Under part three of the Program Integrity
Triad, one of the Company's schools currently has a recertification application
pending with the U.S. Department of Education and three other schools are in the
process of completing recertification applications and expect to file them
before December 31, 1996. A denial of recertification would preclude a school
from continuing to participate in Title IV Programs.
Financial Responsibility Standards. All institutions participating in
Title IV Programs must satisfy a series of specific standards of financial
responsibility. Institutions are evaluated for compliance with those
requirements as part of the U.S. Department of Education's quadrennial
recertification process and also annually as each institution submits its
audited financial statements to the U.S. Department of Education. One standard
requires each institution to demonstrate an acid test ratio (defined as the
ratio of cash, cash equivalents and current accounts receivable to current
liabilities) of at least 1:1 at the end of each fiscal year. Another standard
requires that each institution have a positive tangible net worth at the end of
each fiscal year. A third standard prohibits any institution from having a
cumulative net operating loss during its two most recent fiscal years that
results in a decline of more than 10% of that institution's tangible net worth
as measured at the beginning of that two-year period. An institution that is
determined by the U.S. Department of Education not to meet the standards of
financial responsibility on the basis of failing to meet one or more of the
specified numeric indicators is nonetheless entitled to participate in Title IV
Programs if it can demonstrate to the U.S. Department of Education that it is
financially responsible on an alternative basis. An institution may do so by
demonstrating, with the support of a statement from a certified public
accountant, proof of prior compliance with the numeric standards and other
information specified in the regulations, that its continued operation is not
jeopardized by its financial condition. Alternatively, an institution may post
surety either in an amount equal to one-half of the total Title IV Program funds
received by students enrolled at such institution during the prior year or in an
amount equal to 10% of such prior year's funds and agree to disburse those funds
only on an "as-earned" basis. The U.S. Department of Education has interpreted
this surety condition to require the posting of an irrevocable letter of credit
in favor of the U.S. Department of Education. See "Risk Factors -- Potential
Adverse Effects of Regulation; Impairment of Federal Funding -- Financial
Responsibility Standards."
Historically, the U.S. Department of Education has evaluated the financial
condition of the Company's schools on an institution-by-institution basis,
although recently the U.S. Department of Education has requested, and the
Company has provided, financial information concerning The Art Institutes on a
consolidated basis at the level of their parent company, AII. Each of The Art
Institutes individually (other than The Illinois Institute of Art at Chicago and
The Illinois Institute of Art at Schaumburg acquired in November 1995) and on a
consolidated basis at the level of AII (which is the parent of all The Art
Institutes other than The Art Institute of Pittsburgh, which is a division of
AII) has met the financial responsibility standards described above as applied
by the U.S. Department of Education for the relevant periods. At the time of
their acquisition, The Illinois Institute of Art at Chicago and The Illinois
Institute of Art at Schaumburg satisfied those standards by relying on the
consolidated financial statements of AII in their application to the U.S.
Department of Education. Those schools will submit combined financial statements
independent of AII for fiscal 1996, and the Company believes those financial
statements will satisfy the requisite standards. If the U.S. Department of
Education determines that those schools do not satisfy those
52
<PAGE> 55
standards the schools will have an opportunity to demonstrate financial
responsibility based on the consolidated financial statements of AII. If those
schools do not satisfy the standards on either basis, they may be required to
post an irrevocable letter of credit in favor of the U.S. Department of
Education as described in the preceding paragraph. Those schools generated
approximately 1.1% of the Company's fiscal 1996 net revenues and the letter of
credit, if required, is not expected to have a face value exceeding $630,000.
The U.S. Department of Education has not previously considered the Company's
financial position in evaluating the financial responsibility of The Art
Institutes. To the Company's knowledge, the U.S. Department of Education has
sought to consider the financial status of a third-tier entity (such as the
Company) only when that entity's debts are guaranteed by an operating entity or
the revenues of an operating entity are pledged to secure that debt. Neither AII
nor any of the Company's schools is a guarantor of the Company's debts and none
of the revenues of AII or any of the Company's schools are pledged as security
for that debt. Prior to consummation of the Offering, the Company would not, on
a consolidated basis, satisfy the positive tangible net worth standard. The
Company would, however, satisfy that standard on the basis of consolidated
financial statements adjusted for the Offering. See "Risk Factors -- Potential
Adverse Effects of Regulation; Impairment of Federal Funding -- Financial
Responsibility Standards."
Restrictions on Operating Additional Schools. The HEA generally requires
that certain institutions, including proprietary schools, be in full operation
for two years before applying to participate in Title IV Programs. However,
under the HEA and applicable regulations, an institution that is certified to
participate in Title IV Programs may establish an additional location and apply
to participate in Title IV Programs at that location without reference to the
two-year requirement, if such additional location satisfies all other applicable
requirements. In addition, a school which undergoes a change of ownership
resulting in a change in control must be reviewed and recertified for
participation in Title IV Programs under its new ownership. See "Risk
Factors -- Potential Adverse Effects of Regulation; Impairment of Federal
Funding -- Regulatory Consequences of a Change of Ownership or Control." Pending
recertification, the U.S. Department of Education suspends Title IV Program
funding to that school's students. If a school is recertified, it will be on a
provisional basis. During the time a school is provisionally certified, it may
be subject to summary adverse action for violations of Title IV Program
requirements, but provisional certification does not otherwise limit an
institution's access to Title IV Program funds. The Company's expansion plans
are based, in part, on its ability to add additional locations and acquire
schools that can be recertified.
The Illinois Institute of Art at Chicago and The Illinois Institute of Art
at Schaumburg are provisionally certified by the U.S. Department of Education
due to their recent acquisition by the Company. A third school recently acquired
by the Company, NYRS, filed an application to reestablish its eligibility to
participate in Title IV Programs with the U.S. Department of Education in
September 1996. If such application is approved, NYRS will be certified on a
provisional basis. None of the Company's other schools that are participating in
Title IV Programs are on provisional certification status.
Certain of the state authorizing agencies and accrediting agencies with
jurisdiction over the Company's schools also have requirements that may, in
certain instances, limit the ability of the Company to open a new school,
acquire an existing school or establish an additional location of an existing
school. The Company does not believe that those standards will have a material
adverse effect on the Company or its expansion plans.
The "85/15 Rule." Under a provision of the HEA commonly referred to as the
"85/15 Rule," a proprietary institution, such as each of EMC's schools, would
cease being eligible to participate in Title IV Programs if, on a cash
accounting basis, more than 85% of its revenues for the prior fiscal year was
derived from Title IV Programs. Any school that violates the 85/15 Rule
immediately becomes ineligible to participate in Title IV Programs and is unable
to apply to regain its eligibility until the following fiscal year. The Company
has calculated that, since this requirement took effect in fiscal 1995, none of
the Company's schools has derived more than 79% of its revenues from Title IV
Programs for any fiscal year, and that for fiscal 1996 the range for the
Company's schools was from approximately 42% to approximately 76%. For fiscal
1995, the Company's independent auditors examined management's assertion that
the Company's schools complied with these requirements and opined that such
assertion was fairly stated in all material respects. The Company's auditors
have not yet issued their reports with respect to these assertions for fiscal
1996. The auditors have, however, informed the Company that their work is
substantially complete and that they expect to again opine that management's
assertion was fairly stated in all material respects. The Company regularly
53
<PAGE> 56
monitors compliance with this requirement in order to minimize the risk that any
of its schools would derive more than 85% of its revenues from Title IV Programs
for any fiscal year. If a school appears likely to approach the 85% threshold,
the Company would evaluate the appropriateness of making changes in student
funding and financing to ensure compliance. See "Risk Factors -- Potential
Adverse Effects of Regulation; Impairment of Federal Funding -- General."
Restrictions on Payment of Bonuses, Commissions or Other Incentives. The
HEA prohibits an institution from providing any commission, bonus or other
incentive payment based directly or indirectly on success in securing
enrollments or financial aid to any person or entity engaged in any student
recruitment, admission or financial aid awarding activity. EMC believes that its
current compensation plans are in compliance with HEA standards, although the
regulations of the U.S. Department of Education do not establish clear criteria
for compliance.
STATE AUTHORIZATION
Each of EMC's schools is authorized to offer education programs and grant
degrees or diplomas by the state in which such school is located. The level of
regulatory oversight varies substantially from state to state. In some states,
the schools are subject to licensure by the state education agency and also by a
separate higher education agency. State laws establish standards for
instruction, qualifications of faculty, location and nature of facilities,
financial policies and responsibility and other operational matters. State laws
and regulations may limit the ability of the Company to obtain authorization to
operate in certain states or to award degrees or diplomas or offer new degree
programs. Certain states prescribe standards of financial responsibility that
are different from those prescribed by the U.S. Department of Education. The
Company believes that each of the Company's schools is in substantial compliance
with state authorizing and licensure laws. See "Risk Factors -- Potential
Adverse Effects of Regulation; Impairment of Federal Funding -- State
Authorization."
LEGAL PROCEEDINGS
EMC is subject to litigation in the ordinary course of its business.
Certain proceedings have been brought under the Texas Deceptive Trade Practices
Act and similar statutes in other jurisdictions. Typically, under those laws, an
individual can seek treble damages and attorneys' fees or, in the alternative,
actual and punitive damages, plus interest and court costs.
While there can be no assurance as to the ultimate outcome of any
litigation involving the Company, the Company does not believe that any pending
legal proceeding is likely to result in a judgment or settlement that would have
a material adverse effect on the Company's financial condition, results of
operations or liquidity.
54
<PAGE> 57
MANAGEMENT AND DIRECTORS
DIRECTORS AND EXECUTIVE OFFICERS
Under the Company's current Restated Articles of Incorporation, directors
serve one-year terms and are elected by the holders of the Class A Stock and
Class B Stock voting as a single class. Under the New Articles, the Board of
Directors will be divided into three classes, with the classes as nearly equal
in the number of directors as possible. At each annual meeting of shareholders,
directors will be elected for three-year terms to succeed the directors of that
class whose terms are expiring. Mr. Greenstone will be a Class I director with a
term of office expiring in 1997; Mr. Burke and Ms. Drucker will be Class II
directors with their terms of office expiring in 1998; and Mr. Knutson and Mr.
Sanford will be Class III directors with their terms of office expiring in 1999.
Mr. Christofferson has informed EMC that he intends to resign from the Board of
Directors immediately following consummation of the Offering, and accordingly
has not been designated as a Class I, II or III director. Following consummation
of the Offering, the Company intends to name two additional directors, Mr.
Atwell and Mr. Campbell, who are not officers or affiliates of the Company. Mr.
Atwell and Mr. Campbell will be appointed Class I directors.
Set forth below is certain information as of June 30, 1996 concerning the
Company's directors and executive officers and nominees for director.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Robert B. Knutson............. 62 Chairman and Chief Executive Officer
Miryam L. Drucker............. 51 Vice Chairman and Director
Patrick T. DeCoursey.......... 51 Executive Vice President
William M. Webster, IV........ 38 Executive Vice President
Robert T. McDowell............ 42 Senior Vice President, Chief Financial
Officer and Treasurer
James J. Burke, Jr............ 44 Director
J. Thomas Christofferson...... 58 Director
Albert Greenstone............. 69 Director
Harvey Sanford................ 70 Director
Robert H. Atwell.............. 65 Nominee for Director
William M. Campbell, III...... 36 Nominee for Director
</TABLE>
ROBERT B. KNUTSON is the Chairman and Chief Executive Officer of the
Company; a graduate of the University of Michigan (B.A., Economics 1956);
fighter pilot with the U.S. Air Force, 1957 to 1962; lending officer and later a
vice president responsible for domestic merger and acquisition activities,
Morgan Guaranty Trust Company of New York, 1962 to 1969; a vice president
specializing in corporate acquisitions, Drexel Harriman Ripley, 1969 to 1970;
joined the Board of Directors in 1969 and became the President in 1971 and the
Chairman, President and Chief Executive Officer in 1986. Mr. Knutson is the
husband of Miryam L. Drucker.
MIRYAM L. DRUCKER is the Vice Chairman of the Company; a graduate of the
Universidad del Zulia, Venezuela (B.A., Journalism 1965); director of the
Washington, D.C., School for Secretaries, a division of BOC/Airco, 1973 to 1982;
president of Bauder College, a division of National Education Corporation, 1982
to 1984; joined EMC in 1984, president of The Art Institute of Dallas, 1985 to
1987, president of The Art Institute of Fort Lauderdale, 1987 to 1988, head of
The Art Institutes, 1988 to 1989, and President and Chief Operating Officer,
1989 to 1996. Ms. Drucker is the wife of Robert B. Knutson.
PATRICK T. DECOURSEY is an Executive Vice President of the Company
responsible for the operations of the Company's schools; a graduate of Maryknoll
College (B.A., Philosophy, Spanish 1967); president and regional manager of
higher education vocational training institutions at National Education
Corporation, 1980 to 1987, and Phillips Colleges, 1987 to 1990; joined EMC as
president of The Art Institute of Dallas, 1991 to 1992; Executive Vice
President, 1993 to present.
55
<PAGE> 58
WILLIAM M. WEBSTER, IV is an Executive Vice President of the Company
responsible for corporate development and various administrative departments; a
graduate of Washington and Lee University (B.A., English, German 1979) and
University of Virginia School of Law (J.D., 1983); Fulbright Scholar, Germany
(1980); president and chief executive officer, Bojangles of South Carolina, 1987
to 1992; White House Fellow, 1991 to 1992; Chief of Staff, U.S. Department of
Education, 1993 to 1994; Assistant to the President and Director of Scheduling
and Advance, The White House, 1994 to 1995; joined EMC in 1996.
ROBERT T. MCDOWELL is the Senior Vice President, Chief Financial Officer
and Treasurer of the Company; a graduate of the University of Pittsburgh
(M.B.A., 1978, B.A., Economics 1977); financial analyst, Texas Instruments, 1978
to 1981; manager, Arthur Andersen & Co., 1981 to 1988; joined EMC in 1988,
Treasurer, 1990 to 1993.
JAMES J. BURKE, JR. is a managing partner of Stonington Partners, Inc., a
private investment firm, since July 1994; a graduate of Brown University (B.A.,
Psychology 1973) and Harvard University Graduate School of Business
Administration (M.B.A., 1979); president and chief executive officer, Merrill
Lynch Capital Partners, Inc., and a managing director, Merrill Lynch, Pierce,
Fenner & Smith Incorporated, 1987 to 1994; serves on the boards of directors of
Ann Taylor Stores Corporation, Borg-Warner Security Corporation, Pathmark
Stores, Inc., Supermarkets General Holdings Corporation, United Artists Theatre
Circuit, Inc. and Wherehouse Entertainment, Inc.
J. THOMAS CHRISTOFFERSON is a vice president, Securities Department, The
Northwestern Mutual Life Insurance Company, since 1988; a graduate of Oberlin
College (B.A., Economics 1962) and The University of Chicago Graduate School of
Business (M.B.A., Finance 1967).
ALBERT GREENSTONE is the president emeritus, The National Center for
Professional Development; attended the University of Virginia (1946 to 1948) and
graduated the University of Georgia Law School (J.D., 1950); Assistant Director
of the Practising Law Institute, New York City, 1969 to 1972; joined EMC in 1972
as president and chief executive officer of the National Center for Paralegal
Training.
HARVEY SANFORD is the president of Sanford Management Group, Inc., a
private investment and management consulting firm, since 1988; a graduate of the
University of Maryland (B.S., Marketing/Economics 1949); president and chief
executive officer of Forbes and Wallace, 1969 to 1974; Joske's of Dallas, a
division of Allied Stores, 1974 to 1976; Gimbels, Pittsburgh, 1976 to 1982; and
Pittsburgh Brewing Company, 1982 to 1987; serves on the board of directors of
Callanen International and St. Francis Hospital.
ROBERT H. ATWELL is the president of the American Council on Education,
since 1984 (and is scheduled to retire from that position on November 1, 1996);
a graduate of the College of Wooster (B.A., Political Science 1953); vice
chancellor for administration, University of Wisconsin at Madison, 1965 to 1970;
president, Pitzer College, 1970 to 1984; Mr. Atwell also worked in a variety of
federal agencies including the Office of Management and Budget, the State
Department, and the National Institutes of Health. Effective November 1, 1996,
Mr. Atwell will join A.T. Kearney, Inc., a global consulting firm.
WILLIAM M. CAMPBELL, III, is the executive vice president of CBS
Entertainment, since 1995; a graduate of Harvard College (B.A., Economics 1982)
and Harvard University Graduate School of Business Administration (M.B.A.,
1987); Rotary International Scholar, Hong Kong (1984 to 1985); analyst, mergers
and acquisitions, Smith Barney, Harris Upham & Co. Incorporated, 1982 to 1984;
director of creative series, ABC Entertainment, 1987 to 1991; senior vice
president, drama development, Warner Brothers Television, 1991 to 1995.
DIRECTORS' COMPENSATION
Currently, directors who are not employees of the Company are paid an
annual retainer of $12,000 and reimbursed for their out-of-pocket expenses.
After consummation of the Offering, the Company intends to provide each
non-employee director with the following compensation: (i) a $12,000 annual
retainer and reimbursement for out-of-pocket expenses, (ii) a $1,000 fee for
each Board of Directors' meeting attended, (iii) a $500 fee for each committee
meeting attended that is not held on the same day as a Board of Directors'
meeting, (iv) pursuant to the Incentive Plan (as defined below), a grant of an
option to purchase 7,500 shares of Common Stock, such grant to be made on the
date of the consummation of the Offering (or upon the date
56
<PAGE> 59
that a non-employee director is first elected to the Board of Directors), which
option will vest 50% on the first anniversary and 50% on the second anniversary
of such grant, and (v) pursuant to the Incentive Plan, an annual grant of an
option to purchase 2,500 shares of Common Stock, such grant to be made on the
date of each annual meeting of the Company's shareholders while such director
remains a director, which option will vest 50% on the first anniversary and 50%
on the second anniversary of that meeting. Directors who are employees of the
Company will receive no additional compensation for serving on the Board of
Directors.
THE BOARD OF DIRECTORS
The Board of Directors currently has six members and four principal
committees: (i) an Audit Committee comprised of Mr. Burke (Chairman), Ms.
Drucker and Mr. Sanford, (ii) a Compensation Committee comprised of Mr. Knutson
(Chairman), Mr. Burke and Mr. Sanford, (iii) a Stock Incentive Committee
comprised of Mr. Burke and Mr. Sanford, and (iv) a Nominating Committee
comprised of Ms. Drucker (Chairman), Mr. Burke and Mr. Sanford.
COMPENSATION OF EXECUTIVE OFFICERS
The following tables set forth information concerning the compensation of,
option grants to, and aggregate options held by, the Company's Chairman and
Chief Executive Officer and the Company's four other most highly compensated
executive officers.
SUMMARY COMPENSATION TABLE FOR THE FISCAL YEAR ENDED JUNE 30, 1996
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION ------------
-------------------------------------------- SECURITIES
OTHER ANNUAL UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($)(2) COMPENSATION($) OPTIONS (#) COMPENSATION($)(3)
- --------------------------- ---- --------- ----------- --------------- ------------ ------------------
<S> <C> <C> <C> <C> <C> <C>
Robert B. Knutson................. 1996 $310,340 $ 175,000 - - $ 44,312
Chairman and Chief Executive
Officer
Miryam L. Drucker................. 1996 $239,664 $ 145,000 - 145,761 $ 64,362
Vice Chairman
Patrick T. DeCoursey.............. 1996 $191,672 $ 75,000 - 75,000 $ 37,632
Executive Vice President
William M. Webster, IV(1)......... 1996 $ 23,141 - - 75,000 -
Executive Vice President
Robert T. McDowell................ 1996 $150,000 $ 70,000 - 34,631 $ 36,604
Senior Vice President and Chief
Financial Officer
</TABLE>
- ---------------
(1) Mr. Webster was hired in May 1996 at an annual salary of $190,000. The
amount shown represents the salary earned from Mr. Webster's date of hire to
June 30, 1996.
(2) Bonuses are determined by the Compensation Committee.
(3) Such amounts represent the Company's contributions to the ESOP,
profit-sharing retirement plan and deferred compensation plan and the dollar
value of life insurance premiums paid by the Company with respect to term
life insurance for the benefit of certain executive officers of the Company.
57
<PAGE> 60
OPTION GRANTS IN THE FISCAL YEAR ENDED JUNE 30, 1996
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS POTENTIAL REALIZABLE
--------------------------- VALUE AT ASSUMED
NUMBER OF % OF TOTAL ANNUAL RATES OF STOCK
SECURITIES OPTIONS PRICE APPRECIATION
UNDERLYING GRANTED TO EXERCISE OR FOR OPTION TERM
OPTIONS EMPLOYEES IN BASE PRICE EXPIRATION ---------------------
NAME GRANTED (#) FISCAL YEAR ($/SHARE) DATE 5% ($) 10% ($)
- ---- ----------- ------------ ----------- ---------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
Robert B. Knutson....... - - - - - -
Miryam L. Drucker....... - - - - - -
Patrick T. DeCoursey.... - - - - - -
William M. Webster,
IV.................... 75,000 100% $ 11.00 5/1/06 $518,838 $1,314,838
Robert T. McDowell...... - - - - - -
</TABLE>
AGGREGATED OPTIONS HELD AT JUNE 30, 1996
<TABLE>
<CAPTION>
NUMBER OF NUMBER OF
SECURITIES VALUE OF SECURITIES VALUE OF
UNDERLYING UNEXERCISED, UNDERLYING UNEXERCISED,
UNEXERCISED AND EXERCISABLE UNEXERCISED AND UNEXERCISABLE
EXERCISABLE IN-THE-MONEY UNEXERCISABLE IN-THE-MONEY
OPTIONS AT OPTIONS OPTIONS AT OPTIONS AT
JUNE 30, AT JUNE 30, JUNE 30, JUNE 30,
NAME 1996(#)(1) 1996($)(2) 1996(#)(1) 1996($)(2)
- ---- --------------- ------------ --------------- ----------------
<S> <C> <C> <C> <C>
Robert B. Knutson.............. - - - -
Miryam L. Drucker.............. 124,881 $1,195,886 20,880 $169,425
Patrick T. DeCoursey........... - - 75,000 $510,000
William M. Webster, IV......... 18,750 $ 28,125 56,250 $ 84,375
Robert T. McDowell............. 20,131 $ 192,505 14,500 $130,500
</TABLE>
- ---------------
(1) In August 1996, the Board of Directors provided for vesting of the
approximately 11% of the outstanding options that had not previously vested
in accordance with their terms (other than Mr. Webster's).
(2) Based on an assumed fair market value of $12.50 per share. See "Certain
Transactions."
BENEFIT PLANS
EMPLOYEE STOCK OWNERSHIP PLAN
The Board of Directors adopted the ESOP effective January 1, 1989. The
purpose of the ESOP is to enable participating employees to share in the growth
and prosperity of EMC and to provide an opportunity for participating employees
to accumulate capital for their future economic advantage by receiving
beneficial ownership of EMC's stock in proportion to their relative
compensation. The ESOP is intended to be a stock bonus plan qualified under
Section 401(a) of the Internal Revenue Code of 1986, as amended (the "Code").
All employees who have completed at least 900 hours of service on an annual
basis are eligible to participate in the ESOP.
To establish the ESOP, the Company borrowed approximately $36.2 million
from certain lending institutions and then loaned the funds to the ESOP to allow
it to purchase shares of Class A Stock and Series A Preferred Stock. As the
Company made contributions to the ESOP and paid dividends on the Series A
Preferred Stock, the ESOP paid its indebtedness owed to the Company. Upon making
such loan payments to the Company, the ESOP released to the accounts of eligible
employees shares of Class A Stock and Series A Preferred Stock. As of June 30,
1996, the ESOP's indebtedness to the Company had been fully repaid and all
shares of Class A Stock and Series A Preferred Stock had been released for
allocation to participants' accounts. Any shares that are distributed to ESOP
participants are subject to a right of first refusal of the ESOP and the
Company. In addition, each participant has a right to "put" distributed shares
to the Company or the ESOP. After the consummation of the Transactions, the ESOP
will hold only shares of
58
<PAGE> 61
Common Stock. Upon consummation of the Offering, and for so long thereafter as
the Common Stock is actively traded on an established securities market, such
right of first refusal and "put" option will no longer apply to shares
distributed from the ESOP.
The ESOP Committee directs the trustee of the ESOP as to the ESOP's
investments. The ESOP Committee may require that the ESOP's funds be invested
only in the Company's securities. Upon reaching the age of 55 and attaining ten
years of participation in the ESOP, a participant may diversify his or her
investment in the ESOP by transferring up to 25% of his or her shares to the
trustee of the Education Management Corporation Retirement Plan to be invested
in accordance with its provisions. This diversification opportunity increases to
50% of the participant's shares upon attainment of age 60 and ten years of
participation.
1996 STOCK INCENTIVE PLAN
The Board of Directors has adopted and prior to consummation of the
Offering the shareholders of the Company will have approved the Education
Management Corporation 1996 Stock Incentive Plan (the "Incentive Plan") to
attract and retain key personnel and non-employee directors. The Incentive Plan
is administered by the Stock Incentive Committee which is authorized to grant
officers and key employees of the Company and its subsidiaries non-statutory
stock options, incentive stock options, stock appreciation rights, limited stock
appreciation rights, performance shares and restricted stock for up to 1,250,000
shares of Common Stock.
Incentive stock options granted to any holder on the date of grant of more
than 10% of the total combined voting power of all classes of stock of the
Company must be exercised not later than five years from the date of grant of
the options. All other options granted under the Incentive Plan must be
exercised within a period fixed by the Stock Incentive Committee, which may not
exceed ten years from the date of any such grant. Additionally, in the case of
incentive stock options granted to any holder of more than 10% of the total
combined voting power of all classes of stock of the Company on the date of
grant, the exercise price may not be less than 110% of the market value per
share of the Common Stock on the date of grant. In all other cases, the exercise
price must be not less than the fair market value per share on the date of grant
as determined by the methods and procedures established by the Stock Incentive
Committee. The Stock Incentive Committee sets the exercise price for options
granted under the Incentive Plan and is authorized to grant stock appreciation
rights, which authorize payments of cash and/or stock to holders of such rights
in an amount based on the appreciation in the value of the Common Stock from the
date of grant to the date of exercise. Limited stock appreciation rights are
stock appreciation rights that become exercisable only upon a Change in Control
of the Company (as defined in the Incentive Plan).
The Stock Incentive Committee also may grant performance shares, the number
and value of which are determined by the extent to which the grantee meets
performance goals and other terms and conditions set by the Stock Incentive
Committee. In addition, the Stock Incentive Committee is authorized to grant
shares of Common Stock subject to restrictions on transferability and other
restrictions it may impose, including time-based and performance-based
forfeiture restrictions. Such restricted stock is subject to forfeiture upon
termination of employment during the restriction period.
Options and awards granted under the Incentive Plan are not transferable by
the grantee other than by will or the laws of descent and distribution, except
that the Stock Incentive Committee may grant non-statutory stock options that
are transferable to immediate family members or trusts or partnerships for such
family members. If a Change in Control occurs, all outstanding options and
awards will become fully exercisable and all restrictions on outstanding options
and awards will lapse. The Incentive Plan also provides that, in the event of
changes in the corporate structure of the Company affecting the Common Stock,
the Stock Incentive Committee will make adjustments in the number, class and/or
price of the shares of capital stock subject to awards granted under the
Incentive Plan to preserve the proportionate interest of a participant in an
award and to prevent dilution or enlargement of rights. The number of shares
available for future awards will also be adjusted.
The Stock Incentive Committee will grant future awards under the Incentive
Plan as it deems necessary to motivate, attract and retain the services of the
Company's officers and other key employees. The Stock
59
<PAGE> 62
Incentive Committee's decisions regarding future awards will be based on
subjective and objective factors that it, in its sole discretion, deems
appropriate.
The Incentive Plan provides for annual, non-discretionary stock option
grants to be made to members of the Board of Directors who are not employees of
the Company. Each person who is a non-employee director as of the consummation
of the Offering will receive an option to purchase 7,500 shares of Common Stock.
Each person whose initial election or appointment as a non-employee director
occurs after consummation of the Offering will receive an option to purchase
7,500 shares of Common Stock as of the date of such election or appointment.
Each non-employee director whose term as a director continues after the date of
any annual meeting of shareholders of the Company, commencing with the initial
annual meeting after the effective date of the Incentive Plan and continuing
until the date the Incentive Plan terminates, will as of the date of each such
annual meeting of shareholders be granted a non-statutory stock option to
purchase 2,500 shares of Common Stock. The exercise price for such non-employee
director stock options will be the fair market value on the date of grant of the
shares subject to the option. All such options will have a ten-year term and
will vest and become exercisable in equal installments on the first and second
anniversaries of the date of grant.
It is anticipated that, upon consummation of the Offering, in addition to
non-discretionary stock options to be awarded to non-employee directors, the
Company will grant to the executive officers of the Company and other key
employees options for an aggregate of approximately 603,000 shares of Common
Stock. All of those options are expected to be granted pursuant to the Incentive
Plan, other than options for approximately 23,000 shares of Common Stock to be
granted under the Company's other existing option plans. See "--Current
Management Incentive Stock Options Plans" below. The Board of Directors has
determined that the executive officers will be granted options for a total of
250,000 shares of Common Stock, as follows: Mr. Knutson (60,000 shares), each of
Ms. Drucker, Mr. DeCoursey and Mr. Webster (50,000 shares), and Mr. McDowell
(40,000 shares). The specific grants of the remaining options for 353,000 shares
of Common Stock to other key employees has not yet been determined.
The options to be granted upon the consummation of the Offering to
executive officers and other key employees are generally expected (i) to have an
exercise price equal to the initial public offering price (before underwriting
discounts), (ii) to provide for vesting on a pro-rata basis over a period of
four years, subject to earlier vesting or termination in certain circumstances,
(iii) to be exercisable for a period of ten years, subject to earlier
termination in certain circumstances, and (iv) to constitute incentive stock
options to the maximum extent permitted under applicable law and otherwise to be
non-statutory stock options.
CURRENT MANAGEMENT INCENTIVE STOCK OPTION PLANS
Effective November 11, 1993, EMC implemented the Management Incentive Stock
Option Plan (the "1993 Option Plan") to attract and retain talented management
and other key employees. The 1993 Option Plan authorizes the grant of
non-statutory stock options to eligible employees. The 1993 Option Plan is
administered by the Compensation Committee, which is authorized to grant
officers of the Company or its subsidiaries and certain other key executive and
management employees of the Company options to purchase up to 200,000 shares of
Common Stock. The exercise price of an option granted under the 1993 Option Plan
is the fair market value of the subject shares determined as of the date of
grant. No option will be granted to a participant who, upon exercise of such
option, would own more than 5% of the total combined voting power of all classes
of stock of the Company. In August 1996, the Board of Directors provided for
full vesting of all outstanding options granted under the 1993 Option Plan not
previously vested in accordance with their terms.
Effective July 1, 1990, the Company's predecessor, EMC Holdings, Inc.,
approved the Management Incentive Stock Option Plan (the "1990 Option Plan").
The 1990 Option Plan contains substantially the same terms and conditions as the
1993 Option Plan. The Board of Directors had reserved 359,642 shares of Common
Stock for issuance under the 1990 Option Plan. All options granted under the
1990 Option Plan are fully vested.
The Company expects to grant options pursuant to the 1990 Option Plan
and/or the 1993 Option Plan for approximately 23,000 shares of Common Stock upon
the consummation at the Offering. See "--1996 Stock Incentive Plan."
60
<PAGE> 63
1996 EMPLOYEE STOCK PURCHASE PLAN
The Board of Directors has adopted and prior to consummation of the
Offering the shareholders of the Company will have approved the Education
Management Corporation 1996 Employee Stock Purchase Plan (the "Purchase Plan").
The Purchase Plan will allow eligible employees of the Company and its
subsidiaries to purchase up to an aggregate of 750,000 shares of Common Stock at
quarterly intervals through periodic payroll deductions. Interest is paid by EMC
on such payroll deduction amounts at 5% per annum or such other interest rate as
may be set from time to time. Limits may be imposed on the number of shares
issuable under the Purchase Plan in any year. No more than 150,000 such shares
will be issuable in the first year of the Purchase Plan, excluding shares
available for purchase in the Offering. The Purchase Plan also will permit
eligible employees to purchase up to a total of 175,000 shares of Common Stock
in the Offering from the Underwriters at the initial public offering price less
the underwriting discount. See "Underwriting."
In general, the Purchase Plan will be implemented in a series of successive
quarterly offering periods. The purchase price per share, in general, will be
85% of the lower of (i) the Fair Market Value (as defined in the Purchase Plan)
of a share of Common Stock on the first day of the offering period, or (ii) the
Fair Market Value of a share of Common Stock on the purchase date. The purchase
price is to be paid through periodic payroll deductions not to exceed 5% of a
participant's earnings during each payroll period which ends during the offering
period (or such other percentage as may be established from time to time) other
than for the purchase of shares by employees in the Offering. No participant may
purchase more than $25,000 worth of Common Stock annually.
The purchase right of a participant will terminate automatically in the
event the participant ceases to be an employee of the Company or any subsidiary
of the Company and any payroll deductions collected from such individual during
the offering period in which such termination occurs will be refunded. A special
rule applies in the event of a participant's death.
DEFERRED COMPENSATION PLAN
The Education Management Corporation Deferred Compensation Plan (the
"Deferred Plan") is a non-qualified deferred compensation plan under the Code
designed to permit certain "highly compensated" officers of the Company to defer
current compensation. Officers of the Company earning at least $118,800 annually
and the presidents of operating units are eligible participants.
A participant can defer up to 7% of compensation on an annual basis. A
participant must decide by December 15 of the current year whether to defer
under this plan for the upcoming year. In addition, participants will receive
credit to their individual accounts under the Deferred Plan if their
contributions to the Education Management Corporation Retirement Plan or the
ESOP are limited by the Code or contribution maximums. Upon termination for any
reason, a participant is entitled to receive 100% of deferred compensation. A
participant becomes entitled to Company credits accumulated in his or her
account pursuant to a formula based on years of service with the Company.
Regardless of years of service, a participant is entitled to the full value of
Company credits upon termination of employment on or after reaching the age of
65 or as a result of death or disability during active employment.
The Company has established a grantor trust with PNC Bank, National
Association, to accumulate assets for the payments of the benefits established
under the Deferred Plan. As of June 30, 1996, each of the executive officers of
the Company had the following amounts allocated to their individual accounts:
Mr. Knutson $49,437; Ms. Drucker $43,855; Mr. DeCoursey $35,551; Mr. McDowell
$10,453; and Mr. Webster $0.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPANTS
The Company's Compensation Committee reviews and acts on matters relating
to compensation levels and benefit plans for key executives of the Company. The
Compensation Committee currently consists of Mr. Knutson, Mr. Burke and Mr.
Sanford. Mr. Knutson serves as the Chairman and Chief Executive Officer of the
Company.
61
<PAGE> 64
EMPLOYMENT AGREEMENT
The Company and Mr. Knutson have entered into an amended and restated
employment agreement, dated as of August 15, 1996, with an initial term ending
June 30, 2000 (the "Employment Agreement"). The Employment Agreement is subject
to successive, automatic one-year extensions unless either party gives written
notice of non-extension to the other party at least 270 days prior to the then
current expiration date. Under the terms of the Employment Agreement, Mr.
Knutson will serve as Chairman and Chief Executive Officer of the Company and is
to receive a base salary at an annual rate of $325,000, subject to adjustment,
and incentive compensation and other employee benefits under the various benefit
plans and programs maintained by the Company. Any initial stock options granted
to Mr. Knutson after the effective date of the Employment Agreement become fully
vested and exercisable no later than June 30, 2000.
The Employment Agreement will terminate prior to the scheduled expiration
date in the event of the death or disability of Mr. Knutson. In addition, the
Company may terminate the Employment Agreement with or without cause (as defined
therein) and Mr. Knutson may resign upon 30 days' advance written notice to the
Company. If Mr. Knutson is discharged from his employment by the Company without
cause or if he resigns with good reason (as defined therein), he will receive
continued payments of his base salary, average incentive compensation and other
benefits for the remainder of the term of the Employment Agreement, or a period
of one year following the date of termination, whichever is longer. In addition,
all of Mr. Knutson's stock options will become fully vested and exercisable. The
Employment Agreement contains non-competition, non-interference and
confidentiality covenants on the part of Mr. Knutson.
CERTAIN TRANSACTIONS
Mr. Knutson is a limited partner, with no managerial authority, in Ocean
World Associates Ltd. The Art Institute of Fort Lauderdale leases a portion of
its facilities from Ocean World Associates Ltd. for approximately $1.3 million
annually.
Mr. Knutson and Mr. Greenstone are limited partners, with no managerial
authority, in AIPH Limited Partnership, which is a general partner of the Art
Institute of Philadelphia Limited Partnership. The Art Institute of Philadelphia
leases its facility from The Art Institute of Philadelphia Limited Partnership
for approximately $516,000 annually.
In connection with acquiring shares of Class B Stock, Mr. DeCoursey and Mr.
McDowell incurred indebtedness to the Company in an aggregate amount of $133,400
and $179,700, respectively. The highest principal amount of such indebtedness
outstanding in the fiscal year ended June 30, 1996 was approximately $133,400,
in the case of Mr. DeCoursey, and $158,000, in the case of Mr. McDowell.
Interest rates on such indebtedness were 6.28% for Mr. DeCoursey and 9%, 6.28%
and 6.75% for Mr. McDowell. Mr. DeCoursey has prepaid his indebtedness in full
and Mr. McDowell has prepaid all but $27,000 of his indebtedness.
On August 9, 1996, the Company redeemed 75,000 shares of Series A Preferred
Stock from the ESOP at a redemption price of $101.43 per share (the equivalent
of $6.57 per share of the Class A Stock into which the Series A Preferred Stock
is convertible or the equivalent of $13.14 per share of Common Stock), plus
accrued and unpaid dividends thereon equal to $83,750 (or the equivalent of $.14
per share of Common Stock). The Company financed such redemption with borrowings
under the Revolving Credit Agreement.
On August 9, 1996, the ESOP purchased a total of 1,188,470 shares of Class
B Stock (which is the equivalent of 594,235 shares of Common Stock) (the "ESOP
Purchase") from 18 current or former members of EMC's management (including
three executive officers of the Company), at a price of $6.25 per share (or the
equivalent of $12.50 per share of Common Stock), or $7,427,937 in the aggregate.
This transaction was structured in a manner intended to permit any eligible
seller who so elected to receive tax-deferred treatment on any gain from the
sale under Section 1042 of the Code. No management shareholder sold more than
20% of the total number of fully diluted shares he or she beneficially owned.
The trustee of the ESOP, which is an independent corporate trustee, made
the determination to proceed with each of the Redemption and the ESOP Purchase.
The ESOP's administrative committee (which is composed of certain officers of
the Company) did not participate in such determinations. In connection with
62
<PAGE> 65
such transactions, the ESOP's trustee engaged its own independent legal counsel
and financial advisor. That financial advisor informed the ESOP's trustee that
(i) the purchase price paid in the ESOP Purchase was not more than "adequate
consideration," and (ii) the redemption price paid in the Redemption was not
less than "adequate consideration". The purchase price paid in the ESOP Purchase
was determined by negotiations between representatives of the ESOP and
representatives of the selling management shareholders.
The Company has agreed with the trustee of the ESOP that, if the initial
public offering price is less than the Specified Amount, and the Company were to
determine nonetheless to consummate the Offering and therefore to effect the
ESOP Conversion, the Company would pay to the ESOP an amount equal to the
difference between the Specified Amount and the initial offering price (before
underwriting discounts or commissions). If the Company makes that aggregate
payment to the ESOP, the ESOP will convert its shares of Series A Preferred
Stock into shares of Class A Stock. The ESOP Conversion is a condition to the
consummation of the Offering. See "The Transactions."
PRINCIPAL AND SELLING SHAREHOLDERS
The following table (including the notes thereto) sets forth certain
information regarding the beneficial ownership of the Common Stock as of
September 30, 1996 (after giving effect to the Transactions) and as adjusted to
reflect the sale of the shares of Common Stock being offered hereby by: (i) each
person (or group of affiliated persons) known by the Company to beneficially own
more than 5% of the outstanding shares of Common Stock), (ii) the Merrill Lynch
Entities (as defined below), National Union Fire Insurance Company of
Pittsburgh, PA and The Northwestern Mutual Life Insurance Company (collectively,
the "Selling Shareholders"), (iii) each director of the Company, (iv) each
executive officer, and (v) all of the Company's directors and executive officers
as a group. Each shareholder possesses sole voting and investment power with
respect to the shares listed, unless otherwise noted.
<TABLE>
<CAPTION>
SHARES OF COMMON SHARES OF COMMON
STOCK BENEFICIALLY SHARES OF COMMON STOCK BENEFICIALLY
OWNED PRIOR TO THE STOCK TO BE SOLD OWNED AFTER THE
OFFERING IN THE OFFERING OFFERING(10)
------------------- ---------------- -------------------
NAME AND ADDRESS(1) NUMBER PERCENT NUMBER NUMBER PERCENT
- ------------------- -------- ------- ---------------- -------- -------
<S> <C> <C> <C> <C> <C>
Education Management Corporation
Employee Stock Ownership Trust..... 3,562,014 31.7% - 3,562,014 24.1%
Merrill Lynch Entities(2)............ 1,615,186 14.4 457,139 1,158,047 7.8(11)
National Union Fire Insurance Company
of Pittsburgh, PA.................. 1,116,765 9.9 316,073 800,692 5.4
The Northwestern Mutual Life
Insurance Company.................. 1,861,274 16.5 526,788 1,334,486 9.0
Robert B. Knutson(3)(4).............. 2,079,889 18.5 - 2,079,889 14.1
James J. Burke, Jr................... - - - - -
Miryam L. Drucker(4)(5)(6)........... 265,294 2.4 - 286,175 1.9
J. Thomas Christofferson............. - - - - -
Albert Greenstone.................... 31,007 * - 31,007 *
Harvey Sanford(3).................... 25,000 * - 25,000 *
Patrick T. DeCoursey(6).............. 24,704 * - 99,704 *
William M. Webster, IV(7)............ 18,750 * - 18,750 *
Robert T. McDowell(6)(8)............. 70,131 * - 84,631 *
All executive officers and directors
as a group(6)(9)................... 2,489,775 22.1 2,600,156 17.6
</TABLE>
- ---------------
* Less than 1%
(1) The address of each listed shareholder, unless noted otherwise, is c/o
Education Management Corporation, 300 Sixth Avenue, Pittsburgh,
Pennsylvania 15222.
(2) Shares of Common Stock beneficially owned by the Merrill Lynch Entities
prior to the Offering are owned of record as follows: 1,054,059 shares by
Merrill Lynch Capital Appreciation Partnership No. IV, L.P.; 26,798 shares
by ML Offshore
63
<PAGE> 66
LBO Partnership No. IV; 45,111 shares by ML IBK Positions, Inc.; 437,228
shares by Merrill Lynch Capital Corporation; 26,202 shares by ML Employees
LBO Partnership No. I, L.P.; and 25,788 shares by Merrill Lynch KECALP L.P.
1986.
(3) Mr. Knutson has granted to Mr. Sanford an option to purchase up to 25,000
shares of Common Stock beneficially owned by Mr. Knutson. Such option is
exercisable within 60 days of the date of the table set forth above.
(4) Mr. Knutson and Ms. Drucker, who are husband and wife, disclaim beneficial
ownership of each other's shares.
(5) Includes 124,881 shares of Common Stock receivable upon the exercise of
options that are exercisable within 60 days of the date of the table set
forth above.
(6) Shares beneficially owned increased after the Offering solely because
previously vested options will become exercisable as a result of the
consummation of the Offering.
(7) The 18,750 shares of Common Stock are receivable upon the exercise of
options that are exercisable within 60 days of the date of the table set
forth above.
(8) Includes 20,131 shares of Common Stock receivable upon the exercise of
options that are exercisable within 60 days of the date of the table set
forth above.
(9) Includes 163,762 shares of Common Stock receivable upon the exercise of
options that are exercisable within 60 days of the date of the table set
forth above.
(10) If the Underwriters exercise their over-allotment option in full and
purchase an additional 543,600 shares of Common Stock, the Merrill Lynch
Entities will own 1,016,900 shares of Common Stock (6.8% of the Common
Stock taking into account exercisable options), National Union Fire
Insurance Company of Pittsburgh, PA will own 703,100 shares of Common Stock
(4.7% of the Common Stock taking into account exercisable options) and The
Northwestern Mutual Life Insurance Company will own 1,171,834 shares of
Common Stock (7.9% of the Common Stock taking into account exercisable
options).
(11) After the Merrill Lynch Distribution, the Merrill Lynch Entities will own
in the aggregate approximately shares or % of the outstanding
Common Stock (or if the Underwriters exercise their over-allotment option
in full, approximately shares or % of the outstanding Common
Stock).
DESCRIPTION OF CAPITAL STOCK
The following is a description of the material provisions of the New
Articles, the New By-Laws and the Rights Agreement (as defined below) but does
not purport to be complete and is qualified in its entirety by reference to
applicable Pennsylvania law. Copies of the New Articles, the New By-Laws and the
Rights Agreement have been filed as exhibits to the Registration Statement (as
defined below), of which this Prospectus forms a part.
Upon consummation of the Offering, the authorized capital stock of the
Company will consist of 60,000,000 shares of Common Stock and 10,000,000 shares
of Preferred Stock.
COMMON STOCK
The holders of shares of Common Stock are entitled to one vote for each
share held on all matters submitted to a vote of shareholders and do not have
cumulative voting rights. Holders of shares of Common Stock are entitled to
receive dividends, if any, as declared by the Board of Directors out of funds
legally available therefor. Upon liquidation, dissolution or winding up of the
Company, holders of shares of Common Stock are entitled to share ratably in the
net assets of the Company available after the payment of all debts and other
liabilities of the Company, subject to the prior rights of outstanding shares of
Preferred Stock, if any. Holders of shares of Common Stock have no preemptive,
subscription, redemption or conversion rights. The outstanding shares of Common
Stock are, and the shares of Common Stock offered in the Offering will be, when
issued and paid for, validly issued, fully paid and nonassessable. The rights,
preferences and privileges of holders of shares of Common Stock are subject to,
and may be adversely affected by, the rights of the holders of shares of any
series of Preferred Stock the Company may designate and issue in the future.
PREFERRED STOCK
The Board of Directors of the Company has the authority, without further
action by the shareholders, to issue shares of Preferred Stock in one or more
series and to fix the number of shares, designations, voting powers,
preferences, optional and other special rights and the restrictions or
qualifications thereof. The rights, preferences, privileges and powers of each
series of Preferred Stock may differ with respect to dividend rates, amounts
payable on liquidation, voting rights, conversion rights, redemption provisions,
sinking fund provisions
64
<PAGE> 67
and other matters. The issuance of shares of Preferred Stock could decrease the
amount of earnings and assets available for distribution to holders of shares of
Common Stock and could adversely affect the rights and powers, including voting
rights, of holders of shares of Common Stock. The existence of authorized and
undesignated shares of Preferred Stock may also have a depressive effect on the
market price of the Common Stock. In addition, the issuance of any shares of
Preferred Stock could have the effect of delaying, deferring or preventing a
change of control of the Company. Upon consummation of the Offering, no shares
of Preferred Stock will be outstanding, and the Company has no current intention
to issue any shares of Preferred Stock.
PROVISIONS OF THE NEW ARTICLES AND THE NEW BY-LAWS
The New Articles and the New By-Laws contain a number of provisions
relating to corporate governance and the rights of shareholders. Certain of
these provisions may be deemed to have a potential "anti-takeover" effect
insofar as such provisions may delay, defer or prevent a change of control of
the Company, including, but not limited, to the following provisions:
The New By-Laws contain certain notification requirements relating to
nominations to the Board of Directors and to the raising of business matters at
shareholder meetings. Such requirements provide that a notice of proposed
shareholder business must be timely given in writing to the Secretary of the
Company prior to the appropriate meeting. To be timely, notice relating to an
annual meeting must be given not less than 60, nor more than 90, days in advance
of such meeting; provided, that if the date of the annual meeting is changed by
more than 30 days from the anniversary date of the prior annual meeting, written
notice must be given no later than the fifth day after the first public
disclosure of the date of the meeting. The New By-Laws provide that special
meetings of shareholders may be called only by certain officers of the Company
or the Board of Directors.
The New By-Laws contain certain provisions permitted under the Pennsylvania
Business Corporation Law of 1988, as amended (the "PBCL"), regarding the
liability of directors. These provisions eliminate the personal liability of a
director to the Company and its shareholders for monetary damages unless such
director has breached or failed to perform the duties of his or her office under
Subchapter 17B of the PBCL and that breach or failure constitutes self-dealing,
willful misconduct or recklessness. Those provisions do not eliminate a
director's duty of care and do not affect the availability of equitable remedies
such as an action to enjoin or rescind a transaction involving a breach of
fiduciary duty. In accordance with Section 1715 of the PBCL, the New Articles
permit the Board of Directors, in discharging their duties, to consider, among
other things, the interests of shareholders, suppliers, customers and creditors
of the Company. The New By-Laws further provide that the Company will indemnify
its directors and officers, and may indemnify any authorized representative of
the Company, to the fullest extent permitted by the PBCL. The Company believes
that such provisions will assist the Company in attracting and retaining
qualified individuals to serve as directors and officers.
The New By-Laws provide that the number of directors constituting the
entire Board of Directors will be established by the Board of Directors, but
will consist of not less than three members. Directors may be removed by
shareholders only for cause and new directors may be elected simultaneously with
such removal. The New By-Laws further provide that any amendment of the New
By-Laws to permit the removal of directors without cause by shareholders will
not apply to any incumbent director for the balance of his term.
The New By-Laws provide that the Board of Directors will be divided into
three classes of directors serving staggered three-year terms. Each class will
consist, as nearly as possible, of one-third of the whole number of the members
of the Board of Directors. The classification of the Board of Directors has the
effect of making it more difficult for shareholders to change the composition of
the Board of Directors in a relatively short period of time. At least two annual
meetings of shareholders will generally be required to effect a change in a
majority of the Board of Directors.
The New By-Laws may be amended by a majority of the Board of Directors,
subject to the right of the shareholders to amend the New By-Laws by the
affirmative vote of the holders of at least two-thirds of the outstanding shares
of Common Stock. The New Articles may be amended by the affirmative vote of the
holders of a majority of the outstanding shares of Common Stock, except that the
affirmative vote of the holders of at least two-thirds of such shares is
required to amend, certain provisions, including provisions
65
<PAGE> 68
establishing a classified board, prohibiting cumulative voting and granting the
Board of Directors the right to designate one or more series or classes of
Preferred Stock.
RIGHTS PLAN
The Board of Directors has adopted a Preferred Share Purchase Rights Plan
(the "Rights Plan") which will become effective upon the consummation of the
Offering. Pursuant to the Rights Plan, each share of Common Stock outstanding as
of the date the New Articles are adopted and each share of Common Stock issued
and outstanding thereafter (unless and until the Rights expire or are redeemed
or a Distribution Date (as described below) occurs) will be accompanied by one
preferred share purchase right (each, a "Right") entitling the registered holder
to purchase from the Company one one-hundredth of a share of Series A Junior
Participating Preferred Stock, $.01 par value (the "Junior Preferred Shares"),
of the Company at an exercise price of $50 (the "Purchase Price"), subject to
adjustment. The description and terms of the Rights Plan are set forth in a
Rights Agreement (the "Rights Agreement") between the Company and ChaseMellon
Shareholder Services, L.L.C., as Rights Agent. The shares of Common Stock sold
in the Offering will be accompanied by Rights. The Rights Plan and the Rights
will expire in 2006, unless extended.
The Rights are and will be evidenced by the Common Stock certificates
representing the shares which they accompany, and no separate Rights
certificates will be distributed, until the occurrence of a Distribution Date.
The Rights will separate from the Common Stock and a Distribution Date will
occur at the close of business on the earlier of (x) the tenth business day
following a public announcement that a person or group of affiliated or
associated persons has acquired or obtained the right to acquire beneficial
ownership of 17.5% or more of the outstanding shares of Common Stock (an
"Acquiring Person"), unless the person becomes the owner of 17.5% solely by
reason of a share purchase by the Company or under certain other circumstances,
or (y) the tenth business day (or such later date as may be determined by action
of the Board of Directors prior to such time as any person becomes an Acquiring
Person) following the commencement of (or announcement of the intention to
commence) a tender offer or exchange offer (other than by the Company or certain
affiliates) that would result in an Acquiring Person beneficially owning 17.5%
or more of the outstanding shares of Common Stock. The Rights Plan permits the
Board of Directors to redeem the Rights in whole, but not in part, at a price of
$.01 per Right (subject to adjustment) at any time prior to the time any person
becomes an Acquiring Person.
In the event that (i) a person becomes an Acquiring Person or (ii) the
Company is acquired in a merger or business combination or 50% or more of its
consolidated assets or earning power are sold after a person has become an
Acquiring Person, each holder of a Right will thereafter have the right to
receive, upon exercise thereof and payment of the Purchase Price, Common Stock
(or, in certain circumstances, cash, property or other securities of the
acquiring company) having a value equal to two times the Purchase Price.
Notwithstanding the foregoing, following the occurrence of any of the events
described in clause (i) or (ii) of the preceding sentence, all Rights that are
or (under certain circumstances specified in the Rights Agreement) were
beneficially owned by any Acquiring Person will be null and void. At any time
after a person or group becomes an Acquiring Person and prior to the acquisition
of 50% or more of the Common Stock then outstanding, the Board of Directors may
exchange the Rights (other than Rights owned by the Acquiring Person) in whole
or in part at an exchange ratio of one share of Common Stock or one
one-hundredth of a share of Junior Preferred Shares per Right, subject to
adjustment.
The Junior Preferred Shares purchasable upon exercise of the Rights will
not be redeemable. Each Junior Preferred Share will be entitled to a
preferential quarterly dividend equal to the greater of $1.00 per share or 100
times the aggregate dividends declared, in cash or in kind, per share of Common
Stock. In the event of liquidation, the holders of Junior Preferred Shares will
be entitled to a minimum preferential liquidation payment of $100 per share and
will be entitled to an aggregate payment of 100 times the payment to be made per
share of Common Stock. Each Junior Preferred Share will have 100 votes and will
be voted together with the Common Stock. In the event of any merger,
consolidation or other transaction in which shares of Common Stock are
exchanged, each Junior Preferred Share will be entitled to receive 100 times the
amount received per share of Common Stock. The number of Junior Preferred Shares
or other securities or property issuable upon exercise of the Rights, and the
Purchase Price payable, are subject to customary adjustments from time to time
to prevent dilution. The number of outstanding Rights and the number of shares
of the
66
<PAGE> 69
Junior Preferred Shares issuable upon exercise of each Right are also subject to
adjustment in the event of a stock split of the Common Stock or a stock dividend
on the Common Stock payable in Common Stock or subdivisions, consolidations or
combinations of the Common Stock occurring, in any such case, prior to the
Distribution Date.
Certain of the provisions described above could discourage potential
acquisition proposals and could delay or prevent a change in control of the
Company. These provisions are intended to enhance the likelihood of continuity
and stability in the composition of the Board of Directors and in the policies
formulated by the Board of Directors and to discourage certain types of
transactions that may involve an actual or threatened change of control of the
Company.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is ChaseMellon
Shareholder Services, L.L.C..
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the Offering, 14,240,134 shares of Common Stock will be
outstanding (14,382,343 shares if the over-allotment option is exercised in
full). Of these shares, the 4,530,000 shares of Common Stock sold in the
Offering (5,073,600 shares if the over-allotment option is exercised in full)
will be freely tradeable without restriction or further registration under the
Securities Act, except that any shares of Common Stock purchased by "affiliates"
of the Company, as that term is defined in Rule 144 under the Securities Act
("Affiliates"), may generally be sold only in compliance with the limitations of
Rule 144 described below. The remaining 9,710,134 shares of Common Stock
(9,308,743 shares if the over-allotment option is exercised in full) are deemed
"restricted securities" under Rule 144.
In general, under Rule 144 as currently in effect, beginning approximately
90 days after the effective date of the Registration Statement of which this
Prospectus is a part, a shareholder, including an Affiliate, who has
beneficially owned his or her restricted securities (as that term is defined in
Rule 144) for at least two years from the date those restricted securities were
acquired from the Company or an Affiliate, is entitled to sell, within any
three-month period, a number of such shares that does not exceed certain volume
restrictions; provided, that certain requirements concerning availability of
public information, manner of sale and notice of sale are satisfied. In
addition, under Rule 144(k), if a period of at least three years has elapsed
from the date the restricted securities were acquired from the Company or an
Affiliate, a shareholder that is not an Affiliate at the time of sale and has
not been an Affiliate for at least three months prior to the sale is entitled to
sell such securities without compliance with the above-described requirements
under Rule 144.
Following consummation of the Offering, the Company intends to register on
Form S-8 under the Securities Act 2,634,642 shares of Common Stock reserved for
issuance under the Company's stock-based compensation plans. Shares registered
on Form S-8 will be available for resale in the open market subject to the
volume limitations applicable to Affiliates as provided in Rule 144 under the
Securities Act. The Company expects that shares of Common Stock distributable
from time to time by the ESOP in connection with the retirement, death and other
termination of employment of ESOP participants will be available for resale on
the open market, subject to certain limitations and conditions applicable to
Affiliates under Rule 144 under the Securities Act. See "Management and
Directors -- Benefit Plans."
Certain of the Merrill Lynch Entities that are limited partnerships will
distribute an aggregate of approximately shares of Common Stock owned
by them in the Merrill Lynch Distribution. As a condition to receiving shares of
Common Stock in the Merrill Lynch Distribution, such partners have agreed to be
bound by the same lock-up provision as the Company, its officers and directors,
the Selling Shareholders and certain other shareholders (including the ESOP).
The Merrill Lynch Distribution is expected to occur as soon as practicable after
180 days after the date of this Prospectus, or on such earlier date consented to
by CS First Boston Corporation.
The Company has entered into a Registration Rights Agreement with each of
the Selling Shareholders, the ESOP, Mr. Knutson (collectively, the "Initiating
Holders") and certain other shareholders. The Registration Rights Agreement
provides that, on or after the first anniversary of the consummation of the
67
<PAGE> 70
Offering, any Initiating Holder may, subject to certain conditions, demand that
the Company register at least 500,000 of his or its shares of Common Stock. Each
Initiating Holder has the right to make two such demands during the ten-year
term of the Registration Rights Agreement, but the Company will not be required
to effect registrations more frequently than every 180 days. Additionally, the
parties generally have the right to "piggyback" on any registration of shares of
Common Stock by the Company. Except for underwriting discounts and other selling
commissions (which are the responsibility of the selling shareholders), the
Company is required to bear substantially all of the expenses associated with
any registration required under the Registration Rights Agreement.
The Company, its officers and directors, the Selling Shareholders and
certain other shareholders (including the ESOP) who, immediately following the
consummation of the Offering, will own in the aggregate 9,538,967 shares of
Common Stock and vested and exercisable options to purchase an additional
543,842 shares of Common Stock in the aggregate have agreed not to offer, sell,
contract to sell, pledge or otherwise dispose of, directly or indirectly, or
file or cause to be filed with the Commission a registration statement under the
Securities Act relating to, any Common Stock or securities or other rights
convertible into or exchangeable or exercisable for any shares of Common Stock
or publicly disclose the intention to make any such offer, sale, pledge,
disposal or filing, without the prior written consent of CS First Boston
Corporation, for a period of 180 days after the date of this Prospectus. See
"Underwriting."
Prior to the Offering, there has been no public market for the Common
Stock, and no prediction can be made as to the effect, if any, that future sales
of shares of Common Stock, or the availability of shares of Common Stock for
future sale, will have on the market price of the Common Stock prevailing from
time to time. Sales of a substantial number of shares of Common Stock in the
public market following the Offering, or the perception that such sales could
occur, could adversely affect prevailing market prices for the Common Stock and
could impair the Company's ability to raise capital through an offering of its
equity securities.
68
<PAGE> 71
UNDERWRITING
Upon the terms and subject to the conditions contained in an Underwriting
Agreement dated , 1996 (the "Underwriting Agreement"), the
underwriters named below (the "Underwriters"), for whom CS First Boston
Corporation, Smith Barney Inc. and The Chicago Corporation are acting as
representatives (the "Representatives"), have severally but not jointly agreed
to purchase from the Company and the Selling Shareholders the following
respective numbers of shares of Common Stock:
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
- ----------- -----------
<S> <C>
CS First Boston Corporation....................................................
Smith Barney Inc. .............................................................
The Chicago Corporation........................................................
---------
Total........................................................................ 4,530,000
=========
</TABLE>
The Underwriting Agreement provides that the obligations of the
Underwriters are subject to certain conditions precedent and that the
Underwriters will be obligated to purchase all the shares of Common Stock
offered hereby (other than those shares covered by the over-allotment option
described below) if any are purchased. The Underwriting Agreement provides that,
in the event of a default by an Underwriter, in certain circumstances the
purchase commitments of non-defaulting Underwriters may be increased or the
Underwriting Agreement may be terminated.
The Company and the Selling Shareholders have granted to the Underwriters
an option, expiring at the close of business on the 30th day after the date of
this Prospectus, to purchase up to 142,209 additional shares from the Company
and an aggregate of 401,391 additional shares from the Selling Shareholders at
the initial public offering price, less the underwriting discount and
commissions, all as set forth on the cover page of this Prospectus. Such option
may be exercised only to cover over-allotments in the sale of the shares of
Common Stock offered hereby. To the extent such option is exercised, each
Underwriter will become obligated, subject to certain conditions, to purchase
approximately the same percentage of such additional shares of Common Stock as
it was obligated to purchase pursuant to the Underwriting Agreement.
The Company and the Selling Shareholders have been advised by the
Representatives that the Underwriters propose to offer shares of the Common
Stock to the public initially at the public offering price set forth on the
cover page of this Prospectus and, through the Representatives, to certain
dealers at such price less a concession of $ per share, and the
Underwriters and such dealers may allow a discount of $ per share on
sales to certain other dealers. After the initial public offering, the public
offering price and concession and discount to dealers may be changed by the
Representatives.
The Representatives have informed the Company that they do not expect
discretionary sales by the Underwriters to exceed 5% of the shares being offered
hereby.
The Company, its officers and directors, the Selling Shareholders and
certain other shareholders (including the ESOP) who, immediately following the
consummation of the Offering, will own in the aggregate 9,538,967 shares of
Common Stock and vested and exercisable options to purchase an additional
543,842 shares of Common Stock in the aggregate have agreed not to offer, sell,
contract to sell, pledge or otherwise dispose of, directly or indirectly, or
file or cause to be filed with the Commission a registration statement under the
Securities Act relating to, any shares of the Common Stock or securities or
other rights convertible into or exchangeable or exercisable for any shares of
Common Stock or publicly disclose the intention to make any such offer, sale,
pledge, disposal or filing, without the prior written consent of CS First Boston
Corporation, for a period of 180 days after the date of this Prospectus.
69
<PAGE> 72
The Company and the Selling Shareholders have agreed to indemnify the
Underwriters against certain liabilities, including civil liabilities under the
Securities Act, or to contribute to payments that the Underwriters may be
required to make in respect thereof.
At the request of the Company, the Underwriters are reserving up to 225,000
shares of Common Stock from the Offering for sale to employees of the Company
and other persons identified by the Company. Up to 175,000 of such shares may be
purchased by employees at the public offering price less the underwriting
discount and commissions set forth on the cover page of this Prospectus. Any
other sales to employees or sales to such other persons will be at the public
offering price. Any shares not purchased in this reserve program will be sold to
the general public in the Offering. The Company will reimburse the Underwriters
for the underwriting discount and commissions to the extent applicable.
The shares of Common Stock have been approved for listing on the Nasdaq
National Market subject to official notice of issuance, under the symbol "EDMC."
Prior to the Offering, there has been no public market for the Common
Stock. Accordingly, the initial public offering price for the Shares will be
determined by negotiation among the Company, the Selling Shareholders and the
Representatives. In determining such price, consideration will be given to
various factors, including market conditions for initial public offerings, the
history of and prospects for the Company's business, the Company's past and
present operations, its past and present earnings and current financial
position, an assessment of the Company's management, the market for securities
of companies in businesses similar to those of the Company, the general
condition of the securities markets and other relevant factors. There can be no
assurance, however, that the initial public offering price will correspond to
the price at which the Common Stock will trade in the public market subsequent
to the Offering or that an active trading market for the Common Stock will
develop and continue after the Offering.
Certain of the Underwriters have provided financial advisory and investment
banking services to the Company in the past, for which customary compensation
has been received.
NOTICE TO CANADIAN RESIDENTS
RESALE RESTRICTIONS
The distribution of shares of Common Stock in Canada is being made only on
a private placement basis exempt from the requirements that the Company prepare
and file a prospectus with the securities regulatory authorities in each
province where trades of the shares of Common Stock are effected. Accordingly,
any resale of shares of Common Stock in Canada must be made in accordance with
applicable securities laws which will vary depending on the relevant
jurisdiction and which may require resales to be made in accordance with
available statutory exemptions or pursuant to a discretionary exemption granted
by the applicable Canadian securities regulatory authority. Purchasers are
advised to seek legal advice prior to any resale of shares of Common Stock.
REPRESENTATIONS OF PURCHASERS
Each purchaser of shares of Common Stock in Canada who receives a purchase
confirmation will be deemed to represent to the Company, the Selling
Shareholders and the dealer from whom that purchase confirmation is received
that (i) that purchaser is entitled under applicable provincial securities laws
to purchase those shares without the benefit of a prospectus qualified under
those securities laws, (ii) where required by law, that purchaser is purchasing
as principal and not as agent, and (iii) that purchaser has reviewed the text
above under "Resale Restrictions."
RIGHTS OF ACTION AND ENFORCEMENT
The securities being offered are those of a foreign issuer, and Ontario
purchasers will not receive the contractual right of action prescribed by
section 32 of the Regulation under the Securities Act (Ontario). As a result,
Ontario purchasers must rely on other remedies that may be available, including
common law rights of
70
<PAGE> 73
action for damages or rescission or rights of action under the civil liability
provisions of the U.S. federal securities laws.
All of the Company's directors and officers as well as the experts named
herein may be located outside of Canada and, as a result, it may not be possible
for Ontario purchasers to effect service of process within Canada upon the
Company or those persons. All or a substantial portion of the assets of the
Company and those persons may be located outside of Canada and, as a result, it
may not be possible to satisfy a judgment against the Company or those persons
in Canada or to enforce a judgment obtained in Canadian courts against that
issuer or those persons outside of Canada.
NOTICE TO BRITISH COLUMBIA RESIDENTS
A purchaser of shares of Common Stock to whom the Securities Act (British
Columbia) applies is advised that that purchaser is required to file with the
British Columbia Securities Commission a report within ten days of the sale of
any shares of Common Stock acquired by that purchaser pursuant to the Offering.
Such report must be in the form attached to British Columbia Securities
Commission Blanket Order BOR #95/17, a copy of which may be obtained from the
Company. One such report must be filed in respect of shares acquired on the same
date and under the same prospectus exemption.
LEGAL MATTERS
The validity of the shares of Common Stock offered hereby and certain other
legal matters relating to the Offering will be passed upon for the Company and
for the Selling Shareholders by Kirkpatrick & Lockhart LLP, Pittsburgh,
Pennsylvania. Certain legal matters relating to the Offering will be passed upon
for the Underwriters by Dewey Ballantine, New York, New York.
EXPERTS
The consolidated financial statements and schedule of the Company as of
June 30, 1996 and 1995 and for each of the three fiscal years in the period
ended June 30, 1996 included in this Prospectus have been so included in
reliance on the report of Arthur Andersen LLP, independent accountants, given on
the authority of said firm as experts in auditing and accounting.
71
<PAGE> 74
ADDITIONAL INFORMATION
The Company has filed with the Commission a Registration Statement on Form
S-1 under the Securities Act and the rules and regulations promulgated
thereunder covering the shares of Common Stock offered hereby. For the purposes
hereof, the term "Registration Statement" means the original Registration
Statement, any and all amendments thereto and the schedules and exhibits to such
original Registration Statement or any such amendment. This Prospectus omits
certain information contained in the Registration Statement and reference is
made to the Registration Statement for further information with respect to the
Company and the shares of Common Stock offered hereby. Each statement contained
in this Prospectus as to the contents of any contract, agreement or other
document filed as an exhibit to the Registration Statement is qualified in its
entirety by reference to such exhibit for a more complete description of the
matter involved. The Registration Statement may be inspected and copied at the
public reference facilities maintained by the Commission at Judiciary Plaza, 450
Fifth Street, N.W., Washington, D.C. 20549 and at the regional offices of the
Commission maintained at Citicorp Center, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661 and Seven World Trade Center, Suite 1300, New York, New
York 10048. Copies of such materials may be obtained from the Public Reference
Section of the Commission, Room 1024, Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549, upon payment of the prescribed rates. The Commission
also maintains a web site at http://www.sec.gov which contains reports, proxy
statements and other information regarding registrants that file electronically
with the Commission.
As a result of the Offering, the Company will be subject to the
informational requirements of the United States Securities Exchange Act of 1934,
as amended (the "Exchange Act"). The Company will fulfill its obligations with
respect to the requirements of the Exchange Act by filing periodic reports and
other information with the Commission.
72
<PAGE> 75
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Public Accountants............................................ F-2
Consolidated Balance Sheets as of June 30, 1995 and 1996............................ F-3
Consolidated Statements of Income for the years ended June 30, 1994, 1995 and
1996.............................................................................. F-4
Consolidated Statements of Redeemable Shareholders' Investment for the years ended
June 30, 1994, 1995 and 1996...................................................... F-5
Consolidated Statements of Cash Flows for the years ended June 30, 1994, 1995 and
1996.............................................................................. F-6
Notes to Consolidated Financial Statements.......................................... F-7
</TABLE>
F-1
<PAGE> 76
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Education Management Corporation and Subsidiaries:
We have audited the accompanying consolidated balance sheets of Education
Management Corporation (a Pennsylvania corporation) and Subsidiaries as of June
30, 1995 and 1996, and the related consolidated statements of income, redeemable
shareholders' investment and cash flows for each of the three years in the
period ended June 30, 1996. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Education Management
Corporation and Subsidiaries as of June 30, 1995 and 1996, and the results of
their operations and their cash flows for each of the three years in the period
ended June 30, 1996 in conformity with generally accepted accounting principles.
Arthur Andersen LLP
Pittsburgh, Pennsylvania,
August 16, 1996 (except with respect
to matters discussed in Note 13(d)
as to which the date is October 24, 1996)
F-2
<PAGE> 77
EDUCATION MANAGEMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
AS OF JUNE 30,
-----------------------------------------
PRO FORMA
FOR THE
CAPITAL
TRANSACTIONS
1995 1996 1996
-------- -------- -------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 32,120 $ 26,162 $ 26,162
Restricted cash........................................... 7,503 1,237 1,237
-------- -------- ---------
Total cash and cash equivalents......................... 39,623 27,399 27,399
Receivables:
Trade, net of allowances of $1,529, $2,938 and $3,359,
respectively......................................... 4,909 5,680 5,680
Notes, advances and other............................... 2,505 2,492 2,492
Inventories............................................... 992 1,271 1,271
Deferred income taxes..................................... 181 381 381
Other current assets...................................... 1,452 2,635 2,635
-------- -------- ---------
TOTAL CURRENT ASSETS........................................ 49,662 39,858 39,858
-------- -------- ---------
Property and equipment, net................................. 34,111 41,174 41,174
Other assets................................................ 4,560 5,837 5,837
Goodwill, net of amortization of $2,306, $2,713 and $2,713,
respectively.............................................. 13,970 14,543 14,543
-------- -------- ---------
$102,303 $101,412 $ 101,412
======== ======== =========
LIABILITIES AND REDEEMABLE SHAREHOLDERS' INVESTMENT
CURRENT LIABILITIES:
Current portion of long-term debt......................... $ 6,427 $ 3,890 $ 3,890
Accounts payable.......................................... 6,757 4,776 4,776
Accrued liabilities....................................... 8,370 7,355 7,355
Advance payments.......................................... 13,164 11,243 11,243
-------- -------- ---------
TOTAL CURRENT LIABILITIES................................... 34,718 27,264 27,264
-------- -------- ---------
Long-term debt, less current portion........................ 63,383 62,029 69,636
Deferred income taxes and other long-term liabilities....... 2,347 2,463 2,463
Commitments and contingencies (Note 6)
REDEEMABLE SHAREHOLDERS' INVESTMENT (NOTE 4):
Capital stock:
10.19% Series A Convertible Preferred Stock, at paid-in
value................................................ 22,075 22,075 -
Class A Common Stock, $.0001 par value.................. - - -
Class B Common Stock, $.0001 par value.................. 1 1 1
Warrants outstanding...................................... 7,683 7,683 -
Additional paid-in capital................................ 19,118 19,742 41,893
Deferred compensation related to ESOP..................... (3,587) - -
Treasury stock............................................ (248) (99) (99)
Stock subscriptions receivable............................ (212) (442) (442)
Accumulated deficit....................................... (42,975) (39,304) (39,304)
-------- -------- ---------
TOTAL REDEEMABLE SHAREHOLDERS' INVESTMENT................... 1,855 9,656 2,049
-------- -------- ---------
$102,303 $101,412 $ 101,412
======== ======== =========
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
F-3
<PAGE> 78
EDUCATION MANAGEMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED JUNE 30,
----------------------------------
1994 1995 1996
-------- -------- --------
<S> <C> <C> <C>
NET REVENUES..................................................... $122,549 $131,227 $147,863
COSTS AND EXPENSES:
Educational services......................................... 83,566 86,865 98,841
General and administrative................................... 26,174 28,841 32,344
Amortization of intangibles.................................. 6,599 1,937 1,060
ESOP expense................................................. 4,759 7,086 1,366
-------- -------- --------
121,098 124,729 133,611
-------- -------- --------
INCOME BEFORE INTEREST AND TAXES................................. 1,451 6,498 14,252
Interest expense, net........................................ 4,765 4,495 3,371
-------- -------- --------
INCOME (LOSS) BEFORE INCOME TAXES................................ (3,314) 2,003 10,881
Provision (credit) for income taxes.......................... (1,612) 490 4,035
-------- -------- --------
INCOME (LOSS) BEFORE EXTRAORDINARY ITEM.......................... (1,702) 1,513 6,846
Extraordinary loss on early extinguishment of debt (Note
5)........................................................ - - 926
-------- -------- --------
NET INCOME (LOSS)................................................ $ (1,702) $ 1,513 $ 5,920
======== ======== ========
DIVIDENDS ON SERIES A PREFERRED STOCK............................ (2,249) (2,249) (2,249)
INCOME (LOSS) APPLICABLE TO COMMON SHAREHOLDERS.................. $ (3,951) $ (736) $ 3,671
INCOME (LOSS) PER COMMON AND COMMON EQUIVALENT SHARE:
PRIMARY:
Income (loss) before extraordinary item...................... $ (.57) $ (.11) $ .45
Extraordinary loss on early extinguishment of debt (Note
5)........................................................ - - (.09)
-------- -------- --------
Net income (loss)............................................ $ (.57) $ (.11) $ .36
======== ======== ========
FULLY DILUTED:
Income (loss) before extraordinary item...................... $ (.57) $ (.11) $ .39
Extraordinary loss on early extinguishment of debt (Note
5)........................................................ - - (.08)
-------- -------- --------
Net income (loss)............................................ $ (.57) $ (.11) $ .31
======== ======== ========
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
F-4
<PAGE> 79
EDUCATION MANAGEMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF REDEEMABLE SHAREHOLDERS' INVESTMENT
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SERIES A
PREFERRED
STOCK CLASS A CLASS B DEFERRED
STATED AT COMMON COMMON ADDITIONAL COMPENSATION STOCK
PAID-IN STOCK AT STOCK AT WARRANTS PAID-IN RELATED TO TREASURY SUBSCRIPTIONS
VALUE PAR VALUE PAR VALUE OUTSTANDING CAPITAL ESOP STOCK RECEIVABLE
--------- --------- --------- ---------- ---------- ------------ -------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, June 30, 1993.... $22,075 $ - $ 1 $7,683 $ 17,972 $(19,692) $ - $(275)
Net loss.................. - - - - - - - -
Dividends on Series A
Preferred Stock......... - - - - - - - -
Purchase of 65,938 shares
of Class B Stock........ - - - - - - (227) -
Payment on stock
subscriptions receivable
for purchase of stock... - - - - - - - 50
Payments received on ESOP
debt.................... - - - - - 6,986 - -
Tax effect of dividends on
unallocated shares held
by the ESOP............. - - - - - - - -
------- ------- ------- ------- ------- -------- ------ ------
Balance, June 30, 1994.... 22,075 - 1 7,683 17,972 (12,706) (227) (225)
Net income................ - - - - - - - -
Dividends on Series A
Preferred Stock......... - - - - - - - -
Purchase of 5,767 shares
of Class B Stock........ - - - - - - (21) -
Payment on stock
subscriptions receivable
for purchase of stock... - - - - - - - 13
Payments received on ESOP
debt.................... - - - - - 9,119 - -
Tax effect of dividends on
unallocated shares held
by the ESOP............. - - - - - - - -
Vesting of compensatory
stock options........... - - - - 1,146 - - -
------- ------- ------- ------- -------- -------- ------ -----
Balance, June 30, 1995.... 22,075 - 1 7,683 19,118 (3,587) (248) (212)
Net income................ - - - - - - - -
Dividends on Series A
Preferred Stock......... - - - - - - - -
Sale of 43,205 shares of
Class B Stock........... - - - - 160 - 149 (239)
Payment on stock
subscriptions receivable
for purchase of stock... - - - - - - - 9
Payments received on ESOP
debt.................... - - - - - 3,587 - -
Vesting of compensatory
stock options........... - - - - 464 - - -
------- ------- ------- ------ -------- -------- ------ -----
Balance, June 30, 1996.... $22,075 $ - $ 1 $7,683 $ 19,742 $ - $ (99) $(442)
======= ======= ======= ====== ======== ======== ====== =====
<CAPTION>
TOTAL
REDEEMABLE
ACCUMULATED SHAREHOLDERS'
DEFICIT INVESTMENT
----------- -------------
<S> <C> <C>
Balance, June 30, 1993.... $ (38,554) $ (10,790)
Net loss.................. (1,702) (1,702)
Dividends on Series A
Preferred Stock......... (2,249) (2,249)
Purchase of 65,938 shares
of Class B Stock........ - (227)
Payment on stock
subscriptions receivable
for purchase of stock... - 50
Payments received on ESOP
debt.................... - 6,986
Tax effect of dividends on
unallocated shares held
by the ESOP............. 208 208
--------- ----------
Balance, June 30, 1994.... (42,297) (7,724)
Net income................ 1,513 1,513
Dividends on Series A
Preferred Stock......... (2,249) (2,249)
Purchase of 5,767 shares
of Class B Stock........ - (21)
Payment on stock
subscriptions receivable
for purchase of stock... - 13
Payments received on ESOP
debt.................... - 9,119
Tax effect of dividends on
unallocated shares held
by the ESOP............. 58 58
Vesting of compensatory
stock options........... - 1,146
--------- ----------
Balance, June 30, 1995.... (42,975) 1,855
Net income................ 5,920 5,920
Dividends on Series A
Preferred Stock......... (2,249) (2,249)
Sale of 43,205 shares of
Class B Stock........... - 70
Payment on stock
subscriptions receivable
for purchase of stock... - 9
Payments received on ESOP
debt.................... - 3,587
Vesting of compensatory
stock options........... - 464
--------- ----------
Balance, June 30, 1996.... $ (39,304) $ 9,656
========= ==========
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
F-5
<PAGE> 80
EDUCATION MANAGEMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED JUNE 30,
----------------------------------
1994 1995 1996
-------- -------- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)...................................... $ (1,702) $ 1,513 $ 5,920
Adjustments to reconcile net income (loss) to net cash
flows from operating activities:
Depreciation and amortization.......................... 12,419 7,505 8,530
ESOP expense........................................... 4,759 7,086 1,366
Tax effect of dividends on unallocated shares held by
the ESOP............................................ 208 58 -
Vesting of compensatory stock options.................. - 1,146 464
Deferred provision (credit) for income taxes........... (2,432) (210) 137
Changes in current assets and liabilities:
Restricted cash..................................... (5,097) (2,406) 6,266
Receivables......................................... (2,284) (223) (758)
Inventories......................................... (63) 1 (279)
Other current assets................................ 71 182 (1,183)
Accounts payable.................................... (437) 3,236 (1,213)
Accrued liabilities................................. (377) 382 (1,015)
Advance payments.................................... (992) 3,951 (1,921)
-------- -------- --------
Total adjustments................................. 5,775 20,708 10,394
-------- -------- --------
Net cash flows from operating activities.......... 4,073 22,221 16,314
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Expenditures for property and equipment................ (6,292) (10,481) (15,749)
Other items, net....................................... (506) (1,492) (2,682)
-------- -------- --------
Net cash flows from investing activities.......... (6,798) (11,973) (18,431)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on debt............................. (11,669) (12,438) (32,525)
Dividends paid to ESOP................................. (2,249) (2,249) (2,249)
Payments received from ESOP, net....................... 2,227 2,032 2,220
New borrowings......................................... 5,819 19,145 28,634
Capital stock transactions, net........................ (177) (8) 79
-------- -------- --------
Net cash flows from financing activities.......... (6,049) 6,482 (3,841)
-------- -------- --------
NET CHANGE IN CASH AND CASH EQUIVALENTS.................. (8,774) 16,730 (5,958)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR............. 24,164 15,390 32,120
-------- -------- --------
CASH AND CASH EQUIVALENTS, END OF YEAR................... $ 15,390 $ 32,120 $ 26,162
======== ======== ========
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
F-6
<PAGE> 81
EDUCATION MANAGEMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. OWNERSHIP AND OPERATIONS:
Education Management Corporation ("EMC" or the "Company") is among the
largest providers of proprietary postsecondary education in the United States
based on student enrollments and revenues. Through its operating units, the Art
Institutes ("The Art Institutes"), the New York Restaurant School ("NYRS") (see
Note 13), the National Center for Paralegal Training ("NCPT"), and the National
Center for Professional Development ("NCPD"), the Company offers associate's and
bachelor's degree programs and non-degree programs in the areas of design, media
arts, culinary arts, fashion and paralegal studies. The Company has provided
career-oriented education programs for nearly 35 years.
The Company's main operating unit, The Art Institutes, consists of 11
schools in ten cities throughout the United States. Art Institute programs are
designed to provide the knowledge and skills necessary for entry-level
employment in various fields, including computer animation, multimedia,
advertising design, culinary arts, graphic, interior and industrial design,
video production and commercial photography. Those programs typically are
completed in 18 to 27 months and culminate in an associate's degree. As of June
30, 1996, four Art Institutes offered bachelor's degree programs and, subsequent
to year-end, a fifth was approved to introduce such a program.
The Company offers a culinary arts curriculum at six Art Institutes and
NYRS, a culinary arts and restaurant management school located in New York City.
NYRS offers an associate's degree program and certificate programs.
The Company offers paralegal training at NCPT in Atlanta. NCPT offers
certificate programs that generally are completed in four to nine months. NCPD
maintains consulting relationships with seven colleges and universities to
assist in the development, marketing and delivery of paralegal, nurse legal
consultant and financial planner test preparation programs for recent college
graduates and working adults.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
BASIS OF CONSOLIDATION AND PRESENTATION
The consolidated financial statements include the accounts of EMC and its
subsidiaries. All significant intercompany transactions and balances have been
eliminated.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reporting
period. Actual results could differ from these estimates.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid debt instruments purchased with a
maturity of three months or less to be cash equivalents. These investments are
stated at cost which, based upon the scheduled maturities, approximates market
value.
GOVERNMENT REGULATIONS
The Art Institutes participate in various federal student financial aid
programs ("Title IV Programs") under Title IV of the Higher Education Act of
1965, as amended (the "HEA"). Approximately 66% of the Company's net revenues in
1996 was indirectly derived from funds distributed under these programs to
students at The Art Institutes.
F-7
<PAGE> 82
EDUCATION MANAGEMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
The Art Institutes are required to comply with certain federal regulations
established by the U.S. Department of Education. Among other things, they are
required to classify as restricted certain Title IV Program loan proceeds in
excess of charges currently applicable to students' accounts. Such funds are
reported as restricted cash in the accompanying consolidated balance sheets.
The Art Institutes are required to administer Title IV Program funds in
accordance with the HEA and U.S. Department of Education regulations and must
use due diligence in approving and disbursing funds and servicing loans. In the
event an Art Institute does not comply with federal requirements or if student
loan default rates are at a level considered excessive by the federal
government, that Art Institute could lose its eligibility to participate in
Title IV Programs or could be required to repay funds determined to have been
improperly disbursed. Management believes that The Art Institutes are in
substantial compliance with the federal requirements and that student loan
default rates are not at a level considered to be excessive.
EMC makes contributions to Perkins Student Loan Funds (the "Funds") at The
Art Institutes. Current contributions to the Funds are made 75% by the federal
government and 25% by EMC. EMC carries its investments in the Funds at cost, net
of an allowance for estimated future loan losses.
LEASE ARRANGEMENTS
The Company conducts a major part of its operations from leased facilities.
In addition, the Company leases a portion of its furniture and equipment. In
those cases in which the lease term approximates the useful life of the leased
asset or meets certain other prerequisites, the leasing arrangement is
classified as a capitalized lease. The remaining lease arrangements are treated
as operating leases.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost, net of accumulated depreciation.
Expenditures for additions and betterments are capitalized, while those for
maintenance, repairs and minor renewals are expensed as incurred. The Company
uses the straight-line method of depreciation for financial reporting, while
using different methods for tax purposes. Depreciation is based upon estimated
useful lives. Leasehold improvements are amortized over the term of the leases,
or over their estimated useful lives, whichever is shorter.
DEFERRED START-UP EXPENSE
The Company defers costs incurred prior to a new school conducting classes.
Significant cost components of the deferred expense include relocation and
compensation of new school administrative and support personnel, facility rent
and legal fees. Deferred start-up costs are included in other non-current assets
and are amortized to educational services expense during the next fiscal year.
All marketing and student admissions expenses related to new schools are
expensed as incurred.
GOODWILL
The excess of the investment in EMC and other acquisitions over the fair
market values assigned to the net assets acquired has been classified as
goodwill and is being amortized over a period of 40 years.
PRO FORMA FINANCIAL DATA (UNAUDITED)
The unaudited pro forma information presented in the accompanying
consolidated balance sheet as of June 30, 1996 reflects (i) the redemption of
75,000 shares of Series A 10.19% Convertible Preferred Stock, $.0001 par value
(the "Series A Preferred Stock") (as discussed in Note 13), (ii) the conversion
of the remaining 145,750 shares of Series A Preferred Stock into Class A Common
Stock, $.0001 par value (the "Class A Stock") (as discussed in Note 13), and
(iii) the exercise of all outstanding warrants for 2,978,039 shares of Class B
Common Stock, $.0001 par value (the "Class B Stock"), collectively referred to
as the "Capital Transactions."
F-8
<PAGE> 83
EDUCATION MANAGEMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
Pro forma earnings per share information has not been presented in the
accompanying consolidated statement of income as the effect of the Capital
Transactions on income applicable to common shareholders would not be
significant. Such effect would be limited to a reduction in the outstanding
shares and the premium paid on redemption of the Series A Preferred Stock (as
discussed in Note 13).
FINANCIAL INSTRUMENTS
The fair values and carrying amounts of the Company's financial
instruments, primarily accounts receivable and debt, are approximately
equivalent. The debt instruments bear interest at floating rates which are based
upon market rates or fixed rates which approximate market rates. All other
financial instruments are classified as current and will be utilized within the
next operating cycle.
The fair value of the interest rate swap entered into during fiscal 1996 is
based on the difference between the interest rates received or paid on the
notional amounts of the underlying liability. The estimated fair value as of
June 30, 1996 was approximately $120,000, whereas the carrying amount to the
Company was $0. The effect of the interest rate swap was to increase the
Company's interest cost by $13,700 for the year ended June 30, 1996. There were
no such instruments in effect during fiscal 1994 or 1995.
RECENTLY ISSUED ACCOUNTING STANDARDS
Financial Accounting Standards Board Statement No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of "
("SFAS No. 121"), was issued in March 1995. This statement will be applied
prospectively and requires that impairment losses on long-lived assets be
recognized when the book value of the asset exceeds its expected undiscounted
cash flows. The Company will adopt SFAS No. 121 during fiscal 1997, and adoption
is not anticipated to have a material impact on the Company's financial position
or results of operations.
Financial Accounting Standards Board Statement No. 123, "Accounting for
Stock-Based Compensation" ("SFAS No. 123"), was issued in October 1995. This
statement establishes a "fair value based method" of financial accounting and
related reporting standards for stock-based employee compensation plans. SFAS
No. 123 becomes effective in fiscal 1997 and provides for adoption in the income
statement or by disclosure in the notes to financial statements only. The
Company anticipates continuing to account for its stock option plans under
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" as permitted by SFAS No. 123, but will provide the new disclosure in
the notes to the fiscal 1997 financial statements.
EMPLOYEE STOCK OWNERSHIP PLAN
The Company provides an Employee Stock Ownership Plan and Trust (the
"ESOP") for certain of its employees. In connection with establishing the ESOP,
the borrowings under a senior term loan financing ("ESOP Term Loan") were loaned
to the ESOP on the same terms. This loan was recorded as "deferred compensation
related to ESOP" and is shown as a reduction in redeemable shareholders'
investment in the accompanying consolidated financial statements.
As this loan was repaid, shares were released from pledge and allocated to
ESOP participants' accounts. ESOP expense primarily represents the difference
between the cost of shares released to ESOP participants' accounts and the
dividends used by the ESOP for principal and interest repayment on this loan.
The dividends paid to the ESOP on the Series A Preferred Stock were used by the
ESOP trustee to pay the Company for principal and interest due on the ESOP's
loan from the Company. As of June 30, 1996, the senior term loan had been
entirely repaid, as was the loan due from the ESOP to the Company. There will be
no future ESOP expense attributable to the repayment of this loan.
F-9
<PAGE> 84
EDUCATION MANAGEMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
REVENUE RECOGNITION AND RECEIVABLES
The Company's net revenues consist of tuition and fees, student housing
charges and supply store and restaurant sales. In fiscal 1996, the Company
derived 87% of its net revenues from tuition and fees paid by, or on behalf of,
its students. Net revenues, as presented, reflect reductions for student refunds
and scholarships.
The Company recognizes tuition and housing revenues on a monthly pro rata
basis over the term of instruction, typically an academic quarter. Fees are
generally recognized as revenue at the start of the academic period to which
they apply. Student supply store and restaurant sales are recognized as they
occur. If a student withdraws, revenue related to the remainder of the quarter
is recorded and subsequently revenue is reduced by the amount of the refund due
the student for that quarter, if any. Refunds are calculated in accordance with
federal, state and accrediting agency standards. Advance payments represent that
portion of payments received but not earned and are reflected as a current
liability in the accompanying consolidated balance sheets.
The trade receivable balances are comprised of individually insignificant
amounts due primarily from students throughout the United States.
COSTS AND EXPENSES
Educational services expense consists primarily of costs related to the
delivery and administration of the Company's education programs. Major cost
components are faculty compensation, administrative salaries, costs of
educational materials, facility leases and school occupancy costs, computer
systems costs, bad debt expense and depreciation and amortization of property
and equipment.
General and administrative expense consists of marketing and student
admissions expenses and departmental costs such as executive management, finance
and accounting, legal, corporate development and other departments that do not
provide direct services to the Company's students. All marketing and student
admissions costs are expensed in the fiscal year incurred.
Amortization of intangibles relates principally to the values assigned to
student contracts and applications, accreditation, contracts with colleges and
universities and goodwill, which arose principally from the application of
purchase accounting to the establishment and financing of the ESOP and the
related leveraged transaction in October 1989. This transaction was accounted
for in accordance with FASB Emerging Issues Task Force Issue No. 88-16.
EARNINGS PER SHARE
Earnings per share ("EPS") of common stock have been computed using the
weighted average number of common and common equivalent shares outstanding
during the period. Common equivalent shares include stock warrants and options
for both the primary and fully diluted computations calculated using the
treasury stock method. For all periods presented, the weighted average number of
common and common equivalent shares include options issued within one year of
the Offering. The Series A Preferred Stock is assumed to be converted for fully
diluted EPS. In 1994 and 1995, the weighted average common and common equivalent
shares do not include the assumed exercise of the stock options and warrants or
the conversion of the Series A Preferred Stock as the effect would have been
anti-dilutive.
The weighted average number of common and common equivalent shares
outstanding were as follows:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30, PRO FORMA
---------------------------- AS ADJUSTED
1994 1995 1996 1996
------ ------ ------ ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Primary....................................... 6,927 6,891 10,171 14,526
Fully diluted................................. 6,927 6,891 11,875 14,526
</TABLE>
F-10
<PAGE> 85
EDUCATION MANAGEMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
The net income allocable to common shareholders has been reduced by
dividends paid on Series A Preferred Stock in both computations of EPS. In the
event that the Series A Preferred Stock was converted to Class A Stock, the
Company would no longer have paid dividends; however, ESOP expense in the
accompanying consolidated statements of income would have increased
proportionately.
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
----------------------------
Cash paid during the period for 1994 1995 1996
------ ------ ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Interest........................................... $5,422 $5,130 $3,558
Income taxes....................................... 1,532 976 2,854
Noncash investing and financing activities
Expenditures for property and equipment in accounts
payable.......................................... 248 931 163
</TABLE>
RECLASSIFICATIONS
Certain prior year balances have been reclassified to conform to the
current year presentation.
3. PROPERTY AND EQUIPMENT:
Property and equipment consist of the following:
<TABLE>
<CAPTION>
AS OF JUNE 30,
-------------------
1995 1996
------- -------
(DOLLARS IN
THOUSANDS)
<S> <C> <C>
Assets (asset lives)
Land......................................................... $ 300 $ 300
Buildings and improvements (20 years)........................ 1,841 1,841
Equipment and furniture (5 to 10 years)...................... 36,243 47,615
Leasehold interests and improvements (4 to 20 years)......... 24,327 27,936
------- -------
Total..................................................... 62,711 77,692
Less accumulated depreciation.................................. 28,600 36,518
------- -------
$34,111 $41,174
======= =======
</TABLE>
4. REDEEMABLE SHAREHOLDERS' INVESTMENT:
Shareholders' investment is described as redeemable because, prior to the
closing date of an initial public offering, holders of the Company's equity
securities may, under certain circumstances, require the Company to repurchase
such securities. In addition, the Company has the right to redeem shares of
Series A Preferred Stock and Class B Stock under certain circumstances.
Coincident with an initial public offering (Note 13), these rights will expire
and, accordingly, the "redeemable" caption will be removed.
The Series A Preferred Stock, all of which is held by the ESOP, is entitled
to annual cumulative cash dividends per share of $10.19. Under defined
circumstances, the Series A Preferred Stock is redeemable at the option of the
Company at specified prices, which vary based upon the circumstances and timing,
plus accrued dividends. The redemption price was $101.43 as of June 30, 1996 and
declines to $100.00 per share on October 26, 1996. Upon liquidation of the
Company, the preferred shareholders are entitled to a preference of $100.00 plus
accrued dividends. Each share of Series A Preferred Stock is convertible into
7.71854 shares of Class A Stock under defined circumstances. Shareholders may
require the Company to repurchase the Class A Stock at fair market value during
specified time periods.
F-11
<PAGE> 86
EDUCATION MANAGEMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
The Class A Stock and Class B Stock both are subject to redemption at the
request of the shareholders for specified prices under defined circumstances.
As of June 30, 1995 and 1996, the Company's authorized and issued Series A
Preferred Stock and Class A Stock and Class B Stock were as reflected below:
<TABLE>
<CAPTION>
AUTHORIZED ISSUED
---------- ----------
<S> <C> <C>
Series A Preferred Stock........................... 1,000,000 220,750
Class A Stock...................................... 25,000,000 1,842,802
Class B Stock...................................... 17,000,000 5,103,717
</TABLE>
Warrants to purchase up to 2,978,039 shares of Class B Stock were sold for
the fair value of the underlying stock to the holders of certain subordinated
notes. These warrants provide for an exercise price of $.0002 per share and
contain antidilutive features whereby the exercise price and the number of
shares that can be purchased are adjustable under certain circumstances. The
warrants expire on October 26, 1999.
The Company has two management stock option plans under which options to
purchase a maximum of 359,642 and 178,500 shares of Class B Stock have been
granted to management employees. The second plan requires that if options are
granted in excess of 150,000, such excess shares must be reserved in the
treasury for as long as such options can be exercised. As of June 30, 1996, the
28,500 shares held in the treasury were reserved in accordance with this plan.
Options granted under these plans vest ratably over four years based on the
operating results of the Company. The options are exercisable, if vested, during
a five-year period beginning on a date five years after the date of grant.
Vesting and exercisability of the options are accelerated under defined
circumstances. Under the terms of these plans, the Board of Directors granted
options to purchase shares at prices varying from $2.54 to $7.20 per share,
representing the fair market value of the stock at the time of the grant.
Compensation expense related to vesting of the options of $0, $1,146,000 and
$464,000 was recognized for the years ended June 30, 1994, 1995 and 1996,
respectively.
In addition to the above stock option plans, an agreement was entered into
with an executive during fiscal 1996 granting options for the purchase of 75,000
shares of Class B Stock at $11.00 per share. The agreement provides for
time-based vesting over four years. Vesting and exercisability are accelerated
under defined circumstances.
Class B Stock held in the treasury has from time to time been sold to key
management under stock subscription agreements providing for annual payments
based on incentive compensation received during the year and interest at the
applicable federal rate. In any event, all principal must be repaid by the
maturity of the notes, terms of which range from nine to ten years.
5. LONG-TERM DEBT:
The Company and its subsidiaries were indebted under the following
obligations as of June 30:
<TABLE>
<CAPTION>
1995 1996
------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Revolving credit agreement, secured by the stock of the Company's
subsidiaries and all of the Company's assets (see below).......... $30,000 $55,000
ESOP Term Loan...................................................... 3,587 -
Subordinated notes.................................................. 25,000 -
Capitalized lease and equipment installment note obligations (see
below)............................................................ 11,223 10,919
------- -------
69,810 65,919
Less current portion................................................ 6,427 3,890
------- -------
$63,383 $62,029
======= =======
</TABLE>
F-12
<PAGE> 87
EDUCATION MANAGEMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
The revolving credit agreement, as amended (the "Revolving Credit
Agreement"), allows for maximum borrowings of $70,000,000, annually reduced by
$5,000,000 beginning on October 13, 1997 through its expiration on October 13,
2000. The Revolving Credit Agreement requires, among other things, that the
Company maintain a specified level of consolidated net worth and meet interest
and leverage ratio requirements, and restricts capital expenditures, declaration
or payment of dividends on or repurchases of common stock and the incurrence of
additional indebtedness, as defined. As of June 30, 1996, the Company was in
compliance with all covenants. The Revolving Credit Agreement interest rate is
variable; interest can be charged at prime, Eurodollar or cost of funds (as
defined) rates, at the option of the Company. As of June 30, 1996, the average
interest rate under the Revolving Credit Agreement was 7.59%.
The Company has entered into interest rate swap agreements in order to
provide interest rate protection on $15,000,000 of borrowings as required under
the Revolving Credit Agreement. Under the swap agreements, the Company pays a
fixed rate of interest and receives a variable rate of interest based upon the
three-month London Interbank Offered Rate. The net effect of the swaps is that
the Company pays a fixed rate of 7.0175% on $15,000,000 of revolving credit
debt. The swap agreements expire on November 15, 1998. This nonleveraged
interest rate swap acquired to manage interest rate risk represents the only
derivative financial instruments used by the Company.
Relevant information regarding borrowings under the Revolving Credit
Agreement is reflected below:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
-------------------------------
1994 1995 1996
------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Outstanding borrowings, end of period................. $15,600 $30,000 $55,000
Approximate average outstanding balance throughout the
period.............................................. 162 415 16,847
Approximate maximum outstanding balance during the
period.............................................. 15,600 40,000 55,000
Weighted average interest rate for the period......... 7.61% 8.46% 7.33%
</TABLE>
The ESOP Term Loan was prepaid in its entirety on June 30, 1996 by paying
$412,000 that was scheduled for payment in September 1996.
The $25,000,000 principal amount of the Company's 13.25% subordinated notes
was prepaid in full in October 1995. The resulting prepayment penalty of
$1,472,000 was classified as an extraordinary item, loss on early extinguishment
of debt, in the accompanying consolidated statements of income, net of tax of
$546,000.
Capitalized leases and installment notes for equipment and furniture expire
at various dates through June 2000. The following is a schedule of approximate
future minimum payments under capitalized leases, together with the present
value of the net minimum payments as of June 30, 1996:
<TABLE>
<CAPTION>
FISCAL YEARS (DOLLARS IN THOUSANDS)
------------
<S> <C>
1997...................................................... $ 4,660
1998...................................................... 4,092
1999...................................................... 2,820
2000...................................................... 772
--------
Total minimum payments.................................... 12,344
Less amount representing interest......................... 1,425
--------
Present value of net minimum payments..................... $ 10,919
========
</TABLE>
Depreciation expense on assets recorded as capitalized leases and
installment notes was approximately $3,431,000, $3,913,000 and $3,182,000 during
the years ended June 30, 1994, 1995 and 1996, respectively.
F-13
<PAGE> 88
EDUCATION MANAGEMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
6. COMMITMENTS AND CONTINGENCIES:
The Company and its subsidiaries lease certain classroom, dormitory and
office space under operating leases which expire on various dates through the
year 2014. The approximate minimum future commitments under noncancelable
long-term operating leases as of June 30, 1996 are reflected below:
<TABLE>
<CAPTION>
FISCAL YEARS (DOLLARS IN THOUSANDS)
------------
<S> <C>
1997...................................................... $ 13,067
1998...................................................... 12,341
1999...................................................... 10,074
2000...................................................... 8,018
2001...................................................... 5,608
Thereafter................................................ 30,898
--------
$ 80,006
========
</TABLE>
The ESOP provides for distribution of Class A Stock in certain
circumstances. If the Company's stock is distributed to participants at a time
when there is no active public market, participants will have the right to
require the Company to repurchase that stock at fair market value. This right
will expire coincident with an initial public offering (Note 13).
The Company has a management incentive compensation plan which provides for
the awarding of cash bonuses to school management personnel using formalized
guidelines based upon the operating results of each subsidiary and the Company.
The Company is a defendant in certain legal proceedings arising out of the
conduct of its businesses. In the opinion of management, based upon its
investigation of these claims and discussion with legal counsel, the ultimate
outcome of such legal proceedings, individually and in the aggregate, will not
have a material adverse effect on the consolidated financial position, results
of operations or liquidity of the Company.
7. RELATED PARTY TRANSACTIONS:
The Art Institute of Philadelphia, Inc., a wholly owned subsidiary of The
Art Institutes International, Inc. ("AII"), which is a wholly owned subsidiary
of EMC, leases its facility from a partnership in which the subsidiary serves as
a 1% general partner and an executive officer/director and a director of EMC are
minority limited partners. The Art Institute of Fort Lauderdale, Inc., another
wholly owned subsidiary of AII, leases part of its facility from a partnership
in which the subsidiary and an executive officer/director of EMC are minority
limited partners. Total rental payments under these arrangements were
$2,186,000, $1,894,000 and $1,894,000 for the years ended June 30, 1994, 1995
and 1996, respectively.
8. EMPLOYEE BENEFIT PLANS:
The Company has a defined contribution retirement plan which covers
substantially all employees. Contributions to the plan are at the discretion of
the Board of Directors. There are no unfunded past service costs related to the
plan. Under the 401(k) retirement plan, the Company will match 50% of employee
contributions up to 3% of compensation. The expense relating to these plans was
approximately $354,000, $504,000 and $515,000 for the years ended June 30, 1994,
1995 and 1996, respectively.
The Company has established an ESOP which enables eligible employees to
acquire stock ownership in the Company. The Company has made annual
contributions, in addition to dividends paid on the Series A Preferred Stock
held by the ESOP, sufficient to service the interest and principal obligations
on the ESOP's debt to the Company. Since the Company functioned as the lender to
the ESOP, the contribution for the interest component of debt service is
immediately returned to the Company. Such interest income and expense have been
netted in the accompanying consolidated statements of income. As of June 30,
1996, the
F-14
<PAGE> 89
EDUCATION MANAGEMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
ESOP term loan payable to banks by the Company was entirely repaid, as was the
loan between the ESOP and the Company.
Contributions are allocated to the accounts of participating employees
based upon each participant's compensation level relative to the total
compensation of all eligible employees. Eligible employees vest as to equity in
the ESOP based on a seven-year schedule which includes credit for past service.
Distribution of funds from the ESOP are made in the calendar year following the
retirement, disability or death of an employee. For employees who terminate for
any other reason, the distribution of their vested balance will begin five years
from the end of the calendar year in which they terminated.
9. OTHER ASSETS:
Other assets consist of the following as of June 30:
<TABLE>
<CAPTION>
1995 1996
------ ------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Investment in Perkins Student Loan Funds, net of allowance for
estimated future loan losses of $559 and $575, respectively... $2,089 $2,343
Cash value of life insurance, net of loans of $781 each year;
face value of $5,112 and $5,321, respectively................. 1,321 1,542
Other........................................................... 1,150 1,952
------ ------
$4,560 $5,837
====== ======
</TABLE>
10. ACCRUED LIABILITIES:
Accrued liabilities consist of the following as of June 30:
<TABLE>
<CAPTION>
1995 1996
------ ------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Payroll taxes and payroll related............................... $3,791 $2,787
Income and other taxes.......................................... 807 1,223
Other........................................................... 3,772 3,345
------ ------
$8,370 $7,355
====== ======
</TABLE>
11. INCOME TAXES:
The provision (credit) for income taxes includes current and deferred taxes
as reflected below for the years ended June 30:
<TABLE>
<CAPTION>
1994 1995 1996
------- ----- ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Current taxes:
Federal............................................... $ 676 $ 577 $3,215
State................................................. 144 123 683
------- ----- ------
Total.............................................. 820 700 3,898
------- ----- ------
Deferred taxes.......................................... (2,432) (210) 137
------- ----- ------
Total provision (credit)................................ $(1,612) $ 490 $4,035
======= ===== ======
</TABLE>
F-15
<PAGE> 90
EDUCATION MANAGEMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
Income tax provision (credit) varies from the amount that would be provided
by applying the federal statutory income tax rate to earnings before income
taxes as reflected below:
<TABLE>
<CAPTION>
1994 1995 1996
----- ----- ----
<S> <C> <C> <C>
Federal statutory income tax rate.......................... (34.0)% 34.0% 34.0%
State and local income taxes, net of federal income tax
benefit.................................................. (6.0) 6.0 6.0
Amortization of goodwill................................... 4.9 8.1 1.5
Deductible portion of dividends on preferred shares........ (15.0) (32.1) (6.0)
Non-deductible expenses.................................... 3.0 4.9 1.1
All other, net............................................. (1.5) 3.6 .5
----- ----- ----
Income tax provision (credit).............................. (48.6)% 24.5% 37.1%
===== ===== ====
</TABLE>
Net deferred income tax assets (liabilities) are composed of the following
as of June 30:
<TABLE>
<CAPTION>
1994 1995 1996
------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Deferred income tax--current.......................... $ 400 $ 181 $ 381
Deferred income tax--long term........................ (2,239) (1,809) (2,146)
------- ------- -------
Net deferred income tax--liability.................... $(1,839) $(1,628) $(1,765)
======= ======= =======
Consisting of:
Financial reserves and other.......................... $ 261 $ 717 $ 921
Bad debt.............................................. 620 612 1,175
Assigned asset values in excess of tax basis.......... (2,670) (2,369) (2,126)
Depreciation.......................................... (50) (588) (1,735)
------- ------- -------
$(1,839) $(1,628) $(1,765)
======= ======= =======
</TABLE>
12. UNUSUAL ITEMS:
The Company received a refund of state and local business and occupation
taxes in 1995. In the years paid, these taxes had been recorded as educational
services expenses. This credit of $1,107,000 is recorded as an offset to
educational services expenses in the accompanying consolidated statements of
income.
Charges of $2,989,000 were recorded in fiscal 1994. These amounts are
included in educational services and general and administrative expenses in the
accompanying consolidated statements of income and include write-off of
equipment, program termination expenses, severance compensation expenses related
to the settlement of a lease and various legal expenses.
13. SUBSEQUENT EVENTS:
Subsequent to June 30, 1996, the following transactions have occurred or
are anticipated to occur in connection with the proposed initial public stock
offering by the Company:
(A) ACQUISITION OF NEW YORK RESTAURANT SCHOOL
Effective August 1, 1996, the Company acquired certain net assets of NYRS
(subject to obtaining certain regulatory approvals) for $9.5 million in cash.
The Company acquired principally accounts receivable, property and equipment,
certain contracts and student agreements, curriculum, trade names, goodwill and
certain other assets. The acquisition will be accounted for as a purchase. The
purchase price is being held in escrow pending recertification of NYRS by the
United States Department of Education. In the event that such recertification is
denied, the Company has the right to rescind the acquisition of NYRS.
F-16
<PAGE> 91
EDUCATION MANAGEMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
(B) PREFERRED STOCK REDEMPTION
On August 9, 1996, the Company redeemed 75,000 shares of Series A Preferred
Stock from the ESOP at $101.43 per share, plus accrued and unpaid dividends. The
redemption was funded through borrowings of $7.6 million under the Revolving
Credit Agreement.
(C) CONVERSION OF PREFERRED STOCK AND EXERCISE OF STOCK WARRANTS
Prior to the completion of the proposed initial public offering, subject to
the satisfaction of certain conditions, the ESOP will convert the remaining
Series A Preferred Stock into Class A Stock as described in Note 4. The
conversion will result in 145,750 shares of Series A Preferred Stock being
converted into 1,124,977 shares of Class A Stock.
Prior to the completion of the proposed initial public offering, all
outstanding warrants will be exercised for an aggregate of 2,978,039 shares of
Class B Stock.
(D) AMENDMENT TO ARTICLES OF INCORPORATION
On August 15, 1996, the Board of Directors authorized, and on October 24,
1996, the shareholders approved and adopted, the Amended and Restated Articles
of Incorporation providing for, among other things, only two classes of capital
stock consisting of the Common Stock, $.01 par value (the "Common Stock"), and
Preferred Stock and effecting the immediate conversion of all shares of the
existing Class A Stock and Class B Stock into Common Stock at the rate of one
share of Common Stock for each two shares of existing Class A Stock and Class B
Stock. Accordingly, the number of shares of Class A Stock and Class B Stock,
conversion ratios, exercise prices and per share amounts in the accompanying
consolidated financial statements and notes to consolidated financial statements
have been retroactively restated to reflect a two-for-one reverse stock split.
(E) SHAREHOLDER RIGHTS PLAN
Pursuant to a Preferred Share Purchase Rights Plan (the "Rights Plan")
approved by the Company's Board of Directors, one Preferred Share Purchase Right
(each, a "Right") will be associated with each outstanding share of Common
Stock. Each Right will entitle its holder to buy one one-hundredth of a share of
a new series of junior participating preferred stock at a price to be determined
prior to the Offering. The Rights Plan is not subject to shareholder approval.
The Rights will become exercisable following a public announcement of a
person or group of persons acquiring or intending to make a tender offer for
17.5% or more of the Common Stock. If any person acquires 17.5% or more of the
Common Stock, each Right will entitle the shareholders, except the acquiror, to
receive that number of shares of Common Stock having a market value of two times
the exercise price of the Right. In the event the Company is acquired in a
merger or other business combination transaction or 50% or more of its
consolidated assets or earning power are sold after a person or group of persons
acquires 17.5% or more of the Common Stock, each Right will entitle its holder
to purchase, at the exercise price, that number of shares of the acquiring
company having a market value of two times the exercise price. The Rights will
expire on the tenth anniversary of the effective date and are subject to
redemption by the Company at $.01 per Right.
F-17
<PAGE> 92
- --------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS AND,
IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED BY THE COMPANY, ANY SELLING SHAREHOLDER OR ANY
UNDERWRITER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY IN ANY
JURISDICTION TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH AN OFFER IN SUCH
JURISDICTION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE
INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE
HEREOF OR THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE SUCH
DATE.
------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary..................... 3
Risk Factors........................... 7
The Transactions....................... 15
Use of Proceeds........................ 15
Dividend Policy........................ 16
Capitalization......................... 17
Dilution............................... 18
Pro Forma Consolidated Financial
Data................................. 19
Selected Consolidated Financial and
Other Data........................... 23
Management's Discussion and Analysis of
Financial Condition and Results of
Operations........................... 25
Business............................... 34
Management and Directors............... 55
Certain Transactions................... 62
Principal and Selling Shareholders..... 63
Description of Capital Stock........... 64
Shares Eligible for Future Sale........ 67
Underwriting........................... 69
Notice to Canadian Residents........... 70
Legal Matters.......................... 71
Experts................................ 71
Additional Information................. 72
Index to Consolidated Financial
Statements........................... F-1
</TABLE>
------------------
UNTIL , 1996 (25 DAYS AFTER THE COMMENCEMENT OF THE OFFERING), ALL
DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
EDUCATION MANAGEMENT
CORPORATION
4,530,000 SHARES
COMMON STOCK
($.01 par value)
P R O S P E C T U S
CS FIRST BOSTON
SMITH BARNEY INC.
THE CHICAGO CORPORATION
- --------------------------------------------------------------------------------
<PAGE> 93
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the actual fees payable to the Securities
and Exchange Commission, the National Association of Securities Dealers, Inc.
and the NASDAQ Stock Market Inc. and the estimated fees and expenses expected to
be incurred in connection with the issuance and distribution of the shares of
Common Stock, $.01 par value, of the registrant being registered (other than
underwriting discounts and commissions).
<TABLE>
<S> <C>
Securities and Exchange Commission Registration Fee.......... $ 29,741
National Association of Securities Dealers, Inc. Filing
Fee........................................................ 9,125
The NASDAQ Stock Market-National Market Listing Fee.......... 50,000
Printing and Engraving Expenses.............................. 275,000
Accounting Fees and Expenses................................. 150,000
Legal Fees and Expenses...................................... 850,000
Blue Sky Qualification Fees and Expenses..................... 25,000
Transfer Agent Fees and Expenses............................. 3,000
Miscellaneous................................................ 158,134
----------
Total................................................... $1,550,000
==========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The current Articles of Incorporation and the current By-laws of the
registrant provide that the registrant may indemnify directors and officers to
the fullest extent permitted by law. As described below under the Pennsylvania
Business Corporation Law of 1988, as amended (the "BCL"), the registrant is
obligated to indemnify a director or officer and to reimburse (but not advance)
expenses with respect to any threatened, pending or completed action or
proceeding only if such director or officer ultimately prevails in that action.
Therefore, the registrant has entered into indemnification agreements with each
of its directors and officers in which the registrant agrees to indemnify such
directors and officers to the fullest extent permitted by law and to advance the
expenses of any suit or other action to such directors and officers upon their
demand; subject to repayment if such directors or officers are found by a court
of competent jurisdiction not to have been entitled to indemnification by the
registrant.
BCL Sections 1741 and 1742 provide that a business corporation shall have
the power to indemnify any person who was or is a party, or is threatened to be
made a party, to any threatened, pending or completed action or proceeding,
whether civil, criminal, administrative or investigative (other than an action
by or in the right of the corporation), by reason of the fact that such person
is or was a representative (as defined below) of that corporation, or is or was
serving at the request of that corporation as a representative of another
corporation, partnership, joint venture, trust or other enterprise, against
expenses (including attorneys' fees), judgments, fines and amounts paid in
settlement actually and reasonably incurred by such person in connection with
such action or proceeding, if such person acted in good faith and in a manner he
reasonably believed to be in, or not opposed to, the best interests of that
corporation and, with respect to any criminal proceeding, had no reasonable
cause to believe his conduct was unlawful. In the case of an action by or in the
right of a business corporation, such indemnification is limited to expenses
(including attorneys' fees) actually and reasonably incurred by such person in
connection with the defense or settlement of such action, except that no
indemnification shall be made in respect of any claim, issue or matter as to
which such person has been adjudged to be liable to that corporation unless and
only to the extent that a court determines upon application that, despite the
adjudication of liability but in view of all the circumstances of the case, such
person is fairly and reasonably entitled to indemnity for the expenses that the
court deems proper. A representative means a person occupying the position or
discharging the functions of a director, officer, employee or agent of any
enterprise, regardless of the name or title by which that person may be
designated.
BCL Section 1744 provides that, unless ordered by a court, any
indemnification referred to above shall be made by a business corporation only
as authorized in the specific case upon a determination that indemnification is
proper in the circumstances because the indemnitee has met the applicable
standard of conduct. Such determination shall be made:
II-1
<PAGE> 94
(1) by the board of directors by a majority vote of a quorum
consisting of directors who were not parties to the action or proceeding;
or
(2) if such a quorum is not obtainable, or if obtainable and a
majority vote of a quorum of disinterested directors so directs, by
independent legal counsel in a written opinion; or
(3) by the shareholders.
Notwithstanding the above, BCL Section 1743 provides that to the extent
that a representative of a business corporation is successful on the merits or
otherwise in defense of any action or proceeding referred to above, or in
defense of any claim, issue or matter therein, such person shall be indemnified
against expenses (including attorneys' fees) actually and reasonably incurred by
such person in connection therewith.
BCL Section 1745 provides that expenses (including attorneys' fees)
incurred in defending any action or proceeding may be paid by a business
corporation in advance of the final disposition of that action or proceeding
upon receipt of an undertaking by or on behalf of a representative to repay the
amount advanced if it is ultimately determined that the indemnitee is not
entitled to be indemnified by that corporation.
BCL Section 1746 provides that the indemnification and advancement of
expenses provided by, or granted pursuant to, the foregoing provisions is not
exclusive of any other rights to which a person seeking indemnification or
advancement of expenses may be entitled under any By-Law, agreement, vote of
shareholders or disinterested directors or otherwise, both as to action in his
official capacity and as to action in another capacity while holding that
office, and that indemnification may be granted under any By-Law, agreement,
vote of shareholders or directors or otherwise for any action taken and may be
made whether or not that corporation would have the power to indemnify the
person under any other provision of law and whether or not the indemnified
liability arises or arose from any threatened, pending or completed action by or
in the right of that corporation; provided, however, that no indemnification may
be made in any case where the act or failure to act giving rise to the claim for
indemnification is determined by a court to have constituted willful misconduct
or recklessness.
BCL Section 1747 permits a Pennsylvania business corporation to purchase
and maintain insurance on behalf of any person who is or was a representative of
that corporation, or is or was serving at the request of that corporation as a
representative of another corporation, partnership, joint venture, trust or
other enterprise, against any liability asserted against such person and
incurred by him in any such capacity, or arising out of his status as such,
whether or not that corporation would have the power to indemnify that person
against such liability under the provisions described above.
The Restated By-laws of the registrant (the "New By-laws") require, as
described below, that the registrant indemnify directors and officers to the
maximum extent permitted by law and also provide for the mandatory advancement
of expenses to directors in most circumstances.
Section 7.1 of Article VII of the New By-laws provides that the registrant
shall indemnify, to the fullest extent now or hereafter permitted by law, each
director or officer (including each former director or officer) of the
registrant who was or is made a party to or a witness in or is threatened to be
made a party to or a witness in any threatened, pending or completed action,
suit or proceeding, whether civil, criminal, administrative or investigative and
whether external or internal to the registrant, by reason of the fact that he is
or was an authorized representative of the registrant, against all expenses
(including attorneys' fees, disbursements and other charges), judgments, fines
(including excise taxes and penalties) and amounts paid in settlement actually
and reasonably incurred by him in connection with such action, suit or
proceeding.
Section 7.2 of Article VII of the New By-laws further provides that the
registrant shall pay expenses (including attorneys' fees, disbursements and
other charges) actually and reasonably incurred by a director or officer of the
registrant referred to in Section 7.1 of such Article in defending or appearing
as a witness in any civil or criminal action, suit or proceeding described in
Section 7.1 of such Article in advance of the final disposition of such action,
suit or proceeding. The expenses incurred by such director or officer shall be
paid by the registrant in advance of the final disposition of such action, suit
or proceeding only upon receipt of an undertaking by or on behalf of such
director or officer to repay all amounts advanced if it shall ultimately be
determined that he is not entitled to be indemnified by the registrant, and an
irrevocable assignment to the registrant of all payments to which such director
or officer may be or become entitled, under any policy of insurance or
otherwise, in reimbursement of any such expenses paid by the registrant.
II-2
<PAGE> 95
The New By-Laws provide that the rights of indemnification and advancement
of expenses provided for therein shall not be deemed exclusive of any other
rights to which those seeking indemnification or advancement of expenses may
otherwise be entitled.
Section 7.9 of Article VII of the New By-Laws provides that the registrant
may purchase and maintain insurance on behalf of each director and officer
against any liability asserted against or incurred by such officer or director
in any capacity, or arising out of such director's or officer's status as such,
whether or not the registrant would have the power to indemnify such person
against such liability under the provisions of such Article VII.
The registrant maintains directors' and officers' liability insurance
covering its directors and officers with respect to liabilities, including
liabilities under the Securities Act of 1933, as amended, which they may incur
in connection with their serving as such. Such insurance provides coverage for
the directors and officers against certain liabilities even though such
liabilities may not be covered by the indemnification provisions of the New
By-Laws.
As permitted by BCL Section 1713, the New By-Laws provide that no director
shall be personally liable for monetary damages for any action taken, or failure
to take any action, except to the extent that such elimination or limitation of
liability is expressly prohibited by the Act of November 28, 1986 (P.L. No. 145)
as in effect at the time of the alleged action or failure to take action by the
director. The BCL states that this exculpation from liability does not apply
where the director has breached or failed to perform the duties of his office
and the breach or failure to perform constitutes self-dealing, willful
misconduct or recklessness, and does not apply to the responsibility or
liability of a director pursuant to any criminal statute or the liability of a
director for payment of taxes pursuant to Federal, state or local law. It may
also not apply to liabilities imposed upon directors by the Federal securities
laws.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
Within the past three years, the Company sold shares of its capital stock
in the following transactions, each of which was intended to be exempt from the
registration requirements of the Securities Act of 1933, as amended, by virtue
of Section 4(2) thereof.
<TABLE>
<CAPTION>
AGGREGATE
CONSIDERATION
AMOUNT OF PAID IN EACH
PURCHASER DATE OF SALE TITLE SECURITIES SOLD TRANSACTION
- --------- ------------ ----- --------------- -------------
<S> <C> <C> <C> <C>
N.G. Temnick........... August 9, 1996 Class B Common Stock 1,500 Shares $ 5,250.00(a)
N.L. Gruber............ July 31, 1996 Class B Common Stock 11,550 Shares $ 37,337.00(b)
L.S. Pritchard, III.... October 13, 1995 Class B Common Stock 7,500 Shares $ 54,000.00
R.M. Barber............ July 31, 1995 Class B Common Stock 3,000 Shares $ 21,600.00
R.S. Peterson.......... July 31, 1995 Class B Common Stock 3,000 Shares $ 21,600.00
P.T. DeCoursey......... July 17, 1995 Class B Common Stock 24,704 Shares $177,872.40
R.T. McDowell.......... July 17, 1995 Class B Common Stock 5,000 Shares $ 36,000.00
J.R. Knepper........... January 21, 1994 Class B Common Stock 4,050 Shares $ 11,087.00(c)
</TABLE>
- ------------------
(a) Representing the exercise of stock options at an exercise price of $3.50 per
share.
(b) Representing the exercise of stock options at exercise prices ranging from
$2.54 to $3.50 per share.
(c) Representing the exercise of stock options at exercise prices ranging from
$2.54 to $3.18 per share.
II-3
<PAGE> 96
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) The following exhibits are filed as part of this registration
statement:
<TABLE>
<S> <C> <C>
1.01 Form of Underwriting Agreement**
3.01(a) Current Restated Articles of Incorporation of Education Management
Corporation*
3.01(b) Amended and Restated Articles of Incorporation (effective upon
consummation of Offering)*
3.02(a) Current Restated By-laws of Education Management Corporation*
3.02(b) Restated By-laws (effective upon consummation of Offering)*
4.01 Specimen Common Stock Certificate**
4.02 Stockholders Agreement, dated October 26, 1989, among Merrill Lynch
Interfunding Inc., EMC Holdings, Inc., EMC Holdings, Inc. Employee
Stock Ownership Trust, the Stockholders listed on the Schedules of
Stockholders listed on Schedule I of this Agreement, various
partnerships and corporations listed on Schedule 2 of this
Agreement and certain institutions listed on Schedule 3 attached to
this Agreement*
4.03 Amendment No. 1 to Stockholders Agreement, dated April 30, 1991,
among Education Management Corporation Employee Stock Ownership
Plan, Merrill Lynch Interfunding Inc., EMC Holdings, Inc.,
Education Management Corporation, certain stockholders, option
holders and warrant holders*
4.04 Form of Rights Agreement, dated August , 1996, between Education
Management Corporation and [Trust Company]*
4.05 Form of Common Stock Registration Rights Agreement, dated August
, 1996, among Education Management Corporation and Marine Midland
Bank, Northwestern Mutual Life Insurance Company, National Union
Fire Insurance Company of Pittsburgh, PA, Merrill Lynch Employees
LBO Partnership No. I, L.P., Merrill Lynch IBK Positions, Inc.,
Merrill KECALP L.P. 1986, Merrill Lynch Offshore LBO Partnership
No. IV, Merrill Lynch Capital Corporation, Merrill Lynch Capital
Appreciation Partnership IV, L.P., Merrill Lynch Employees LBO
Partnership No. I, L.P., Robert B. Knutson and certain other
individuals*
4.07 Exchange and Repurchase Agreement, dated October 21, 1989, between
Education Management Corporation and Robert B. Knutson*
4.08 Form of Exchange and Repurchase Agreement, dated October 21, 1989,
between EMC Holdings, Inc. and certain management stockholders*
4.09 Form of Amendment No. 1 to Exchange and Repurchase Agreement, dated
January 19, 1995, between Education Management Corporation and
certain management stockholders*
4.10 Amendment No. 2 to Exchange and Repurchase Agreement, dated January
1, 1996, between Education Management Corporation and certain
management stockholders*
4.11 Form of Common Stock Subscription and Repurchase Agreement, dated
various dates, between Education Management Corporation and various
stock purchasers*
4.12 Form of Amendment No. 1 to Common Stock Subscription and Repurchase
Agreement, dated January 1, 1996, between Education Management
Corporation and certain management stockholders*
4.13 Form of Common Stock Subscription and Repurchase Agreement, dated
various dates, between Education Management Corporation and certain
management stockholders*
</TABLE>
II-4
<PAGE> 97
<TABLE>
<S> <C> <C>
4.14 Amendment No. 1 to Common Stock Subscription and Repurchase
Agreement, dated January 19, 1995, between Education Management
Corporation and certain management stockholders*
4.15 Amendment No. 2 to Common Stock Subscription and Repurchase
Agreement, dated January 1, 1996, between Education Management
Corporation and certain management stockholders*
4.16 Amended and Restated Credit Agreement, dated March 16, 1995, among
Education Management Corporation, certain banks and PNC Bank,
National Association*
4.17 First Amendment to Amended and Restated Credit Agreement, dated
October 13, 1995, among Education Management Corporation, certain
banks and PNC Bank, National Association*
4.18 Second Amendment to Amended and Restated Credit Agreement, dated
July 31, 1996, among Education Management Corporation, certain
banks and PNC Bank, National Association*
4.19 Note and Warrant Purchase Agreement, dated October 25, 1989,
between EMC Holdings, Inc. and certain warrant purchasers*
4.20 Amendment No. 1 to Loan Documents, Assumption Agreement and Partial
Release, dated April 30, 1991, between EMC Holdings, Inc., the
Company and certain warrant purchasers*
4.21 Amendment No. 2 to the Note and Warrant Purchase Agreement, dated
March 16, 1995, between EMC Holdings, Inc. and certain warrant
purchasers*
4.22 Nonqualified Stock Option Agreement, dated May 2, 1996, between
Education Management Corporation and William M. Webster, IV*
4.23 Letter Agreement, dated August 9, 1996, between Education
Management Corporation Employee Stock Ownership Trust and Education
Management Corporation*
4.24 Letter Agreement, dated September 23, 1996, between Marine Midland
Bank, trustee for the Education Management Corporation Employee
Stock Ownership Trust and Education Management Corporation*
5.01 Opinion of Kirkpatrick & Lockhart LLP as to the validity of the
securities being registered**
10.01 Education Management Corporation Employee Stock Ownership Plan*
10.02 First Amendment to Education Management Corporation Employee Stock
Ownership Plan*
10.03 Second Amendment to Amended and Restated Education Management
Corporation Employee Stock Ownership Plan*
10.04 Third Amendment to Amended and Restated Education Management
Corporation Employee Stock Ownership Plan*
10.05 Education Management Corporation Management Incentive Stock Option
Plan, effective November 11, 1993*
10.06 EMC Holdings, Inc. Management Incentive Stock Option Plan,
effective July 1, 1990*
10.07 Form of Management Incentive Stock Option Agreement, dated various
dates, between EMC Holdings, Inc. and various management employees*
10.08 Form of Amendment to Management Incentive Stock Option Agreement,
dated January 19, 1995, among Education Management Corporation and
various management employees*
10.09 Education Management Corporation Retirement Plan*
10.11 Education Management Corporation Deferred Compensation Plan*
10.12 1996 Employee Stock Purchase Plan*
</TABLE>
II-5
<PAGE> 98
<TABLE>
<S> <C> <C>
10.13 Education Management Corporation 1996 Stock Incentive Plan*
10.14 Asset Purchase Agreement, dated August 1, 1996, among New York
Restaurant School, Chicago Restaurant School, Inc., Center for
Hospitality Education, Inc. and NYRS Acquisition Corp.*
10.15 Second Amended and Restated Employment Agreement of Robert B.
Knutson, dated August 15, 1996, between Robert B. Knutson and
Education Management Corporation*
10.16 Employment Agreement, dated June 1, 1996, between Albert Greenstone
and Education Management Corporation*
10.17 Form of EMC-Art Institutes International, Inc. Director's and/or
Officer's Indemnification Agreement*
10.18 Agreement and Lease, dated September 1, 1978, between Stabile &
Associates and Education Management Corporation.*
10.19 Amendment to Agreement and Lease, dated March 1, 1980, between
Stabile & Associates and Education Management Corporation.*
10.20 Renewal Option Letter Agreement dated November 21, 1984, between
Stabile & Associates and Education Management Corporation.*
11.01 Statement re: Calculation of Earnings Per Share*
21.01 List of subsidiaries of Education Management Corporation*
23.01 Consent of Arthur Andersen LLP**
23.02 Consent of Dow, Lohnes & Albertson, PLLC.*
23.03 Consent of Kirkpatrick & Lockhart LLP (included in Exhibit 5.01).**
24.01 Power of Attorney*
27.01 Financial Data Schedule*
</TABLE>
- ------------------
* Previously filed.
** Filed herewith.
(b) Financial Statement Schedules:
Schedule II - Valuation and Qualifying Accounts
ITEM 17. UNDERTAKINGS.
The undersigned registrant hereby undertakes that insofar as
indemnification for liabilities arising under the Securities Act of 1933 may be
permitted to directors, officers and controlling persons of the registrant
pursuant to the foregoing provisions, or otherwise, the registrant has been
advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of this registration statement in reliance upon Rule 430A and contained in
a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
II-6
<PAGE> 99
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this amendment to registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Pittsburgh,
Commonwealth of Pennsylvania, on October 28, 1996
EDUCATION MANAGEMENT CORPORATION
By: /s/ WILLIAM M. WEBSTER, IV
-------------------------------------
William M. Webster, IV
Executive Vice President
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE CAPACITY DATE
--------- -------- ----
<C> <S> <C>
* Chairman and October 28, 1996
- ----------------------------------- Chief Executive Officer
Robert B. Knutson
* Senior Vice President and October 28, 1996
- ----------------------------------- Chief Financial and
Robert T. McDowell Accounting Officer
* Vice Chairman and Director October 28, 1996
- -----------------------------------
Miryam L. Drucker
* Director October 28, 1996
- -----------------------------------
James J. Burke, Jr.
* Director October 28, 1996
- -----------------------------------
J. Thomas Christofferson
* Director October 28, 1996
- -----------------------------------
Albert Greenstone
* Director October 28, 1996
- -----------------------------------
Harvey Sanford
By: /s/ WILLIAM M. WEBSTER, IV
-----------------------------
William M. Webster, IV
Attorney-in-fact, pursuant to the
power of attorney previously
filed as part of this
registration statement.
</TABLE>
II-7
<PAGE> 100
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Education Management Corporation and Subsidiaries:
We have audited, in accordance with generally accepted auditing standards,
the consolidated financial statements of Education Management Corporation (a
Pennsylvania corporation) and Subsidiaries, included in this registration
statement and have issued our report thereon dated August 16, 1996. Our audits
were made for the purpose of forming an opinion on the basic consolidated
financial statements taken as a whole. Schedule II, which is the responsibility
of the Company's management, is presented for the purpose of complying with the
Securities and Exchange Commission's rules and is not part of the basic
consolidated financial statements. This schedule has been subjected to the
auditing procedures applied in the audit of the basic consolidated financial
statements and, in our opinion, fairly states in all material aspects the
financial data required to be set forth in relation to the basic consolidated
financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Pittsburgh, Pennsylvania
August 16, 1996
II-8
<PAGE> 101
SCHEDULE II
EDUCATION MANAGEMENT CORPORATION AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
BALANCE AT ADDITIONS BALANCE
BEGINNING CHARGED TO AT END OF
OF PERIOD EXPENSES DEDUCTIONS PERIOD
---------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
ALLOWANCE ACCOUNTS FOR:
Year ended June 30, 1994
Uncollectible accounts receivable............. $1,055 $3,491 $2,995 $ 1,551
Estimated future loan losses.................. 330 135 - 465
Year ended June 30, 1995
Uncollectible accounts receivable............. 1,551 3,706 3,728 1,529
Estimated future loan losses.................. 465 94 - 559
Year ended June 30, 1996
Uncollectible accounts receivable............. 1,529 2,995 1,586 2,938
Estimated future loan losses.................. 559 16 - 575
</TABLE>
II-9
<PAGE> 102
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIAL
NUMBER EXHIBIT NUMBER PAGE
- -------- ------------------------------------------------------------------- -------------
<S> <C> <C>
1.01 Form of Underwriting Agreement**
3.01(a) Current Restated Articles of Incorporation of Education Management
Corporation*
3.01(b) Amended and Restated Articles of Incorporation (effective upon
consummation of Offering)*
3.02(a) Current Restated By-laws of Education Management Corporation*
3.02(b) Restated By-laws (effective upon consummation of Offering)*
4.01 Specimen Common Stock Certificate**
4.02 Stockholders Agreement, dated October 26, 1989, among Merrill Lynch
Interfunding Inc., EMC Holdings, Inc., EMC Holdings, Inc. Employee
Stock Ownership Trust, the Stockholders listed on the Schedules of
Stockholders listed on Schedule I of this Agreement, various
partnerships and corporations listed on Schedule 2 of this
Agreement and certain institutions listed on Schedule 3 attached to
this Agreement*
4.03 Amendment No. 1 to Stockholders Agreement, dated April 30, 1991,
among Education Management Corporation Employee Stock Ownership
Plan, Merrill Lynch Interfunding Inc., EMC Holdings, Inc.,
Education Management Corporation, certain stockholders, option
holders and warrant holders*
4.04 Form of Rights Agreement, dated August , 1996, between Education
Management Corporation and [Trust Company]*
4.05 Form of Common Stock Registration Rights Agreement, dated August
, 1996, among Education Management Corporation and Marine Midland
Bank, Northwestern Mutual Life Insurance Company, National Union
Fire Insurance Company of Pittsburgh, PA, Merrill Lynch Employees
LBO Partnership No. I, L.P., Merrill Lynch IBK Positions, Inc.,
Merrill KECALP L.P. 1986, Merrill Lynch Offshore LBO Partnership
No. IV, Merrill Lynch Capital Corporation, Merrill Lynch Capital
Appreciation Partnership IV, L.P., Merrill Lynch Employees LBO
Partnership No. I, L.P., Robert B. Knutson and certain other
individuals*
4.07 Exchange and Repurchase Agreement, dated October 21, 1989, between
Education Management Corporation and Robert B. Knutson*
4.08 Form of Exchange and Repurchase Agreement, dated October 21, 1989,
between EMC Holdings, Inc. and certain management stockholders*
4.09 Form of Amendment No. 1 to Exchange and Repurchase Agreement, dated
January 19, 1995, between Education Management Corporation and
certain management stockholders*
4.10 Amendment No. 2 to Exchange and Repurchase Agreement, dated January
1, 1996, between Education Management Corporation and certain
management stockholders*
4.11 Form of Common Stock Subscription and Repurchase Agreement, dated
various dates, between Education Management Corporation and various
stock purchasers*
4.12 Form of Amendment No. 1 to Common Stock Subscription and Repurchase
Agreement, dated January 1, 1996, between Education Management
Corporation and certain management stockholders*
</TABLE>
<PAGE> 103
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIAL
NUMBER EXHIBIT NUMBER PAGE
- -------- ------------------------------------------------------------------- -------------
<S> <C> <C>
4.13 Form of Common Stock Subscription and Repurchase Agreement, dated
various dates, between Education Management Corporation and certain
management stockholders*
4.14 Amendment No. 1 to Common Stock Subscription and Repurchase
Agreement, dated January 19, 1995, between Education Management
Corporation and certain management stockholders*
4.15 Amendment No. 2 to Common Stock Subscription and Repurchase
Agreement, dated January 1, 1996, between Education Management
Corporation and certain management stockholders*
4.16 Amended and Restated Credit Agreement, dated March 16, 1995, among
Education Management Corporation, certain banks and PNC Bank,
National Association*
4.17 First Amendment to Amended and Restated Credit Agreement, dated
October 13, 1995, among Education Management Corporation, certain
banks and PNC Bank, National Association*
4.18 Second Amendment to Amended and Restated Credit Agreement, dated
July 31, 1996, among Education Management Corporation, certain
banks and PNC Bank, National Association*
4.19 Note and Warrant Purchase Agreement, dated October 25, 1989,
between EMC Holdings, Inc. and certain warrant purchasers*
4.20 Amendment No. 1 to Loan Documents, Assumption Agreement, and
Partial Release, dated April 30, 1991, between EMC Holdings, Inc.,
the Company and certain warrant purchasers*
4.21 Amendment No. 2 to the Note and Warrant Purchase Agreement, dated
March 16, 1995, between EMC Holdings, Inc. and certain warrant
purchasers*
4.22 Nonqualified Stock Option Agreement, dated May 2, 1996, between
Education Management Corporation and William M. Webster, IV*
4.23 Letter Agreement, dated August 9, 1996, between Education
Management Corporation Employee Stock Ownership Trust and Education
Management Corporation*
4.24 Letter Agreement, dated September 23, 1996, between Marine Midland
Bank, trustee for the Education Management Corporation Employee
Stock Ownership Trust and Education Management Corporation*
5.01 Opinion of Kirkpatrick & Lockhart LLP as to the validity of the
securities being registered**
10.01 Education Management Corporation Employee Stock Ownership Plan*
10.02 First Amendment to Education Management Corporation Employee Stock
Ownership Plan*
10.03 Second Amendment to Amended and Restated Education Management
Corporation Employee Stock Ownership Plan*
10.04 Third Amendment to Amended and Restated Education Management
Corporation Employee Stock Ownership Plan*
10.05 Education Management Corporation Management Incentive Stock Option
Plan, effective November 11, 1993*
10.06 EMC Holdings, Inc. Management Incentive Stock Option Plan,
effective July 1, 1990*
</TABLE>
<PAGE> 104
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIAL
NUMBER EXHIBIT NUMBER PAGE
- -------- ------------------------------------------------------------------- -------------
<S> <C> <C>
10.07 Form of Management Incentive Stock Option Agreement, dated various
dates, between EMC Holdings, Inc. and various management employees*
10.08 Form of Amendment to Management Incentive Stock Option Agreement,
dated January 19, 1995, among Education Management Corporation and
various management employees*
10.09 Education Management Corporation Retirement Plan*
10.11 Education Management Corporation Deferred Compensation Plan*
10.12 1996 Employee Stock Purchase Plan*
10.13 Education Management Corporation 1996 Stock Incentive Plan*
10.14 Asset Purchase Agreement, dated August 1, 1996, among New York
Restaurant School, Chicago Restaurant School, Inc., Center for
Hospitality Education, Inc. and NYRS Acquisition Corp.*
10.15 Second Amended and Restated Employment Agreement of Robert B.
Knutson, dated August 15, 1996, between Robert B. Knutson and
Education Management Corporation*
10.16 Employment Agreement, dated June 1, 1996, between Albert Greenstone
and Education Management Corporation*
10.17 Form of EMC-Art Institutes International, Inc. Director's and/or
Officer's Indemnification Agreement*
10.18 Agreement and Lease, dated September 1, 1978, between Stabile &
Associates and Education Management Corporation.*
10.19 Amendment to Agreement and Lease, dated March 1, 1980, between
Stabile & Associates and Education Management Corporation.*
10.20 Renewal Option Letter Agreement dated November 21, 1984, between
Stabile & Associates and Education Management Corporation.*
11.01 Statement re: Calculation of Earnings Per Share*
21.01 List of subsidiaries of Education Management Corporation*
23.01 Consent of Arthur Andersen LLP**
23.02 Consent of Dow, Lohnes & Albertson, PLLC*
23.03 Consent of Kirkpatrick & Lockhart LLP (included in Exhibit 5.01).**
24.01 Power of Attorney*
27.01 Financial Data Schedule*
</TABLE>
- ------------------
* Previously filed.
** Filed herewith.
<PAGE> 1
Exhibit 1.01
Draft of 10/25/96
4,530,000 SHARES
EDUCATION MANAGEMENT CORPORATION
COMMON STOCK ($.01 PAR VALUE)
UNDERWRITING AGREEMENT
___________, 1996
CS FIRST BOSTON CORPORATION
SMITH BARNEY INC.
THE CHICAGO CORPORATION
As Representatives of the Several Underwriters,
c/o CS First Boston Corporation,
Park Avenue Plaza,
New York, N.Y. 10055
Dear Sirs:
1. Introductory. Education Management Corporation, a
Pennsylvania corporation ("Company"), proposes to issue and sell 3,230,000
shares of its common stock, $.01 par value ("Securities"), and the shareholders
listed in Schedule A hereto ("Selling Shareholders") propose severally to sell
an aggregate of 1,300,000 shares of the Securities (such 4,530,000 shares of
Securities being hereinafter referred to as the "Firm Securities"). The
Company also proposes to sell to the several Underwriters named in Schedule B
hereto ("Underwriters"), at the option of the Underwriters, an aggregate of not
more than 142,209 additional shares of the Securities, and the Selling
Shareholders also propose to sell to the Underwriters, at the option of the
Underwriters, an aggregate of not more than 401,391 additional shares of the
Securities, as set forth below (such 543,600 additional shares being
hereinafter referred to as the "Optional Securities"). The Firm Securities and
the Optional Securities are herein collectively referred to as the "Offered
Securities". The Company and the Selling Shareholders hereby agree with the
Underwriters as follows:
2. Representations and Warranties of the Company and the Selling
Shareholders.
(a) The Company represents and warrants to, and agrees with, the
several Underwriters that:
(i) A registration statement (No. 333-10385) relating to
the Offered Securities, including a form of prospectus, has been filed
with the Securities and Exchange Commission ("Commission") and either
(A) has been declared effective under the Securities Act of 1933, as
amended ("Act"), and is not proposed to be amended or (B) is proposed
to be amended by amendment or post-effective amendment. If such
registration statement (the "initial registration statement") has been
declared effective, either (A) an additional registration statement
(the "additional registration statement") relating to the Offered
Securities may have been filed with the Commission pursuant to Rule
462(b) ("Rule 462(b)") under the Act and,
<PAGE> 2
if so filed, has become effective upon filing pursuant to such Rule
and the Offered Securities all have been duly registered under the Act
pursuant to the initial registration statement and, if applicable, the
additional registration statement or (B) such an additional
registration statement is proposed to be filed with the Commission
pursuant to Rule 462(b) and will become effective upon filing pursuant
to such Rule and upon such filing the Offered Securities will all have
been duly registered under the Act pursuant to the initial
registration statement and such additional registration statement. If
the Company does not propose to amend the initial registration
statement or if an additional registration statement has been filed
and the Company does not propose to amend it, and if any
post-effective amendment to either such registration statement has
been filed with the Commission prior to the execution and delivery of
this Agreement, the most recent amendment (if any) to each such
registration statement has been declared effective by the Commission
or has become effective upon filing pursuant to Rule 462(c) ("Rule
462(c)") under the Act or, in the case of the additional registration
statement, Rule 462(b). For purposes of this Agreement, "Effective
Time" with respect to the initial registration statement or, if filed
prior to the execution and delivery of this Agreement, the additional
registration statement means (A) if the Company has advised the
Representatives that it does not propose to amend such registration
statement, the date and time as of which such registration statement,
or the most recent post-effective amendment thereto (if any) filed
prior to the execution and delivery of this Agreement, was declared
effective by the Commission or has become effective upon filing
pursuant to Rule 462(c), or (B) if the Company has advised the
Representatives that it proposes to file an amendment or
post-effective amendment to such registration statement, the date and
time as of which such registration statement, as amended by such
amendment or post-effective amendment, as the case may be, is declared
effective by the Commission. If an additional registration statement
has not been filed prior to the execution and delivery of this
Agreement but the Company has advised the Representatives that it
proposes to file one, "Effective Time" with respect to such additional
registration statement means the date and time as of which such
registration statement is filed and becomes effective pursuant to Rule
462(b). "Effective Date" with respect to the initial registration
statement or the additional registration statement (if any) means the
date of the Effective Time thereof. The initial registration
statement, as amended at its Effective Time, including all information
contained in the additional registration statement (if any) and deemed
to be a part of the initial registration statement as of the Effective
Time of the additional registration statement pursuant to the General
Instructions of the Form on which it is filed and including all
information (if any) deemed to be a part of the initial registration
statement as of its Effective Time pursuant to Rule 430A(b) ("Rule
430A(b)") under the Act, is hereinafter referred to as the "Initial
Registration Statement". The additional registration statement, as
amended at its Effective Time, including the contents of the initial
registration statement incorporated by reference therein and including
all information (if any) deemed to be a part of the additional
registration statement as of its Effective Time pursuant to Rule
430A(b), is hereinafter referred to as the "Additional Registration
Statement". The Initial Registration Statement and the Additional
Registration Statement are hereinafter referred to collectively as the
"Registration Statements" and individually as a "Registration
Statement". The form of prospectus relating to the Offered
Securities, as first filed with the Commission pursuant to and in
accordance with Rule 424(b) ("Rule 424(b)") under the Act or (if no
such filing is required) as included in a Registration Statement, is
hereinafter referred to as the "Prospectus". No document has been or
will be prepared or distributed in reliance on Rule 434 under the Act.
No stop order suspending the effectiveness of a Registration Statement
or any part thereof has been issued and no proceeding for that purpose
has been instituted or, to the best knowledge of the Company,
threatened by the Commission.
(ii) If the Effective Time of the Initial Registration
Statement is prior to the execution and delivery of this Agreement:
(A) on the Effective Date of the Initial Registration Statement, the
Initial Registration Statement conformed in all respects to the
requirements of
2
<PAGE> 3
the Act and the rules and regulations of the Commission ("Rules and
Regulations") and did not include any untrue statement of a material
fact or omit to state any material fact required to be stated therein
or necessary to make the statements therein not misleading, (B) on the
Effective Date of the Additional Registration Statement (if any), each
Registration Statement conformed or will conform in all respects to
the requirements of the Act and the Rules and Regulations and did not
include, or will not include, any untrue statement of a material fact
and did not omit, or will not omit, to state any material fact
required to be stated therein or necessary to make the statements
therein not misleading, and (C) on the date of this Agreement, the
Initial Registration Statement and, if the Effective Time of the
Additional Registration Statement is prior to the execution and
delivery of this Agreement, the Additional Registration Statement each
conforms, and at the time of filing of the Prospectus pursuant to Rule
424(b) or (if no such filing is required) on the Effective Date of the
Registration Statement in which the Prospectus is included, each
Registration Statement and the Prospectus will conform in all respects
to the requirements of the Act and the Rules and Regulations, and none
of such documents includes, or will include, any untrue statement of a
material fact or omits, or will omit, to state any material fact
required to be stated therein or necessary to make the statements
therein not misleading. If the Effective Time of the Initial
Registration Statement is subsequent to the execution and delivery of
this Agreement: on the Effective Date of the Initial Registration
Statement, the Initial Registration Statement and the Prospectus will
conform in all respects to the requirements of the Act and the Rules
and Regulations, neither of such documents will include any untrue
statement of a material fact or will omit to state any material fact
required to be stated therein or necessary to make the statements
therein not misleading, and no Additional Registration Statement has
been or will be filed. The two preceding sentences do not apply to
statements in or omissions from a Registration Statement or the
Prospectus based upon written information furnished to the Company by
any Underwriter through the Representatives specifically for use
therein, it being understood and agreed that the only such information
is that described as such in Section 7(c).
(iii) The Company has been duly incorporated and is a
validly subsisting corporation in good standing under the laws of the
Commonwealth of Pennsylvania, with corporate power and authority to
own, lease and operate its properties and conduct its business as
described in the Prospectus; and the Company is duly qualified to do
business as a foreign corporation in good standing in all other
jurisdictions in which its ownership, leasing or operation of property
or the conduct of its business requires such qualification, except
where the failure to be so qualified or in good standing would not,
individually or in the aggregate, have a material adverse effect on
the financial condition, business or results of operations of the
Company and its subsidiaries taken as a whole ("Material Adverse
Effect").
(iv) Exhibit 1 hereto sets forth all subsidiaries of the
Company which are, individually or on a consolidated basis, material
to the operations of the Company and its subsidiaries and the conduct
of their respective businesses (collectively, "Material
Subsidiaries"). Each such subsidiary of the Company has been duly
incorporated and is validly existing as a corporation in good standing
under the laws of the jurisdiction of its incorporation, with
corporate power and authority to own, lease and operate its properties
and conduct its business as described in the Prospectus; and each such
subsidiary of the Company is duly qualified to do business as a
foreign corporation in good standing in all other jurisdictions in
which its ownership, leasing or operation of property or the conduct
of its business requires such qualification, except where the failure
to be so qualified or in good standing would not, individually or in
the aggregate, have a Material Adverse Effect; all of the issued and
outstanding capital stock of each such subsidiary of the Company has
been duly authorized and validly issued and is fully paid and
nonassessable; and the capital stock of each such subsidiary is owned
by the Company, directly or through one or more of the Company's other
subsidiaries, free and clear of any mortgage, pledge, lien, security
interest,
3
<PAGE> 4
claim, encumbrance or defect of any kind, except for shares of the
capital stock of certain of the Company's subsidiaries which have been
pledged as collateral pursuant to the Company's Amended and Restated
Credit Agreement dated March 16, 1995, as amended (the "Revolving
Credit Agreement"); and there are no rights granted to or in favor of
any third party (whether acting in an individual, fiduciary or other
capacity) other than the Company to acquire such capital stock, any
additional capital stock or any other securities of any such
subsidiary.
(v) The Offered Securities have been duly authorized and
will be, when issued and paid for in accordance with this Agreement,
validly issued, fully paid and nonassessable and no further approval
or authorization of the shareholders or the Board of Directors of the
Company is or will be required for the issuance and sale of the
Offered Securities as contemplated by this Agreement; on each Closing
Date (as defined below), all other outstanding shares of capital stock
of the Company will be duly authorized, validly issued, fully paid and
nonassessable and will have been issued in compliance with applicable
federal and state securities laws; the authorized and outstanding
capital stock of the Company on each Closing Date will conform to the
descriptions thereof contained in the Prospectus under the captions
"Capitalization" and "Description of Capital Stock"; and on each
Closing Date the shareholders of the Company will have no preemptive
or similar rights with respect to the Offered Securities or any other
securities of the Company.
(vi) Except as disclosed in the Prospectus, there are no
contracts, agreements or understandings between the Company and any
third party that would give rise to a valid claim against the Company
or any Underwriter for a brokerage commission, finder's fee or other
like payment in connection with the transactions contemplated by this
Agreement.
(vii) Except as disclosed in the Prospectus, on each
Closing Date there will be no contracts, agreements or understandings
between the Company and any third party (whether acting in an
individual, fiduciary or other capacity) granting such third party the
right to require the Company to file a registration statement under
the Act with respect to any securities of the Company owned or to be
owned by such third party or to require the Company to include such
securities in the Offered Securities registered pursuant to the
Registration Statement or in any securities being registered pursuant
to any other registration statement filed by the Company under the
Act.
(viii) The Offered Securities have been approved for listing
subject to notice of issuance on the Nasdaq Stock Market's National
Market.
(ix) Except as disclosed in the Prospectus, no consent,
approval, authorization, order, registration or qualification of, or
filing with, any third party (whether acting in an individual,
fiduciary or other capacity) or any governmental, regulatory or
accrediting agency or body or any court is required for the
consummation by the Company of the transactions contemplated by this
Agreement in connection with the issuance and sale of the Offered
Securities or for the consummation by the Company of the other
transactions contemplated by this Agreement or the Prospectus,
including, without limitation, the transactions described in the
Prospectus under the captions "The Transactions" and "Use of
Proceeds", except such as have been obtained and made under the Act
and such as may be required under state securities laws.
(x) The execution, delivery and performance by the
Company of this Agreement and the agreements, documents or instruments
entered into by the Company in connection with the transactions
described in the Prospectus under the captions "The Transactions" and
"Certain Transactions" and the consummation by the Company of the
transactions herein and therein contemplated have been duly authorized
by all necessary corporate action on the part
4
<PAGE> 5
of the Company and, to the extent required, its shareholders and do
not and will not conflict with or result in a breach or violation of
any of the terms and provisions of, and do not and will not constitute
a default (or an event which with the giving of notice or the lapse of
time or both could reasonably be likely to constitute a default)
under, and do not and will not result in the creation or imposition of
any lien, charge or encumbrance upon any assets or properties of the
Company or any of its Material Subsidiaries (including any individual
institution within such entity) under, (A) the charter, by-laws or
other organizational documents of the Company or any such subsidiary,
(B) any statute, any rule, regulation, requirement, order or decree of
any governmental, regulatory or accrediting agency or body or any
court having jurisdiction over the Company or any such subsidiary or
any of their properties, assets or operations, including, without
limitation, The Higher Education Act of 1965, as amended, and the
regulations promulgated thereunder (the "HEA"), or (C) any indenture,
mortgage, loan or credit agreement, note, lease, permit, license or
other agreement or instrument to which the Company or any such
subsidiary is a party or by which the Company or any such subsidiary
is bound or to which any of the properties, assets or operations of
the Company or any such subsidiary is subject, except for such
conflicts, breaches, violations, defaults, liens, charges and
encumbrances which would not, individually or in the aggregate, have a
Material Adverse Effect. The issuance and sale of the Offered
Securities or consummation of the other transactions contemplated by
this Agreement or the Prospectus will not constitute a change in
ownership resulting in a "change of control" of the Company as defined
in the HEA.
(xi) This Agreement and the agreements, documents or
instruments entered into by the Company in connection with the
transactions described in the Prospectus under the captions "The
Transactions" and "Certain Transactions" have been duly authorized,
executed and delivered by the Company and constitute the legal, valid
and binding obligations of the Company enforceable against the Company
in accordance with their respective terms, except to the extent that
(A) enforceability may be limited by bankruptcy, insolvency,
reorganization, moratorium or other similar laws relating to
creditors' rights generally and by general principles of equity and
(B) rights to indemnity and contribution may be limited by federal and
state securities laws or policies underlying such laws.
(xii) The Company and its Material Subsidiaries have good
and marketable title to all real properties and all other material
properties and assets owned by them, in each case free and clear of
any mortgage, pledge, lien, security interest, claim or other
encumbrance or defect that would, individually or in the aggregate,
materially interfere with the use made or to be made thereof by them,
or have a Material Adverse Effect; the Company and its Material
Subsidiaries hold all their material leased real or personal
properties under valid, subsisting and enforceable leases or subleases
with no exceptions that would materially interfere with the use made
or to be made thereof by them; neither the Company nor any Material
Subsidiary is in default under any such lease or sublease, except for
any such defaults which would not, individually or in the aggregate,
have a Material Adverse Effect; and, to the knowledge of the Company,
no claim of any sort has been asserted in writing by anyone adverse to
the rights of the Company or any such subsidiary under any such lease
or sublease or affecting or questioning the right of such entity to
the continued possession of the leased or subleased properties under
any such lease or sublease.
(xiii) Except as disclosed in the Prospectus, the Company
and its Material Subsidiaries (including any individual institution
within such entity) possess all accreditations, approvals,
authorizations, certificates, permits and licenses (collectively,
"Licenses") issued by appropriate governmental, regulatory or
accrediting agencies or bodies, including, without limitation, all
authorizations required for participation in federal aid programs
under Title IV of the HEA ("Title IV Programs"), as are necessary to
own, lease or operate their properties
5
<PAGE> 6
and to conduct the business now operated by them and all such Licenses
are in full force and effect, except where the failure to possess such
Licenses or the failure of such Licenses to be in full force and
effect would not, individually or in the aggregate, have a Material
Adverse Effect; the Company and its Material Subsidiaries are in
substantial compliance with their respective obligations under such
Licenses, subject to such qualifications as are described in the
Prospectus; and neither the Company nor any of its Material
Subsidiaries has received written notice of any proceedings,
investigations or inquiries (or has knowledge of any facts that could
form a reasonable basis for any proceedings, investigations or
inquiries) relating to the revocation, modification, termination or
suspension of any such License, except where any such noncompliance,
revocation, modification, termination or suspension would not,
individually or in the aggregate, have a Material Adverse Effect.
(xiv) No labor dispute with the employees of the Company or
any Material Subsidiary exists or, to the knowledge of the Company, is
imminent that would, individually or in the aggregate, have a Material
Adverse Effect.
(xv) The Company and its Material Subsidiaries own or have
obtained valid licenses for all trademarks, trademark registrations,
service marks, service mark registrations, trade names, copyrights,
copyright registrations, confidential information and any other
intellectual property described in the Prospectus as being owned,
licensed or used by the Company or any of its Material Subsidiaries or
that are necessary for the conduct of the businesses (collectively,
"Intellectual Property"), except where the failure to own or obtain
any such Intellectual Property would not, individually or in the
aggregate, have a Material Adverse Effect, and the Company has no
knowledge of any written claim to the contrary or any challenge in
writing by any third party with respect to the rights of the Company
or any such subsidiaries in any such Intellectual Property or to the
validity or scope of any such Intellectual Property and neither the
Company nor any of its subsidiaries has any written claim against a
third party with respect to the infringement by such third party to
any such Intellectual Property that, if determined adversely to the
Company or any of its subsidiaries, would, individually or in the
aggregate, have a Material Adverse Effect. The Company and its
subsidiaries have a good faith belief in the distinctiveness and
enforceability of all trademarks, service marks and trade names
comprising the Intellectual Property.
(xvi) The Company and its Material Subsidiaries are in
compliance with all applicable federal, state and local environmental
laws, rules and regulations, orders, decrees, judgments, permits and
licenses relating to public and worker health and safety, and to the
protection and clean-up of the natural environment including, without
limitation, those relating to the production, generation, handling,
disposal, transportation or release of hazardous materials
(collectively, "Environmental Laws"), except where noncompliance would
not, individually or in the aggregate, have a Material Adverse Effect,
and the Company has no knowledge of any matters that could interfere
with or prevent compliance or continued compliance by the Company and
its subsidiaries with applicable Environmental Laws. To the knowledge
of the Company, neither the Company nor any of its Material
Subsidiaries is the subject of any federal, state or local
investigation, and neither the Company nor any such subsidiaries has
received any written notice or claim (or has knowledge of any facts
that could form a reasonable basis for any such claim), or entered
into any negotiations or agreements with any third party relating to
any liability or potential liability or remedial action or potential
remedial action under Environmental Laws, nor are there any pending
or, to the knowledge of the Company, threatened in writing actions,
suits or proceedings against or affecting the Company, any of its
Material Subsidiaries or their properties, assets or operations in
connection with any such Environmental Laws. The term "hazardous
materials" shall mean those substances that are regulated by or form
the basis for liability under any applicable Environmental Laws.
6
<PAGE> 7
(xvii) Except as disclosed in the Prospectus, there are no
pending actions, suits, proceedings or investigations against or
affecting the Company or any of its Material Subsidiaries (including
any individual institution within such entity) or any of their
respective properties, assets or operations that, if determined
adversely to the Company or any of its Material Subsidiaries, would,
individually or in the aggregate, have a Material Adverse Effect or
could materially and adversely affect the ability of the Company to
perform its obligations under this Agreement or which are otherwise
material in the context of the sale of the Offered Securities; and no
such actions, suits, proceedings or investigations are, to the
knowledge of the Company, threatened.
(xviii) The audited financial statements and related
schedules and notes included in each Registration Statement and the
Prospectus present fairly the financial position of the Company and
its consolidated subsidiaries as of the dates shown and their results
of operations and cash flows for the periods shown, have been prepared
in conformity with the generally accepted accounting principles in the
United States applied on a consistent basis, and, to the knowledge of
the Company, comply with the requirements of the Act and the Rules and
Regulations. The financial information and statistical data set forth
in the Prospectus under the captions "Summary Consolidated Financial
and Other Data", "Capitalization" and "Selected Consolidated Financial
and Other Data" present fairly the information shown therein and, with
the exception of any pro forma information, have been compiled on a
basis consistent with that of the audited consolidated financial
statements included in the Registration Statements. The pro forma
financial information included in the Prospectus present fairly the
information shown therein, have been prepared in accordance with the
Commission's rules and guidelines with respect to pro forma financial
statements and have been properly compiled on the pro forma basis
described therein. In the opinion of the Company, the assumptions
used therefor provide a reasonable basis for presenting the
significant effects directly attributable to the transactions or
events described therein, the related pro forma adjustments give
appropriate effect to those assumptions, and the pro forma columns
therein reflect the proper application of those adjustments to the
corresponding historical financial statement amounts.
(xix) Since the dates as of which information is given in
each Registration Statement and the Prospectus, (A) neither the
Company nor any of its Material Subsidiaries has incurred any material
liability or obligation (indirect, direct or contingent) or entered
into any material verbal or written agreement or other transaction
that is not in the ordinary course of business or that could result in
a material reduction in the future earnings of the Company; (B)
except as described in the Prospectus, there has been no material
change in the indebtedness of the Company, no change in the capital
stock of the Company and no dividend or distribution of any kind
declared, paid or made by the Company on any class of its capital
stock; and (C) there has been no material adverse change, nor any
development or event involving a prospective material adverse change,
in the financial condition, business or results of operations of the
Company and its subsidiaries taken as a whole.
(xx) The Company is not and, after giving effect to the
offering and sale of the Offered Securities and the application of the
proceeds therefrom as described in the Prospectus, will not be an
"investment company" as defined in the Investment Company Act of 1940,
as amended.
(xxi) Neither the Company nor any of its affiliates does
business with the government of Cuba or with any person or affiliate
located in Cuba within the meaning of Section 517.075, Florida
Statutes.
7
<PAGE> 8
(xxii) Except as described in the Prospectus, there are no
outstanding (A) securities or obligations of the Company convertible
into or exchangeable for any capital stock of the Company, (B)
warrants, rights or options to subscribe for or purchase from the
Company any such capital stock or any such convertible or exchangeable
securities or obligations or (C) obligations of the Company to issue
any such capital stock, convertible or exchangeable securities or
obligations, or warrants, rights or obligations.
(xxiii) Each "employee benefit plan" within the meaning of
the Employee Retirement Income Security Act of 1974, as amended
("ERISA"), in which employees of the Company or any subsidiary of the
Company participate or as to which the Company or any such subsidiary
has any liability (the "ERISA Plans") is in substantial compliance
with the applicable provisions of ERISA and the Internal Revenue Code
of 1986, as amended (the "Code"). Neither the Company nor any
subsidiary of the Company has any liability, whether or not
contingent, with respect to the ERISA Plans or otherwise under Title
IV of ERISA, nor does the Company have knowledge of any facts that
could form a reasonable basis for any such liability. Neither the
Company nor any subsidiary of the Company has any liability, whether
or not contingent, with respect to any ERISA Plan that provides
post-retirement welfare benefits. The descriptions of the Company's
stock arrangements set forth in the Prospectus are accurate and
complete in all material respects.
(xxiv) The Company's Employee Stock Ownership Plan and Trust
(the "ESOP") constitutes an "employee stock ownership plan" as defined
in Section 4957(e)(7) of the Code and Section 407(d)(6) of ERISA. All
loans to the trust created pursuant to the ESOP (the "ESOP Trust") and
each pledge of shares of the Securities by the ESOP Trust in
connection with the ESOP has satisfied and continues to satisfy the
requirements of Section 4975(d)(3) of the Code and Section 408(b)(3)
of ERISA, and has not and will not subject the Company or any
subsidiary to a tax imposed under Section 4975 of the Code or a civil
penalty assessed under Section 502(i) of ERISA. The Securities
satisfy the definition of a "qualifying employer security" within the
meaning of Section 4975(e)(8) of the Code and Section 407(d)(5) of
ERISA. Sales of shares of Securities to the ESOP Trust have satisfied
and continue to satisfy the requirements of Section 4975(d)(13) of the
Code and Section 408(e) of ERISA, and such sales have not and will not
subject the Company nor any subsidiary to a tax imposed under Section
4975 of the Code of a civil penalty assessed under Section 502(i) of
ERISA. None of the transactions involving the ESOP described in the
Prospectus under the captions "The Transactions" or "Certain
Transactions" constitute or will constitute a violation of, or result
or will result in liability under, ERISA or the Code (including,
without limitation, any tax under Section 4975 or Section 4978B of the
Code).
(xxv) The Company and its subsidiaries have filed on a
timely basis all federal, state and local tax returns required to be
filed, such returns are complete and correct in all material respects,
and all taxes shown by such returns or otherwise assessed that are due
and payable have been paid, except such taxes as are being contested
in good faith and as to which adequate reserves have been provided.
The charges, accruals and reserves on the books of the Company and its
subsidiaries in respect of any tax liability for any year not finally
determined are adequate to meet any assessments or reassessments for
additional taxes; and there has been no tax deficiency asserted and
the Company has no knowledge of any facts that could form a reasonable
basis for the assertion of any tax deficiency against the Company or
any of its subsidiaries that would, individually or in the aggregate,
have a Material Adverse Effect.
(xxvi) The Company and its subsidiaries maintain a system of
internal accounting controls sufficient in all material respects for
purposes of the prevention or detection of errors or irregularities in
amounts that could be expected to be material to the Company's
8
<PAGE> 9
consolidated financial statements and the recording of transactions so
as to permit the preparation of such consolidated financial statements
in conformity with generally accepted accounting principles.
(xxvii) Neither the Company nor any of its Material
Subsidiaries (including any individual institution within such entity)
is in violation of (A) its charter, by-laws or other organizational
documents or (B) any statute, any rule, regulation, requirement,
order, decree or judgment of any governmental, regulatory or
accrediting agency or body or any court having jurisdiction over the
Company or any such subsidiary, except for any such violations which
would not, individually or in the aggregate, have a Material Adverse
Effect; and no event of default or event which with the giving of
notice or the lapse of time or both, could constitute an event of
default exists, or upon consummation of the transactions contemplated
by this Agreement or the Prospectus, including, without limitation,
the use of proceeds from the sale of the Offered Securities in the
manner contemplated by the description under the caption "Use of
Proceeds" contained in the Prospectus and consummation of the
transactions described in the Prospectus under the captions "The
Transactions" and "Certain Transactions", will exist, under any
indenture, mortgage, loan or credit agreement, note, lease, permit,
license or other agreement or instrument to which the Company or any
such subsidiary is a party or by which the Company or any such
subsidiary is bound or to which any of the properties, assets or
operations of the Company or any such subsidiary is subject, except
for any such defaults which would not, individually or in the
aggregate, have a Material Adverse Effect. There are no statutes,
regulations, contracts or other documents that are required to be
described in the Registration Statements or the Prospectus or to be
filed as an exhibit to the Registration Statements that are not
described or filed as required.
(xxviii) The Company and its subsidiaries carry or are
entitled to the benefits of insurance in such amounts and covering
such risks as are generally maintained by companies of established
repute engaged in the same or a similar business, and all such
insurance is in full force and effect.
(xxix) The Company has not taken and will not take, directly
or indirectly, any action designed to or that could cause or result in
the stabilization or manipulation of the price of the Offered
Securities to facilitate the sale or resale of the Offered Securities.
(b) Each Selling Shareholder severally represents and warrants to,
and agrees with, the several Underwriters that:
(i) Such Selling Shareholder on each Closing Date will
have valid and unencumbered title to the Offered Securities to be
delivered by such Selling Shareholder on such Closing Date and has
full right, power and authority to enter into this Agreement and the
Custody Agreement (the "Custody Agreement") and Irrevocable Power of
Attorney (the "Power of Attorney") entered into by such Selling
Shareholder in connection with the transactions contemplated hereby
and will have full right, power and authority to sell, assign,
transfer and deliver the Offered Securities to be delivered by such
Selling Shareholder on such Closing Date hereunder; and upon the
delivery of and payment for the Offered Securities on each Closing
Date hereunder the several Underwriters will acquire valid and
unencumbered title to the Offered Securities to be delivered by such
Selling Shareholder on such Closing Date.
(ii) If the Effective Time of the Initial Registration
Statement is prior to the execution and delivery of this Agreement:
(A) on the Effective Date of the Initial Registration Statement, the
Initial Registration Statement did not include any untrue statement of
a material fact or omit to state any material fact required to be
stated therein or necessary to make the
9
<PAGE> 10
statements therein not misleading, (B) on the Effective Date of the
Additional Registration Statement (if any), each Registration
Statement did not include, or will not include, any untrue statement
of a material fact and did not omit, or will not omit, to state any
material fact required to be stated therein or necessary to make the
statements therein not misleading, and (C) on the date of this
Agreement, the Initial Registration Statement and, if the Effective
Time of the Additional Registration Statement is prior to the
execution and delivery of this Agreement, the Additional Registration
Statement, and at the time of filing of the Prospectus pursuant to
Rule 424(b) or (if no such filing is required) at the Effective Date
of the Registration Statement in which the Prospectus is included,
each Registration Statement and the Prospectus does not include, or
will not include, any untrue statement of a material fact or does not
omit, or will not omit, to state any material fact required to be
stated therein or necessary to make the statements therein not
misleading. If the Effective Time of the Initial Registration
Statement is subsequent to the execution and delivery of this
Agreement: on the Effective Date of the Initial Registration
Statement, neither the Initial Registration Statement nor the
Prospectus will include any untrue statement of a material fact or
will omit to state any material fact required to be stated therein or
necessary to make the statements therein not misleading. The two
preceding sentences apply to each Selling Shareholder only to the
extent that any statements in or omissions from a Registration
Statement or the Prospectus are based upon written information
furnished to the Company or its representatives by or on behalf of
such Selling Shareholder specifically for use therein.
(iii) This Agreement, the Custody Agreement and Power of
Attorney and, to the extent applicable to such Selling Shareholder,
the agreements, documents or instruments entered into by such Selling
Shareholder in connection with the transactions described in the
Prospectus under the caption "The Transactions" have each been duly
authorized, executed and delivered by or on behalf of such Selling
Shareholder and constitute the legal, valid and binding obligations of
such Selling Shareholder enforceable against such Selling Shareholder
in accordance with their respective terms, except to the extent that
(A) enforceability may be limited by bankruptcy, insolvency,
reorganization, moratorium or other similar laws relating to
creditors' rights generally and by general principles of equity and
(B) rights to indemnity and contribution may be limited by federal and
state securities laws or policies underlying such laws.
(iv) No consent, approval, authorization, order,
registration or qualification of, or filing with, any third party
(whether acting in an individual, fiduciary or other capacity) or any
governmental or regulatory agency or body or any court is required to
be obtained or made for the consummation of the transactions
contemplated by this Agreement, the Custody Agreement and Power of
Attorney by such Selling Shareholder in connection with the sale of
the Offered Securities or for the consummation of the other
transactions contemplated by this Agreement or the Prospectus,
including, without limitation, the consummation by such Selling
Shareholder, to the extent applicable, of the transactions described
in the Prospectus under the caption "The Transactions", except such as
have been obtained and made under the Act and such as may be required
under state securities laws.
(v) The execution, delivery and performance by such
Selling Shareholder of this Agreement, the Custody Agreement and Power
of Attorney and, to the extent applicable to such Selling Shareholder,
the agreements, documents or instruments entered into by such Selling
Shareholder in connection with the transactions described in the
Prospectus under the caption "The Transactions", the sale of the
Offered Securities being sold by such Selling Shareholder and the
consummation by such Selling Shareholder of any of the other
transactions herein or therein contemplated, do not and will not
conflict with or result in a breach or violation of any of the terms
and provisions of, or constitute or will constitute a default (or an
event which with the giving of notice or the lapse of time or both
could
10
<PAGE> 11
reasonably be likely to constitute a default) under, or result in the
creation or imposition of any lien, charge or encumbrance upon the
Offered Securities to be sold by such Selling Shareholder under (A)
the charter, by-laws or other organizational documents of such Selling
Shareholder, (B) any statute, any rule, regulation, requirement, order
or decree of any governmental or regulatory agency or body, or any
court having jurisdiction over such Selling Shareholder or any of its
properties, assets or operations or (C) any indenture, mortgage, loan
or credit agreement, note, lease, permit, license or other agreement
or instrument to which such Selling Shareholder is a party or by which
such Selling Shareholder is bound or to which any of the properties,
assets or operations of such Selling Shareholder is subject, except,
in the case of clauses (B) and (C), for such conflicts, breaches,
violations, defaults, liens, charges and encumbrances which could not,
individually or in the aggregate, have a material adverse effect on
the ability of such Selling Shareholder to consummate the transactions
contemplated by this Agreement and the Custody Agreement and Power of
Attorney or perform such Selling Shareholder's obligations hereunder
or thereunder.
(vi) Except as disclosed in the Prospectus, there are no
contracts, agreements or understandings between such Selling
Shareholder and any third party that would give rise to a valid claim
against such Selling Shareholder or any Underwriter for a brokerage
commission, finder's fee or other like payment in connection with the
transactions contemplated by this Agreement, the Custody Agreement and
Power of Attorney.
(vii) Such Selling Shareholder has not taken and will not
take, directly or indirectly, any action designed to or that could
cause or result in the stabilization or manipulation of the price of
the Offered Securities to facilitate the sale or resale of the Offered
Securities.
3. Purchase, Sale and Delivery of Offered Securities. On the
basis of the representations, warranties and agreements herein contained, but
subject to the terms and conditions herein set forth, the Company and each
Selling Shareholder agree, severally and not jointly, to sell to each
Underwriter, and each Underwriter agrees, severally and not jointly, to
purchase from the Company and each Selling Shareholder, at a purchase price of
$[_____] per share, that number of Firm Securities (rounded up or down, as
determined by CS First Boston Corporation ("CS First Boston") in its
discretion, in order to avoid fractions) obtained by multiplying [_________]
Firm Securities in the case of the Company and the number of Firm Securities
set forth opposite the name of such Selling Shareholder in Schedule A hereto,
in the case of a Selling Shareholder, in each case by a fraction the numerator
of which is the number of Firm Securities set forth opposite the name of such
Underwriter in Schedule B hereto and the denominator of which is the total
number of Firm Securities.
Certificates in negotiable form representing securities convertible
into or exercisable for (upon the consummation of the Articles Amendment and,
as the case may be, the Warrant Exercise, both as described in the Prospectus
under the caption "The Transactions") the Offered Securities to be sold by the
Selling Shareholders hereunder have been placed in custody, for delivery under
this Agreement, under Custody Agreements with the Company, as custodian
("Custodian"). Each Selling Shareholder agrees that the shares represented by
the certificates held in custody for the Selling Shareholders under such
Custody Agreements are subject to the interests of the Underwriters hereunder,
that the arrangements made by the Selling Shareholders for such custody are to
that extent irrevocable, and that the obligations of the Selling Shareholders
hereunder shall not be terminated by operation of law.
The Company and the Custodian will deliver the Firm Securities to the
Representatives for the accounts of the Underwriters, against payment of the
purchase price by wire transfers to a bank (or banks) acceptable to CS First
Boston in Federal Reserve (same day) funds to an account of the Company in the
case of 3,230,000 shares of Firm Securities and to an account of the Custodian
in the
11
<PAGE> 12
case of 1,300,000 shares of Firm Securities, at the office of Dewey Ballantine,
1301 Avenue of the Americas, New York, New York 10019, at 10:00 A.M., New York
time, on _____________, 1996, or at such other time not later than seven full
business days thereafter as CS First Boston and the Company determine, such
time being herein referred to as the "First Closing Date". The certificates
for the Firm Securities so to be delivered will be in definitive form, in such
denominations and registered in such names as CS First Boston requests upon
reasonable notice prior to the First Closing Date and will be made available
for checking and packaging at the office of CS First Boston, Park Avenue Plaza,
New York, New York 10055 at least 24 hours prior to the First Closing Date.
In addition, upon written notice from CS First Boston given to the
Company and the Selling Shareholders from time to time not more than 30 days
subsequent to the date of the Prospectus, the Underwriters may purchase all or
less than all of the Optional Securities at the purchase price per Security to
be paid for the Firm Securities. The Company and the Selling Shareholders
agree, severally and not jointly, to sell to the Underwriters the respective
numbers of Optional Securities obtained by multiplying the number of Optional
Securities specified in such notice by a fraction the numerator of which is
142,209 in the case of the Company and the number of shares set forth opposite
the names of such Selling Shareholders in Schedule A hereto under the caption
"Number of Optional Securities to be Sold" in the case of the Selling
Shareholders and the denominator of which is the total number of Optional
Securities (subject to adjustment by CS First Boston to eliminate fractions).
Such Optional Securities shall be purchased from the Company and each Selling
Shareholder for the account of each Underwriter in the same proportion as the
number of Firm Securities set forth opposite such Underwriter's name bears to
the total number of Firm Securities (subject to adjustment by CS First Boston
to eliminate fractions) and may be purchased by the Underwriters only for the
purpose of covering over allotments made in connection with the sale of the
Firm Securities. No Optional Securities shall be sold or delivered unless the
Firm Securities previously have been, or simultaneously are, sold and
delivered. The right to purchase the Optional Securities or any portion
thereof may be exercised from time to time and to the extent not previously
exercised may be surrendered and terminated at any time upon notice by CS First
Boston to the Company and the Selling Shareholders.
Each time for the delivery of and payment for the Optional Securities,
being herein referred to as an "Optional Closing Date", which may be the First
Closing Date (the First Closing Date and each Optional Closing Date, if any,
being sometimes referred to as a "Closing Date"), shall be determined by CS
First Boston but shall be not later than five full business days after written
notice of election to purchase Optional Securities is given. The Company and
the Custodian will deliver the Optional Securities being purchased on each
Optional Closing Date to the Representatives for the accounts of the
Underwriters, against payment of the purchase price by wire transfer to a bank
(or banks) acceptable to CS First Boston in Federal Reserve (same day) funds to
an account of the Company in the case of _______ Optional Securities and to an
account of the Custodian in the case of ________ Optional Securities, at the
office of Dewey Ballantine, 1301 Avenue of the Americas, New York, New York
10019. The certificates for the Optional Securities being purchased on each
Optional Closing Date will be in definitive form, in such denominations and
registered in such names as CS First Boston requests upon reasonable notice
prior to such Optional Closing Date and will be made available for checking and
packaging at the office of CS First Boston, Park Avenue Plaza, New York, New
York 10055 at a reasonable time in advance of such Optional Closing Date.
4. Offering by Underwriters. It is understood that the several
Underwriters propose to offer the Offered Securities for sale to the public as
set forth in the Prospectus.
It is further understood that up to an aggregate of 225,000 Firm
Securities will be reserved for offering and sale to employees of the Company
and other persons identified by the Company who have heretofore delivered to CS
First Boston Corporation, in a timely manner and in form satisfactory to CS
First Boston Corporation, written indications of interest to purchase such Firm
Securities. Up to 175,000 of such shares may be purchased by employees at the
initial public offering price less
12
<PAGE> 13
underwriting discounts and commissions. The Company shall reimburse the
Underwriters for the underwriting discounts and commissions on such sales. Any
other sales to employees or sales to other persons identified by the Company
will be at the initial public offering price. Under no circumstances shall the
Representatives or any Underwriter be liable to the Company, any of its
subsidiaries or any such persons for any action taken or omitted in good faith
in connection with such offering and sale to such persons. Any Firm Securities
not purchased by such persons at the First Closing Date will be offered to the
public by the Underwriters as set forth in the Prospectus.
5. Certain Agreements of the Company and the Selling
Shareholders. The Company agrees with the several Underwriters and the Selling
Shareholders and, with respect to clauses (l), (m) and (n) below, the Selling
Shareholders agree with the Company and the several Underwriters that:
(a) If the Effective Time of the Initial Registration
Statement is prior to the execution and delivery of this Agreement,
the Company will file the Prospectus with the Commission pursuant to
and in accordance with subparagraph (1) (or, if applicable and if
consented to by CS First Boston, subparagraph(4)) of Rule 424(b) not
later than the earlier of (A) the second business day following the
execution and delivery of this Agreement or (B) the fifteenth business
day after the Effective Date of the Initial Registration Statement.
The Company will advise CS First Boston promptly of any such filing
pursuant to Rule 424(b). If the Effective Time of the Initial
Registration Statement is prior to the execution and delivery of this
Agreement and an additional registration statement is necessary to
register a portion of the Offered Securities under the Act but the
Effective Time thereof has not occurred as of such execution and
delivery, the Company will file the additional registration statement
or, if filed, will file a post-effective amendment thereto with the
Commission pursuant to and in accordance with Rule 462(b) on or prior
to 10:00 P.M., New York time, on the date of this Agreement or, if
earlier, on or prior to the time the Prospectus is printed and
distributed to any Underwriter, or will make such filing at such later
date as shall have been consented to by CS First Boston.
(b) The Company will advise CS First Boston promptly of any
proposal to amend or supplement the initial registration statement or
any additional registration statement as filed or the related
prospectus or the Initial Registration Statement, the Additional
Registration Statement (if any) or the Prospectus and will not effect
such amendment or supplementation without CS First Boston's prior
consent; and the Company will also advise CS First Boston promptly of
the effectiveness of each Registration Statement (if its Effective
Time is subsequent to the execution and delivery of this Agreement)
and of any amendment or supplementation of a Registration Statement or
the Prospectus and of the institution by the Commission of any stop
order proceedings in respect of a Registration Statement and will use
its reasonable best efforts to prevent the issuance of any such stop
order and to obtain as soon as possible its lifting, if issued.
(c) If, at any time when a prospectus relating to the Offered
Securities is required to be delivered under the Act in connection
with sales by any Underwriter or dealer, any event occurs or a
condition exists as a result of which the Prospectus as then amended
or supplemented would include an untrue statement of a material fact
or omit to state any material fact necessary to make the statements
therein, in the light of the circumstances under which they were made,
not misleading, or if it is necessary at any time to amend the
Prospectus to comply with the Act, the Company will promptly notify CS
First Boston of such event and will promptly prepare and file with the
Commission, at its own expense, an amendment or supplement which will
correct such statement or omission or an amendment which will effect
such compliance. Neither CS First Boston's consent to, nor the
Underwriters' delivery of, any such amendment or supplement shall
constitute a waiver of any of the conditions set forth in Section 6.
13
<PAGE> 14
(d) As soon as practicable, but not later than the
Availability Date (as defined below), the Company will make generally
available to its security holders an earnings statement covering a
period of at least 12 months beginning after the Effective Date of the
Initial Registration Statement (or, if later, the Effective Date of
the Additional Registration Statement) which will satisfy the
provisions of Section 11(a) of the Act. For the purpose of the
preceding sentence, "Availability Date" means the 45th day after the
end of the fourth fiscal quarter following the fiscal quarter that
includes such Effective Date, except that, if such fourth fiscal
quarter is the last quarter of the Company's fiscal year,
"Availability Date" means the 90th day after the end of such fourth
fiscal quarter.
(e) The Company will furnish to the Representatives copies of
each Registration Statement (three of which will be signed and will
include all exhibits and a signed accountant's report of Arthur
Andersen LLP), each related preliminary prospectus, and, so long as a
prospectus relating to the Offered Securities is required to be
delivered under the Act in connection with sales by any Underwriter or
dealer, the Prospectus and all amendments and supplements to such
documents, in each case in such quantities as CS First Boston
reasonably requests. The Prospectus shall be so furnished on or prior
to 3:00 P.M., New York time, on the business day following the later
of the execution and delivery of this Agreement or the Effective Time
of the Initial Registration Statement. All other such documents shall
be furnished as soon as available. The Company will pay the expenses
of printing and distributing to the Underwriters all such documents.
(f) The Company will, in cooperation with CS First Boston and
counsel for the Underwriters, arrange for the qualification of the
Offered Securities for sale under the laws of such jurisdictions as CS
First Boston designates and will continue such qualifications in
effect so long as required for the distribution; provided, that the
Company shall not be required to file a general consent to service of
process or qualify to do business in any jurisdiction in which it is
not so qualified.
(g) During the period ending on the fifth anniversary hereof,
the Company will furnish to the Representatives and, upon request, to
each of the other Underwriters, (i) as soon as practicable after the
end of each of its fiscal years, a copy of its annual report to
shareholders for such year, (ii) as soon as available, a copy of each
report and definitive proxy statement of the Company filed with the
Commission under the Securities Exchange Act of 1934, as amended, or
mailed to shareholders and (iii) from time to time, such other
information concerning the Company as CS First Boston may reasonably
request.
(h) For a period of 180 days after the date of the initial
public offering of the Offered Securities, the Company will not offer,
sell, contract to sell, pledge or otherwise dispose of, directly or
indirectly, or file or cause to be filed with the Commission a
registration statement under the Act relating to, any shares of
Securities or securities or other rights convertible into or
exchangeable or exercisable for any shares of Securities, or publicly
disclose the intention to make any such offer, sale, pledge, disposal
or filing, without the prior written consent of CS First Boston.
(i) The Company will use its best efforts to cause its
officers, directors and shareholders (other than the Selling
Shareholders) of the Company who beneficially own an aggregate of
[________________] outstanding shares (or _____%) of the Securities
and vested options to purchase an additional [ ] shares of
the Securities to agree that each such holder will not offer, sell,
contract to sell, pledge or otherwise dispose of, directly or
indirectly, or cause to be filed with the Commission a registration
statement under the Act relating to, any shares of the Securities or
securities or other rights convertible into or exchangeable or
exercisable for any shares of Securities, or publicly disclose the
intention to
14
<PAGE> 15
make any such offer, sale, pledge or disposal, without the prior
written consent of CS First Boston, for a period of 180 days after the
date of the initial public offering of the Offered Securities.
(j) The Company will apply the net proceeds from the sale of
the Offered Securities sold by it in the manner set forth in the
Prospectus under the caption "Use of Proceeds".
(k) The Company will pay all expenses incident to the
performance of the obligations of the Company and each Selling
Shareholder under this Agreement and will reimburse the Underwriters
(if and to the extent incurred by them) for any filing fees and other
expenses (including fees and disbursements of counsel) incurred by
them in connection with the qualification of the Offered Securities
for sale under the laws of such jurisdictions as CS First Boston
designates in accordance with clause (f) and the printing of memoranda
relating thereto, for the filing fee of the National Association of
Securities Dealers, Inc. relating to the Offered Securities, for any
travel expenses of the Company's officers and employees and any other
expenses of the Company in connection with attending or hosting
meetings with prospective purchasers of the Offered Securities and for
expenses incurred in printing and distributing preliminary
prospectuses and the Prospectus (including any amendments and
supplements thereto) or related documents. Each Selling Shareholder
will reimburse the Underwriters (if and to the extent incurred by
them) for any transfer taxes on the sale by the Selling Shareholders
of the Offered Securities to the Underwriters.
(l) Each Selling Shareholder agrees to deliver to CS First
Boston (Attention: Transactions Advisory Group) on or prior to the
First Closing Date a properly completed and executed United States
Treasury Department Form W-9 (or other applicable form or statement
specified by Treasury Department regulations in lieu thereof).
(m) Each Selling Shareholder agrees, for a period of 180 days
after the date of the initial public offering of the Offered
Securities, not to offer, sell, contract to sell, pledge or otherwise
dispose of, directly or indirectly, or cause to be filed with the
Commission a registration statement under the Act relating to any
shares of the Securities of the Company or securities or other rights
convertible into or exchangeable or exercisable for any shares of
Securities, or publicly disclose the intention to make any such offer,
sale, pledge or disposal, without the prior written consent of CS
First Boston.
6. Conditions of the Obligations of the Underwriters. The
obligations of the several Underwriters to purchase and pay for the Firm
Securities on the First Closing Date and the Optional Securities to be
purchased on each Optional Closing Date will be subject to the accuracy of the
representations and warranties on the part of the Company and the Selling
Shareholders herein, to the accuracy of the statements of Company officers made
pursuant to the provisions hereof, to the performance by the Company and the
Selling Shareholders of their obligations hereunder and to the following
additional conditions precedent:
(a) The Representatives shall have received a letter, dated
the date of delivery thereof (which, if the Effective Time of the
Initial Registration Statement is prior to the execution and delivery
of this Agreement, shall be on or prior to the date of this Agreement
or, if the Effective Time of the Initial Registration Statement is
subsequent to the execution and delivery of this Agreement, shall be
prior to the filing of the amendment or post-effective amendment to be
filed shortly prior to such Effective Time), of Arthur Anderson LLP
confirming that they are independent public accountants within the
meaning of the Act and the applicable Rules and Regulations and
stating to the effect that:
15
<PAGE> 16
(i) in their opinion the financial statements and
schedules examined by them and included in the Registration
Statements comply as to form in all material respects with the
applicable accounting requirements of the Act and the related
published Rules and Regulations;
(ii) they have performed the procedures specified
by the American Institute of Certified Public Accountants for
a review of interim financial information as described in
Statement of Auditing Standards No. 71, Interim Financial
Information, on the unaudited financial statements included in
the Registration Statements;
(iii) on the basis of the review referred to in
clause (ii) above, a reading of the latest available interim
financial statements of the Company, a reading of the minutes
of all meetings of the shareholders and directors (including
each committee thereof) of the Company and its subsidiaries,
inquiries of officials of the Company who have responsibility
for financial and accounting matters and other specified
procedures, nothing came to their attention that caused them
to believe that:
(A) the unaudited financial statements
included in the Registration Statements and the
Prospectus do not comply as to form in all material
respects with the applicable accounting requirements
of the Act and the related published Rules and
Regulations or any material modifications should be
made to such unaudited financial statements for them
to be in conformity with generally accepted
accounting principles;
(B) the information set forth in the
Prospectus under the captions "Summary Consolidated
Financial and Other Data" and "Selected Consolidated
Financial and Other Data" does not agree with the
amounts set forth in the unaudited consolidated
financial statements or the audited consolidated
financial statements, as the case may be, from which
it was derived or were not determined on a basis
substantially consistent with that of the
corresponding amounts in the audited statements
included in the Registration Statements and the
Prospectus;
(C) at the date of the latest available
balance sheet read by such accountants, or at a
subsequent specified date not more than three days
prior to the date of this Agreement, there was any
decrease in shareholders' equity or change in the
capital stock or any increase in short-term
indebtedness or long-term debt of the Company and its
consolidated subsidiaries or, at the date of the
latest available balance sheet read by such
accountants, there was any decrease in consolidated
net current assets or net assets, as compared with
amounts shown on the latest balance sheet included in
the Registration Statements and the Prospectus; or
(D) for the period from the closing date of
the latest income statement included in the
Registration Statements and the Prospectus to the
closing date of the latest available income statement
read by such accountants there were any decreases, as
compared with the corresponding period of the
previous year and with the period of corresponding
length ended the date of the latest income statement
included in the Registration Statements and the
Prospectus, in consolidated net revenues or
consolidated net income, or in the total or per share
amounts of consolidated net income or income from
continuing operations before extraordinary item, or
any
16
<PAGE> 17
increases or decreases, as the case may be, in other items
specified by the Representatives;
except in all cases set forth in clauses (C) and (D) above for
changes, increases or decreases which the Prospectus discloses
have occurred;
(iv) they have proved the arithmetic accuracy of
the application of the pro forma adjustments to the historical
amounts in the unaudited pro forma statements of earnings and
balance sheet data included in the Registration Statements and
the Prospectus and on the basis of the foregoing procedure and
a reading of the unaudited pro forma financial statements
included in the Registration Statements and the Prospectus, a
reading of the minutes of all meetings of the stockholders and
directors (including each committee thereof) of the Company
and its subsidiaries, inquiries of officials of the Company
who have responsibility for financial and accounting matters
and other specified procedures, nothing came to their
attention that caused them to believe that the pro forma
financial statements included in the Registration Statements
and the Prospectus do not comply in all material respects with
the applicable accounting requirements of Rule 11-02 of
Regulation S-X or that the pro forma adjustments have not been
properly applied to the historical amounts in the compilation
of such financial statements or on the pro forma basis
described in the notes thereto;
(v) they have compared specified dollar amounts
(or percentages derived from such dollar amounts) and other
financial information contained in the Registration Statements
and the Prospectus (in each case to the extent that such
dollar amounts, percentages, numerical data and other
financial information are derived from the general accounting
records of the Company and its subsidiaries subject to the
internal controls of the Company's accounting system or are
derived directly from such records by analysis or computation)
with the results obtained from inquiries, a reading of such
general accounting records and other procedures specified in
such letter and have found such dollar amounts, percentages,
numerical data and other financial information to be in
agreement with such results.
For purposes of this subsection, (i) if the Effective Time of the
Initial Registration Statements is subsequent to the execution and
delivery of this Agreement, "Registration Statements" shall mean the
initial registration statement as proposed to be amended by the
amendment or post-effective amendment to be filed shortly prior to its
Effective Time; (ii) if the Effective Time of the Initial Registration
Statements is prior to the execution and delivery of this Agreement
but the Effective Time of the Additional Registration Statement is
subsequent to such execution and delivery, "Registration Statements"
shall mean the Initial Registration Statement and the additional
registration statement as proposed to be filed or as proposed to be
amended by the post-effective amendment to be filed shortly prior to
its Effective Time; and (iii) "Prospectus" shall mean the prospectus
included in the Registration Statements.
(b) If the Effective Time of the Initial Registration
Statement is not prior to the execution and delivery of this
Agreement, such Effective Time shall have occurred not later than
10:00 P.M., New York time, on the date of this Agreement or such later
date as shall have been consented to by CS First Boston. If the
Effective Time of the Additional Registration Statement (if any) is
not prior to the execution and delivery of this Agreement, such
Effective Time shall have occurred not later than 10:00 P.M., New York
time, on the date of this Agreement or, if earlier, the time the
Prospectus is printed and distributed to any Underwriter or such later
date as shall have been consented to by CS First Boston. If the
Effective Time of the Initial Registration Statement is prior to the
execution and delivery of this
17
<PAGE> 18
Agreement, the Prospectus shall have been filed with the Commission in
accordance with the Rules and Regulations and Section 5(a) of this
Agreement. Prior to such Closing Date, no stop order suspending the
effectiveness of a Registration Statement shall have been issued and
no proceedings for that purpose shall have been instituted or, to the
knowledge of any Selling Shareholder, the Company or the
Representatives, shall be threatened by the Commission.
(c) Subsequent to the execution and delivery of this
Agreement, there shall not have occurred (i) any change, or any
development or event involving a prospective change, in the condition
(financial or other), business, prospects, results of operations or
general affairs of the Company and its subsidiaries taken as a whole
which, in the judgment of a majority in interest of the Underwriters
including the Representatives, is material and adverse and makes it
impractical or inadvisable to proceed with completion of the public
offering or the sale of and payment for the Offered Securities; (ii)
any downgrading in the rating of any debt securities of the Company by
any "nationally recognized statistical rating organization" (as
defined for purposes of Rule 436(g) under the Act), or any public
announcement that any such organization has under surveillance or
review its rating of any debt securities of the Company (other than an
announcement with positive implications of a possible upgrading, and
no implication of a possible downgrading, of such rating); (iii) any
suspension or limitation of trading in securities generally on the New
York Stock Exchange, or any setting of minimum prices for trading on
such exchange, or any suspension of trading of any securities of the
Company on any exchange or in the over-the-counter market; (iv) any
banking moratorium declared by U.S. Federal or New York authorities;
or (v) any outbreak or escalation of major hostilities in which the
United States is involved, any declaration of war by Congress or any
other substantial national or international calamity or emergency if,
in the judgment of a majority in interest of the Underwriters
including the Representatives, the effect of any such outbreak,
escalation, declaration, calamity or emergency makes it impractical or
inadvisable to proceed with completion of the public offering or the
sale of and payment for the Offered Securities.
(d) The Representatives shall have received an opinion, dated
such Closing Date, of Kirkpatrick & Lockhart LLP, counsel for the
Company, to the effect that:
(i) The Company has been duly incorporated and is
a validly subsisting corporation in good standing under the
laws of the Commonwealth of Pennsylvania, with corporate power
and authority to own, lease and operate its properties and
conduct its business as described in the Prospectus.
(ii) The Offered Securities delivered on such
Closing Date by the Company have been duly authorized and will
be, when issued and paid for in accordance with this
Agreement, validly issued, fully paid and nonassessable and
the Offered Securities delivered on such Closing Date by the
Selling Shareholders have been duly authorized, validly
issued, fully paid and nonassessable; no further approval or
authorization of the shareholders or the Board of Directors of
the Company is or will be required for the issuance and sale
of the Offered Securities as contemplated by this Agreement;
and, to the knowledge of such counsel, the shareholders of the
Company have no preemptive or similar rights with respect to
the Offered Securities.
(iii) All outstanding shares of the capital stock
of the Company have been duly authorized, are validly issued,
fully paid and non-assessable and have been issued in
compliance with applicable federal and state securities laws;
the authorized and outstanding shares of capital stock of the
Company are as set forth in the Prospectus under the captions
"Capitalization" and "Description of Capital Stock" and
18
<PAGE> 19
conform to the descriptions thereof contained in the Prospectus; and
the shareholders of the Company have no preemptive or similar rights
with respect to any securities of the Company.
(iv) Except as disclosed in the Prospectus, no
consent, approval, authorization, order, registration or
qualification of, or filing with, any third party (whether
acting in an individual, fiduciary or other capacity) or any
governmental or regulatory agency or body or any court is
required for the consummation by the Company of the
transactions contemplated by this Agreement in connection with
the issuance and sale of the Offered Securities or for the
consummation by the Company of the other transactions
contemplated by this Agreement or the Prospectus, including,
without limitation, the transactions described in the
Prospectus under the captions "The Transactions" and "Use of
Proceeds", except such as have been obtained and made under
the Act, such as may be required under state securities laws
and such as may be required under the HEA or any similar state
statute.
(v) The execution, delivery and performance by
the Company of this Agreement and the agreements, documents or
instruments entered into by the Company in connection with the
transactions described in the Prospectus under the captions
"The Transactions" and "Certain Transactions" and the
consummation by the Company of the transactions herein and
therein contemplated have been duly authorized by all
necessary corporate action on the part of the Company and, to
the extent required, its shareholders and do not and will not
conflict with or result in a breach or violation of any of the
terms and provisions of, and do not and will not constitute a
default (or an event which with the giving of notice or the
lapse of time or both could reasonably be likely to constitute
a default) under, and do not and will not result in the
creation or imposition of any lien, charge or encumbrance upon
any assets or properties of the Company or any of its Material
Subsidiaries (including any individual institution within such
entity) under, (A) the charter, by-laws or other
organizational documents of the Company or any such
subsidiary, (B) except as to the HEA or any similar state
statute and any rules, regulations, requirements, orders or
decrees related thereto as to which such counsel need express
no opinion, to the knowledge of such counsel, any statute, any
rule, regulation, requirement, order or decree of any
governmental or regulatory agency or body or any court having
jurisdiction over the Company or any such subsidiary or any of
their properties, assets or operations, or (C) to the
knowledge of such counsel, any indenture, mortgage, loan or
credit agreement, note, lease, permit, license or other
agreement or instrument to which the Company or any such
subsidiary is a party or by which the Company or any such
subsidiary is bound or to which any of the properties, assets
or operations of the Company or any such subsidiary is
subject, except for such conflicts, breaches, violations,
defaults, liens, charges and encumbrances which would not,
individually or in the aggregate, have a Material Adverse
Effect.
(vi) This Agreement and the agreements, documents
or instruments entered into by the Company in connection with
the transactions described in the Prospectus under the
captions "The Transactions" and "Certain Transactions" have
been duly authorized, executed and delivered by the Company
and constitute the legal, valid and binding obligations of the
Company enforceable against the Company in accordance with
their respective terms, except to the extent that (A)
enforceability may be limited by bankruptcy, insolvency,
reorganization, moratorium or other similar laws relating to
creditors' rights generally and by general principles of
equity and (B) rights to indemnity and contribution may be
limited by federal and state securities laws or policies
underlying such laws.
19
<PAGE> 20
(vii) Except as disclosed in the Prospectus, there
are no pending or, to the knowledge of such counsel,
threatened actions, suits, proceedings or investigations
against or affecting the Company or any of its Material
Subsidiaries (including any individual institution within such
entity) or any of their respective properties, assets or
operations that, if determined adversely to the Company or any
of its Material Subsidiaries, would, individually or in the
aggregate, have a Material Adverse Effect or could materially
and adversely affect the ability of the Company to perform its
obligations under this Agreement or which are otherwise
material in the context of the sale of the Offered Securities.
(viii) The Company is not and, after giving effect
to the offering and sale of the Offered Securities and the
application of the proceeds therefrom as described in the
Prospectus, will not be an "investment company" as defined in
the Investment Company Act of 1940, as amended.
(ix) The transactions contemplated in the
Prospectus under the caption "The Transactions" have been duly
authorized and consummated; all consents, approvals and other
authorizations required to consummate such transactions have
been duly obtained; and there is no pending or, to the best
knowledge of such counsel, threatened legal or governmental
proceedings with respect to such transactions.
(x) To the knowledge of such counsel, the
descriptions in the Registration Statements and the Prospectus
of statutes, legal and governmental proceedings and contracts
and other documents are accurate and fairly present the
information required to be shown and such counsel do not know
of any legal or governmental proceedings required to be
described in a Registration Statement or the Prospectus or of
any contracts or documents of a character required to be
described or to be filed as exhibits to a Registration
Statement or the Prospectus which, in each case, are not
described and filed as required (it being understood that such
counsel need express no opinion as to the portions of the
Registration Statements and the Prospectus as to which Dow,
Lohnes & Albertson is providing an opinion to the
Underwriters).
(xi) The Initial Registration Statement was
declared effective under the Act as of the date specified in
such opinion, the Additional Registration Statement (if any)
was filed and became effective under the Act as of the date
and time (if determinable) specified in such opinion, the
Prospectus either was filed with the Commission pursuant to
the subparagraph of Rule 424(b) specified in such opinion on
the date specified therein or was included in the Initial
Registration Statement or the Additional Registration
Statement (as the case may be), and, to the knowledge of such
counsel, no stop order suspending the effectiveness of a
Registration Statement or any part thereof has been issued and
no proceedings for that purpose have been instituted or are
pending or threatened under the Act, and each Registration
Statement and the Prospectus, and each amendment or supplement
thereto, as of their respective effective or issue dates,
complied as to form in all material respects with the
requirements of the Act and the Rules and Regulations. Such
counsel have participated in the preparation of the
Registration Statements and the Prospectus and have no reason
to believe that any part of a Registration Statement or any
amendment thereto, as of its effective date or as of such
Closing Date, contained any untrue statement of a material
fact or omitted to state any material fact required to be
stated therein or necessary to make the statements therein not
misleading or that the Prospectus or any amendment or
supplement thereto, as of its issue date or as of
20
<PAGE> 21
such Closing Date, contained any untrue statement of a material
fact or omitted to state any material fact necessary in order
to make the statements therein, in the light of the
circumstances under which they were made, not misleading (it
being understood that such counsel need express no opinion as
to the financial statements and schedules or other financial
data contained in the Registration Statements or the Prospectus
or the portions of the Registration Statements and the
Prospectus as to which Dow, Lohnes & Albertson is providing an
opinion to the Underwriters).
Such opinion shall be to such further effect with respect to
other legal matters relating to this Agreement and the transactions
contemplated hereby as the Representatives and counsel to the
Underwriters may reasonably request. In rendering such opinion, such
counsel may rely as to matters governed by the laws of jurisdictions
other than the laws of jurisdictions in which such counsel are
admitted to practice and the federal laws of the United States upon
the opinions of counsel reasonably satisfactory to the Representatives
and counsel to the Underwriters.
(e) The Representatives shall have received an opinion, dated
such Closing Date, of Frederick W. Steinberg, Vice President, General
Counsel and Secretary of the Company, to the effect that:
(i) Each of the Company's Material Subsidiaries
has been duly incorporated and is a validly existing
corporation in good standing under the laws of the
jurisdiction of its incorporation, with corporate power and
authority to own, lease and operate its properties and conduct
its business as described in the Prospectus.
(ii) Each of the Company and its Material
Subsidiaries is duly qualified to do business as a foreign
corporation in good standing in all other jurisdictions in
which its ownership, leasing or operation of property or the
conduct of its business requires such qualification, other
than where the failure to be so qualified or in good standing
would not, individually or in the aggregate, have a Material
Adverse Effect.
(iii) All of the issued and outstanding capital
stock of each of the Company's Material Subsidiaries has been
duly authorized and validly issued, is fully paid and
non-assessable and is owned by the Company, directly or
through one or more of its other subsidiaries, free and clear
of any mortgage, pledge, lien, security interest, claim,
encumbrance or defect of any kind, except for shares of the
capital stock of certain of the Company's subsidiaries which
have been pledged as collateral pursuant to the Revolving
Credit Agreement; and there are no rights granted to or in
favor of any third party (whether acting in an individual,
fiduciary or other capacity) other than the Company to acquire
such capital stock, any additional capital stock [or any other
securities] of any such subsidiary.
(iv) Except as disclosed in the Prospectus, there
are no contracts, agreements or understandings between the
Company and any third party (whether acting in an individual,
fiduciary or other capacity) granting such third party the
right to require the Company to file a registration statement
under the Act with respect to any securities of the Company
owned or to be owned by such third party or to require the
Company to include such securities in the Offered Securities
registered pursuant to the Registration Statement or in any
securities being registered pursuant to any other registration
statement filed by the Company under the Act.
21
<PAGE> 22
(v) Except as disclosed in the Prospectus, the
Company and its Material Subsidiaries (including any
individual institution within such entity) possess all
Licenses issued by appropriate governmental, regulatory or
accrediting agencies or bodies, including, without limitation,
all authorizations required for participation in Title IV
Programs, as are necessary to own, lease or operate their
properties and conduct the business now operated by them and
all such Licenses are in full force and effect, except where
the failure to possess such Licenses or the failure of such
Licenses to be in full force and effect would not,
individually or in the aggregate, have a Material Adverse
Effect. The Company and its Material Subsidiaries are in
substantial compliance with their respective obligations under
such Licenses, subject to such qualifications as are described
in the Prospectus, and neither the Company nor any of its
Material Subsidiaries has received notice of any proceedings,
investigations or inquiries (or has knowledge of any facts
that could form a reasonable basis for any proceedings,
investigations or inquiries) relating to the revocation,
modification, termination or suspension of any such License,
except where any such noncompliance, revocation, modification,
termination or suspension would not, individually or in the
aggregate, have a Material Adverse Effect.
(vi) Except as disclosed in the Prospectus, there
are no pending or, to the best knowledge of such counsel,
threatened actions, suits, proceedings or investigations
against or affecting the Company or any of its Material
Subsidiaries (including any individual institution within such
entity) or any of their respective properties, assets or
operations that, if determined adversely to the Company or any
of its Material Subsidiaries, would, individually or in the
aggregate, have a Material Adverse Effect or could materially
and adversely affect the ability of the Company to perform its
obligations under this Agreement or which are otherwise
material in the context of the sale of the Offered Securities.
(vii) Except as disclosed in the Prospectus, there
are no outstanding (A) securities or obligations of the
Company convertible into or exchangeable for any capital stock
of the Company, (B) warrants, rights or options to subscribe
for or purchase from the Company any such capital stock or any
such convertible or exchangeable securities or obligations or
(C) obligations of the Company to issue any capital stock,
convertible or exchangeable securities or obligations, or any
warrants, rights or obligations.
(viii) Neither the Company nor any of its Material
Subsidiaries (including any individual institution within such
entity) is in violation of (A) its charter, by-laws or other
organizational documents or (B) any statute, any rule,
regulation, requirement, order or decree of any governmental,
regulatory or accrediting agency or body or any court having
jurisdiction over the Company or any of its Material
Subsidiaries, except for any such violations which would not,
individually or in the aggregate, have a Material Adverse
Effect; and no event of default or event which with the giving
of notice or the lapse of time or both, could be reasonably be
expected to constitute an event of default exists, or upon
consummation of the transactions contemplated by this
Agreement or the Prospectus, including, without limitation,
the use of proceeds from the sale of the Offered Securities in
the manner contemplated by the description under the caption
"Use of Proceeds" contained in the Prospectus and consummation
of the transactions described in the Prospectus under the
captions "The Transactions" and "Certain Transactions", will
exist, under any indenture, mortgage, loan or credit
agreement, note, lease, permit, license or other agreement or
instrument to which the Company or any Material Subsidiary is
a party or by which the Company or any such subsidiary is
bound or to which any
22
<PAGE> 23
of the properties, assets or operations of the Company or any
such subsidiary is subject, except for any such defaults which
would not, individually or in the aggregate, have a Material
Adverse Effect.
(ix) Such counsel has participated in the
preparation of the Registration Statements and the Prospectus
and has no reason to believe that any part of a Registration
Statement or any amendment thereto, as of its effective date
or as of such Closing Date, contained any untrue statement of
a material fact or omitted to state any material fact required
to be stated therein or necessary to make the statements
therein not misleading or that the Prospectus or any amendment
or supplement thereto, as of its issue date or as of such
Closing Date, contained any untrue statement of a material
fact or omitted to state a material fact required to be stated
therein or necessary in order to make the statements therein,
in the light of the circumstances under which they were made,
not misleading (it being understood that such counsel need
express no opinion as to the financial statements and
schedules or other financial data contained in the
Registration Statements and the Prospectus or the portions of
the Registration Statements and the Prospectus as to which
Dow, Lohnes & Albertson is providing an opinion to the
Underwriters).
Such opinion shall be to such further effect with respect to
other legal matters relating to this Agreement and the transactions
contemplated hereby as the Representatives and counsel to the
Underwriters may reasonably request. In rendering such opinion, such
counsel may rely as to matters governed by the laws of jurisdictions
other than the laws of jurisdictions in which such counsel is admitted
to practice and the federal laws of the United States upon the
opinions of counsel reasonably satisfactory to the Representatives and
counsel for the Underwriters.
(f) The Representatives shall have received an opinion, dated
such Closing Date, of [ ], counsel for the Selling
Shareholders, to the effect that:
(i) To the best knowledge of such counsel, each
Selling Shareholder has valid and unencumbered title to the
Offered Securities delivered by such Selling Shareholder on
such Closing Date and has full right, power and authority to
enter into this Agreement and the Custody Agreement and Power
of Attorney and to sell, assign, transfer and deliver the
Offered Securities delivered by such Selling Shareholder on
such Closing Date; and upon the delivery of and payment for
the Offered Securities on such Closing Date the several
Underwriters have acquired valid and unencumbered title to the
Offered Securities delivered by such Selling Shareholder on
such Closing Date;
(ii) This Agreement, the Custody Agreement and
Power of Attorney and, to the extent applicable to such
Selling Shareholder, the agreements, documents or instruments
entered into by such Selling Shareholder in connection with
the transactions described in the Prospectus under the caption
"The Transactions" have each been duly authorized, executed
and delivered by or on behalf of such Selling Shareholder and
constitute the legal, valid and binding obligations of such
Selling Shareholder enforceable against such Selling
Shareholder in accordance with their respective terms, except
to the extent that (A) enforceability may be limited by
bankruptcy, insolvency, reorganization, moratorium or other
similar laws relating to creditors' rights generally and by
general principles of equity and (B) rights to indemnity and
contribution may be limited by federal and state securities
laws or policies underlying such laws.
23
<PAGE> 24
(iii) To the best knowledge of such counsel, no
consent, approval, authorization, order, registration or
qualification of, or filing with, any third party (whether
acting in an individual, fiduciary or other capacity) or any
governmental or regulatory agency or body or any court is
required to be obtained or made by such Selling Shareholder
for the consummation of the transactions contemplated by this
Agreement, the Custody Agreement and the Power of Attorney in
connection with the sale of the Offered Securities or for the
consummation of the other transactions contemplated by this
Agreement or the Prospectus, including without limitation, the
consummation by such Selling Shareholder, to the extent
applicable, of the transactions contemplated in the Prospectus
under the caption "The Transactions", except such as have been
obtained and made under the Act and such as may be required
under state securities laws.
(iv) The execution, delivery and performance by
such Selling Shareholder of this Agreement, the Custody
Agreement and Power of Attorney, and, to the extent applicable
to such Selling Shareholder, the agreements, documents or
instruments entered into by such Selling Shareholder in
connection with the transactions described in the Prospectus
under the caption "The Transactions", the sale of the Offered
Securities being sold by such Selling Shareholder and the
consummation by such Selling Shareholder of any of the other
transactions herein or therein contemplated, do not and will
not conflict with or result in a breach or violation of any of
the terms and provisions of, and do not and will not
constitute or will constitute a default (or an event which
with the giving of notice or the lapse of time or both could
reasonably be likely to constitute a default) under, or result
in the creation or imposition of any lien, charge or
encumbrance upon the Offered Securities to be sold by such
Selling Shareholder under (A) the charter, by-laws or other
organizational documents of such Selling Shareholder, (B) to
the best knowledge of such counsel, any statute, any rule,
regulation, requirement, order or decree of any governmental
or regulatory agency or body, or any court having jurisdiction
over such Selling Shareholder or any of its properties, assets
or operations or (C) to the best knowledge of such counsel,
any indenture, mortgage, loan or credit agreement, note,
lease, permit, license or other agreement or instrument to
which such Selling Shareholder is a party or by which such
Selling Shareholder is bound or to which any of the
properties, assets or operations of such Selling Shareholder
is subject, except, in the case of clauses (B) and (C), for
such conflicts, breaches, violations, defaults, liens, charges
and encumbrances which could not, individually or in the
aggregate, have a material adverse effect on the ability of
such Selling Shareholder to consummate the transactions
contemplated by this Agreement and the Custody Agreement and
Power of Attorney or perform such Selling Shareholder's
obligations hereunder or thereunder.
(g) The Representatives shall have received from Dow, Lohnes
& Albertson, special regulatory counsel to the Company, such opinion
or opinions, dated as of such Closing Date, to the effect that:
(i) The statements contained in the Prospectus
under the captions "Risk Factors -- Potential Adverse Effects
of Regulation"; "Risk Factors -- Student Loan Defaults"; "Risk
Factors -- Financial Responsibility Standards"; "Risk Factors
-- Regulatory Consequences of a Change of Ownership or
Control"; "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Regulation"; "Business
-- Accreditation"; "Business -- Student Financial Assistance";
"Business -- Nature of Federal Support for Postsecondary
Education"; "Business -- Availability of Lenders"; "Business
-- Other Financial Aid Programs"; "Business --
24
<PAGE> 25
Federal Oversight of Title IV Programs" and "Business -- State
Authorization" and other references in the Prospectus to
educational regulatory matters (collectively, "Regulatory
Matters"), insofar as such statements constitute a summary of
legal matters, documents or proceedings, are accurate and
complete in all material respects.
(ii) Such counsel have participated in the
preparation of those portions of the Registration Statements
and the Prospectus relating to Regulatory Matters and have no
reason to believe that the information relating to Regulatory
Matters contained in any Registration Statement or any
amendment thereto, as of its effective date or as of such
Closing Date, contained any untrue statement of a material
fact or omitted to state any material fact required to be
stated therein or necessary to make the statements therein not
misleading, or that any such information contained in the
Prospectus or any amendment or supplement thereto, as of its
issue date or as of such Closing Date, contained any untrue
statement of a material fact or omitted to state a material
fact required to be stated therein or necessary in order to
make the statements therein, in the light of the circumstances
under which they were made, not misleading.
(iii) Except as disclosed in the Prospectus, no
consent, approval, authorization, order, registration or
qualification of, or filing with, any third party (whether
acting in an individual, fiduciary or other capacity) or any
governmental or regulatory agency or body or any court under
the HEA or any similar state statute is required for the
consummation of the transactions contemplated by this
Agreement by the Company in connection with the issuance and
sale of the Offered Securities or for the consummation by the
Company of the other transactions contemplated by this
Agreement or the Prospectus, including, without limitation,
the transactions described in the Prospectus under the
captions "The Transactions" and "Use of Proceeds", except such
as have been obtained and made under the Act and such as may
be required under state securities laws.
(iv) To the best knowledge of such counsel, the
execution, delivery and performance by the Company of this
Agreement and the agreements, documents or instruments entered
into by the Company in connection with the transactions
described in the Prospectus under the captions "The
Transactions" and "Certain Transactions" and the consummation
by the Company of the transactions herein and therein
contemplated do not and will not conflict with or result in a
breach or violation of (A) the HEA or any similar state
statute, or (B) any rule, regulation or requirement of any
governmental or regulatory agency or body or any order or
decree of any court having jurisdiction over the Company or
any Material Subsidiary or any of their properties, assets or
operations, implementing or otherwise related to the HEA or
any similar state statute, except for such conflicts, breaches
or violations which could not, individually or in the
aggregate, have a material adverse effect on the Company and
its subsidiaries taken as a whole.
(v) The issuance and sale of the Offered
Securities and the consummation of the other transactions
contemplated by this Agreement or the Prospectus will not
constitute a change in ownership resulting in a "change in
control" as defined in the HEA.
(vi) To the best knowledge of such counsel, except
as disclosed in the Prospectus, the Company and its
subsidiaries have all necessary Licenses required for
25
<PAGE> 26
the Company and such subsidiaries to participate in Title IV
Programs as described in the Registration Statements and the
Prospectus.
(h) The Representatives shall have received from Dewey
Ballantine, counsel for the Underwriters, such opinion or opinions,
dated such Closing Date, with respect to the validity of the Offered
Securities delivered on such Closing Date, the Registration
Statements, the Prospectus and other related matters as the
Representatives may require, and the Selling Shareholders and the
Company shall have furnished to such counsel such documents as they
reasonably request for the purpose of enabling them to pass upon such
matters.
(i) The Representatives shall have received a certificate,
dated such Closing Date, of the President or any Vice-President and a
principal financial or accounting officer of the Company in which such
officers, to the best of their knowledge after reasonable
investigation, shall state that: (A) the representations and
warranties of the Company in this Agreement are true and correct; (B)
the Company has complied with all agreements and satisfied all
conditions on its part to be performed or satisfied hereunder at or
prior to such Closing Date; (C) no stop order suspending the
effectiveness of any Registration Statement has been issued and no
proceedings for that purpose have been instituted or are contemplated
by the Commission; (D) the Additional Registration Statement (if any)
satisfying the requirements of subparagraphs (1) and (3) of Rule
462(b) was filed pursuant to Rule 462(b), including payment of the
applicable filing fee in accordance with Rule 111(a) or (b) under the
Act, prior to the time the Prospectus was printed and distributed to
any Underwriter; (E) subsequent to the dates as of which information
is given in the Registration Statements and the Prospectus, there has
been no material adverse change, nor any development or event
involving a prospective material adverse change, in the condition
(financial or other), business, prospects, results of operations or
general affairs of the Company and its subsidiaries taken as a whole;
and (vi) they have carefully examined the Registration Statements and
the Prospectus and neither any Registration Statement nor the
Prospectus or any amendment or supplement thereto, as of their
respective effective or issue dates, contained an untrue statement of
a material fact or omitted to state any material fact required to be
stated therein or necessary to make the statements therein not
misleading.
(j) The Representatives shall have received a letter, dated
such Closing Date, of Arthur Anderson LLP which meets the requirements
of subsection (a) of this Section, except that the specified date
referred to in such subsection will be a date not more than three days
prior to such Closing Date for the purposes of this subsection.
(k) The Representatives shall have received written
undertakings of shareholders of the Company (other than the Selling
Shareholders) who beneficially own an aggregate of [______________]
shares (or ___%) of the outstanding Securities and vested options to
purchase an additional [________] shares of the Securities immediately
following the Offering to the effect contemplated in subsection (i) of
Section 5 hereof unless otherwise waived or agreed to by the
Representatives.
(l) The transactions described in the Prospectus under the
caption "The Transactions" shall have been duly authorized and
consummated; all consents, approvals and other authorizations required
to consummate such transactions shall have been duly obtained; and
there shall not be any pending or threatened legal or governmental
proceedings with respect to such transactions.
(m) The Offered Securities shall have been approved for
listing upon notice of issuance as a national market security on the
Nasdaq Stock Market's National Market.
26
<PAGE> 27
(n) The Representatives shall have received such other
opinions, certificates, letters and other documents from or on behalf
of the Company or the Selling Shareholders as the Representatives
shall reasonably request.
All such opinions, certificates, letters and other documents will be in
compliance with the provisions hereof, only if they are reasonably satisfactory
in form and substance to CS First Boston and counsel for the Underwriters. The
Company and the Selling Shareholders will furnish the Representatives with such
conformed copies of such opinions, certificates, letters and documents as the
Representatives reasonably requests. CS First Boston may in its sole
discretion waive on behalf of the Underwriters compliance with any conditions
to the obligations of the Underwriters hereunder, whether in respect of an
Optional Closing Date or otherwise.
7. Indemnification and Contribution. (a) The Company will
indemnify and hold harmless each Underwriter against any losses, claims,
damages or liabilities, joint or several, to which such Underwriter may become
subject, under the Act or otherwise, insofar as such losses, claims, damages or
liabilities (or actions in respect thereof) arise out of or are based upon any
untrue statement or alleged untrue statement of any material fact contained in
any Registration Statement, the Prospectus, or any amendment or supplement
thereto, or any related preliminary prospectus, or arise out of or are based
upon the omission or alleged omission to state therein a material fact required
to be stated therein or necessary to make the statements therein not
misleading, and will reimburse each Underwriter for any legal or other expenses
reasonably incurred by such Underwriter in connection with investigating or
defending any such loss, claim, damage, liability or action as such expenses
are incurred; provided, however, that the Company will not be liable in any
such case to the extent that any such loss, claim, damage or liability arises
out of or is based upon an untrue statement or alleged untrue statement in or
omission or alleged omission from any of such documents in reliance upon and in
conformity with written information furnished to the Company by any Underwriter
through the Representatives specifically for use therein, it being understood
and agreed that the only such information furnished by any Underwriter consists
of the information described as such in subsection (c) below.
(b) The Selling Shareholders, severally and not jointly, will
indemnify and hold harmless each Underwriter against any losses, claims,
damages or liabilities, joint or several, to which such Underwriter may become
subject, under the Act or otherwise, insofar as such losses, claims, damages or
liabilities (or actions in respect thereof) arise out of or are based upon any
untrue statement or alleged untrue statement of any material fact contained in
any Registration Statement, the Prospectus, or any amendment or supplement
thereto, or any related preliminary prospectus, or arise out of or are based
upon the omission or alleged omission to state therein a material fact required
to be stated therein or necessary to make the statements therein not
misleading, in each case to the extent, but only to the extent, that such
untrue statement or alleged untrue statement was made in reliance upon and in
conformity with written information furnished to the Company or its
representatives by or on behalf of such Selling Shareholder specifically for
use therein, and will reimburse each Underwriter for any legal or other
expenses reasonably incurred by such Underwriter in connection with
investigating or defending any such loss, claim, damage, liability or action as
such expenses are incurred; provided, however, that the liability of each
Selling Shareholder pursuant to this Section 7(b) is limited to the proceeds
received (less underwriting discounts and commissions) by such Selling
Shareholder from the sale of the Offered Securities; provided further, however,
that the Selling Shareholders will not be liable in any such case to the extent
that any such loss, claim, damage or liability arises out of or is based upon
an untrue statement or alleged untrue statement in or omission or alleged
omission from any of such documents in reliance upon and in conformity with
written information furnished to the Company by an Underwriter through the
Representatives specifically for use therein, it being understood and agreed
that the only such information furnished by any Underwriter consists of the
information described as such in subsection (c) below.
27
<PAGE> 28
(c) Each Underwriter will severally and not jointly indemnify and
hold harmless the Company and each Selling Shareholder against any losses,
claims, damages or liabilities to which the Company or such Selling Shareholder
may become subject, under the Act or otherwise, insofar as such losses, claims,
damages or liabilities (or actions in respect thereof) arise out of or are
based upon any untrue statement or alleged untrue statement of any material
fact contained in any Registration Statement, the Prospectus, or any amendment
or supplement thereto, or any related preliminary prospectus, or arise out of
or are based upon the omission or the alleged omission to state therein a
material fact required to be stated therein or necessary to make the statements
therein not misleading, in each case to the extent, but only to the extent,
that such untrue statement or alleged untrue statement or omission or alleged
omission was made in reliance upon and in conformity with written information
furnished to the Company by such Underwriter through the Representatives
specifically for use therein, and will reimburse any legal or other expenses
reasonably incurred by the Company and each Selling Shareholder in connection
with investigating or defending any such loss, claim, damage, liability or
action as such expenses are incurred, it being understood and agreed that the
only such information furnished by any Underwriter consists of the following
information in the Prospectus furnished on behalf of each Underwriter: (i) the
legend concerning over-allotments and stabilizing on the inside front cover
page and (ii) the information appearing under the caption "Underwriting" with
respect to (A) the list of names of the Underwriters and the number of Offered
Securities to be purchased by each Underwriter, (B) concession and discount
figures and (C) discretionary sales.
(d) Promptly after receipt by an indemnified party under this Section
of notice of the commencement of any action, such indemnified party will, if a
claim in respect thereof is to be made against an indemnifying party under
subsection (a), (b) or (c) above, notify the indemnifying party of the
commencement thereof; but the omission so to notify the indemnifying party will
not relieve it from any liability which it may have to any indemnified party
otherwise than under subsection (a), (b) or (c) above. In case any such action
is brought against any indemnified party and it notifies an indemnifying party
of the commencement thereof, the indemnifying party will be entitled to
participate therein and, to the extent that it may wish, jointly with any other
indemnifying party similarly notified, to assume the defense thereof, with
counsel reasonably satisfactory to such indemnified party (who shall not,
except with the consent of the indemnified party, be counsel to the
indemnifying party), and after notice from the indemnifying party to such
indemnified party of its election so to assume the defense thereof, the
indemnifying party will not be liable to such indemnified party under this
Section for any legal or other expenses subsequently incurred by such
indemnified party in connection with the defense thereof other than reasonable
costs of investigation. No indemnifying party shall, without the prior written
consent of the relevant indemnified party, effect any settlement of any pending
or threatened action in respect of which such indemnified party is or could
have been a party and indemnity could have been sought hereunder by such
indemnified party unless such settlement includes an unconditional release of
such indemnified party from all liability on any claims that are the subject
matter of such action.
(e) If the indemnification provided for in this Section is
unavailable or insufficient to hold harmless an indemnified party under
subsection (a), (b) or (c) above, then each indemnifying party shall contribute
to the amount paid or payable by such indemnified party as a result of the
losses, claims, damages or liabilities referred to in subsection (a), (b) or
(c) above (i) in such proportion as is appropriate to reflect the relative
benefits received by the Company and the Selling Shareholders on the one hand
and the Underwriters on the other from the offering of the Offered Securities
or (ii) if the allocation provided by clause (i) above is not permitted by
applicable law, in such proportion as is appropriate to reflect not only the
relative benefits referred to in clause (i) above but also the relative fault
of the Company and the Selling Shareholders on the one hand and the
Underwriters on the other in connection with the statements or omissions which
resulted in such losses, claims, damages or liabilities as well as any other
relevant equitable considerations. The relative benefits received by the
Company and the Selling Shareholders on the one hand and the Underwriters on
the other shall be deemed to be in the same proportion as the total net
proceeds from the offering (before deducting
28
<PAGE> 29
expenses) received by the Company and the Selling Shareholders bear to the
total underwriting discounts and commissions received by the Underwriters. The
relative fault shall be determined by reference to, among other things, whether
the untrue or alleged untrue statement of a material fact or the omission or
alleged omission to state a material fact relates to information supplied by
the Company, the Selling Shareholders or the Underwriters and the parties'
relative intent, knowledge, access to information and opportunity to correct or
prevent such untrue statement or omission. The amount paid by an indemnified
party as a result of the losses, claims, damages or liabilities referred to in
the first sentence of this subsection (e) shall be deemed to include any legal
or other expenses reasonably incurred by such indemnified party in connection
with investigating or defending any action or claim which is the subject of
this subsection (e). Notwithstanding the provisions of this subsection (e), no
Underwriter shall be required to contribute any amount in excess of the amount
by which the total price at which the Offered Securities underwritten by it and
distributed to the public were offered to the public exceeds the amount of any
damages which such Underwriter has otherwise been required to pay by reason of
such untrue or alleged untrue statement or omission or alleged omission, and no
Selling Shareholder shall be required to contribute any amount in excess of the
amount by which the proceeds received (less underwriting discounts and
commissions) by such Selling Shareholder from the sale of the Offered
Securities exceeds the amount of any damages which such Selling Shareholder has
otherwise been required to pay by reason of such untrue or alleged untrue
statement or omission or alleged omission. No person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Act) shall be
entitled to contribution from any person who was not guilty of such fraudulent
misrepresentation. The Underwriters' obligations in this subsection (e) to
contribute are several in proportion to their respective underwriting
obligations and not joint. The Selling Shareholders' obligations in this
subsection (e) to contribute are several and not joint.
(f) The obligations of the Company and the Selling Shareholders under
this Section shall be in addition to any liability which the Company and the
Selling Shareholders may otherwise have and shall extend, upon the same terms
and conditions, to each person, if any, who controls any Underwriter within the
meaning of the Act; and the obligations of the Underwriters under this Section
shall be in addition to any liability which the respective Underwriters may
otherwise have and shall extend, upon the same terms and conditions, to each
director of the Company, to each officer of the Company who has signed a
Registration Statement and to each person, if any, who controls the Company
within the meaning of the Act.
8. Default of Underwriters. If any Underwriter or Underwriters
default in their obligations to purchase Offered Securities hereunder on either
the First Closing Date or any Optional Closing Date and the aggregate number of
shares of Offered Securities that such defaulting Underwriter or Underwriters
agreed but failed to purchase does not exceed 10% of the total number of shares
of Offered Securities that the Underwriters are obligated to purchase on such
Closing Date, CS First Boston may make arrangements satisfactory to the Company
and the Selling Shareholders for the purchase of such Offered Securities by
other persons, including any of the Underwriters, and if no such arrangements
are made by such Closing Date, the non-defaulting Underwriters shall be
obligated severally, in proportion to their respective commitments hereunder,
to purchase the Offered Securities that such defaulting Underwriters agreed but
failed to purchase on such Closing Date. If any Underwriter or Underwriters so
default and the aggregate number of shares of Offered Securities with respect
to which such default or defaults occur exceed 10% of the total number of
shares of Offered Securities that the Underwriters are obligated to purchase on
such Closing Date and arrangements satisfactory to CS First Boston, the Company
and the Selling Shareholders for the purchase of such Offered Securities by
other persons are not made within 36 hours after such default, this Agreement
will terminate without liability on the part of any non-defaulting
Underwriter, the Company or the Selling Shareholders, except as provided in
Section 9 (provided that if such default occurs with respect to Optional
Securities after the First Closing Date, this Agreement will not terminate as
to the Firm Securities or any Optional Securities purchased prior to such
termination).
29
<PAGE> 30
As used in this Agreement, the term "Underwriter" includes any person
substituted for an Underwriter under this Section. Nothing herein will relieve
a defaulting Underwriter from liability for its default.
9. Survival of Certain Representations and Obligations. The
respective indemnities, agreements, representations, warranties and other
statements of the Selling Shareholders, of the Company or its officers and of
the several Underwriters set forth in or made pursuant to this Agreement will
remain in full force and effect, regardless of any investigation, or statement
as to the results thereof, made by or on behalf of any Underwriter, any Selling
Shareholder, the Company or any of their respective representatives, officers
or directors or any controlling person, and will survive delivery of and
payment for the Offered Securities. If this Agreement is terminated pursuant
to Section 8 or if for any reason the purchase of the Offered Securities by the
Underwriters is not consummated, the Company shall remain responsible for the
expenses to be paid or reimbursed by it pursuant to Section 5 and the
respective obligations of the Company, the Selling Shareholders, and the
Underwriters pursuant to Section 7 shall remain in effect, and if any Offered
Securities have been purchased hereunder the representations and warranties in
Section 2 and all obligations under Section 5 shall also remain in effect. If
the purchase of the Offered Securities by the Underwriters is not consummated
for any reason other than solely because of the termination of this Agreement
pursuant to Section 8 or the occurrence of any event specified in clause (iii),
(iv) or (v) of Section 6(c), the Company will reimburse the Underwriters for
all out-of-pocket expenses (including fees and disbursements of counsel)
reasonably incurred by them in connection with the offering of the Offered
Securities.
10. Notices. All communications hereunder will be in writing and,
if sent to the Underwriters, will be mailed, delivered or telegraphed and
confirmed to the Representatives, c/o CS First Boston Corporation, Park Avenue
Plaza, New York, New York 10055, Attention: Investment Banking Department -
Transactions Advisory Group, or, if sent to the Company, will be mailed,
delivered or telegraphed and confirmed to it at Education Management
Corporation, 300 Sixth Avenue, Pittsburgh, Pennsylvania 15222, Attention:
[__________]; or if sent to Merrill Lynch Capital Appreciation Partnership No.
IV, L.P., ML Offshore LBO Partnership No. IV, ML IBK Positions, Inc., Merrill
Lynch Capital Corporation, ML Employees LBO Partnership No. I, L.P., Merrill
Lynch KECALP L.P. 1986 or any of them, will be mailed, delivered or telegraphed
and confirmed to James V. Caruso at 225 Liberty Street, New York, New York
10080; or if sent to National Union Fire Insurance Company of Pittsburgh, PA,
will be mailed, delivered or telegraphed and confirmed to David B. Pinkerton at
200 Liberty Street, New York, New York 10287; or if sent to The Northwestern
Mutual Life Insurance Company, will be mailed, delivered or telegraphed and
confirmed to J. Thomas Christofferson at 720 East Wisconsin Avenue, Milwaukee,
Wisconsin 53202; provided, however, that any notice to an Underwriter pursuant
to Section 7 will be mailed, delivered or telegraphed and confirmed to such
Underwriter.
11. Successors. This Agreement will inure to the benefit of and
be binding upon the parties hereto and their respective successors and the
officers and directors and controlling persons referred to in Section 7, and no
other person will have any right or obligation hereunder.
12. Representation. The Representatives will act for the several
Underwriters in connection with the transactions contemplated by this
Agreement, and any action taken under this Agreement by the Representatives
jointly or by CS First Boston will be binding upon all the Underwriters. The
Custodian will act for the Selling Shareholders in connection with such
transactions, and any action taken under or in respect of this Agreement by the
Custodian will be binding upon all the Selling Shareholders.
13. Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be deemed to be an original, but all such
counterparts shall together constitute one and the same Agreement.
30
<PAGE> 31
14. APPLICABLE LAW. THIS AGREEMENT SHALL BE GOVERNED BY, AND
CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK, WITHOUT REGARD
TO PRINCIPLES OF CONFLICTS OF LAWS.
The Company hereby submits to the non-exclusive jurisdiction of the
Federal and state courts in the Borough of Manhattan in The City of New York in
any suit or proceeding arising out of or relating to this Agreement or the
transactions contemplated hereby.
31
<PAGE> 32
If the foregoing is in accordance with the Representatives'
understanding of our agreement, kindly sign and return to the Company one of
the counterparts hereof, whereupon it will become a binding agreement among the
Selling Shareholders, the Company and the several Underwriters in accordance
with its terms.
Very truly yours,
EDUCATION MANAGEMENT CORPORATION
By________________________________
Name:
Title:
SELLING SHAREHOLDERS:
MERRILL LYNCH CAPITAL APPRECIATION
PARTNERSHIP NO. IV, L.P.
By: Merrill Lynch LBO Partners No. I, L.P.,
General Partner
Merrill Lynch Capital Partners, Inc.,
General Partner
By________________________________
Name: James V. Caruso
Title: Vice President
ML OFFSHORE LBO PARTNERSHIP NO. IV
By: Merrill Lynch LBO Partners No. I, L.P.,
Investment General Partner
Merrill Lynch Capital Partners, Inc.,
General Partner
By________________________________
Name: James V. Caruso
Title: Vice President
ML IBK POSITIONS, INC.
By________________________________
Name: James V. Caruso
Title: Vice President
MERRILL LYNCH CAPITAL CORPORATION
By________________________________
Name: Jeffrey S. Martin
Title: Senior Vice President
32
<PAGE> 33
ML EMPLOYEES LBO PARTNERSHIP NO. I, L.P.
By: ML Employees LBO Managers, Inc.,
General Partner
By________________________________
Name: James V. Caruso
Title: Vice President
MERRILL LYNCH KECALP L.P. 1986
By: KECALP Inc., General Partner
By________________________________
Name: James V. Caruso
Title: Vice President
NATIONAL UNION FIRE INSURANCE
COMPANY OF PITTSBURGH, PA
By________________________________
Name: David B. Pinkerton
Title: Vice President
THE NORTHWESTERN MUTUAL LIFE
INSURANCE COMPANY
By________________________________
Name:
Title:
33
<PAGE> 34
The foregoing Underwriting Agreement is hereby
confirmed and accepted as of the date first above
written.
CS FIRST BOSTON CORPORATION
SMITH BARNEY INC.
THE CHICAGO CORPORATION
Acting on behalf of themselves and as the
Representatives of the several
Underwriters.
By CS FIRST BOSTON CORPORATION
By________________________
Name:
Title:
34
<PAGE> 35
SCHEDULE A
<TABLE>
<CAPTION>
Number of Number of
Firm Optional
Securities Securities
Selling Shareholder to be Sold to be Sold
------------------- --------------- ---------------
<S> <C> <C>
Merrill Lynch Capital Appreciation Partnership No. IV, L.P.
ML Offshore LBO Partnership No. IV
ML IBK Positions, Inc.
Merrill Lynch Capital Corporation
ML Employees LBO Partnership No. I, L.P.
Merrill Lynch KECALP L.P. 1986
National Union Fire Insurance Company of Pittsburgh, PA
The Northwestern Mutual Life Insurance Company
----------- ----------
Total . . . . . . . . . . . . . . . . . . . . . . .
=========== ==========
</TABLE>
35
<PAGE> 36
SCHEDULE B
<TABLE>
<CAPTION>
Number of
Firm Securities
Underwriter to be Purchased
----------- ---------------
<S> <C>
CS First Boston Corporation . . . . . . . . . . . . . . . . . . . . . . . . .
Smith Barney Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
The Chicago Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . .
-----------
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
===========
</TABLE>
36
<PAGE> 37
EXHIBIT 1
SUBSIDIARIES
Name of Subsidiary Jurisdiction of Incorporation
------------------ -----------------------------
37
<PAGE> 1
Exhibit 4.01
[FRONT OF CERTIFICATE]
NUMBER SHARES
SEE REVERSE FOR
CERTAIN DEFINITIONS
CUSIP 28139T 10 1
EDUCATION MANAGEMENT CORPORATION
INCORPORATED UNDER THE LAWS OF THE COMMONWEALTH OF PENNSYLVANIA
COMMON STOCK, PAR VALUE $.01 PER SHARE
THIS CERTIFIES THAT
is the owner of
FULLY PAID AND NON-ASSESSABLE SHARES OF THE COMMON STOCK OF EDUCATION
MANAGEMENT CORPORATION (THE "CORPORATION"), transferable only on the books of
the Corporation by the holder hereof in person or by Attorney upon surrender of
this Certificate properly endorsed.
The Corporation will furnish without charge to each stockholder who so
requests a statement of the powers, designations, preferences and relative,
participating, optional, or other special rights of each class of stock or
series thereof and the qualifications, limitations or restrictions of such
preferences and/or rights.
IN WITNESS WHEREOF, EDUCATION MANAGEMENT CORPORATION has caused this
Certificate to be signed by its duly authorized officers.
Dated:
/s/ FREDERICK W. STEINBERG /s/ ROBERT B. KNUTSON
SECRETARY CHAIRMAN AND CHIEF EXECUTIVE OFFICER
COUNTERSIGNED AND REGISTERED:
CHASEMELLON SHAREHOLDER SERVICES, L.L.C.
TRANSFER AGENT AND REGISTRAR
BY
AUTHORIZED SIGNATURE
<PAGE> 2
[REVERSE OF CERTIFICATE]
EDUCATION MANAGEMENT CORPORATION
The following abbreviations, when used in the inscription on the face
of this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
<TABLE>
<S> <C>
TEN COM -- as tenants in common UNIF GIFT MIN ACT -- ............. Custodian .................
TEN ENT -- as tenants by the entireties (Cust) (Minor)
JT TEN -- as joint tenants with right of under Uniform Gifts to Minors
survivorship and not as tenants Act .....................................
in common (State)
UNIF TRF MIN ACT -- ............ Custodian (until age ......)
(Cust)
............ under Uniform Transfers
(Minor)
to Minors Act ...........................
(State)
</TABLE>
ADDITIONAL ABBREVIATIONS MAY ALSO BE USED THOUGH NOT IN THE ABOVE LIST.
FOR VALUE RECEIVED, hereby sell, assign and transfer unto
------------------
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
- ---------------------------------------
- ---------------------------------------
- -----------------------------------------------------------------------------
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE, OF ASSIGNEE)
- -----------------------------------------------------------------------------
- -----------------------------------------------------------------------------
- ---------------------------------------------------------------------- Shares
of the capital stock represented by the within Certificate, and do hereby
irrevocably constitute and appoint
- ---------------------------------------------------------------------- Attorney
to transfer the said stock on the books of the within named Corporation with
full power of substitution in the premises.
Dated
--------------------
X
-----------------------------------------
X
-----------------------------------------
THE SIGNATURE(S) TO THIS ASSIGNMENT MUST
NOTICE: CORRESPOND WITH THE NAME(S) AS WRITTEN
UPON THE FACE OF THE CERTIFICATE IN
EVERY PARTICULAR, WITHOUT ALTERATION OR
ENLARGEMENT OR ANY CHANGE WHATEVER.
Signature(s) Guaranteed
By
---------------------------------------------------
THE SIGNATURE(S) SHOULD BE GUARANTEED BY AN ELIGIBLE
GUARANTOR INSTITUTION (BANKS, STOCKBROKERS, SAVINGS AND
LOAN ASSOCIATIONS AND CREDIT UNIONS WITH MEMBERSHIP IN
AN APPROVED SIGNATURE GUARANTEE MEDALLION PROGRAM),
PURSUANT TO S.E.C. RULE 17Ad-15.
This certificate also evidences and entitles the holder hereof to certain
Rights as set forth in a Rights Agreement between Education Management
Corporation and Mellon Bank, N.A. dated as of October 1, 1996 (the "Rights
Agreement"), the terms of which are hereby incorporated herein by reference and
a copy of which is on file at the principal executive offices of Education
Management Corporation. Under certain circumstances, as set forth in the Rights
Agreement, such Rights will be evidenced by separate certificates and will no
longer be evidenced by this certificate. Education Management Corporation will
mail to the holder of this certificate a copy of the Rights Agreement without
charge after receipt of a written request therefor. Under certain
circumstances, as set forth in the Rights Agreement, Rights issued to any
Person who becomes an Acquiring Person or any Affiliate or Associate thereof
(as such terms are defined in the Rights Agreement), whether currently held by
or on behalf of such Person or by any subsequent holder, may become null and
void.
<PAGE> 1
Exhibit 5.01
[Kirkpatrick & Lockhart LLP letterhead]
October 28, 1996
Education Management Corporation
300 Sixth Avenue
Pittsburgh, Pennsylvania 15222
Re: REGISTRATION STATEMENT ON FORM S-1
(FILE NO. 333-10385)
----------------------------------
Ladies and Gentlemen:
We are acting as special counsel to Education Management Corporation, a
Pennsylvania corporation (the "Company"), in connection with the Registration
Statement on Form S-1 (File No. 333-10385) filed with the Securities and
Exchange Commission pursuant to the Securities Act of 1933, as amended, by the
Company on August 19, 1996 and amended on October 1, 1996, October 8, 1996 and
October 28, 1996 (the "Registration Statement"). The Registration Statement
relates to the public offering (the "Offering") of up to 5,073,600 shares of
the Company's Common Stock, $.01 par value (the "Common Stock"), which consists
of: (i) up to 3,372,209 shares of Common Stock (the "Company Shares") to be
sold to the underwriters for whom CS First Boston Corporation, Smith Barney
Inc. and The Chicago Corporation are acting as representatives (the
"Underwriters") by the Company, including up to 142,209 Company Shares which
the Underwriters will have an option to purchase from the Company solely for
the purpose of covering over-allotments; and (ii) up to 1,701,391 shares of
Common Stock (the "Selling Shareholders' Shares") to be sold to the
Underwriters by certain shareholders identified in the Registration Statement
(the "Selling Shareholders"), including up to 401,391 Selling Shareholders'
Shares which the Underwriters will have an option to purchase from the Selling
Shareholders solely for the purpose of covering over-allotments. Each share of
Common Stock to be sold in the Offering will be accompanied by one preferred
share purchase right (a "Right"), the terms of which are set forth in a Rights
Agreement, dated as of October 1, 1996 (the "Rights Agreement"), between the
Company and Mellon Bank, N.A.
We are familiar with the Registration Statement. We have examined (i) the
Company's Restated Articles of Incorporation, (ii) the Company's Restated
Bylaws, (iii) the Company's proposed Amended and Restated Articles of
Incorporation in the form in which they are to be filed with the Department of
State of the Commonwealth of Pennsylvania (the "New Articles") prior to the
consummation of the Offering, (iv) the Company's proposed Amended and Restated
Bylaws in the form in which they are proposed to become effective prior to the
consummation of the Offering (the "New Bylaws"), (v) the Rights Agreement,
<PAGE> 2
Education Management Corporation
October 28, 1996
Page 2
(vi) the proceedings of the Board of Directors of the Company with respect to
the approval and adoption of the New Articles, New Bylaws and Rights Agreement,
and (vii) the Notice of Annual Meeting of Shareholders of the Company to be
held on October 24, 1996 and the related proxy statement therefor, at which
meeting the Company's shareholders voted to approve and adopt the New Articles
and New Bylaws. We have also examined such other documents, corporate records,
certificates of public officials, instruments, statutes and questions of law as
we deemed necessary or appropriate to enable us to express an informed opinion
on the matters hereinafter set forth. In making such examinations and
rendering the opinions on the matters set forth below, we have assumed the
genuineness of all signatures, the authenticity of all documents submitted to
us as originals, the conformity to original documents of all documents
submitted to us as certified, conformed, telecopied, photostatic or other
reproduced copies and the authenticity of the originals of such documents, and
the due execution and delivery of all such documents.
Based upon and subject to the foregoing and subject to the filing of the New
Articles with the Department of State of the Commonwealth of Pennsylvania, we
are of the opinion that:
(a) The Company Shares, when issued and sold in accordance with the plan of
distribution set forth in the Registration Statement, will be validly issued,
fully paid and non-assessable.
(b) As of immediately prior to the consummation of the Offering, the
Selling Shareholders' Shares will have been validly issued and be fully paid
and non-assessable.
(c) Effective upon the consummation of the Offering, the Rights will be
legally issued obligations of the Company.
We consent to the filing of this opinion as Exhibit 5.01 to the Registration
Statement and to the reference to the undersigned in the prospectus forming a
part thereof under the caption "Legal Matters."
Yours truly,
/s/ KIRKPATRICK & LOCKHART LLP
<PAGE> 1
EXHIBIT 23.01
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
reports (and to all references to our Firm) included in or made a part of this
Registration Statement.
Arthur Andersen LLP
Pittsburgh, Pennsylvania
October 28, 1996
